The idea of “Black Swans” came out of Nassim Taleb’s experiences with rare events related to his Wall Street stock investments. It had been assumed that the stock market was orderly and that the mathematical tools similar to normal distribution of bell curves would be a good guide to forecasting probable events. Unfortunately there were too many rare events which should happen only once in a very long time, a thousand years or more, using those models, but they were happening more than once in ten years. Taleb named these unusual events Black Swans. The term came from an old English tradition that all swans were white, and although it was easy to talk about black ones, as black birds are common, black swans had never been seen in England and therefore they didn’t exist.
It may be possible to predict where Taleb’s rare black swans do exist, by searching for the factors that are precursors to these events, these low-probability, high-consequence events. Here is an article from Stanford University called Black Swans and Perfect Storms, that discusses the problem from a statistical risk perspective. It is concerned with rare disasters, but I wanted to include positive Black Swans and those rare events that could have disproportionately positive effects. The idea to be explored in this post is to find a more general way to explore the qualities of rare events and reveal their common attributes. This subject could be, and probably soon will be, a whole department at a major university, but I will cover it in this single blog post. This of course is hubris expanded several orders of magnitude, but let’s move on into this unknown and see what there is to discover.
Some outlines for searching into the Unknown Unknowns
The Universe permits all things that can be done and prevents all things that can not be done. If something is clearly impossible, not just unknown, then we shouldn’t waste time chasing after it. But, if it is not clearly impossible, it might exist and therefore could be sought and if found explored. To do these kinds of risky searches would imply there was expected to be a very large reward. Some kinds of Black Swans will have great reward for little risk, and others will have little reward for great risk, and it is usually easy to identify the difference.
An objective scale for measuring the Trustworthiness of information. Trustworthiness of information is always important, but when searching for Black Swans it becomes critical to identify the information that is most likely to be valid and to give it appropriate weight. It is likewise critical to identify information that has low reliability and to give it an appropriate weight too. Black Swans are by their very nature rare events, and will require a very large database to identify the most valuable information, but that database doesn’t exist, and may never exist. And yet, we must make decisions. The goal would be to make decisions in such a way as to minimize loss if it is a negative Swan and maximize gain if it is a positive Swan. It might take only a modest outlay of time, effort and money to cover these contingencies, because there is no competition.
Defining the limits of the possible and the impossible. In the stock market example it would appear almost impossible for there to be price fluctuations in the fifth standard deviation using the bell curve, and therefore no one will waste their time and money thinking about it. This means if you are the only one with a collection and protection plan that takes these events into account you will make a fortune. If it’s a negative movement, you can also make a fortune because you can buy stuff for pennies on the dollar, or even less, but that requires being prepared for the unpredictable. But, it is predictable, because with this theory in mind it is not impossible, and not being impossible in some cases it is inevitable. In the case of the US stock market these rare events happen all too often.
Intentional blindness to the unknown unknowns. Everyone acts as if Black Swan events are too rare to happen now, and they believe they will see these major events before they occur, and can make effective last minute preparations. In hindsight huge events appear inevitable, because they caused so much disruption and the stressors were so obvious. But, that isn’t what happens in those people’s present, because everything seemed to be working okay. There is a hesitancy to act, and get out of their personal situation, when there will be an immediate personal cost, even if that cost is small. We tend to wait for trusted authorities’ opinions, and until there is a general consensus. The first to panic are those who are over-trusting, overextended, and over-leveraged; they are living on borrowed money and borrowed time. But when a few of these happy fools are visible in their panicked collapse, and others in a similar overextended condition see the danger they try to get out quick. The instant there is no slack in the system to exploit these conspicuous failing fools, there soon develops a general panic and then it’s too late to do any adjustment based on the old system, and the collapse becomes too big to be controlled. One of the qualities of a Black Swan event is that you can’t see it until you are well into it; it is too sudden to act reasonably. Watch for over-extended groups with behavior that implies things are okay without any evidence that they are okay. They are overextended into an unstable situation with no slack, and no one able to help them or even exploit them.