A Flock of Black Swans

- P3 (BA) candidates better read and understand this!

Pic 01: Greek Crisis that hits the World

Pic 02: Mass unemployment and still rising!

What was said in my class? 
Last semester ( about February, 2012), I have said in my modest size P3 class in PJ Kasturi that I am more worried about the PIIGS (Portugal, Ireland, Island, Greek and Spain) Government default more than the after effects of Japan's economic effect of tsunami. [PIC 1 & 2] Guess what? That proved true today as Euro currency is losing credibility and the world of retail investors have exited and poured into the world's last safe investment haven, American Bonds. Just last week, report showed that retailers poured $964 billions into US Treasury Market. 

Are these improbable? Actually not, as P3 candidates are introduced through recent Exam article of the Black Swan concept, made popular by Nassim Taleb in his book Fooled by Randomness. 

Pic 03: I don't know what will happen to me tomorrow! (Nassim T)

Pic 04: Nassim's Best Seller Book

Black Swan - What is it? Black swan theory was developed by Nassim Taleb [PIC 03-05] to explain:
•    the huge impact of unpredictable, rare events that are outside our normal experience and without historical precedent
•    the non-computability of the effect of these rare events because there is no data on which to base calculations
•    the psychological bias that blinds us to the possibility and impact of rare events. We tend to assume that things (such as property price increases) will continue in a predictable way.

Pic 05: Black Swan was never sighted for over 200 years. Thought never to exists, at least statistically.

The phrase ‘black swan event’ is therefore used as a metaphor for the frailty and limitation of any system of thought and planning: bounded rationality. This means that we cannot know all-important factors that will affect the future (and, anyhow, do not have time to evaluate them). We are, in practice, likely to suffer from bounded rationality even with the known knowns because of imperfect research or pressure of time.
 






To illustrate: 

Pic 06: Turkey's Perfect World

Pic 07: Turkey, "Life couldn't be better. Food! Food! Food!"

Imagine you are a turkey [PIC 6-7]. Everyday, you spend a paradisiac life in a garden and a wonderful man comes with a bucket of delicious meal. He has been doing that since you hatch from your egg shell. Your total experience is he is a every turkey's dream man. 

On Thanksgiving Day, instead of bringing the usual bucket of food, he comes in armed with an axe! [PIC 8] What is the probability of you foreseeing that? It is virtually zero or maybe statisiticians called it the Long Tail of the Bell Curve.  This is fits the Black Swan theory that: 

Pic 08: Turkey 'thankfully' became food - A delicious one at that.

1. Huge impact of unpredictable or rare events.
2. Non-computability since he never came in with an axe before. 
3. Psychological bias that blinds you the possibility of you ending on the dining table. 

In P3(BA) the use of Scenario Planning is vital tool when making Strategic Rational Planning. 
 
Below are a host of black swans events. 

Enjoy it as it tells you that our future is not that bright as politicians would like you to believe.

ACCA Candidates need to foresee the 'obvious Black Swan' coming to them. 

1. Do you think that the Big 4 Accounting firms will be a safe employment firm? 
Clue: Think of Arthur Andersen. 

2. Will joining a MNC be considered as sure career progress? 
Clue: Think of difference between Starbucks and Maggi noodles. 

3. Will Asian economies stay resilient despite the record high unemployment in America and Europe? They are at 9.3 million and 18.7million respectively!!  
Clue: Think of what Asian main businesses are. 

4. Should I buy properties now? Its always going up since my grandparents time.

Clue: The answer is in the question!

Pic 09: What is the Probability of the End of the World - Armegeddon? Read Revelation 16:16 and Revelation 19:19 for clues

5. Will the world come to an END? Armegeddon [PIC 10] as made famous be Ben Affleck?
Clue: There will people coming to your doors telling you that. Pay attention to them, I recommend.

In my class, if you pay close attention, you will see how I elaborate the Black Swan Theory and its applications to your career future. Well, its part of P3 syllabus for crying out loud. You gotta to know it.

Best Regards,
Marcus - ACCA Lecturer in theory-narrative papers. 

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20 August 2012

Author: Jeffrey Frankel [PIC 10], a professor at Harvard University's Kennedy School of Government, 

Pic 10: Professor Jeffrey Frankel, Harvard University

Pic 11: World War? Nah, it will never happen!

Wars, Economic Sanctions, Forex Mechanism, Property crisis
Throughout history, major political and economic shocks have often occurred in August, when leaders have gone on vacation believing that world affairs are quiet. Consider World War I’s outbreak in 1914 [PIC 11], the Nazi-Soviet pact in 1939, the Sputnik launch in 1957, the Berlin Wall in 1961, and the failed coup in Moscow of 1991. Then there was the Nixon shock of 1971 (when the American president took the dollar off the gold standard and imposed wage, price, and trade controls), the 1982 international debt crisis in Mexico, the 1992 crisis in the European Exchange Rate Mechanism, and the 2007 subprime mortgage crisis in the United States.

Many of these shocks constituted events that had previously been considered unthinkable. They were not even on the radar screen. Such developments have been called “black swans” – events of inconceivably tiny probability.

But, in my view, “black swan” should refer to something else: an event that is considered virtually impossible by those whose frame of reference is limited in time and geographical area, but not by those who consider other countries and other decades or centuries.

The origin of the black swan metaphor was the belief that all swans are white, a conclusion that a nineteenth-century Englishman might have reached based on a lifetime of personal observation and David Hume’s principle of induction. But ornithologists already knew that black swans existed in Australia, having discovered them in 1697.  They should not have been viewed as “unthinkable.”

Pic 11b: Pilots flying directly to your office.

Before September 11, 2001, some experts [PIC 11B] warned that foreign terrorists might try to blow up American office buildings. Those in power did not take these warnings seriously.  After all, “it had never happened before.” Many Americans did not know the history of terrorist events in other countries and other decades.

Likewise, until 2006, most Americans based their economic behavior on the assumption that nominal housing prices, even if they slowed, would not fall, because they had not done so before – within living memory in the US. They may not have been aware that housing prices had often fallen in other countries, and in the US before the 1940’s. Needless to say, many indebted homeowners and leveraged bank executives would have made very different decisions had they thought that there was a non-negligible chance of an outright decline in prices.

From 2004 to 2006, financial markets perceived market risk as very low. This was most apparent in the implicit volatilities in options prices such as the VIX. But it was also manifest in junk-bond spreads, sovereign spreads, and many other financial prices. One reason for this historic mispricing of risk is that traders’ models went back only a few years, or at most a few decades (the period of the late “Great Moderation”). Traders should have gone back much further – or better yet, formed judgments based on a more comprehensive assessment of what risks might confront the world economy.

Pic 12: Big Banks don't fail?!

Starting in August 2007, supposedly singular black swans begin to multiply quickly. “Big banks don’t fail?” [PIC 12] No comment. “Governments of advanced countries don’t default?” Enough said.

Debt troubles in Greece, especially, should not have surprised anyone, least of all northern Europeans. But, even when the Greek crisis erupted, leaders in Brussels and Frankfurt failed to recognize it as a close cousin of the Argentine crisis of 2001-2002, the Mexican crisis of 1994, and many others in history, including among European countries.

 

Nowadays, a eurozone breakup has become one of the most widely discussed possible shocks. Considered unthinkable just a short time ago, the probability that one or more euro members will drop out is now well above 50%. A hard landing in China and other emerging markets is another possibility.

An oil crisis in the Mideast is the classic black-swan event. Each one catches us by surprise: 1956, 1973, 1979, 1990. Oil prices can rise for many other reasons, as they have in recent years. But the most likely crisis scenarios currently stem from either military conflict with Iran or instability in some Arab country. The threat of a supply shock typically fuels a sharp increase in demand for oil inventories – and thus in prices.

The most worrisome financial threat is that currently over-priced bond markets will crash. In theory, inflation (particularly commodity-induced inflation, as in 1973 or 1979) could precipitate a collapse. But this seems unlikely. Default in some euro countries or political dysfunction in the US is a much more likely trigger.

Evidence of extreme dysfunction in US politics is already plain to see, reaching a low in 2011 during the debt-ceiling showdown (also in August), which cost America its AAA sovereign rating from Standard & Poor’s. In theory, as the “fiscal cliff” set for January 1, 2013, approaches, fearful investors should start dumping bonds now. But investors still believe that politicians, aware of the dire consequences of going over the cliff, will again find a last-minute way to avoid it.

Pic 13: First USA Black President - unpredictable event!

Perhaps observers believe that a clear result in November’s elections, one way or the other, would help to settle things. A true black swan – low probability, but high enough to think about – would be a repeat of the disputed 2000 presidential election [PIC 13]. There has been no reform since then to ensure that people’s votes will be counted or that a disputed outcome will not be resolved by political appointees.

Scariest on the black-swan list is a terrorist attack with weapons of mass destruction. There is a long-standing gap between terrorism experts’ perception of the probability of a nuclear event and the probability as perceived by the public. (Admittedly, the risk is lower now that Osama bin Laden is dead.)

Pic 14: Armageddon as End of the World? Disasters as in Environmental Catastrophe? Economic Meltdown? Divine Judgment? (Please read Matthew 5:5)

Last on the list is an unprecedented climate disaster [PIC 14]. Environmentalists sometimes underestimate the benefits of technological and economic progress when they reason that a finite supply of resources must imply their eventual exhaustion. But it is equally mistaken to believe that a true climate disaster cannot happen simply because one has not already occurred.

Pic 15: Everything is GONE!

Have a nice vacation.

Main source:
Jeffrey Frankel, 2012, A Flock of Black Swans, http://www.project-syndicate.org/print/a-flock-of-black-swans-by-jeffrey-frankel, 20th August.

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