The Dim-Post

February 28, 2010

Fooled by randomness

Filed under: Politics — danylmc @ 6:50 pm

Don't cross a river if it is four feet deep on average - Nassim Taleb

Via Cactus Kate,  ACT Deputy Heather Roy quoted the philosopher Nassim Taleb in her conference speech yesterday:

A ‘Black Swan’ is the occurrence of high-impact, hard-to-predict and rare events beyond normal expectations
A ‘Black Swan’ is the occurrence of high-impact, hard-to-predict and rare events that are beyond the realm of normal expectations. Despite our hard work and successes, we have already seen the black swans overhead. We will see them again before the next election.

I’m pleased to hear that Roy is reading The Black Swan. It’s a good book in which Taleb argues that markets are chaotic systems prone to unpredictable catastrophic failure – I’d be interested in how Roy squares this with the ACT philosophy that markets are perfectly efficient systems that should govern every aspect of our society.

I don’t think Taleb’s theories about the epistemology of chance apply to politics. To use his terminology, political events occur in the realms of mediocristan not extremistan. Political parties do not appear out of nowhere and capture 99.9% of the vote, they don’t disappear overnight, voters respond (fairly) rationally to broad social and economic trends, not unpredictable changes in technology or market conditions.

It might seem to politicians as if their world is subject to extreme, unpredictable events – just ask Phil Heatley – but at a macro level politics is subject to known probabilities. Taleb has made himself a huge amount of money hedging against unpredictable events in the financial markets, but for a politician or a party to try and build a policy platform around unpredictable or statistically unprobable events would be clinically insane.

(So maybe it’s a pretty good fit for ACT after all.)

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37 Comments »

  1. Danyl I think the point is that everything is subject to extreme outlier events or black swans not just financial markets although ultimately, imho, the human condition is mostly defined by financial markets of some description whether it be weather futures or the spot price of deliverable sweetcorn (very nice it is too).

    Comment by expat — February 28, 2010 @ 8:26 pm

  2. Expat, the point is that some systems (such as democracies with separation of powers, robust judicial and electoral systems, stringent probity requirements and hawkish oversight on the main participants) are structured such as to have a chance of riding out black swan events without major changes being required, while others (such as the global capital markets) are not really.

    In another indication that Roy was just dropping names (and she dropped a few in that speech), she didn’t actually name any of the black swans which are supposedly flying overhead. Her next paragraph was about the need to win more than 5% and not be reliant on Epsom, suggesting she thinks “losing Epsom” is a black swan event. It’s not; in fact, it’s nothing of the sort. She seems to have made an elementary mistake many folk do when reading Taleb’s book: that a black swan is “something which seems unlikely but which would be very bad if it happened”.

    L

    Comment by Lew — February 28, 2010 @ 8:43 pm

  3. I hear you Lew and agree however would add that with all that interconnectedness stuff a black swan event in one ecosystem can have a large and unexpected impact on another so while politics may not be that susceptible to earth shattering events in the normal course of events it doesn’t mean that a) a black swan in another ecosysytem may kick off one in the political ecosystem b)the political ecosystem is immune to black swan events and indeed when one does occur it will be all the more unexpected and unprepared for.

    But I do chuckle at ACT in effect talking about planning for extreme outlier events when the whole point is that humans are particularly bad at doing that.

    A very interesting topic for a whole heap of people.

    Comment by expat — February 28, 2010 @ 9:02 pm

  4. a) should have a ‘not’ in there after ‘may’ …

    Comment by expat — February 28, 2010 @ 9:03 pm

  5. @lew my thinking exactly. she likely thinks that whole financial crisis nonsense was a “black swan”, as opposed to a systematic failure of the markets to self-regulate.

    Comment by Che Tibby — February 28, 2010 @ 9:10 pm

  6. But isn’t that the point? A black swan may seem easy to spot in retrospect but because of the shared viewpoint/blindness of society, ‘the markets’, etc no-one really did plan for or predict the collapse of the global financial system and it was therefore a black swan?

    Talebs discussion about contrarians was interesting as if I recall correctly he notes even they aren’t any good at spotting black swans, just at picking the upcoming predictable swing.

    Comment by expat — February 28, 2010 @ 9:19 pm

  7. “I don’t think Taleb’s theories about the epistemology of chance apply to politics.”

    Sure… no Austro-Hungarian prince will ever be assassinated, and there are no such things as coups or oil shocks.

    Comment by will — February 28, 2010 @ 9:45 pm

  8. For a party that denies the likelihood of climate change, mentioning Black Swans seems so utterly contradictory.

    Comment by Will de Cleene — February 28, 2010 @ 10:16 pm

  9. And I don’t think Act has to worry about a Black Swan in Epsom. It’s a Blue Duck that could prove their downfall.

    Comment by Will de Cleene — February 28, 2010 @ 10:18 pm

  10. Yes again proving in the thread here with the difference in interpretations that there is no general consensus on actually what the fuck she meant in the first place.

    Comment by Cactus Kate — February 28, 2010 @ 10:57 pm

  11. Perhaps it will be a white swan and not a greedy black one when they lose Epsom!

    Comment by Bob — February 28, 2010 @ 11:18 pm

  12. Here, have a comma “,”, and another drink.

    Comment by will — February 28, 2010 @ 11:49 pm

  13. Is Don Brash a ACT’s black swan?

    Many voters are “not only venal, but ignorant”, according to former National Party leader Don Brash.

    Or would the best bird analogy for ACT be a Dodo?

    (quote from John Amrstrong strangeness in teh herald today)

    More from the ‘WTF’ is Brash smoking and can I get some to please, department.

    “Note the near total failure of the public to see any connection between the sudden requirement by the Labour Government in 2008 that employers would have to pay the same amount to someone coming out of high school at 16 as they paid to an adult, and, the resulting very sharp increase in youth unemployment.

    Excuse me but did we just not have a frickin global economic meltdown in 2008, and the first people to be not hired or let go are the yoof. I am so glad we dodged the Brash bullet, that example of rock solid fantasy make shit up thinking is what we don’t need.

    Comment by andy (the other one) — March 1, 2010 @ 7:52 am

  14. the sudden requirement by the Labour Government in 2008 that employers would have to pay the same amount to someone coming out of high school at 16 as they paid to an adult

    It’s also not true.

    1. For the first 200 hours you can pay them less than the minimum wage.
    2. The requirement does not actually exist: it is perfectly lawful to pay someone under the age of 20 less than someone else solely on the basis of their age.

    What Brash is talking about is the minimum wage. Most adults aren’t on it, and there’s no requirement to pay any 16 year-old the same as them.

    Comment by Graeme Edgeler — March 1, 2010 @ 8:03 am

  15. @expat, plenty of people knew the financial crisis would happen, and they bet against it, and made squillions. many others had selective blindness because they were making tonnes, and got out. etc.

    not a black swan.

    Comment by Che Tibby — March 1, 2010 @ 8:20 am

  16. There has been a generous use of the word ‘conference’ in regards to the weekend ACT get together.

    But the dismal gathering at the conference, held in a theatre with capacity for only 140 seats but which was never full, is a sign of the challenge ACT faces to make itself relevant even to its own supporters at the next election.

    Comment by andy (the other one) — March 1, 2010 @ 8:37 am

  17. Kate,

    Perhaps Roy mean’t KFC? As in copy Labours bribe the electorate with KFC election rort? Or maybe she was drawing an analogy with the ugly duckling parable?

    Che,

    Some people yes, Talebs point was that humans naturally do not consider extreme outliers in analysis and planning so most of our methods do the same.

    Comment by expat — March 1, 2010 @ 8:50 am

  18. I think they should be looking eslewhere for swan inspiration

    Comment by Neil — March 1, 2010 @ 9:16 am

  19. @expat. i think we’re saying the same thing. my understanding of ‘black swan’ is from philosophy. they used to argue “all swans are white” as an example of an absolute truth.

    then they discovered australia, and black swans. an event that was completely outside the ambit of reality, not just chance.

    so all this talk about markets encountering ‘black swans’ is largely bullshit. if anything has happened in the past is the bust of markets. therefore, market collapse *cannot ever* be considered “unforeseeable”. in fact, market collapse is normal.

    this makes me think that the black swan analogy is heavily abused…

    Comment by Che Tibby — March 1, 2010 @ 9:32 am

  20. Yeah, heavily abused especially by Roy. I still think she actually means KFC, it’s the only option that makes any sense as the Ugly Duckling parable doesn’t apply as ACT hasn’t grown up.

    We agree. People are blind and only see what they want to see.

    Comment by expat — March 1, 2010 @ 9:39 am

  21. Speaking of ACT conference speakers:

    Many voters are “not only venal, but ignorant”, according to former National Party leader Don Brash.

    Comment by mjl — March 1, 2010 @ 10:07 am

  22. I’ve observed in the past that many politicians tend to get their philosophy and literature by googling for quotes.

    Comment by lyndon — March 1, 2010 @ 11:00 am

  23. @ Che
    plenty of people knew the financial crisis would happen

    Techinically true, but not of much us to your argument. It strikes me that the same people who “knew” the GFC(tm) was just around the corner, were the same people screaming that the whole of western capitalist civilization was about to collapse when the tech-bubble burst, and also during the asian crisis, and during the oil spike in the 70′s, and during so-on-and-so-forth…

    I’m reminded of two cynical comments from my Finance Lecturer at Canterbury;
    The markets can remain irrational longer than you can remain solvent
    Economists have predicted fifteen of the last six recessions

    Comment by Phil — March 1, 2010 @ 11:12 am

  24. @phil. wrong.

    andrew ladhe – hedge fund manager (right on the mark, till he goes off rails talking about hemp…)

    Comment by Che Tibby — March 1, 2010 @ 11:38 am

  25. andrew ladhe

    Thumbed through the article (NYT or WSJ?), seen the interview, bought the t-shirt.

    He’s a hedge-fund manager. He timed the market and got it right. Good on him. See cynical finance lecturer quote #1.

    Comment by Phil — March 1, 2010 @ 12:26 pm

  26. ?

    he’s also proof that the financial “black swan” argument is silly. if people knew it would happen, and it did, then it was “unforeseen”.

    logic 101.

    Comment by Che Tibby — March 1, 2010 @ 1:26 pm

  27. if people knew it would happen, and it did, then it was “unforeseen”

    I might be arguing semantics, but to me ‘forseen’ and ‘knowing’ place a higher burden of proof upon the prognosticator than that which Ladhe showed. He took a punt. He has freely admitted in interviews that it was a risk/gamble. That’s not knowing.

    Comment by Phil — March 1, 2010 @ 3:15 pm

  28. i think you are arguing semantics. the black swan idea (the subject of this debate) says that there are ideas entirely outside the bounds of possibility or “reality” which cannot ever be known

    the financial crisis was *possible*, because there have been many market busts before, and therefore not a black swan.

    Comment by Che Tibby — March 1, 2010 @ 3:36 pm

  29. Almost all swans are black in Australasia. What are they on about?

    Comment by Rich — March 1, 2010 @ 3:53 pm

  30. Most swans have a few grey feathers if you look hard enough.
    Though they may peck you if you get that close.

    But all she was really saying is ‘I’m better at predicting surprises than you guys’.
    Most people think that of themselves don’t they?

    Comment by Roger Parkinson — March 1, 2010 @ 4:29 pm

  31. “Almost all swans are black in Australasia. What are they on about?”

    prior to the Eurpoean discovery of Australia, the existence of black swans was not known to European peoples. Therefore many Europeans wrongly assumed that black swans were impossible because nobody they knew had ever seen one. The blcak swan is a metaphor for something you wrongly assume is impossible because your culture has never come into contact with it.

    Comment by kahikatea — March 1, 2010 @ 4:32 pm

  32. [...] Fooled by randomness [5] [...]

    Pingback by Pacific.scoop.co.nz » Scoop Top Stories For March 1, 2010 New Summary — March 1, 2010 @ 5:02 pm

  33. Che, you kinda miss the argument that there are perceptions of reality and if people perceive that there is no rational chance of a massive GFC type collapse it won’t be planned for or modeled for in mote carlo type risk models etc thats why at the time it was a black swan event. I agree that in hind site its blindingly obvious, 20/20 vision huh.

    Comment by EXPAT — March 1, 2010 @ 6:21 pm

  34. @phil like k-tea says, back in the age of reason the smartest guys in the room used to argue, “all swans are white”. it was regarded as an objective truth that couldn’t be refuted. it allowed other arguments to also be justified, like “god is awesome”. then they discovered australia, and all bets on objective truths were off.

    @expat you’re right, i hadn’t realised it referred to economic modelling. which makes me wonder even more how these wankers were allowed to build such crazy models.

    as for hindsight, back in 97 i was eavedropping on to two financial boffins talking in a cafe here in wellington. they were spelling out exactly what was going to happen once the wheels fell of the sub-prime schmoozle. i didn’t get the full implication until 98.

    Comment by Che Tibby — March 1, 2010 @ 7:33 pm

  35. It’s crazy stuff. The only rules were do it to them before they do it to you. Some traders I had dinner with said our kids will hate us for this bailout.

    Comment by EXPAT — March 1, 2010 @ 8:02 pm

  36. Did you mean 07 and 08 che?

    Comment by EXPAT — March 1, 2010 @ 8:10 pm

  37. A cooler description of civilization-shattering events is an OCP

    Comment by ropata — March 1, 2010 @ 11:10 pm


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