Posted by: graemelaidlaw | March 7, 2010

Black swans and dead kings

Our lectures this week were about tax and economics, which did not initially fill me with enthusiasm but they were far more interesting than i would have thought.  We have to try and think of a sustainable taxation system which would work in 2050, which will require a bit more thought than my usual blogs, and therefore i wont write too much about the actual lectures here.  One point that did strike me however was in Stephen Kinsella’s lecture on the Thursday.  He spoke about ‘black swan’ events – defined by Nassim Nicholas Taleb as ‘ high-impact, hard-to-predict, and rare events that are beyond the realm of normal expectations’. 

Writing in the New York Times, (but copied straight from Wikipedia) Taleb asserted, “What we call here a Black Swan (and capitalize it) is an event with the following three attributes. First, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility. Second, it carries an extreme impact. Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable. I stop and summarize the triplet: rarity, extreme impact, and retrospective (though not prospective) predictability. A small number of Black Swans explain almost everything in our world, from the success of ideas and religions, to the dynamics of historical events, to elements of our own personal lives.

I like the fact that so much of world history seems to have hinged on such small pieces of luck, or lack of it – on such small events that then have such major reprecussions.  Seeing Braveheart at the weekend brings one  such event to mind – the whole event that the film is so roughly based on(the scottish wars of independence) came about because the Scottish king 20 years previosly, Alexander II, was without a male heir, so decided to marry a fine young french queen.  He had been out hunting a drinking one day but decided that he wanted to return home to his wife – he got on his horse and rode along the cliff-side path on a dark stormy night and surprisingly died.  As there was no direct heir to the throne a civil war started that the kind King Edward of England decided to adjudicate over. That one event, and bad drunken decission had repercussions that were felt for hundreds of years.  I’m not sure if this technically counts as a black swan event as riding a horse while drunk, on a stormy evening next to big sea cliffs can have only a very limited number of outcomes, but i’m sure at the time no-one would have predicted that this one evening would signal the onset of hundreds of years of war and turmoil.

Nassim Nicholas Taleb in his book ‘The black swan’ enumerates ten principles for building systems that are robust to Black Swan Events: (which once more I have copied straight from Wikipedia)

  1. What is fragile should break early while it is still small. Nothing should ever become too big to fail.
  2. No socialisation of losses and privatisation of gains.
  3. People who were driving a school bus blindfolded (and crashed it) should never be given a new bus.
  4. Do not let someone making an “incentive” bonus manage a nuclear plant – or your financial risks.
  5. Counter-balance complexity with simplicity.
  6. Do not give children sticks of dynamite, even if they come with a warning.
  7. Only Ponzi schemes should depend on confidence. Governments should never need to “restore confidence”.
  8. Do not give an addict more drugs if he has withdrawal pains.
  9. Citizens should not depend on financial assets or fallible “expert” advice for their retirement.
  10. Make an omelette with the broken eggs.

It all seems very sensible, although point 11. should perhaps include late night drunken horse rides

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