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Pull out the ”Black Swan” from your bookshelf!

16-03-2011 08:56

Do you remember 9/11 or the financial crisis? Highly improbable events with three principal characteristics: It is unpredictable; it carries a massive impact; and, after the fact, we concoct an explanation that makes it appear less random, and more predictable, than it was. This is how Nassim Nicholas Taleb introduced his book from 2007 about the impact of the highly improbable, the “Black Swan”.

So now we have the earthquake, the tsunami and the nuclear power plant emergencies, all at the same time in Japan, and another black swan is emerging, or perhaps three of them. I grab my Black Swan book, and start to think about the logic of it all, that what you don’t know is far more relevant than what you know.

At this time, when the Japanese disaster is still unfolding, there are certainly things we don’t know yet. Still, there are experts who are certain about things, as today, when I learnt that selling shares at this point was an overreaction. How do we know this? We could of course think about the “normal” by looking at previous earthquakes and nuclear accidents, and learning that after some time the share prices were up again. But the bell curve might not be the best way of looking at things at this point, it may be relevant to also consider the outlier events, or the fat tails of that bell curve.

Taleb calls the bell curves the GIF, the Great Intellectual Fraud, because they ignore the large deviations. Things can go well in Japan, but things could at this stage also get worse, and how do we deal with that? By being open minded also about the extremes, even if it comes with fear. Remember that today, when you find too much certainty reported even though things are everything else but certain.

Cecilia Hermansson
Group Chief Economist


Cecilia Hermansson
Cecilia Hermansson
Group Chief Economist, Economic Research Department, Sweden


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