14 March, 2011

Black swan observations...

There are two particular observations of "black swan" events that tend to repeat themselves over and over again.
The first has to do with the fact that they occur more frequently than we think they do. Our cognitive brain has a way of erasing or minimizing unpleasant experiences, so we almost tend to forget that they ever occurred, unless something of that "unpleasant" experience persists. That probably explains why we tend to repeat the same mistakes or when the tide runs down, so to speak, a lot of people are caught swimming naked.
The second has to do with clustering or the fact that a negative event almost instantly tends to attract other negative events like a magnet, which means that the original event is subject to a snowball effect. Take the last two months as an example. It began with an uprising in Tunisia, rapidly spread to Egypt, and now Libya and other countries in the region. As if that was not enough, commodity prices have been surging (adding more fuel to the fire) and now we have the totally unanticipated quake/tsunami disaster in Japan and a growing risk of leaks from nuclear reactors in the region. Impressive and worrying series of events that have the potential of dragging the rest of the world into another slump.
So if there are certain "predictable" patterns built into black swans, can we do something about them? This is the topic of much debate, and there seems to be growing consensus that strategies can be built around them. I guess the first place to start would be to accept these observations as a given and to "strategize" accordingly.

DISCLAIMER

This document has been produced purely for the purpose of information and does not therefore constitute an invitation to invest, nor an offer to buy or sell anything nor is it a contractual document of any sort. The opinions on this blog are those of the author which do not necessarily reflect the opinions of Lobnek Wealth Management. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of the author. Contents subject to change without notice.