The Brown Swan
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January 06, 2009, 01:04 AM
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My critique in of Nassim Nicholas Taleb`s bestseller "The Black Swan: The Impact of the Highly Improbable" tries to walk the delicate line of giving the book credit while explaining some of the ways it will be misinterpreted — especially its title phrase.

In From Dawn to Decadence, 94-year-old historian Jacques Barzun offered a dozen dictums on pp. 655-656 from what he`s learned from three quarters of a century of scholarship. One was:

"The potent writings that helped to reshape minds and institutions in the West have done so through a formula or two, not always consistent with the text. Partisans and scholars start to read the book with care after it has done its work."

(By the way, this is certainly true of Barack Obama`s autobiography, which has "done its work" without being carefully read!)

A reader explains how the new catchphrase "Black Swan" is being rapturously greeted on Wall Street by the very people who poured billions into subprime mortgages in Compton. Hey, it`s not their fault they didn`t see all those defaults coming: it was a Black Swan!
I would emphasize, that in my opinion the Black Swan is a timely rationalization for the gross incompetence seen across finance (both the more private part and their governmental overseers) regarding very predictable events. That is, it is wrong in principal, because, and as you state, the disaster(s) should have been expected (or rather, the �black swan’ event would have been loaning to bad credit risks and having them actually paying the loans back, not the other way around).

Furthermore, you focus on residential mortgages and minority ownership (i.e., given VDare’s emphasis), but, of course it also applies to commercial mortgages, credit card debt, etc. In short, Taleb has given incompetent and/or corrupt finance types (especially �quants�) an easy out. For example, let’s say you are a risk manager at [gigantic but inept financial institution] (which I was), and you missed seeing, as you point out, that based on a normal distribution the default rate for Mexicans is on average X% (which is significantly more than for your typical founding stock American). Basic probabilities based on normal distributions would suggest you were a fool for not seeing a wave of defaults coming, but then you now have Taleb’s �black swan’ event to explain yourself.

I will now give you personal insight into this. I worked at [humongous Wall Street money pit] (until February of 2008) on what was called a �credit specific risk� add-on to their Value-at-Risk model. My focus was covering Credit Default Swaps (�CDSs�) and related credit derivates (CDOs, CDO-squareds, etc.) and non-derivatives. After the financial markets began their meltdown (which continues predictably to this day, and beyond) in late July/early August of 2007, the head of the Market Risk asked me if I had read The Black Swan. I told him that I had not, and asked if he had read [Taleb`s earlier book] Fooled by Randomness. ... By Thanksgiving almost every high level risk manager on Wall Street had read (or said they had read) The Black Swan. In hindsight, it is all so clear, here is a book that essentially goes on and on about what is normally a true but normally trivial point, by definition.

In effect Taleb gave the elites that screwed up on a monumental scale an easy out For example, �yes, I’m head of risk for Merrill and some say I should have seen it coming, but surely you have read �The Black Swan’ and now understand how that would have been impossible.� In short, Taleb has given all of finance the copout they need when they most needed it (i.e., everyone - practitioners, academics, regulators, etc.).

Attributing the worthlessness of your mortgage-backed security full of 2006-vintage Sand State subprime loans to a "Black Swan" is, in effect, a lot like blaming it on "Sh*t Happens," but it makes you sound erudite rather than stoned.

As today`s WSJ article "Housing Push for Hispanics Spawns Wave of Foreclosures" suggests, the mortgage meltdown wasn`t an unpredictable Black Swan at all. That rapidly Hispanicizing regions turned out to be full of people who couldn`t pay back their giant mortgages wasn`t impossible to forecast: instead, it was, to coin a term, a Brown Swan — a predictable disaster that goes unforeseen due to pervasive political correctness.