thinking: relating- celebrating :-)

I live in part of the world where black swans don’t seem that unusual, but for many the idea of a black swan was unthinkable until they were actually discovered in Australia. Somewhere, I even have a hat with 32 Black Swans on it. The metaphor of Black Swans just doesn’t work in part of the world where they are plentiful but it is a strong visual idea.

“Before the discovery of Australia, people in the old world were convinced that all swans were white, an unassailable belief as it seemed completely confirmed by empirical evidence…that was disproved by the discovery of black swans.”

So what is a Black Swan?

Author Nassim Nicholas Taleb has written a book to explain the central idea of a Black Swan: The Impact of the Highly Improbable.

In his description a Black Swan is typified by 3 attributes.

1. Nothing in the past can point to its possibility
2. Extreme Impact
3. Even so we can somehow explain this by hindsight after the fact -( I believe this is called a confirmation bias in investment circles.)

It is an interesting idea and best of all, you don’t have to read the whole book to get the arguments – you can read a much shorter manifesto by Taleb called Few & Far Between which has been made available on www.ChangeThis.com and here as well. (16pages version) download your copy free above.

Taleb makes some good points about our blindness with respect to randomness and the ability we have to ignore large deviations or outliers – when I suspect he is more interested in the outliers.

The metaphor got me thinking about complexity theory and fractals where patterns become evident if you sweep wider enough to see them. So perhaps the patterns are always there; but our frame of reference is focused too much on the micro to see the true significance of the macro.

The idea that you can’t predict a Black Swan seems self defeating – or that in hindsight you can somehow explain the linkages. That we need to be looking much widely at impact points is a key point that is not quite made; but should be.

Larry Elliot seems to like the idea of Black Swans and markets..and knows more about maths than I do.

“Taleb is a fan of the Polish-born French mathematician Benoît Mandelbrot, who gives short shrift to those who believe financial markets resemble a bell curve, with modest movements the norm and violent moves infinitesimally rare. Looking at the daily movements of the DJIA from 1916 to 2003, Mandelbrot said that according to the bell-curve analysis, there should have been 58 days when the Dow moved more than 3.4%, when in fact there were 1,001.

Only once in every 300,000 years should there have been a day when the Dow moved by 7% or more, but it happened 48 times. “Extreme price swings are the norm in financial markets – not aberrations that can be ignored,” Mandelbrot argues in The (Mis)Behaviour of Markets

It seems highly unlikely that this has been built into market thinking. That, of course, is precisely Taleb’s point”.

For alternative view on the Black Swan book check the review by Giles Foden who wasn’t quite convinced. I particularly like this mangling of metaphors that Foden highlights below – turkeys are like swans etc…..The paragraph is so good I can see it becoming part of a stand-up routine in the next comedy festival.

It is the silence – the gap – the missing energy in the historical system, which produces the black swan. Imagine, says Taleb, the problem of turkeys: “Every single feeding will firm up the bird’s belief that it is the general rule of life to be fed every day by friendly members of the human race ‘looking out for its best interests’, as a politician will say. On the afternoon of the Wednesday before Thanksgiving, something unexpected will happen to the turkey. It will incur a revision of belief.”

Ray Poynter notes that that the book has good and bad parts and his post is one of the best on the Black Swan concept. Ray is something of an expert on advanced quant (statistics) and his excellent review is very thorough.

One of the good points he noted about the book was.

“When Taleb talks about luck and randomness he is onto something very important and under appreciated. In order to succeed you need to be good and lucky.

When we analyse the success of something or somebody, we often pay too little heed to luck and therefore too much to what they actually did. If we accept that random events play a role in success, then we should assume that, even in theory, we can’t create a model which fully measures and predicts how to be successful.”

He also points to NYTimes review and two others.

I’d be interested to know what you think of the Black Swan concept?

Taleb black swan theory BlackSwan

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Just tonight as I was driving, I heard some parts of a radio speech that were so sharp I had to pull over to the kerb for safety reasons.  Talking on a mobile while driving is not safe and neither was the speech I was hearing.

Turns out it was Professor Jeffrey Sachs giving Lecture No 3 of the BBC Reith Lectures called “The Great Convergence” described by programme synopsis notes as:

Power and America have seemed synonymous for the last fifty years. No longer. Power in the 21st Century is shifting to the East: to India and above all to China. Facing up to the end of centuries of North Atlantic dominance – first Europe then the U.S. – will pose huge challenges.

 The opening theme goes like this ..(full transcript is available from BBC)

“Global problems can only be solved with global public understanding.

Next is the deployment of technologies to address the challenge. Though advanced technologies are sometimes considered to be a malign force, yet a further threat, they are of fundamental importance in enabling 6.6 billion people, and perhaps 9.2 billion people, to meet the twin aspirations of improved material life and ecological sustainability.”

He then continues about the difficulties of achieving global co-operation to make some of the changes that we know can be made – but lack the political will or trust to do so mentioning some examples.

In President Bush’s 2008 budget just submitted, military spending is $623 billion***(see footnote below), more than all of the rest of the world combined, while aid to all of Africa is $4.5 billion…..

Kennedy’s speech on June 10, 1963, which I have quoted throughout this evening and throughout the Reith Lectures, was not only a scintillating exposition on peace, and not only a challenge to his generation to make peace, but was also part of the process itself, a way of problem solving. Kennedy literally used the speech to make peace.

Kennedy’s chosen process was ingenious. The entire speech is to his fellow Americans, not to the Soviet Union. He didn’t tell the Soviets that they were either with us or against us. He didn’t lay down preconditions for negotiations. He didn’t make a list of things that the Soviets must do. There were no threats of sanctions. In fact, the opposite was true. The entire speech was about US behavior and US attitudes..

We need to end pre-conditions to talk. We need to end the prevailing confusion that claims that negotiating with an adversary is the same as appeasing that adversary. The true lesson of the 1938 Munich Agreement, when British Prime Minister Chamberlain acceded to Hitler’s assault on Czechoslovakia, is not to end future negotiations with adversaries, but to reject concessions that cripple one’s security….

We can help, and we should do so.”

If we are interested in breaking some of these cycles and a changed outlook for the better; then, some of the challenges from this set of lectures may help in framing a deeper level of debate. Best to hear the full set speeches themselves - which you can do as the transcripts don’t do full justice to the content.

Many years ago I interviewed a famous musician and as as you do, I asked him what type of art he might find interesting as an aside. His answer was that he would find the prospect of watching a debate between Malcolm Muggeridge and James Baldwin (it was the early 80′s) delicious, or words to that effect. I was a bit surprised but also impressed and intrigued to think that an articulate debate or speech could have such an inspired effect.

Regarding this particular Reith Lecture I noticed that the Kennedy speech, was being sprinkled a bit like pixie dust to help add some weight. As it happens the speechwriter behind that particular speech was in the house and he also made some comments included below. He was asked if he wrote the speech.

THEODORE SORENSEN: Oh I never acknowledge that. President Kennedy was the author of all of his speeches. (LAUGHTER & APPLAUSE) Or I, or what I should say in answer to that question is, ‘Ask not’. (LAUGHTER) So my recommendation to you, Jeff, when you make this lecture again, is to cite two other parts of that speech. One is a passage where President Kennedy said, ‘The world knows America will not start a war. This generation of Americans has seen enough of war.’ Haven’t heard that recently! The second was where he not only asked for a re-examination of our relations with the Soviet Union, but praised the Soviet people for the enormous contribution and sacrifice they made in World War Two, which no-one had ever done before, and the Soviets rather resented it, and it was one of the ways that he reached Khrushchev. Seems to me we live in a world where the people of Islam have been rejected and humiliated for generations, and if someone took the time to praise their contributions to civilisation over the centuries, that might help.

I especially like that last part by Sorensen which leans more towards respect than we are seeing from some of the current leaders of Iran and the U.S for example.

I also noticed in the Guardian last week, that President Putin announced it was considering withdrawing from a Soviet- era weapons treaty. This was in response to US plans to site  a missile defence shield in Poland and the Czech Republic.  

It seems ironic that the Kennedy speech which is partly credited with ending the cold war and is now being amplified by the Reith lecture above is again echoing current events and we seem to have learned little despite optimistic signs.

Also writing in the Guardian, Simon Jenkins notes that:

Countries too have feelings. So I am told by a Russian explaining the recent collapse in relations between Vladimir Putin and his one-time western admirers. “We have done well in the past 15 years, yet we get nothing but rebuffs and insults. Russia’s rulers have their pride, you know.”

“Britain and America have been led by essentially reactive politicians with no grasp of history……

Russia and the west have everything to gain from good relations. Putin has struggled to modernise his economy while holding together a traumatised and shrunken Russian federation. The west may feel he errs towards authoritarianism, but second-guessing Russian leaders is seldom a profitable exercise. This is a huge country, rich in natural and human resources. It is hard to think of somewhere the west would be better advised to “hug close”. Instead, Putin will hand his successor an isolated and bruised nation. Under a less confident president, it could retreat into protectionism and alliances the west will hate. To have encouraged that retreat is truly stupid.”

It seems incredible to think that- even while Professor Sachs is delivering his speech, we still seem stuck in old patterns that need to be broken. We should be taking a great deal of notice of not only the vaguely abstract global challenges but the very real example mentioned by Jenkins as well.

Footnote:*** I have also come across this piece on the annual restoration budget to heal the planet at the Earth Policy Institute website. Compared to the $623b of military spending mentioned above – fixing some of this seems a much better idea.

“Altogether, restoring the earth will require additional expenditures of $93 billion per year. Many will ask, Can the world afford this? But the only appropriate question is, Can the world afford to not make these investments?”