Nasem Taleb of 'Black Swan' Fame Will Be On The Colbert Report Tonight @ 11:30 PM
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C'mon Aaron. Does it make it any better if you know that he pronounces it 'Kol-Bear'?
Taleb had a French risk manager back when he worked at (I think) Bank Paribas, who asked him what was his risk control plan if a plane flew into the building. Rick Rescorla, head of security at Morgan Stanley's WTC operations, predicted that a 9/11 style attack was on the cards. So that's at least 2 people in the job of assessing those risks, who realised it was a possibility. Not their fault if Taleb, Condi Rice, their employers and others dismissed their warnings.
In 1995 I was in San Francisco with a software designer, we had met over the internet and over a beer we both agreed that the internet was going to "revolutionise society". Many others said the same, some who had money bet on it. So the rise of the internet was predictable too.
Dan Zanger rode Google up several hundred points on huge size.
Harry Potter first book got a nice advance from a publisher. The author then got a huge multi-book deal. Predicted again.
Loads of people predicted the Iraq invasion and occupation would screw up. Even Colin Powell back in 1991 said it would be a "quagmire".
Taleb is being either duplicitous to sell his concept, or just totally ignorant.
Is BS a good book? I read his first and liked it - is BS as good, better?
D&L
Did anyone predit the Chineese would have over 2 trillion in bonds and agencies? Doubt it.
"In Nassim Nicholas Taleb's definition, a black swan is a large-impact, hard-to-predict, and rare event beyond the realm of normal expectations."
One characteristic missing but important is, that it has to happen rather QUICKLY. If the unexpected happen slowly, people have time to expect it. Thus neither Google, Harry Potter nor the Chinese bond was a trully BS event, because it happened over a long period of time and people were able to see the TREND.
Taleb has never said that ANYTHING is predictable...
Only that unlikely events happen more often...
Than experienced, professional option market makers with advanced degrees...
Running state-of-the-art computers predict with their pricing of far out-of-the-money options.
His basic money making point...
Is that the Top 5000 global option traders are idiots.
The Nassim Taleb Whore Train will compete on "Dancing With The Stars" fall 2007...
And will eventually come to a strip club near you.
Only that unlikely events happen more often...
Than experienced, professional option market makers with advanced degrees...
Running state-of-the-art computers predict with their pricing of far out-of-the-money options.
His basic money making point...
Is that the Top 5000 global option traders are idiots.
The Nassim Taleb Whore Train will compete on "Dancing With The Stars" fall 2007...
And will eventually come to a strip club near you.
Boring!
A "Black Swan" can be either a totally unanticipated event or an expected event in which risk is under priced.
I'll give you examples.
We all know that options premium works in similar fashion to insurance premium. It's no accident that we hear interchangeable jargon like the word premium itself or the phrase portfolio insurance. Same animal. Deferred OTM strikes represent differing levels of deductibility.
So let's pretend that earthquake insurance is exchange listed (someday it will be). We can assume on the ET Earthquake Exchange that different locales will trade at different prices. We know it will cost more to buy the Los Angeles or Bay Area policy than the Omaha policy. Logical eh?
So how do markets price in the real world?
If L.A. were to have a Northridge quake we'd see uninsured home owners (option buyers) bid up for policies while nervous insurers (premium writers) demand top dollar for coverage. Think of the VIX after 9/11.
Then after several years of no quakes observe how the market dynamic changes. Insurers are banking windfall profits and homeowners become WAY less apprehensive about being uninsured. Suddenly premium buyers think "I should just self insure, I'm pissing away this premium each year" and insurance companies who'd never operated in SoCal think, "we should enter this market and undercut these high premium insurers." Now think VIX, 2007.
The intrinsic risk of an L.A. earthquake hasn't changed at all yet premium prices have fluctuated wildly.
Now here's the Black Swan. Our Omaha contract trades at a very low premo. There's never been a quake there so to a premium writer it's a virtual sure bet to collect even a scant $79 a year on each policy (contract). Out of no where though a 7.2 hits the Missouri River and thousands of homes are destroyed. Unimaginable to the market place.
At the same time a 7.0 hits L.A. Totally imaginable and anticipated to participants but even still it was a Black Swan because the risk was mispriced.
I'll give you examples.
We all know that options premium works in similar fashion to insurance premium. It's no accident that we hear interchangeable jargon like the word premium itself or the phrase portfolio insurance. Same animal. Deferred OTM strikes represent differing levels of deductibility.
So let's pretend that earthquake insurance is exchange listed (someday it will be). We can assume on the ET Earthquake Exchange that different locales will trade at different prices. We know it will cost more to buy the Los Angeles or Bay Area policy than the Omaha policy. Logical eh?
So how do markets price in the real world?
If L.A. were to have a Northridge quake we'd see uninsured home owners (option buyers) bid up for policies while nervous insurers (premium writers) demand top dollar for coverage. Think of the VIX after 9/11.
Then after several years of no quakes observe how the market dynamic changes. Insurers are banking windfall profits and homeowners become WAY less apprehensive about being uninsured. Suddenly premium buyers think "I should just self insure, I'm pissing away this premium each year" and insurance companies who'd never operated in SoCal think, "we should enter this market and undercut these high premium insurers." Now think VIX, 2007.
The intrinsic risk of an L.A. earthquake hasn't changed at all yet premium prices have fluctuated wildly.
Now here's the Black Swan. Our Omaha contract trades at a very low premo. There's never been a quake there so to a premium writer it's a virtual sure bet to collect even a scant $79 a year on each policy (contract). Out of no where though a 7.2 hits the Missouri River and thousands of homes are destroyed. Unimaginable to the market place.
At the same time a 7.0 hits L.A. Totally imaginable and anticipated to participants but even still it was a Black Swan because the risk was mispriced.