By: OpenPages Admin
In any one month, I typically get around a dozen different risk management publications flowing across my desk. Most are informative and add some layer of knowledge on top of my growing repository of information on the many faceted realms of risk management. One publication, Risk Management Reports, not only dishes up really good insights into the world of risk, but its editor, Beaumont Vance, serves up his fare in very entertaining style.
In the latest issue of Risk Management Reports, Mr. Vance reviews the latest work from Nassim Taleb, whom I first encountered when reading Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets. In this book, Nassim brings in the notion of the black swan to discuss flaws in current risk management measurement and management techniques. Mr. Vance takes time to review Nassim’s new book, Black Swan, which further expounds on the analogy
This idea of the black swan was first popularized by John Stuart Mill and immortalized through this statement from David Hume: “No amount of observations of white swans can allow the inference that all swans are white, but the observation of a single black swan is sufficient to refute that conclusion.â€
In essence people from Europe, Africa, North and South America or mainland Asia had ever seen anything but a white swan in thousands of years and everyone believed that all swans were indeed white. Then they arrived in Australia, stared in the face of a jet black swan, and that belief was buried instantly in the graveyard of worldly delusions, three rows back from the idea that the world is flat.
Mr. Vance goes on to illustrate the notion that we are currently living in a world where many Black Swans are waiting to be revealed. The markets have changed. Bets placed on new instruments, new global socio-political dynamics, and new products and technologies are growing by zeros ($000,000,000,000) and the potential for calamity and systemic collapse of global financial systems is growing with them. Novelty will break the models so it is important that the models take into account more than historical data- they must actively deal with uncertainty and extreme events.
Check out Nasssim’s Black Swan, and I also highly recommend subscribing to Risk Management Reports.
