Dead Swan Events

“It does not matter how frequently something succeeds if failure is too costly to bear” – Nassem Taleb

I caught an interview with Taleb, author of the Black Swan: The Impact of the Highly Improbable, talking about our economic systems and potential dangers. What I found interesting is that Taleb wasn’t talking about economic theories or policy so much as he was about randomness, interactions, errors, and human behavior. It reminded me of a book I read once where the author indicated that most innovations come not from a new development, but rather the successful transfer of an existing model, algorithm, or idea to a new field. Taleb is all but irrefutable on these fronts, not because he’s “right” but because he’s not talking about economic theory but about simple, time-tested, well-understood aspects of systems, interactions, and errors.

I’ve heard a number of definitions for the dreaded “Black Swan Event” over the past few years. Most take it to be a “six-sigma” type event, where something awful happens at random and is outside of the system’s ability to respond. I don’t think this is Taleb’s definition, and I certainly don’t think most “black swan” events (as people call them  in the media after the fact) would fit.

Consider, for example, the collapse of Lehman Brothers. Most take this as a black swan event that sent the financial system tumbling. But that is a bit weak, to say the least. Lehman had to collapse because the whole model of Lehman was built on an unsustainable path. If it had not collapsed when it did, something else would have collapsed later – and probably worse. If we could have delayed Lehman by one or five years would it really have mattered? (The answer is, I think, it would have mattered differently to different people, but would have been net-negative on the whole.)

Now, the massive earthquake that hit Japan a few years back would qualify as a “six-sigma”‘ type event (OK, probably more like “four-sigma” … actually, for earthquakes it doesn’t make as much sense to talk about “sigma” since it induces most think of a gaussian distribution, where earthquakes follow a Boltzmann distribution … but I digress).

I’ve caught a number of articles or interviews lately where folks conjecture what the next black swan event might be. The notion that we could predict a massive outlier is silly, but what these folks are talking about are not outliers, they are “Lehman” – all but certain, it’s just a matter of when. The big hitters are these: a European financial crisis, a mideast conflagration between Israel and Iran, and an economic collapse (political collapse?) in China. Again, if we could predict it, it’s hardly an outlier, and I suggest that these events are not outliers – they will happen (somehow, someday, and to some extent).

The EU is hosed. The system cannot hold on. It is perhaps built on a worse model than Lehman. How will it break? I don’t know, but break it will. When will it break? I don’t know, someday.

Israel and Iran will dust it up. Iran has sworn to destroy Israel (loudly at times), and is clearly developing a nuclear weapon. It would be the most absurd thing to imagine Israel just sitting by and letting that happen – they won’t. There will be a fight (of some sort). “But what if sanctions work?” OK, the notion of sanctions “working” implies either that the Iranian leadership changes course because they see the pain on the faces of their suffering people, or that the people revolt and overthrow the government (or some combination thereof). But autocrats don’t typically change course out of altruism. And if we  (the U.S.) actually wanted to see the people rise up then we would have thrown our support behind them when they did rise up … but we didn’t.

And what of China? I’m amused when the talking heads claim that China’s economy is robust and won’t collapse. When asked “why?” they revert to “well, China is a command economy, so it’s not subject to the same market forces.” Really? The Chinese leadership can just say “grow at 8.2% with 1.3% inflation and let all be joyous and at peace with their neighbors” and it will happen? Perhaps the forces apply themselves slightly differently in China, but if you think the communist party isn’t concerned about a social uprising that will throw them out of power, then you’d be seriously mistaken. (Side note: the folks who demand that China is impervious tend to be econo-theocrats who hold that the whole system would work better if people would do as they are told instead of what they want or judge to be in their best interests. Now where have I heard that before ….)

What’s my point? Good question. Well, on the issues of economic absurdity where the wealthy use the “system” to oppress the poor and extract productivity from them, my point is Psalm 37:12-13: “The wicked plot against the righteous and gnash their teeth at them;but the Lord laughs at the wicked, for he knows their day is coming.”

On the issue of Iran and Israel, I think I’m simply offering a reminder that Israel has shown itself resilient in its own defense over the past 60+ years. That major combat operations haven’t been seen in nearly (1973 Yom Kippur war) is merely a sign that their mideast foes of that generation finally learned the hard lesson. But time has a way of “healing” us of the lessons we’ve learned.

I don’t mean any of this as a “sky is falling” moment. All of these eventualities can happen and we move along with our lives just fine – just like our parents did when difficult things happened in their days. But if your plans for the future depend on everything going exactly right, including the nigh-on impossible, then maybe you need more robust plans.

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