Black Swans

Who knew that a pair of shoes could lead to a black swan event?

I’m deliberately steering clear of the financial news; while it’s certainly a black swan (and continues to surprise almost everyone with its severity), it’s more than well enough covered.

One percent is the amount by which the Reserve Bank of Australia decided to cut the official benchmark interest rate today. Given that the average cut predicted was on the order of half of one percent, this counts as a black swan move to me.

Nick Leeson has weighed in with his comments on the world situation, and the media seem to be revelling in it all.

One thing you see a lot with the current turmoil, as with any stock market fluctuation of interest, are “reasons” given for whatever fluctuation is happening. At the moment, that means journalistic comments like:

“The rally came amid renewed hope that US politicians will pass a financial rescue package.”

Maybe another “reason” is that fundamentally sound businesses were now on sale at bargain prices, and some people moved in to take advantage of this?

My point is this: both are merely guesses, and essentially meaningless ones at that. They don’t help us understand what’s really going on.

“It is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing one dollar in any of those transactions.” — Joseph J. Cassano, a former A.I.G. executive, August 2007, from NYTimes.com

As of now, the financial crisis causing havoc on many major stock markets looks to be well under way: all five of the big US investment banks are gone; one of the biggest insurers in the world is in deep trouble, and it’s probably fair to say there’s more to come yet.

Anyone can come up with any number of “reasons” behind this current mess, with the biggest excuses given being poor lending practices and a feeble housing market in the United States. [more…]