The Graying of Swan Lake

Seldom have I been more impressed with the subtle accuracy of a generalization than in the case of Nassim Nicholas Taleb’s dictum, “you never win an argument until they attack your person.” As an essayist and statistician, this Lebanese American teaching currently at NYU Polytechnic has developed some of the most original critical thinking on risk analysis and risk engineering. It reaches far beyond mathematical finance and has game-changing consequences for decision-making overall. Not many quants have their writings called to be among the dozen most influential books since WWII. No stranger to controversy, Taleb made his assertion first in 2007 that statistics is inherently incomplete as a tool set because it cannot predict the risk of rare events (which he calls Black Swans). But despite their rarity, and despite being incapable of prediction by extrapolation of existing data, they have disproportionally vast effects.

Since I can remember, I have heard people acknowledge, with a snicker, the ‘theoretical’ possibility of systemic risk, of a meltdown of basic operating infrastructure and assumptions. Like the presumption of innocence, it had become one of those exercises in lip service everyone made a ritual of mentioning while appealing to a near-universal consensus (end-time theorists of all stripes excepted) that systemic risk was just a theoretical hypothesis. Prior to 2008, who except few eye witnesses of 1929 et seq. would have given serious consideration to “major banks not lending to their peers,” bringing the money market to a virtual standstill? Who would have expected that banks would, in essence, depart the lending business altogether – at least to the extent it could not be pushed off their balance sheet? Or that there would not be significant demand for major-ticket securities blessed by all three major rating agencies with their highest medals of honor? Or have perceived the Swiss National Bank as a source of global instability?

If we are to capture by intellect and to deal meaningfully with the effects of entirely random and unpredictable events in life, we require different tools than conventional wisdom traditionally uses – and that includes transcending conventional statistics.