Saturday, January 31, 2009

The Black Swan Predicted Financial Collapse

coin tower ready to collapse

If I had pots of money, I would buy a copy of The Black Swan and distribute a copy of The Black Swan to every banker, economist and policy maker and all those hanging out at Davos.

Now, you have to remember that this book was published in 2007 and I am assuming the book would have taken about 15 months to complete (or more!) Read this extract ...

A similar effect is taking place in economic life. [G]lobalization; it is here, but it is not all for good: it creates interlocking fragility, while reducing volatility and giving the appearance of stability. In other words it creates devastating Black Swans. We have never lived before under the threat of a global collapse. Financial institutions have been merging into a smaller number of very large banks. Almost all banks are now interrelated. So the financial ecology is swelling into gigantic, incestuous, bureaucratic banks ... - when one falls, they all fall. The increased concentration among banks seems to have the effect of making financial crisis less likely, but when they happen they are more global in scale and hit us very hard.

And then in the footnote, Nassim Nicholas Taleb goes on to say ...

As if we did not have enough problems, banks are now more vulnerable to the Black Swan and ludic fallacy than ever before with "scientists" among their staff taking care of exposures. ... [T]he government sponsored institution Fanny Mae, when I look at their risks, seems to be sitting on a barrel of synamite, vulnerable to the slightest hiccup. But not to worry: their staff of scientists deemed those events "unlikely."

Spooky or what?

Just one clarification.
The Black Swan is not about prediction. It is about the unpredictable. The above extract is an example of how one should anticipate the unpredictable.


Picture Courtesy: 'Rolve'

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1 comment:

eksparsh said...

I love the analogy of 'financial ecology' and 'scientists of Fannie Mae'. I am intrigued by 'Black Swan' and now added it to my reading list!
Adarsh.

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