I happened on an article about black swans, as Nassim Taleb had recently been speaking at a CFA (Chartered Financial Androids) function and a reporter for the Financial Times was in attendance, blogging, not reporting, because as we all know the two are very different. I wondered with all the talk of recession, and with The Black Swan having been on the New York Times bestseller list, whether people had adopted the term. A quick search of Google News brought back several articles, but hardly a widespread adoption.
Why not? I mean this is a bestseller we’re talking about with Black Swan plastered on the cover in big, bold, black letters over a non invasive white back ground. People talked about who cut the cheese and chicken soup for at least six months, and we had to hear about the 7 Hobbits of Highly Effective People for the entire 90s. Well, Nassim doesn’t tell people what they want to hear, nor does he provide much in the way of solutions that people are agreeable to. He’s a bubble burster. Essentially, avoiding a black swan is akin to avoiding a hurricane, move to the mountains, so from the readers perspective it really says, we’re screwed. People aren’t willing to give up a little comfort today to avoid a future risk that they cannot anticipate or even identify.
In a sense, Black Swan speaks more to the people we entrust to manage our savings than to the masses. I say savings because that’s how we think of the money we put in mutual funds these days, even though the government does not classify it as such for the purposes of calculating savings rates. That’s why I think we should refer to ourselves not as savers or investors, but savestors. Black Swan says modern risk management practices suck. And they do. They suck really bad.
I know, I worked for really big insurance companies for a number of years and the people in charge of calculating risk there all had really big heads and minds shut tighter than a submarine. There’s no way anything remotely qualitative was going to find it’s way in there. Is it really any wonder so many banks and insurance companies are in financial trouble today?
For a decade Nassim and other financial thinkers have been pointing out the problems with VAR (value at risk) and other tools used by the quantitative risk management set. Did they listen? Apparently, not. Banks and insurance companies are run by risk robots and chartered financial androids information reporting up to MBA Cyborgs.
But hey, here’s a guide to getting around one possible black swan: Survive a Zombie Apocalypse. Tips include weaponry effective against zombie attacks, keeping your head as in your wits. I’m adding to this, if they are brain eating zombies then wear a helmet, duh. These techniques might also be effective on the disgruntled actuary who loses his job and his mind then decides to shoot up the office building. Since no actuary has every been laid off before, you know they won’t take it very well. That is, unless the insurance companies and banks decide they need even more actuaries and CFAs to manage their risk.
Links:
Only now are our money managers considering the not so quantitative:
After subprime fiasco, risk models may weigh human behavior
Quantitative methods remain, but social sciences added to mix
A failure to properly evaluate the risk and pricing of collateralized debt obligations and other structured debt products was one of the problems that brought turmoil to the securitization market last year.
Industry experts are now saying market participants shouldn’t rely exclusively on mathematical models but should also use the social sciences to understand behaviors—of home owners, for instance. They’re also calling for more disclosure and more transparency from market participants.
Duh
The Good Stuff: Nassim Taleb, Author Of “The Black Swan” Interview
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