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The Brown Swan


"My critique in VDARE.com 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."

http://isteve.blogspot.com/2009/01/brown-swan.html