08 Dec What Is a Black Swan Event?
08.12.11
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3 Comments
(Update: On a more serious note, Stuart Benjamin at Volokh discusses whether Gingrich saying he would appoint Bolton as Secretary of State violated any law, as has been argued around the blogosphere; Benjamin says no law violated.)
One of my Business Associations students asked me what a “black swan event” is – I think she read it in a Wall Street Journal article. The following is a “cascading” black swan event:
- Newt Gingrich becomes the Republican candidate in 2012.
- Newt Gingrich wins presidency in 2012.
- Newt Gingrich somehow recalls impetuous campaign promise to appoint John Bolton as Secretary of State.
- US Senate magically becomes filibuster proof Republican in 2012 election.
- US Senate okays John Bolton as Secretary of State.
- John Bolton reads Ken Anderson’s book on US-UN relations appearing just in time for big Republican primaries in 2012, concluding that it will be his user manual.
- John Bolton especially likes part where Anderson describes Bolton’s work on UN reform in 2005.
- John Bolton writes, in Claremont Review of Books, glowing review of Anderson’s “Living With the UN” (penciling in an addendum, “Or Not.”).
- President Gingrich, at Secretary Bolton and Vice-President Bachman’s urging, nominates Anderson for US ambassador to UN.
- Anderson is approved by the Senate.
- World ends.
To some Europeans, I imagine the following could also be added to the list:
* Brilliant international law professor writes book praising John Bolton’s work on UN reform
Erlend: Yes, yes!
ps: I didn’t understand a word of it, but a professor of statistics who does a lot of real world investing and, I’m pretty sure, helped lose a lot of money in 2008, explained to me once a theory of fractal based risk management in which the ‘cascade’ here somehow becomes more likely with successive events. Meaning, although you’d think that the overall scenario becomes exponentially less likely by adding each of the long list of extremely unlikely events, to a forbiddingly unlikely overall event – according to this theory, if looked at as a chain, the occurrence of each unlikely event makes each successive black swan not more likely overall but increases the tail risk on account of some weird fractal path dependency. I didn’t understand a word of it, and I’m worried that it was the sort of methodology by which rating agencies in 2006 awarded AAAs to dodgy derivatives. However, if he’s right – watch out!