Positive Black Swans

11 responses to “Positive Black Swans”

1. 

   Apollo 11

   Sep 24, 2008 at 9:15 am

   Taleb has always been conveniently vague on practical advice.

   Reply
2. 

   Resh B.

   Sep 24, 2008 at 1:20 pm

   See what you did – I start reading this, and then navigate to black swan wiki, get side tracked by Taleb on Colbert Report, and I’m now on amazon looking at book reviews!

   Reply
3. 

   nhr

   Sep 24, 2008 at 7:01 pm

   > unlike the banks, that lost it all thinking they could contain their exposure to negative surprises…

   My two cents:

   Act 1.
   • Picture a normal deposit-taking financial institution.
   • The outfit gets money from the depositors, who expect to get paid a reasonable interest.
   • The outfit therefore tries to earn money by making loans.
   • If the loans are non-performing — e.g. dud real estate loans — the financial institution ends up losing money.
   • Depositors who try to keep current on economic matters then start to worry that the financial institutions are doing business with people of dubious creditworthiness, and that they might not see their money back.
   • Consequence: run on the banks by the depositors, shrinking balance sheets and severe liquidity problems at financial institutions, and concomitant failures — e.g. the US Savings&Loan crisis of the eighties, which ended up costing the US taxpayer a bundle.

   Act 2.
   • Picture a normal (by US standards) financial institution that doesn’t keep in its inventory the loans it makes to borrowers. Borrowers might include people with dubious credit ratings who have been somehow convinced that they should buy a house, duped by low teaser rates and the myth that ever-increasing real estate prices will make mortgage refinancings easy when their introductory teaser interest rates are reset to higher levels.
   • The "securitized" loans are sold by the bank to investors, who expect to get paid a reasonable interest.
   • Some investors in such asset-backed securities who like to keep current on economic matters then start to worry that the money flows from these mortgages might actually be quite fragile, and that the stated value of the real estate collateral attached to these debt obligations might be a bit inflated.
   • Consequence: demand in the financial markets for these mortgage-backed securites starts to drop; shrinking balance sheets and severe liquidity problems ensue for the issuing institutions and the investors in such securities, who get stuck with large inventories of unsaleable securitized loans with plummeting values.
   • Fears of systemic failures force the US government to bail out distressed financial institutions, which ends up costing the US taxpayer a bundle.

   I think a simple Mediocristan-based analysis of:

   • careless extension of credit to non-creditworthy counterparties
   • unrealistic real estate value appreciation assumptions
   • conflicts of interest / agency problems at loan origination intermediaries, who are paid on a commission basis, and thus share the upside but not the downside

   is sufficient to understand this latest situation of easy credit — i.e. capital mispricing — and resulting capital destruction, without having to resort to unpredictably rare dark-colored palmiped metaphors.
   It’s déja vu all over again, or nihil novi sub sole

   Reply
4. 

   jurvetson

   Sep 25, 2008 at 1:28 am

   Ah, all very cogent and logical, he would respond, but the very definition of a Black Swan is that it affords retrospective predictability. It was not at all clear just a few months ago to those unknowingly betting billions against this very scenario.

   I can see how Taleb drives his detractors crazy.

   Apollo11: What’s not practical about the advisement to get lucky!?
   😉

   Reply
5. 

   nhr

   Sep 25, 2008 at 7:27 am

   > It was not at all clear just a few months ago to those unknowingly betting billions against this very scenario.

   I’m certainly not a detractor of Taleb’s, and my opinion is that people who participate in financial markets without conducting sufficient due diligence on the products or sectors in which they allocate direct or indirect capital — e.g. real estate — get what they deserve

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6. 

   Resh B.

   Sep 30, 2008 at 2:49 am

   Can’t get this Black Swan thing out of my head. Ron Paul might be President!

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7. 

   Apollo 11

   Sep 30, 2008 at 7:10 am

   You’re right Steve, that is good advice. I’m going to get lucky!

   I just listed my house. I’m going to use the money to buy lotto tickets — limited downside, unlimited upside! How can I go wrong, now that I’m long the Positive Swan?

   Funny though, no bids on the house so far. I’m sure it’s just a slow week… 😉

   Reply
8. 

   jurvetson

   Sep 30, 2008 at 4:01 pm

   Yeah, and get a load of this – when we asked NNT if he would speak at one of our events, he charges for his time! I quoted him in response and offered a dollar for each point of NASDAQ swing that day (unlimited upside!) but he did not bite… harumph.

   Reply
9. 

   PhOtOnQuAnTiQuE

   Oct 13, 2008 at 8:58 pm

   Aeroculus just upload a link to a very passionate talk of Nassim Taleb on the financial crisis. What do you think of it ? ; )

   Reply
10. 

    mikescottnz

    May 31, 2009 at 3:19 am

    Who actually pays for their liability or mistakes ?

    Reply
11. 

    Broken Toy Shop

    Jul 12, 2012 at 11:45 am

    Who actually pays for their liability or mistakes ?

    You are joking right?

    NNT is some what vague and long winded at times. Currently reading his Black Swan book during work flights. I normally doze off before he finishes a point.

    Reply