January 6, 2009

Black Swan Sighting

Jill Claman of Fox News interviews investment guru David Swensen, who has guided Yale's endowment ($20 billion last summer) to (until recently) consistently (and, to my mind, suspiciously) gigantic returns (17.8% per year for ten years):

Claman: Isn't it fair to say right now we face what some call a Black Swan event? This term "Black Swan" indicates that something we rarely ever see. Has it taken you by surprise?

Swensen: You're absolutely right to characterize it as the Black Swan event. By the nature, the events have to take people by surprise.

Don't blame me, it was a Black Swan!

My published articles are archived at iSteve.com -- Steve Sailer

22 comments:

Vernunft said...

"Real estate bubble bursts" should not be a surprise to anyone. Especially some dude in charge of billions.

headache said...

OK, I'm just an engineer so I know zilch about money. But I kept reading in the press that there would be a financial meltdown based on mortgages and a housing bubble. Most serious people in the US and Europe were calling this since 2002. In fact I have an article at home from the Economist dated 2000 which stated the international housing bubble had to burst eventually.

Seems Swensen was not reading the papers. I thought gurus like him were paid to know exactly WHEN the crash comes. Us johns just have a clue there's trouble but we don’t know WHEN it will hit. Nice theory this swan stuff, nice way to get rid of some blame for being a clueless exec.

Sammler said...

There is a sense in which Mr. Swensen's statement is defensible. A "black swan" as described in Mr. Taleb's book is an event which shows the falsehood of one's axioms: for example, the axiom that swans are white. What Mr. Swensen is literally saying is that the market, and he himself, based their reasoning on premises which turned out to be false. This is not necessarily an excuse.

Regarding "headache"'s comment above: knowing when (i.e., timing the market) is notoriously the most difficult part of trading. Following a trend is very easy; knowing when it will break is between difficult and impossible.

agnostic said...

Black Swan shooting:

"Moreover, Mr Roubini says it was economic analysis, rather than a gloomy cast of mind – he describes himself as a cheerful pragmatist – that inspired his bleak predictions. "This crisis was not a Black Swan event," he argues, citing Nassim Nicholas Taleb's book on the importance of the extreme and the unknowable. "It was more of a generalised asset and credit bubble throughout the economy . . . But whenever you are in the middle of a bubble people find ways to justify the asset prices."

From here

Anonymous said...

Fascinating. Ab-friggin'-solutely fascinating.

Can we start calling Hitler (and the Holocaust) a "Black Swan event" now?


JD

Wade Nichols said...

Seems to me that the construction of the narrative (which is one of the elements of Taleb's Black Swan theory) is more reflective of human nature.

We always attribute our investing successes to our own personal "genius" or unique insight into the markets (internalization) - "Well, of course my hedge fund is up 48% this year, I'm a genius!"

Of course, when our portfolios are down 35%, it's never our own fault. It's always some external factor beyond our control - above average market volatility; war in the middle east; spike in the price of oil, etc. etc.

You see this especially when you ask foreign exchange traders why they had a bad quarter. They almost always will blame it on: "unusual or above average market volatility". But if markets weren't volatile, if they simply didn't move, these same FX traders would never earn any money. When they have an excellent quarter, they never say: "I was lucky!", it's always: "My unique insight and perspective on the market allowed me to position my portfolio to take advantage of market trends", or some other garbage explanation.

rightsaidfred said...

It seems that part of being an "expert" is lining up fall guys.

Canson said...

Clearly a genuine BSE would have been for Wall Street and the rest of the boys in the chorus failing to adopt this soon to be meaningless phrase.

Prediction: Continued lies, hollow self justification and hubris with occasional showers of corporate socialism.

Bobby Rush said...

Why y'all got to call it a BLACK swan?!?! Sheeee-iiit!!

beowulf said...

I think you've hit on something, The Black Swan as the new corporate scapegoat.

For several years after 9/11, you'd hear corporate managers blame, well, 9/11 for their losses. Then you had Katrina and the oil spike, I guess The Black Swan (do we capitalize "The"?) will now be the excuse of choice for both the innocent and guilty alike.

JoeShipman said...

Naseem Taleb himself has loudly criticized those who call the current crisis a Black Swan, since he himself had been predicting it. He also makes the point that "it was a Black Swan", even if it were true, is no excuse, because people have to stop acting so epistemologically arrogant and start protecting themselves against that which they don't know. His biggest lesson for investors is that, even though Black swans cannot be predicted, they can be avoided. People can and should organize their affairs in such a way that their only exposure to Black swans is on the upside.

Anonymous said...

Um- if Taleb is doing Murphy's Law #oo: 'Where a stable Bell Curve is seen, an unstable power law must be presumed'-

This kind of was an example of Murphy's Law. People who didn't ride the bubble went broke underestimating how long it would last. People who rode the bubble went broke when the bubble broke. Play Different= Lose Different. Murphy's Law.

So, kind of, the weasels aren't lying? Kindasorta.

Anonymous said...

"Most serious people in the US and Europe were calling this since 2002."

Headache is correct. I remember reading an article on the Web sometime in 2003 that predicted a Fanny/Freddie/subprime collapse. All three words (Fannie, Freddie, sub-prime) were mentioned, as well as their relationship to the coming disaster. The article was written by a British guy who at the time worked for Jim Kramer. I neither work in finance nor am I particularly interested in it, and yet even I remember this being predicted. Someone who actually follows financial press must have read about this many more times than I have.

How do I remember that I read this in 2003? Because the article's author also predicted that the future (not-yet-begun) Iraq War would be a quick success, followed by a lengthy quagmire. Another no-brainer.

I hereby confidently predict that when the federal government finally defaults on its debt (a certainty), someone in a high position of authority will say that he didn't see it coming. I further predict that the reporters on he other end of the lie will not question that lie.

The only uncertainty in these types of situations (and the reason it's hard to make money off such knowledge) is timing. You can't time the markets. Everyone in the late 90s knew that the tech bubble would burst, but no one knew in what year that would happen. Same with subprime and with the future federal default.

Lee said...

university endowments such as yale's are able to make above-market returns in part because of the various tax breaks they get (e.g., the ability to issue tax-exempt bonds). this is never mentioned when all the endowment gurus are praised for their work.

Joe said...

Whew, I'm not the only one who has had serious questions about the rate of return of Yale's endowment. (My thinking was that Yale graduates are quite common on Wall Street and, well, you can see where it goes from there...)

Anonymous said...

as much as you disapprove of Taleb's anti-bell curve thinking, he does have the intellectual honesty to admit that the housing collapse was a "white swan." eg, predictable. he can be seen admitting this on Charlie Rose within the last month. david swensen seems either surprisingly daft or very PC (he managed money at Yale, after all).

and remember, david swensen didn't "manage" Yale's assets, he "allocated" them to hedge funds that managed them on his behalf, and then had the good fortune to do so in one of the major bull phases in history. so, taleb would likely say that swensen himself is a slow-motion positive black swan, which is actually more interesting to think about than swensen's actual opinions on anything in life.

but, let's face it - taleb really only has one idea, which is not even his (eg, mandelbrot) and that is the "fat tails" concept. the fact that he managed to eke out two books on this topic is amazing.

Little Johnny said...

I'm sorry teacher, a Black Swan ate my homework!

Svigor said...

Headache is correct. I remember reading an article on the Web sometime in 2003 that predicted a Fanny/Freddie/subprime collapse.

I'm a complete econ illiterate and around that time I warned my sister against buying the house she's barely affording right now, based on the same forecasts.

John Seiler said...

One problem I find is that the Black Swan Theory is a distortion of the old black swan problem (of induction) from logic, which I learned 33 years ago. Most people won't know the difference, so Taleb's adaption of the term to his own uses, which he is aware of, reduces our ability to communicate. (Wikipedia has a good discussion under "Black Swan Theory.")

From now on, if I say, "That's like the black swan problem," most people, including intelligent ones, will assume I'm talking about the Black Swan Theory, so it'll take me another 5 minutes to explain what I'm really saying -- assuming they can even follow me. Other distortions like this: Gladwell's "Tipping Point" and "Outliers."

As Steve has been pointing out, the key to a pundit getting rich seems to be to take an old concept and distort it in a way that makes half-educated political, media, and business types feel good about themselves.

John Seiler said...

Gladwell-Taleb Theory: Taking a useful word, phrase, or concept, and distorting it as the basis of a best-selling book.

David Davenport said...

Gladwell-Taleb ...

Mixing Taleb up with bro' Malcolm is unfair to Taleb.

American Goy said...

"I thought gurus like him were paid to know exactly WHEN the crash comes. Us johns just have a clue there's trouble but we don’t know WHEN it will hit."

Bravo, Mr. headache.