Black Swan 101

[Cain]

Perhaps this is a good example of a Black Swan:

Moodys is a renowned investment firm that uses complex formula to rate investments.  A few years ago, they gave top rating to a some products.  On their advice, many, many people bought in, for billions.

This product was tied to the sub-prime market, and crashed.  Of course.

Upon review, the AAA rating given was because of a computer glitch. http://www.forbes.com/afxnewslimited/feeds/afx/2008/05/21/afx5032513.html


The glitch would be considered a black swan because:

1.  It occured outside the "rules" of investment strategy.
2.  No one expected it until it happened.
3.  It had a major impact.

The entire sub-prime business was a black swan too.  Virtually no-one in the financial industry cared to think about what happened if too many people defaulted on payments at the same time.

[Bebek Sincap Ratatosk]

Perhaps this is a good example of a Black Swan:

Moodys is a renowned investment firm that uses complex formula to rate investments.  A few years ago, they gave top rating to a some products.  On their advice, many, many people bought in, for billions.

This product was tied to the sub-prime market, and crashed.  Of course.

Upon review, the AAA rating given was because of a computer glitch. http://www.forbes.com/afxnewslimited/feeds/afx/2008/05/21/afx5032513.html


The glitch would be considered a black swan because:

1.  It occured outside the "rules" of investment strategy.
2.  No one expected it until it happened.
3.  It had a major impact.

The entire sub-prime business was a black swan too.  Virtually no-one in the financial industry cared to think about what happened if too many people defaulted on payments at the same time.

But was that because it was unpredictable, or predictable, if it were not for the sand encasing their head? 

[Cainad (dec.)]

OSHIT

Now we must clarify whether a Black Swan is unpredictable, or merely unpredicted. Or does it matter?

[Verbal Mike]

Doesn't matter.

[Bebek Sincap Ratatosk]

Well, maybe they're variations... one could be avoided with proper controls and planning... the other, not so much?

[Triple Zero]

no rat, that's not how black swans work.

[Verbal Mike]

I don't think it matters. People will always have a certain idea of what they can predict, and this will almost invariably be true of less than they think. It's natural to assume Extreminstani events and eventualities are in Mediocristan, and it's surprising when this turns out to be wrong.

[Bebek Sincap Ratatosk]

no rat, that's not how black swans work.

Huh? Well, I was asking not saying

I thought they were the things one couldn't plan for... but rather they're the things you don't plan for? Or...?

[Verbal Mike]

They're the things you didn't think about which turn out to change the way you think about things.

[Bu🤠ns]

i've been dilligently listening to the audiobook on my rides home from work and from what i can gather is Taleb presents the idea of a black swan and it's 3 characteristics.  then he presents a story of how certain fallacies and fundamental assumptions (most of what cain posted in the OP) about the way things work don't account for randomness.  some of the biggies are the narrative fallacy and the silent evidence fallacy.  see, the book tends to read in a kind of story-like kind of way with anecdotes and such drawn mostly from Taleb's personal experience. So while i have found cain's notes incredibly helpful i can see how his short notes might seem confusing without also referencing the book.  It's a really great read (ahem, listen), as it is immediately applicable to daily life.

[Cain]

http://business.timesonline.co.uk/tol/business/economics/article4022091.ece?print=yes&randnum=1212475411171

May be of interest

[Bebek Sincap Ratatosk]

http://www.cnn.com/2008/WORLD/asiapcf/06/11/pakistan.troops.killed/index.html

A U.S. official with knowledge of the reports acknowledged Wednesday that U.S. planes launched an airstrike in the area on Tuesday but did so in "hot pursuit" of suspected militants who had conducted an ambush on the Afghan side of the border.

A Pakistani military statement condemned the "completely unprovoked and cowardly act" that killed 11 members of a Pakistani paramilitary force on Pakistani soil. It said the attack "had hit at the very basis of cooperation and sacrifice with which Pakistani soldiers are supporting the coalition in war against terror."

Ohh, Ohh, Teacher!! Is dropping 500lb bombs on some of your close friends a sort of Black Swan?

[Bebek Sincap Ratatosk]

Taleb had been vindicated. "It was my greatest vindication. But to me that wasn't a black swan; it was a white swan. I knew it would happen and I said so. It was a black swan to Ben Bernanke [the chairman of the Federal Reserve].

Of Course! Black Swans are specific to Black Iron Prisons, because they live "where our eyes don't go"^TMBG. So the BiP of an economist doesn't see the swan, until it poops on his head... and guys like Taleb saw the swan ahead of time, and thus it was just a variable, rather than a surprise.

Brilliant.

[Verbal Mike]

That article was made of win and kittens. Black kittens.

[Triple Zero]

Of Course! Black Swans are specific to Black Iron Prisons, because they live "where our eyes don't go"^TMBG. So the BiP of an economist doesn't see the swan, until it poops on his head... and guys like Taleb saw the swan ahead of time, and thus it was just a variable, rather than a surprise.

hey!

BINGO!

black swans are indeed caused by the BIP

Taleb's most important point is that they are caused by a bar shared by (nearly) everybody.

thanks for that insight, Rat!