Hi Hawk, I have a fairly full discussion of this but the short answer is no. Food prices are not going to collapse and buying cheap out of the money puts looking for a collapse in the agricultural and meat market is not going to occur in the next 18 months. The black swan is in this case a call for much higher food prices the coming 12 to 18 months.
on a personal note, I have been getting incredibly great buys on chicken, steaks and pork cuts from Randalls here in Houston. It's got to be due to the early harvesting of these herds and animal stocks that are too expensive to feed.
We should be expecting all retail meat prices to double by this time next year.
John Mauldlin had a full column devoted to the black swan in terms of financial markets and statistical outlier events. It has been a hot selling book this year.
As we know from Stats 101. about 67% of outcomes are within two standard deviations of the median, with 99.7% of outcomes are within 3 standard deviations. The unusual thing about the financial markets is that every few years we are having financial market abnormalities/ shocks / events that are statistically modelled to be more like 4,5, 6 or more standard deviations from the normal outcome. This appears to be due to underlying assumptions that are flawed. Probably because it enables Investment firm proprietary trading and strategic positioning profit centers to get more "risk points" from the firms risk management committee's. ( I have a true anecdotal story of how head of the swaps department at Citibank in Australia came me asking me how would we could show a decrease in the volatility of the australian Bank-Bill Rate, this would enable the Swaps department at Citi Australia to get more risk points. It was simply a question of taking a look at the volatility over a shorter and more recent rolling day period, as daily volatility had declined over the past year and year and a half as the market matured.)
He says that food prices will soar, but that's what the market anticipates. I have to disagree that the average man on the street and even on wall street is really looking for agricultural prices to rise substantially from here.
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Overview: Black swan theory
Taleb, bestselling author of Fooled by Randomness, treats uncertainty and randomness as a single idea. See Black swan theory for Taleb's definition of a Black swan.
[edit] Sales
The Black Swan had sold as many as 370,000 copies domestically by April 2008.[1] It also spent 17 weeks on the New York Times Bestseller list and was translated into 27 languages.[1] The impressive sales of Taleb's first two books garnered an advance of $4 million dollars for a follow-up, tentatively titled "Tinkering."[1]
[edit] Summary
Nassim Nicholas Taleb refers to the book variously as an essay or a narrative with one single idea: "our blindness with respect to randomness, particularly large deviations".[2] It is Taleb's questioning of why this occurs and his explanations of it that drive the book forward.
The book's layout follows "a simple logic"[3] moving from literary subjects in the beginning to scientific and mathematical subjects in the later portions. Part 1 and the beginning of Part 2 delve into Psychology. Taleb addresses science and business in the latter half of Part 2 and Part 3. Part 4 contains advice on how to approach the world in the face of uncertainty and still enjoy life.
Taleb himself, acknowledges a contradiction in the book. He uses an exact metaphor, Black Swan Idea to argue against the "unknown, the abstract, and imprecise uncertain--white ravens, pink elephants, or evaporating denizens of a remote planet orbiting Tau Ceti."
There is a contradiction; this book is a story, and I prefer to use stories and vignettes to illustrate our gullibility about stories and our preference for the dangerous compression of narratives.
You need a story to displace a story. Metaphors and stories are far more potent (alas) than ideas; they are also easier to remember and more fun to read.[4]
[edit] Part 1 Umberto Eco's antilibrary, or how we seek validation
In the first chapter, the black swan theory is first discussed in relation to Taleb's coming of age in the Levant. The author then elucidates his approach to historical analysis. He describes history as opaque, essentially a black box of cause and effect. You see events go in and events go out, but you have no way of determining which ones produced what effect. Taleb argues this is due to The Triplet of Opacity[5]
In the second chapter, Taleb tells the story of author Yevgenia Nikolayevna Krasnova and her book A Story of Recursion. She published her book on the web and was discovered by a small publishing company; they published her work unedited and the book became an international bestseller. The small publishing firm became a big corporation, and Yevgenia became famous. This incident is a Black Swan. Taleb seems to be using "recursion" as a hint that he is predicting the story of his own book The Black Swan--Yevgenia's rejection of fiction and nonfiction as categories is eerily reminiscent of Taleb's idea, and her character seems autobiographical as Taleb may be poking fun at his own intolerant temperament.
In the third chapter, Taleb introduces the concepts of Extremistan and Mediocristan. He uses them as guides to define how predictable the environment you're studying is. Mediocritstan environments can safely use Gaussian distribution. In Extremistan environments a Gaussian distribution is used at your peril.
Chapter 4 brings together the topics discussed earlier in the narrative of a turkey. Taleb uses it to illustrate the philosophical problem of induction and how past performance is no indicator of future performance. He then takes the reader into the history of Skepticism.
In Chapter 9 Taleb outlines the multiple topics he has previously described and connects them as a single basic idea.
[edit] Arguments
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The term black swan comes from the ancient Western conception that all swans were white. Thus, the Black Swan is an oft cited reference in philosophical discussions of the improbable. Aristotle's Prior Analytics is most likely the original reference that makes use of example syllogisms involving the predicates "white", "black" and "swan." More specifically Aristotle uses the White Swan as an example of necessary relations and the Black Swan as improbable. This example may be used to demonstrate either deductive or inductive reasoning. However, neither form of reasoning is infallible since in inductive reasoning premises of an argument may support a conclusion but does not ensure it and similarly in deductive reasoning an argument is dependent on the truth of its premises. That is, a false premise can possibly lead to a false result, and inconclusive premises will also yield an inconclusive conclusion. John Stuart Mill first used the black swan narrative to discuss falsification.
Ironically the 17th Century discovery of black swans in Australia metamorphosed the term to connote an exception to the rule and the very existence of the improbable. Thus, the limits of the argument behind "all swans are white" is exposed - it is merely based on the limits of experience (e.g that every swan I have seen, heard, or read about is white). Hume's attack against induction and causation is primarily based on the limits of experience and so too the limitations of scientific knowledge.
[edit] Higher frequency
Rare and improbable events do occur much more than we dare to think. Our thinking is usually limited in scope and we make assumptions based on what we see, know, and assume. Reality, however, is much more complicated and unpredictable than we think.
Also, assumptions relevant to average situations are less relevant to irregular situations, especially when the "rules of the game" themselves do change.
[edit] The huge effect
Extreme events do happen and have a big effect. Examples abound, including September 11th. The Internet with its various effects was scarcely anticipated, and it is a development that has had a significant effect. The effects of extreme events are even higher due to the fact that they are unexpected.
[edit] Limited human knowledge
Why do people tend to neglect rare events? Partly because humans underestimate their ignorance in most situations—the effect of unexpected events is far more significant than people often imagine. Taleb argues that the proposition "we know" is in many cases an illusion—the human mind tends to think it knows, but it does not always have a solid basis for this delusion of "I know". This notion that we do not know is very old, dated as far back at least as Socrates. Some felt[who?] that the advancement of science has rendered the world well-known; Taleb argues that while science added knowledge, the world did not turn into a fictitious world where everything is known. Socrates' dictum "the only thing I know is that I do not know" is as true as ever, Taleb concludes. Taleb characterizes the trait, in part, as the Ludic fallacy.
[edit] Not all experts deserve the title
Taleb also questions the authority of experts. The "truth" behind science is limited to certain areas and methods, and in many areas having an academic degree and presenting oneself as a scientist is irrelevant.
[edit] The narrative fallacy
Another issue is the "narrative fallacy" which refers to our tendency to construct stories around facts, which in love for example may serve a purpose, but when someone begins to believe the stories and accommodate facts into the stories, they are likely to err.
[edit] Sardonic humor
Taleb has a chapter entitled Yevgenia's Black Swan. In it, he discusses a neuroscientist with an interest in philosophy, named Yevgenia Nikolayevna Krasnova.[6]
He admits a few pages later that the so-called author is a work of fiction.[6] Yevgenia rejects the distinction between fiction and nonfiction. So did Montaigne, Umberto Eco, Nietzsche and many other writers. It is, after all, an artificial chasm. The human mind thrives on stories, vignettes and aphorisms. Taleb’s point: It is the hallmark of great writers to combine deep thoughts with these forms. Taleb also hates the very idea of enforcing things into well defined "categories", holding that the world is generally complex and not easy to define. |
