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  • Quote of the Day

    Posted by Jonathan on September 7th, 2010 (All posts by )

    Any system susceptible to a Black Swan will eventually blow up.

    Nassim Taleb [Link is a pdf.]

     

    8 Responses to “Quote of the Day”

    1. tyouth Says:

      I imagine any system is susceptible a black swan eventually, and eventually, they’ll all experience one given enough time.

    2. Jonathan Says:

      Some systems aren’t susceptible. It depends on the returns distribution. A trading system based on buying options has bounded risks and unbounded returns. It may bleed to death slowly but won’t blow up. A trading system based on selling naked short options has bounded returns and unbounded risk and will probably blow up eventually.

    3. tyouth Says:

      Jon, I’m thinking more generally. Ultimately, no system is closed and unto itself. In the larger, more universal system of human behavior a black swan could occur and disrupt many things, many systems, at the same time. In analyzing BSs of options one must consider the more universal BS to be a “BS of options trading” in particular since the system could blow up (although your loss would limited) along with everything (or many things).

    4. Kirk Parker Says:

      Having read BS itself, I’m still left to wonder: how is this any more profound than saying, no human system can ever be perfect? I mean, that’s not exactly news

    5. Daran Says:

      Tyouth, that was my first thought as well. People seem to be fond of convincing themselves that this time everything will be different and we have entered a new age/way of doing business.

    6. Jonathan Says:

      Not all failures are alike. Some systems fail relatively safely, others have divergent behavior. The latter are subject to BS. See Taleb’s discussion in the linked interview of the two different types of noise.

    7. J. Scott Says:

      Jonathan, I used to ride submarines and we had a phrase for hull valves (valves that went directly to the ocean, therefore very important); “fail safe,” which led to a another phrase which referred to people; “fail stupid.”

      When I read BS, my initial reaction was that people naturally are desperate to make sense of their lives/professions. In particular, folks in the finance business who place too much faith in the vagaries inherent in any human system (particularly a system where “value” is a moving target subject to emotion/trends/etc) are setting themselves up when they ascribe too much to data which reveals less than assumed. Taleb’s warning that over-reliance on imperfect data will eventually cause adherents to fail stupid.

      I enjoyed the article—particularly the “remedy” Hill offers against confirmation bias—“Use the method of conjecture and refutation introduced by Karl Popper: formulate a conjecture and search for observations that would prove it wrong. This is the opposite of our search for confirmation.” This is an exceptionally difficult proposition; requiring the practitioner to think deeply and attempt to deconstruct their assumptions.

      Thanks for sharing.

    8. Daran Says:

      There are many systems that can degrade gracefully, but even they can be overwhelmed by Black Swan events. Could be the weather (Katrina), terrorism (9-11) or governement action (GM bond holders). Offering predictable, stable returns is what made Madoff so popular.