Waves and Swans: A Beginning

On my flight to the East Coast (New Jersey) I read the The Black Swan: The Impact of the Highly Improbable, which in an of itself being #76 on the Amazon best-seller list is by the authors criteria itself a “Black Swan”. This book has a number of good ideas, but alas uses a number of fallacious notions and claims, some less critical some more so to stake its claim.

One of the interesting repeated targets of Mr Taleb’s scorn, which he terms Platonism, is one which is carried too far. Platonism, that is essentially the use of abstraction, is ridiculed and dismissed repeatedly. However, one might at the same time, put alongside the paper cited a few days ago of Mr Wigner’s on the unreasonable success of Mathematics in Physics (or one might say … the unreasonable success of Platonism in explaining the Physical universe).

I plan to get into more detail about some of the notions in this book during the rest of this week, but I’ll leave with a few short comments tonight.

  • I had mentioned when I noted that I was going to be reading this book, that camparisons to the more traditional historical work by David Hackett Fischer, The Great Wave: Price Revolutions and the Rhythm of History, might serve as a counterbalance to this book. In The Great Wave, Mr Fisher notes some intruiging research. In the last 800 years of Western history there have been a small countable number of periods of dramatic stability (or in the Mr Taleb’s terms the “Black Swans” had little impact) and periods of great instability (lots of Black Swans having greater effect) on political and social fronts. Mr Fisher correlates ecomonic price data of staples and commodities and lines them up with those historical periods and found a strong correlation. Periods of growing price instability especially in staples and other commodities precede and continue throughout periods of instabliity and during periods of relative price stability … political stability was also seen. 
  • Mr Taleb “cleans” up his argument a great deal. He presents occupations as being part of, or disconnected from, the affect of Black Swans, i.e. the improbable. One of his consistent examples is writing. However there in addition to luck (or the improbable) as connected with the career of writing at the same time a stable (non-Black Swan) related career one can derive from that. Not all aspiring writers are either wildly successful novelists like Ms Rowlings or operating machinery in Starbucks. Many, if not most, writers are writing copy for ordinary use. Writing technical manuals, textbooks, advertising copy, white papers, and so on. Programmers like the Woz made a killing, but there is an ordinary profession and stable livelihood to be made from perfecting and developing skill at programming (as at writing).
  • It’s interesting to note that the ancient Chinese Lao-Tzu philosopher also considered the problem of the danger of upheaval and perhaps loosely interpreted the Black Swan in the political arena. Lao-Tzu suggested becoming a craftsman in a trade that was specifically not useful for the machinery of State, so you wouldn’t get drafted into the games of Nations and at the same time, being useful for society, but not useful for the state insured the greatest chance of not being caught up gristmill of intra-national and inter-national strife.

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2 comments

  1. Boonton says:

    Interesting but what did you make of his ‘war’ against the bell curve? If I had to summarize the idea it would be don’t assume a time series is a random sample of a population that is normally distributed. In other words, if you look at housing prices for the last 10, 20, 30 or 100 years and derive a mean and standard deviation don’t assume that you have a sample of the population and a sudden fall of five or six sigma is one in many millions.

    As I said in a previous thread, he doesn’t describe his ‘trading theory’ very well. From what I can make of it, he assumes humans underestimate the odds of a ‘black swan’ event. Hence he puts most of his money in very safe investments and a tiny portion purchasing very out of the money options (on the assumption human bias will make them underpriced). The ‘once in a life time’ event where the highly unlikely (like a single 20% drop in a single week) happens allows his fund to make almost all of its 10-20 yr returns in a few days.

    I was speaking to someone at work who had a similar strategy but for different reasons. He had become convinced some time ago that we were in a massive bubble so he moved all his money to very safe treasuries. He would take the interest income on those and buy puts on the S&P 500. He let it go but he had one that would have turned his $2,000 into $200,000 if he had kept playing this strategy when the recent collapse happened.

  2. Mark says:

    Boonton,
    Well, as for the Gaussian. There are three things that come first to mind, in my history, his war against the Gaussian is a little strange, that akin to his remark that the Heisenberg Uncertainty isn’t about uncertainty, because those Gaussians are real (and perhaps Platonic?). I spent my formative years training in Physics … most of my appreciation of the Gaussian is with real Gaussians, as it were. Second, I agree with a lot of his points … my plaint against polls for example is partly based on my annoyance at the “error” bars produces by an assumption that the “errors” in the poll are due to non-random human sources, i.e., non-Gaussian. Finally, his negative remarks about Gauss himself I take in a mixed manner. Gauss was a first order genius and his reputation is well deserved. On the other hand, I think the idea that he also was a not above a little academic “credit” chicanery is shameful and an unfortunate blot on his legacy.