2019’s ‘Black Swans’
Credit to Author: BEN KRITZ, TMT| Date: Wed, 26 Dec 2018 16:16:28 +0000
AS tumultuous as 2018 has been, one of the most surprising things about the events of the year is that nothing really unpredictable has happened. There is a sense that the world is building toward some calamitous upheaval, but all of the economic and social tensions whose increase over the past months have encouraged that sentiment can be traced back to clear causes with enough historical precedents to have made predictions of the consequences possible.
In short, there have not been any real “black swans” in 2018, and that is discouraging. The implication of the lack of the unexpected is that we are deliberately wrecking our own world, rather than being able to blame our woes, at least partially, on some unforeseen, profound event.
For those who are not familiar with the work of Nassim Nicholas Taleb, a Black Swan is an event with three characteristics. First, it is an outlier, something that could not have been convincingly predicted from past events. Second, it has an extreme impact on the world of the observer. And third, it encourages retrospective prediction, or what Taleb describes as “degenerate metaprobability”: It is human nature to seek explanations, and so a Black Swan is subjected to a dubious form of Bayesian probability to make it predictable after the fact. This leads to the “Black Swan problem,” which is Man’s blindness to or psychological bias against uncertainty, which in turn has led to the disproportionate effect of Black Swan events on various aspects of human life throughout history.
To give a more or less familiar example, last year’s explosive expansion of the cryptocurrency bubble was, by Taleb’s definition, a Black Swan. This year’s utter collapse of the cryptocurrency market (the one prediction for this year that I got completely right, thank you very much) was not. Some other examples given by Taleb in his seminal 2007 book The Black Swan include the outbreak of World War I, the rise of the internet, the almost instantaneous collapse of the Soviet Union, and the September 11 terror attacks on the United States.
Apart from the direct effects of a Black Swan, which can be either destructive, beneficial, or both at the same time – after all, the catastrophe of the bubonic plague in Europe led to the Renaissance — the value of such an event is to remind us to account for uncertainty; this is a central theme of Taleb’s work. Without repeated object lessons, we quickly fall into patterns that make us vulnerable to a Black Swan.
One of the areas Taleb focuses on in his work is quantitative finance, in which an assumption of normal distributions guides the construction of models. This leaves the financial sector extremely vulnerable to shocks, such as when markets were completely blindsided by the large-scale devaluation of mortgage-backed securities back in 2007. Alarmingly, the world financial system seems to have again reached a state of extreme vulnerability due to the vast amount of debt created, as I have touched upon in a couple of recent columns.
In social and political terms, the world seems even less prepared for the unexpected. Even down to the level of individual interactions, perspectives and engagement have become rigidly polarized.
We — the people of my generation — need to look no further than the nearest mirror for the fundamental cause of this gross dysfunction. The generation now coming to power in the world, populating its workforce, generating most of its new wealth, and beginning to occupy positions of leadership are our children. We meant well in raising them to prize above all else the often contradictory values of self-esteem and open-minded acceptance of others, but have instead created a generation of self-important and dogmatically intolerant little monsters.
The Black Swans may be scientifically unpredictable, but history has shown that they do at least correlate with periods when the world is at its most tense. Given the current environment, we probably ought to expect an entire flock of Black Swans to descend on us in the coming year.
What they will be we can hardly guess now, of course, and there is probably little we can do to prepare ourselves for their impact. We might improve our resilience, however, by applying a bit of counterfactual reasoning to our assumptions. For example, we may ask ourselves, “What can we do if our monetary policy tools are completely ineffective against inflation?” or, “How might we withstand the total loss of remittance income?” or, “What steps would we take to recover if a disaster destroys Metro Manila?”
By considering the unlikely, we can expand our ability to conceive and employ unconventional solutions, which is what successfully responding to unanticipated events requires. We should realize that we are going to need that ability in the coming year, even if we cannot know when and in what manner the blow will fall.
ben.kritz@manilatimes.net
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