The Parallax Brief

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Unrepentant Subjectivity on Economics, Politics, Defence, Foreign Policy, and Russia

Nicholas Taleb, David Hume and the Arrival of the Unimaginable

Nassim Nicolas Taleb is consumed by the unimaginable, and his life is built on expecting its arrival. Where the Parallax Brief sees bolts from the blue that lead to wildly unforeseeable outcomes, Taleb sees ordinary occurrences.

Taleb’s heroes are empiricists, like David Hume and Karl Popper, who believed that only those things understood through experience can be accepted as real. But Taleb’s empiricism is that of an extreme skeptic, almost an anti-empirical empiricist. He believes that nothing can ever be ruled out — that random events cannot be understood through statistical distribution, even when one’s past experience suggests as much — and that the impossible occurs far more regularly than humans accept.

Taleb’s views are encapsulated by one of his favourite Hume quotations: “No amount of observations of white swans can allow the inference that all swans are white, but the observation of a single black swan is sufficient to refute that conclusion.”

This makes Taleb extraordinarily relevant and important today.

This importance multiplied when Taleb crafted a book on what he, and John Stuart Mill and Hume before him, termed ‘black swan events’: — events written off as impossible but which actually occur, with disastrous consequences, far more frequently than is assumed — and had the good fortune (or prescience) to have it published on the eve of the credit crunch.

It turned Taleb the leftfield doomsayer into Taleb the celebrity soothsayer.

Taleb’s story is engaging and his theories intellectually fascinating, and both are detailed in an extraordinary Malcolm Gladwell New Yorker essay from a pre-crunch, pre-Black Swan theory 2002. Through the explanation of Taleb’s ideas, we learn of Victor Niederhoffer, a supposed genius stock trader who lost it all; why world renowned stock market players like George Soros and Warren Buffett might just be flat lucky; empiricism and its relevance today; and just what it is about the human mind that leaves our societies vulnerable to Black Swan events.

Highly recommended. (Click the link below.)

Blowing Up, Malcolm Gladwell, New Yorker, April 22nd and 29th, 2002

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Filed under: Economics, , , , ,

Ask and Ye Shall Receive

The Parallax Brief argued on these e-pages a couple of days ago that simply because recent recessions have been relatively short and ‘V-shaped’, there is no guarantee that the terrible crisis we’re currently living through will follow the same pattern. Humans are far more likely to base their predictions on recent memory than to delve back far into history or consider the possibility that something new and unseen could occur.

That’s one of the reasons irrational exuberance and panic pervades the markets still.

But actually, as the Parallax Brief argued in his article, we don’t really have to invent a new and cataclysmic economic Black Swan to get an idea of just how bad this recession could get: we simply need to look back further than 1938. Hot on the heels of the Parallax Brief’s article on this matter, Matthew Yglesias argues the same point (better) on his 100% superfly blog:

“Between the end of [the Great Depression] and the beginning of our current troubles, the National Bureau of Economic Research has identified eleven additional recessions, the longest of which (in the mid-seventies and in the early-eighties) lasted 16 months each. NBER doesn’t have data for the first half of the nineteenth century, but in the second half of the nineteenth century there were eleven recessions of which fully seven were longer-lasting than any of our post-Depression recessions.”

Note in particular the so-called “Long Depression” set off by the Panic of 1873. This was a five year, two month recession followed by a 34 month expansion followed by a new 38 month contraction. In other words, we had an eleven plus year span during which the economy was contracting over 75 percent of the time. That’s no good. And in addition to the direct economic harms of that sort of thing, you can have some very nasty political consequences in these situations. But that’s the world of passivity in the face of economic calamity.

Yglesias is far smarter than the Parallax Brief (he has a magna cum laude philosophy degree from Harvard, the Parallax Brief has a certificate of membership for the GI Joe Club), and it is hoped that his argument might be more persuasive than the Parallax Brief’s for those who don’t yet grasp quite how bad this could all get.

Filed under: Economics, , , , , , , , , ,