PICKING UP NICKELS IN FRONT OF A STEAMROLLER. Looking back (using the search feature for the blog), I see that my first post of many on Nassim Nicholas Taleb’s book THE BLACK SWAN The Impact of the Highly Improbable, was not about the current financial crisis, but dealt with the probability of one lone genius writing Shakespeare’s works. I don’t seem, however, despite having come to use the metaphor frequently in conversation, to have posted on Taleb’s characterization of investors, like those who have been in the news, who make money by borrowing heavily to take advantage of small opportunities for gain while ignoring the small probability of enormous losses. He has a wistful chapter about how those investors are highly prized, even though he says what they do is like picking up nickels in front of a steamroller.
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The problem with the BLACK SWAN imagery is that the probabilty for enormous losses was actually quite high given the collective pattern of behavior. The crash was predictable and predicted, but the warnings were ignored.
Yes, I think the imagery is a little misleading. Perhaps the message should be restated: there are a lot more Black Swans out there than people think. People treat events that, as a hypothetical, have a 5% chance of happening as if they there is a .001 % chance of happening as if they were astounding occurrences. Taleb has said that the current financial crisis was not particularly unusual. I think Nick and I used it the image in the same way in talking about Shakespeare, and I have used it in the same way in talking about the financial crisis.