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“The Future Ain’t What It Used To Be” *

“The Future Ain’t What It Used To Be” *

12.12.2012 17:03

Nassim Nicholas Taleb was a boy growing up in a privileged family in the 1960’s Lebanon. At that time, Lebanon was a paradise on Earth, very cosmopolitan and extremely affluent, a pre-eminent trading and cultural hub open to both Western and Eastern world. The lifestyle was elegant, the economy prospered, the climate was warm and pleasant. The region, historically known as Lebanese Syria or Levant, was since times immemorial home to more than a dozen various ethnical and religious groups and sects. Apart from orthodox Christians and Muslims, there were also Armenian Christians, Greek-Syrian Christians, Byzantine Catholics, the Druze and Jews.

Tolerance was natural and trade blossomed. Christians and Muslims were able to peacefully co-exist with no military conflict of any kind for more than a thousand years. In 1975, the paradise vanished, overnight. Muslims and Christians started a brutal civil war which lasted for nearly 17 years and which permanently changed the country. It resulted in exodus of the majority of the Christian intelligentsia and business leaders who now live in permanent exile. The country’s former economic prosperity is now just a distant memory. Yet, when Nassim Taleb was growing up, the people around him were convinced that the civil war would be over in “several days”. In his book “The Black Swan” (2007, New York) Taleb claims that the Lebanesewar was a typical example of an event which he calls a “Black Swan”.

Taleb’s Black Swan is an event with the following three features: first, it lies beyond the remit of usual expectations, meaning that we cannot deduct that it would happen from anything we have learnt in the past. Second, it has an extraordinary impact. Third, despite it being an event both extreme and unpredictable, our nature forces us to make explanations for it and create the impression that we could have predicted it. To summarize, Black Swans are events which are rare, extremely significant and retrospectively (but not prospectively) predictable. Events such as the break out of World War I, the sudden collapse of the Soviet Block, the impact of the rise of Islamic fundamentalism, the spread of internet, they all fit the description.

However, what is more important than the existence of Black Swans, says Taleb, is the fact that we behave as if they didn’t exist at all. The inability to predict extraordinary events means the inability to predict future development in general. As the famous American baseball player and coach Yogi Berra says, “predicting is difficult, especially if it concerns the future”. Leading global economists have developed a variety of complex forecasting models, using increasingly sophisticated mathematics but also a number of rather unrealistic assumptions. They then vigorously apply such models to the real world which flaunts their assumptions. They achieve predictably poor results. We spend a lot of time forecasting the deficit of social insurance or the price of oil in the next 30 years while we don’t realize we cannot predict it even for next summer. Predictions in economic and financial sphere differ from reality so materiality that it is not even funny. In January 2004, the US Department of Energy was predicting the price of oil for 2029. They estimated it at US$27/barrel. When the price doubled in the next 6 months, they revised the forecast to US$54/barrel. It didn’t even occur to them that they very obviously lacked the tools to be able to do the job. The price currently is US$107/barrel. 

What is even more astounding than the magnitude of these errors, is that we are not aware of them. In summer 1982, the big US banks lost almost all their historical cumulative profits. They were lending to Latin American countries which all simultaneously defaulted. Some ten years later, the same big banks, despite assuring their constituents how well they were managing risks, got themselves into severe financial troubles again after the US real estate market collapsed. The US government rescue program for the savings & loan institutions amounted to US$88bn, a sum trivial compared to the recent bailouts. Already then it was noted that when “conservative” bankers make profits, they retain them, and when they make losses, we all retain them. We have recently been witnesses of yet another, spectacular, financial system crisis where, were it not for the massive government intervention on both side of the Atlantic, Lehman Brothers would have been followed into the dark hole by many other illustrious names…

To be continued…

*Quote by Yogi Berra, the US baseball player and coach

Photo: amira_a / Foter / CC BY

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