The Black Swan

From The Black Swan: The Impact of the Highly Improbable by Kevin Cook:

Market commentators this summer will be reflecting on the first anniversary of the subprime meltdown, which may have total losses of more than $500 billion. Many will connect the dots lining up the “obvious” events which led to the inevitable failure of the debacle’s poster boy, Bear Stearns, whose highly leveraged CDO hedge funds collapsed, followed by the investment bank itself eight months later. The story, in hindsight, was certainly “predictable” they will say. Then why, outside of a few persistent—and prudent—bears, did no one do so?

Someone did—sort of. But he will be the last to take any credit for it or to even say that it was predictable. Nassim Nicholas Taleb wrote The Black Swan in spring 2007, only weeks before the mortgage and credit implosions began. How did Taleb sort of predict the crisis? It wasn’t by studying the housing market or credit derivatives. In fact, he doesn’t talk about any of that. What Taleb predicted was that a surprising financial event with deep impact (like the subprime crisis) was bound to happen precisely because bankers and professional investors were consistently relying on financial models of probability and risk, making it seem so unlikely and remote. The book, named for the phenomenon of surprising and often shocking events (as was the case when Western explorers first encountered black swans in Australia), is an exercise in the philosophy of knowledge, written by a quantitative trader who earned his stripes responding to and then studying the rare, consequential and unpredictable—his three criteria for defining black swan events.

Read the rest here.