Thursday, 31 January 2008

Market Meltdowns and Black Swans

It has been a real messy time that world economy is going through and with all those cries about the slowing US market pulling down bunch (may be more) of world economies with it.
Inciedentally i couldnt stop myself thinking about the book that i read recently Black Swan by Nicholas Nassim Taleb, It was a very good read and thought provoking. Taleb is one of the few original thinkers that i have come across who leaves a mark on your thoughts. His eloquent arguments that shakes the fundementals of your thinkings especially about those forecasts and rudimentary statistic will leave a strong impression on your thinking process.
He defines Black Swan as a "large-impact, hard-to-predict, and rare event beyond the realm of normal expectations", as the definition implies world is full of surprises that hit you hard in either good or bad way. In simple terms , blackswans are something which people have hardtime predicting and a simple example being wive's anger.

The real interesting part is that nobody would be able to predict (obviously) the occurance of black swans (unless you want to co-relate something that Nastradamus wrote -while he was too drunk), A recent black swan is the global economic meltdown -liquidity crisis , however you would want to call it - which has hit several economies badly, the US real estate boom has been on since from 1996-2006 and nobody warned about the associated sub priming which has been brewing up all those years, atleast those I-KNOW-ALL-ABOUT-ECONOMY types. I am very intrigued to know what happened to that hotshot investment banker who first made the nice presentation about projected incomes from Investments of those securities which were wrapped around sub-prime mortagages, may be he is on the look for the job or could be in caymans island in his own yacht.

Once it became very clear that the meltdown has happened , it became very easy for every body to formulate theories in hindsight and to explain whole anatomy of the subpriming crisis and the world is flooded with those strongly opinionated articles that explain what went wrong. Though we cannot say anything wrong about these post-mortems , after all every body needs to survice, but the fact that phenomenon of such a profoundly complex financial instruments which got wrapped with huge sub priming risks ( in a neatly decorated bouquet, with simple names) and offered at a premium didnt catch the eyes of economic guardians is very surprising.

But whatever may the reason, as Taleb rightly puts we have a strong tendency is formulate theories that explain calamities/catastrophes very clearly in retrospect but our powerful modeling techniques and economic gurus always fail to tell us that something is cooking up which could blow things apart(Any body out there doing Predictive Analytics?), one can argue that it may not be possible to do so given the complexities of the macro economies which are very well tied together after globalisation , but after all its not Tsunami or a Volcanic eruptions, it was those greedy guys who wanted to make good bucks on those who had strong desire to buy a home yet didnt do a math of whether they could repay consistently and those non US global economies around the world who just wanted to dump some money and forget about it.
May be these are the side effects of globalisation and the out comes of capitalistic aspirations which are the prime movers of today's economy.

In the back drop of all of these things, i dont know how may Jerome Kerviels are playing out with billions and how many black swan eggs would be hatched soon. The world is getting to be a more interesting place with lot of things going wrong ,after all - it is the unpredicability and a bit of chaos which adds flavour to our life (As long as we dont lose money on it).

1 comment:

Lo in one sock said...

Hey. I like this book in some ways....interesting ideas. I also particularly like the idea/metaphor of a black swan as originality and grace meeting blackness as opposed to whiteness. I would like to use the image as a logo on my stationary and possibly on a tote bag I would create. Do you know who I need to get copyright privileges from?

Tks for the blog.

Lo Galluccio