Monday, April 23, 2007

Niall Ferguson on VTech Black Swans

Very short and smart piece by Niall Ferguson. The term is coined by Nassim Nicholas Taleb (often used by John Robb).

The term refers to a completely unexpected event. If you lived in North American all your life all you would ever see are white swans. But in Australia, swans are black. You would never have guessed this. And moreover, humans tend to retroactively argue back to the idea that they could have predicted these black swans. Ferguson believes the VTech murder was such a swan and that the media coverage, true to form, has argued back to how we should have known/did know this was coming.

Applied to VTech, here's Ferguson:
Over 20 years of university teaching, I have seen my share of taciturn, moody young men. Many have had difficulties with girls. Some have needed counseling. A few have required psychiatric treatment. I have often contemplated the risk that one of my depressive students might commit suicide. But the risk that one might kill 32 people? Never.
But more broadly, a key quote:
Why, Taleb asks, do we tend to confuse improbability with impossibility? Partly, he suggests, it's because evolution did not favor complex probabilistic thinking. But our flawed way of thinking also reflects the development of Western philosophy, social science and history. The Platonic school of philosophy encouraged us to prefer simple theory to messy reality; it also inclines us to select only the data that fit our theories. Taleb especially abhors the tendency of economists and others to assume that everything conforms to what is called the normal distribution, or bell curve.
When applied to history, Ferguson's task:
YET IT IS Taleb's assault on traditional historiography that is most relevant here. Since Thucydides, it is true, historians have encouraged us to explain low-probability calamities (like wars) after the fact. Such storytelling helps us to make sense of a random disaster. It also enables us to apportion blame. Generations of historians have toiled in this way to explain the origins of such great calamities as, say, World War I, constructing elegant narrative chains of causes and effects, heaping opprobrium on this or that statesman. There is something deeply suspect about this procedure, however. It results in what Taleb calls the "retrospective distortion." These causal chains were quite invisible to contemporaries, to whom the outbreak of war came as a bolt from the blue. The point is that there were umpteen Balkan crises before 1914 that didn't lead to Armageddon. Like Cho, the Sarajevo assassin Gavrilo Princip was a black swan — only vastly bigger.
And then even wider, to globalization itself:
Perhaps the most provocative of Taleb's many provocations is his hypothesis that, as a result of globalization and the speed of electronic communication, the size and incidence of black swans may be changing. Yes, the integration of international markets seems to reduce economic volatility. But by magnifying the effects of herd-like behavior (another of our evolved traits), it also increases the tendency for winners to take all — the "Harry Potter" phenomenon — and for disasters, when they strike, to be comparably huge.
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