I’m off to work with the CSIRO for a few days on modelling, and I may not be able to keep up with blog comments as well as I’d like to.
I’ve also had a correspondent who is prevented from posting to the blog by a too-strict Internet censoring policy in the country he’s currently in. I suggested that perhaps someone on the blog would be willing to “shadow” for him: i.e., sign on to the blog with an additional alias, and copy any emails from him as posts to the site.
If anyone is willing, please drop me a line and I’ll introduce you.
In the meantime, one thing he wanted to raise discussion about was Nassim Taleb’s “Black Swans” book, which is summarised in this article from the Sunday Times: June 1, 2008: Nassim Nicholas Taleb: the prophet of boom and doom. A brief (and not all that representative) extract from the article:
[America’s] primary problem is that both banks and government are staffed by academic economists running their deluded models. Britain and Europe have better prospects because our economists tend to be more pragmatic, adapting to conditions rather than following models. But still we are dependent on American folly.
The central point is that we have created a world we don’t understand. There’s a place he calls Mediocristan. This was where early humans lived. Most events happened within a narrow range of probabilities – within the bell-curve distribution still taught to statistics students. But we don’t live there any more. We live in Extremistan, where black swans proliferate, winners tend to take all and the rest get nothing – there’s Bill Gates, Steve Jobs and a lot of software writers living in a garage, there’s Domingo and a thousand opera singers working in Starbucks. Our systems are complex but over-efficient. They have no redundancy, so a black swan strikes everybody at once. The banking system is the worst of all.
“Complex systems don’t allow for slack and everybody protects that system. The banking system doesn’t have that slack. In a normal ecology, banks go bankrupt every day. But in a complex system there is a tendency to cluster around powerful units. Every bank becomes the same bank so they can all go bust together.”
As someone trained in complexity theory, I have sympathies for the basic thesis of Black Swans, though since I am also a “Minskian” in my economics, I don’t regard this crisis as an unpredictable event, but all too predictable. What’s “Black Swan” about it is simply how big it is, and that’s partly the complex systems perspective: we are lulled into complacency by the small scale “close to the mean” events that happen all the time, but in a complex system it is the really big events that are so enormous that they shape the system, and in the long run the small events are irrelevant.
This is the opposite of a statistically random process, where the tiny movements about the mean are so many that they overwhelm the incredibly rare big events, which can safely be ignored.
At some point I’ll write a post on this topic as applied to the financial system, and also put some explanations of the technical issues. But in the meantime this book–and its discussion in The Sunday Times–may be worth a discussion.
Cheers, Steve
