Out of touch for a few days/Black Swans

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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

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About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.