greg
Thinks s/he gets paid by the post
- Joined
- Jun 1, 2005
- Messages
- 1,071
A Black Swan Review
An interesting read and worth one’s time if understanding risk is worthy of consideration. But I believe Taleb under-perceives risk components in some ways and over-perceives in other ways.
But . . . he seems to focus primarily on the macro, his outside of the box risk and in that process misses or fails to process an enormous amount of micro risk inherent in all financial and business phenomena. He focuses on the flashy, the dramatic, the extreme--all to the exclusion of the mundane, the incremental, and the huge middle area that occupy most folks.
In the late middle part of the book, Taleb mentions as a Black Swan event for a casino a lion attacking Sigfreid (sp?) of Sigfreid & Roy fame. Taleb said that the casino lost about $100 million when that happened and the show ended for good. Who could have predicted such a thing would happen and when and where it did? The odds and asymmetry spin out of whack very quickly. Taleb sees this as a sort of perfect Black Swan event—unforseeable and, probably, the money making odds stacked in favor of anyone who could. But Sigfreid probably saw and knew what could happen. But perhaps after twenty-five years of doing wild animal acts, he had grown complacent to the risk of wild animals, of his wild animals, perhaps feeling he had these creatures completely under control. Perhaps he was just a bit too worried about a few missing sequins on his outfit that night and not focused enough on the level of irritability of his lions. Who knows? But Sigfreid may. It may not have been an unforeseeable event to him; it just may have been a letting down of one’s guard that particular evening or a forgetfulness. To Sigfreid, it should have been an important, although perhaps small event that should have been prepared for adequately; for Taleb, who focuses on macro events (important to him?) detail work is inconsequential. He thinks he thinks big, and he may not see inside the box.
But back to the $100 million single event loss. My thought is that casinos, all businesses, do an incredible amount of risk management on a daily and incremental basis. Even making sure that there is an adequate ratio of managers to employees at a firm is a method of risk management. Part of a supervisor’s job is to make sure risk is reduced in the local working environment: the supervisor may tell the crane operator to go home that day because he smells liquor on his breath. He trains the fry cook not to dip his hand in the oil or splatter the stuff around so that the floors are slippery. In a thousand small, incremental ways, a manager’s job is to make sure his staff is doing things with a redueced amount of risk.
An obvious failure and perhaps a grey swan in the making right now is the mortgage crisis. As observers from outside the box, we may only see the event as a dramatic, unpredictable event. But, I suspect, that it arrived for our viewing as such due to a huge number of incremental mistakes supervised and perhaps encouraged by upper and mid level management. “In order to make our numbers for this quarter (and get our bonuses), we need each office manager to accept and process 10% more loans.” Pretty soon those small initial mistakes turn into a powerful force in the financial markets, rolling thru the market place. And they were foreseeable, as always, if one only stuck his head into the environment where these mortgage excesses were happening.
The same could probably be said about LTCM . If someone had just objectively taken a close look at their formulas and quant stuff, one might have seen problems. But the LTCM folks were the supposed experts, so why should anyone else bother?
On the positive side of business management, Warren Buffett is someone that I see as very, very good at risk management. He looks for and sees all those incremental events that reduce risk and enhance profits and value. I suspect he has gotten better with age too. He has a nose for those non random patterns within businesses and for those people who know that attention to detail is very important. I suspect he knows that if one pays attention to the details in the proper fashion, one can significantly reduce risks and prevent many big negative events from ever manifesting. Of course, for the most part, we as outsiders only see that Berkshire-Hathaway’s stock just keeps going up and the money just keeps pouring in. But those that are interested probably know that Mr. Buffett manages risk very well, but also that it is just one facet of the entire gem package.
Taleb creates an imaginary creature using a real world black swan event as a metaphor. He then builds a wall of rationalizations around this prior creation. He says these Black Swans are random events, but then in the next breath he tells you that he can discern a pattern, a hinted at non-randomness in those random events. And if you follow him . . . .
Empiricists and rationalists know that things aren’t static, that life--and knowledge--is in constant flux with the general trend always upward and towards more. Saying “All swans are white.” is only a temporary pit stop for the scientist. He knows a three legged swan may someday be born, a yellow swan my arrive, etc. And at that time, a small adjustments will be made to the definition--if warranted. Things are always entering the box from outside of it. No need to be melodramatic about such events.
--greg
An interesting read and worth one’s time if understanding risk is worthy of consideration. But I believe Taleb under-perceives risk components in some ways and over-perceives in other ways.
But . . . he seems to focus primarily on the macro, his outside of the box risk and in that process misses or fails to process an enormous amount of micro risk inherent in all financial and business phenomena. He focuses on the flashy, the dramatic, the extreme--all to the exclusion of the mundane, the incremental, and the huge middle area that occupy most folks.
In the late middle part of the book, Taleb mentions as a Black Swan event for a casino a lion attacking Sigfreid (sp?) of Sigfreid & Roy fame. Taleb said that the casino lost about $100 million when that happened and the show ended for good. Who could have predicted such a thing would happen and when and where it did? The odds and asymmetry spin out of whack very quickly. Taleb sees this as a sort of perfect Black Swan event—unforseeable and, probably, the money making odds stacked in favor of anyone who could. But Sigfreid probably saw and knew what could happen. But perhaps after twenty-five years of doing wild animal acts, he had grown complacent to the risk of wild animals, of his wild animals, perhaps feeling he had these creatures completely under control. Perhaps he was just a bit too worried about a few missing sequins on his outfit that night and not focused enough on the level of irritability of his lions. Who knows? But Sigfreid may. It may not have been an unforeseeable event to him; it just may have been a letting down of one’s guard that particular evening or a forgetfulness. To Sigfreid, it should have been an important, although perhaps small event that should have been prepared for adequately; for Taleb, who focuses on macro events (important to him?) detail work is inconsequential. He thinks he thinks big, and he may not see inside the box.
But back to the $100 million single event loss. My thought is that casinos, all businesses, do an incredible amount of risk management on a daily and incremental basis. Even making sure that there is an adequate ratio of managers to employees at a firm is a method of risk management. Part of a supervisor’s job is to make sure risk is reduced in the local working environment: the supervisor may tell the crane operator to go home that day because he smells liquor on his breath. He trains the fry cook not to dip his hand in the oil or splatter the stuff around so that the floors are slippery. In a thousand small, incremental ways, a manager’s job is to make sure his staff is doing things with a redueced amount of risk.
An obvious failure and perhaps a grey swan in the making right now is the mortgage crisis. As observers from outside the box, we may only see the event as a dramatic, unpredictable event. But, I suspect, that it arrived for our viewing as such due to a huge number of incremental mistakes supervised and perhaps encouraged by upper and mid level management. “In order to make our numbers for this quarter (and get our bonuses), we need each office manager to accept and process 10% more loans.” Pretty soon those small initial mistakes turn into a powerful force in the financial markets, rolling thru the market place. And they were foreseeable, as always, if one only stuck his head into the environment where these mortgage excesses were happening.
The same could probably be said about LTCM . If someone had just objectively taken a close look at their formulas and quant stuff, one might have seen problems. But the LTCM folks were the supposed experts, so why should anyone else bother?
On the positive side of business management, Warren Buffett is someone that I see as very, very good at risk management. He looks for and sees all those incremental events that reduce risk and enhance profits and value. I suspect he has gotten better with age too. He has a nose for those non random patterns within businesses and for those people who know that attention to detail is very important. I suspect he knows that if one pays attention to the details in the proper fashion, one can significantly reduce risks and prevent many big negative events from ever manifesting. Of course, for the most part, we as outsiders only see that Berkshire-Hathaway’s stock just keeps going up and the money just keeps pouring in. But those that are interested probably know that Mr. Buffett manages risk very well, but also that it is just one facet of the entire gem package.
Taleb creates an imaginary creature using a real world black swan event as a metaphor. He then builds a wall of rationalizations around this prior creation. He says these Black Swans are random events, but then in the next breath he tells you that he can discern a pattern, a hinted at non-randomness in those random events. And if you follow him . . . .
Empiricists and rationalists know that things aren’t static, that life--and knowledge--is in constant flux with the general trend always upward and towards more. Saying “All swans are white.” is only a temporary pit stop for the scientist. He knows a three legged swan may someday be born, a yellow swan my arrive, etc. And at that time, a small adjustments will be made to the definition--if warranted. Things are always entering the box from outside of it. No need to be melodramatic about such events.
--greg
But it will require a huge amount of study and work to learn such skills and beat the averages or beat a small-cap pharma etf's gains. 
