Posts Tagged ‘Black Swans’

Black swans and nuclear disasters

September 16, 2013

When I was a business reporter for the Democrat and Chronicle here in Rochester, N.Y., I interviewed, and largely believed, supposed experts on risk about how members of the lay public exaggerated the dangers of nuclear power.

These risk specialists said people feared nuclear power because they were prone to irrational fear of dangers that potentially are great, but whose possibility of actually occurring are so small as to be virtually non-existent.

fukushima-factsThe U.S. nuclear power industry did, in fact, have a good safety record.  Even after the partial nuclear reactor meltdown at Three Mile Island, Pennsylvania, in 1979, it was possible to say that no identifiable American had died as a result of nuclear power.

Then came the Chernobyl disaster of 1986 which made parts of Ukraine a toxic wasteland.  I attributed the tragedy to Communists not being able to manage a nuclear power plant competently.

Such a disaster would be highly improbable in a Western country, I thought.  And the last place I thought such a disaster could happen was Japan.  Not only were the Japanese known for being meticulous about good engineering practice, they were the only nation to have suffered nuclear bombing and would be especially nervous and careful about anything nuclear.

By the time of the Fukushima disaster of 2011, I had read Nassim Nicholas Taleb’s The Black Swan, and realized that the human tendency is to forget that the improbable is not impossible.  How likely was it it that a nuclear plant site would be hit simultaneously with an earthquake and a tidal wave?  Yet it happened.

Fukushima is an ongoing disaster that is much, much worse than anyone thought it could be.  Click on The REAL Fukushima Danger for a comprehensive roundup on Washington’s Blog to understand just how bad it is.

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The necessity for error, stress and risk

March 23, 2013

Nassim Nicholas Taleb, a successful options trader on Wall Street, is one of the most interesting and original writers of our time.  In Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets, he wrote of how luck is mistaken for skill.  In The Black Swan: The Impact of the Highly Improbable, he wrote about how frequently people are blindsided by the unpredictable, which is important precisely because people don’t prepare for it.

antifragile-book-coverHow do you prepare for the unpredictable?  In his newest book, Antifragile: Things That Gain From Disorder, he tells how.   Antifragile sparkles with wit and is a delight to read.  Taleb invents dialogues about life and high finance between two fictional characters, the intellectual Nero Tulip and the street-smart Fat Tony.  He tells fascinating anecdotes about his personal life, starting with his boyhood in the Christian community in Lebanon and continuing to the present day.  He insults his enemies and boasts of his accomplishments with readable gusto.

In his philosophy, everything falls into one of three categories—fragile, robust and anti-fragile.  A delicate wine glass is fragile.  In mythology, the fragile is symbolized by the Sword of Damocles.  Nobody knows when it is going to fall, but it can fall at any time.  The robust is symbolized by the Phoenix.  No matter what you do to the Phoenix, it keeps being reborn.  The anti-fragile is Taleb’s original idea.  It is symbolized by the Hydra.  When you whack off its head or limbs, it grows more.  Attacking the Hydra makes it stronger.

A delicate wine glass is fragile.  You don’t know if it will break tomorrow or last a thousand years, but you do know that any little thing can break it.  A granite block is robust.  Few things can damage it, but over time it is going to be ground down.  A roaring fire is antifragile.  Whatever you throw into it or do to it (within limits), it is going to grow stronger.

The reputation of writers is antifragile.  Any attack on a writer’s book will stimulate interest in the book.  It doesn’t matter how many people dislike a writer, only how many are admirers.  Taleb noted that few people saw any merit in the work of the young Ludwig Wittgenstein, but it didn’t matter, because two who did were Bertrand Russell and John Maynard Keynes.

Living things are antifragile (up to a point).  Exposing yourself to error, stress and risk can make you smarter, stronger and safer.  If you spend a month in bed, you grow weaker.  If you spend a month doing hard physical work in the out of doors, you grow stronger.

Taleb tells of twin Greek Cypriot brothers who settled in London at the same time.  One became a taxi driver, the other went to work for a bank.  The taxi driver’s income varied quite a bit from day to day, week to week and month to month, while the bank employee’s income was completely predictable.  Although over time, they earned roughly the same amount of money, it would have seemed that the taxi driver was less secure—that is, until the current banking crisis, which has left the bank employee in jeopardy of being laid off and having to start over in middle age.

turkey.predict

Click to enlarge.

The banker brother is an example of what Taleb calls the turkey problem—inspired by the empirical chicken in Bertrand Russell’s The Problems of Philosophy.  The turkey, noting that it is fed every day at 9 a.m., decides this is a law of nature, right up until the day before Thanksgiving.

The problem with the modern world, according to Taleb, is the illusion that life can be planned and controlled.  The result is fewer minor setbacks and more big crises.  Putting out every little forest fire allows flammable material to accumulate until there is enough for a really big fire that goes out of control.  The illusion by “fragilista” Alan Greenspan and others that they could eliminate the boom-and-bust economic cycle resulted in problems building up into a major economic crisis.

The alternative is trial and error, provided the errors are small and the potential gains are great.  Taleb, an immigrant said the greatness of the United States is that it encourages people to attempt new enterprises, with little penalty and no disgrace for failure, but big rewards for success.

Intellectuals put too much stress on the ability to articulate knowledge, Taleb says.  He wrote a Platonic dialogue between Socrates and Fat Tony, in which Fat Tony refutes Socrates’ contention that he lacks understanding unless his actions are based on clearly-defined terms and theory.  Taleb says the fact is that practice is seldom based on theory, but rather theory is an attempt to explain practice after the fact.  Theorists want to “teach birds how to fly.”

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Nassim Nicholas Taleb’s five rules for policy

March 23, 2013

Rule 1.  Think of the economy as more like a cat than a washing machine.

Rule 2.  Favor businesses that benefit from their own mistakes, not those whose mistakes percolate into the system.

Rule 3.  Small is beautiful, but it is also efficient.

Rule 4.  Trial and error beats academic knowledge.

Rule 5.  Decision-makers must have skin in the game.

Nassim Nicholas Taleb is a successful Wall Street options trader and author of a new book, ANTIFRAGILE: Things That Gain from Disorder.  In a recent article in the Wall Street Journal, he laid down those five wise rules for economic policy-makers.

The economy is organic, like a cat, and not mechanical, like a washing machine.  Every kind of stress on a machine causes it to wear out faster.  But a living animal thrives on stress, up to a point.  Animals and other organic systems are best left alone, except in dire emergency.

One of Taleb’s examples of businesses that learn from their own mistakes is the airline industry.  Every time there is an airplane crash, the airline companies study the causes of the crash and incorporate that information into their practices.  In a sense, every airline crash makes the airlines safer.  Another example is Silicon Valley, where failure is not regarded as a disgrace and the idea is to “fail quickly” so you can go on to try something.   The opposite of this is the Wall Street banking industry, where every bank failure weakens the overall system.

An industry is strongest when it consists of many small units, where the failure of an individual business makes the survivors stronger.  Taleb cited the restaurant business, in which the failure of an individual restaurant is common but the failure of the restaurant industry as a whole is unimaginable.  Failures mean the best restaurants survive, and so the industry is ever-improving (assuming, I would add, that the big chain restaurants don’t drive the individually-owned restaurants out of business).  Government is least harmful, he wrote, when it is vested in the lowest and possible unit, as in Switzerland.

We should honor failed entrepreneurs in the same spirit that we honor warriors who fall in battle.  It is through their individual sacrifice contributes that society as a whole survives and prospers.

He is skeptical of top-down planning, whether done by government, corporations or some other form of corporation.  The best economic and social system is one that allows trial and error in which the errors are small and are a source of knowledge and improvement.  Experimentation and tinkering, not theory, is the source of technological and economic progress.

The trouble with most journalists, academics and government policy-makers is that they suffer no penalty for being wrong, not even a loss of reputation.  Even worse are Wall Street bankers, who are able to pocket the gains from their successes and push their losses onto the taxpayers.   He said the government in a humane society ought to provide for the weak and help the unlucky get back on their feet, but it should never bail out a failed business.  If a business is too big to fail, he said, nobody in that business should receive greater compensation than the most highly-paid civil servant.

Taleb admires Ralph Nader because he is the opposite of a Wall Street banker.  Nader accepts personal risks and sacrifices in order to confer benefits on society as a whole.

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How to live in a world you don’t understand

March 23, 2013

Nassim Nicholas Taleb is the author of  ANTIFRAGILE: Things That Gain From Disorder,  which is about how to thrive in a world that is basically unpredictable.  Taleb said that individuals and societies become stronger when they expose themselves to moderate amounts of stress and risk, and become vulnerable when they try to eliminate stress and risk.   He said it is impossible and unnecessary to predict the future.  What is possible, on an individual and societal level, is to arrange things so that you have more to gain than to lose from change.

In this video he talks about his ideas to his friend Daniel Kahneman, author of Thinking, Fast and Slow, which is about how people make most of their decisions on the basis of intuition, and how thing can lead us astray, particularly when thinking about risk.

I give you fair warning that this video is an hour and nearly 20 minutes long.  I thought it was interesting and maybe you will, too.   Here are some quotes from the book which I hope will pique your interest.

My characterization of a loser is someone who, after making a mistake, doesn’t introspect, doesn’t exploit it, feels embarrassed and defensive rather than enriched with a new piece of information, and tries to explain why he made the mistake rather than moving on.

He who has never sinned is less reliable than he who has only sinned once.  And someone who has made plenty of errors—though never the same error more than once—is more reliable than someone who has never made any.

As a rule, intervening to limit size (of companies, airports, or sources of pollution), concentrations and speed are beneficial in reducing Black Swan risks.  These actions may be devoid of iatrogenics—but it is hard to get governments to limit the size of government.

My idea of the modern Stoic sage is someone who transforms fear into prudence, pain into information, mistakes into initiation, and desire into undertaking.

The true hero in the Black Swan world is someone who prevents a calamity and, naturally, because the calamity did not happen, does not get recognition—or a bonus—for it.

Anything that needs to be marketed heavily is necessarily either an inferior product or an evil one.

If there is something in nature you don’t understand, odds are it makes sense in a deeper way that is beyond your understanding.

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