The Paradoxical Black Swan in the Overgrowth

June 16th, 2017

Taleb argues that we can only recognize ‘black swan’ events retrospectively. Perhaps though we can understand the conditions that create the potential for such events and, by testing those conditions, tempt the black swan to reveal itself in the obscuring overgrowth. Can we perhaps lure the black swan into revealing itself by understanding the drivers of markets or events and considering the implications of their existence; that is by exploring and identifying underlying structures and interactions?

For example, the cheap funding provided (often by states) to car manufacturers enables them to market their vehicles on Personal Contract Plans (PCP) rather than to sell their products directly. The margin the seller earns on the finance (both manufacturer and retailer) exceeds the margin on the cars themselves, so they start making cars in order to sell finance (hence the focus in the dealerships). This can only last until the market is saturated and/or buyers realise how much over the odds they are paying and/or cheap finance is no longer available (e.g. the state needs the money for itself). That realization emerges (the hidden black swan) when external factors interact with the phenomena in a way that destabilizes it e.g. pollution from diesel engines, cost of housing, lack of economic growth, undermines the residual value of the cars already under PCP AND increases the PCP cost of the next generation. The PCP market collapses.

“Nobody saw THAT coming” well, no they didn’t but then nobody was looking! Everybody was looking at the bubbling market, nobody was looking at the distorting structures that were enabling it nor the thin veneer of surface tension sustaining the bubble.

The market collapse is the so-called black swan event, the clues to its existence are in the interactions around it that are then reflected in the distortion in the market introduced by cheap finance, the lack of internal structure and the absence of a negative loop balancing the growth.

In order to discern black swans maybe what we need to do is stop looking at ‘things’ in isolation, stop engaging in ever deeper and more futile analysis. Perhaps we should step back and study the interactions between the ‘things’. We might then be able to see patterns and differences and, perhaps by squeezing, prodding and poking the interactions (simulating change!), the potential black swans will reveal themselves in the collective or aggregate movement.

Of course, if we do this well and, using our new insight, identify and nullify the black swans then they won’t happen and everybody will be able to tell us we were wrong!