Asymmetry and black swans

31 January, 2015 0 No tags 0

As we have seen the reality is not linear. This implies that we need to act assuming that anything can happen. We must be aware of our inability to predict future events.

If reality is not predictable, then we must be conformed fully to the possible occurrence of unexpected events, the black swan events (which have great impact on our businesses and our lives). In fact, we can focus our efforts on finding positive black swans.

There is a strategy to seek positive black swans, based effort to devote odds we add good things happen. We must seek the least linear part of our business, and promote it. This does not mean that all activities are scalable; there are professions that have higher degrees of scalability than others.

As a general strategy, it is advisable not to rely too much on planning and programming too methodical and meticulous. Basically because they kill optionality, as discussed below. The strategy should focus on recognizing opportunities when they arise and tinker and experiment with them. Only then we can go to discover which of these opportunities are actually profitable. Go play with these times increases your chances of success. It is the basis of test/ fail method.

Plan Innovation

24 January, 2015 0 No tags 0

You can plan the development of new products/ services/ business, what you can not plan is their success. We can perform complex development projects, supported by complex market studies, and all under a great and efficient organization. But this does not prevent many of the products end up in the trash, and other succeed.

This is clearly seen in the world of music or publishing, sectors that experience the unexpected sales phenomena.

Here are some real examples.

LTCM: I choose this because Taleb already used it and runned it as an example. With little research you will see that reality is plagued by LTCM ‘s. In 1998 several geniuses even Nobel laureates in economics set up a Hedge Fund that had even a queue of investors. There were even several professors from Harvard or Stanford and even a former vice president of the Fed. The most influential people of the United States invested with them. The hedge fund called Long Term Capital Management (LTCM), has as its basic strategy the “fixed income arbitrage”. No one then doubted its bright future. Initial yields were excellent. The thing is progressively increased leverage to not reduce the profitability of its portfolio. Until leverage was so great that any slight movement of the market in the opposite direction could sink them. And then the impossible happened, Russia defaulted on its government debt in the summer of 1998. Undoing the strategy of LTCM.

In early 1998, LTCM had $ 4,720 million was invested by customers but value of $ 124,500 million, ie. a leverage of 25 times. For the September 25, 1998, increased leverage up to 250 times, completely destroying the LCTM. They burst. A black swan as explained in this blog.

GRAFICO LTCM TABLA LTCM

Note: The amounts and dates are approximate. What is interesting is to see the emergence of the black swan.

Harry Potter: A first edition of the book “Harry Potter and the Sorcerer’s Stone” was published in 1997. The books of the Harry Potter series have sold more than 400 million, in the 10 year history of the series.

Rowling’s fortune (the writer) is estimated at 545 million pounds (807 million euros), despite that 11 years ago was a single mother living on state aid. It is one of the first UK fortunes. Another black swan book, this time in a positive sense.

It is interesting that these types of positive black swans, behave differently to negative. Negative go bump, as happened to LTCM. The positive, have a cumulative process over time. Clearly, the first edition of Harry Potter did not sell thousands of books on the first day. A cumulative process, based on mouth to mouth from people: reading and recommendation. This process is ten years until the author has sell over 400 million copies.

By the way, we have examples of black swans at home. There is more to look at Sara Boyle (she was elected in the casting, and got to the final). It is the participant who has sold more albums, galas it has signed and money has won the contest. The day appeared nobody could have predicted such a feat.

The turkey on Christmas Day or how a black swan works

17 January, 2015 0 No tags 0

This blog entry is a summary of the Russell Beltran’s turkey paradox. I mention it here to support the following post, which have to do with this concept.

On December 24, Christmas Eve is the day where the perception of the reality of countless turkeys changes drastically.

All the knowledge that we got through the observation has certain pitfalls. Consider the turkey to feed every day. Its belief every day confirms the following: “How nice is this human that feeds me so well”. Until December 24 , where he should double check his belief (knowledge). As you can see in this example, the fact confirmatory observation does not provide any relevant knowledge.

But the drama is deeper. The turkey should not only review all its previous knowledge, but that the knowledge it had was all wrong (and deadly). It was a knowledge that provided him security, a security that took hold and grew every day we fed it. In fact, most of its sense of security it had it on Christmas Eve. Just when its  risk to die was higher.

Tabla cisne negro ingesGrafico cisne negro ingles

The black swan- Practice

This leads us to believe that forecasting sales or revenues, viewing the past years, not only looks like a bad idea, but it is also risky (suicidal in my opinion). It doesn’t matter how expensive and sophisticated the program forecast the sales are or the revenue manager of our company. We are unable to understand the properties of the unknown based on the known. It makes no sense, as the turkey understands on Christmas Eve.

What happens to the turkey on Christmas Eve is what we call rare event or black swan. A fact that has implications not expected to impact. These events can be good or can be bad. A positive black swan would be that my blog had 100 million visits in the first year and I became a millionaire by selling advertising and lecturing. A black swan is negative two planes crashing into the Twin Towers of a September 11, or that your investments in one day lost 50 % of its value.

Note: If this post has no diffusion, it will not be a black swan for me. My livelihood does not depend on whether it spreads or not. I’ve only spent part of my leisure time in writing it. What is a small investment for me? This has to do with ants, as you could read in previous posts.

There is another peculiar thing about black swans, and is that if is good, its form isprogressively, while bad come and hit very quickly. To sell ten million books (have to like a significant number of readers, that they spread it mouth to mouth, that the blog is available…) it’s a question of time, however, only a few hours are required to lose all your savings or all your work.

Many times we are sitting on top of a can of gasoline, but as it hasn’t untapped in a thousand days we will confirm with certainty that tomorrow will not explode. It is the greatest proof that there is no danger that a black swan will not call at our door. This shows how we can not know the future through our knowledge of the past. See white swans do not confirm the nonexistence of black swans. The belief stems from the usual, and that’s dangerous.

** In the early eighteenth century, English settlers returning from Australia brought a load of black swans. Black swans are native to Australia. Until that time, it was thought that all swans were white, because they only knew white swans. This was a shock in the English society of the time, the emergence of a kind of a different color swans who weren’t used to seeing, was a source of debate and controversy.

Further reading: The black swan phenomenon is studied in depth by Professor Nassim Nicholas Taleb in his book the black swan.

 

Black Swan

10 January, 2015 0 No tags 0

The term Black Swan is a term that has an Anglo-Saxon origin. This term refers to a highly improbable event occurrence. The term Black Swan comes from the Old World belief that all swans were white. Was taken as an irrefutable belief and factual evidence, as all empiric tests were proven it so.

Belief that had to be revised when it was discovered the first black swan in Australia in the seventeenth century. ** This term shows the fragility of our knowledge and extreme limitation to our learning from observations or experience. Shown as a single observation can invalidate irrefutable beliefs based on experiences of years.

In previous post we have already discussed what is the inductive reasoning. As it might be a while ago, I will do a brief review. Inductive reasoning obtains general conclusions from premises containing particulars.

For example, from the repeated observation of objects or events of a similar nature it could be provided a conclusion for all objects or events of that nature. I noticed a white swan. I have seen a second White Swan. I have observed a third swan was also white. Conclusion: All swans are white.

This reasoning is generalized to all observed elements are finite (in this case three swans). But the truth of these premises (three observations of white swans) is that they don’t make that the conclusion true (all swans are white). There may be swans that have another color (black, for example).

According to Hume: No amount of observations of white swans can infer that all swans are white, but the observation of a single black swan is sufficient to refute that conclusion. Another example of how we were wrong: I’ve been watching my mother living every day for 43 years. My mother is immortal.

Black Swans have two characteristics:

  1. They are unpredictable.
  2. They have an impact (positive or negative) in our lives.

From the above two features, we can obtain two conclusions:

  1. We can not do anything to foresee
  2. Given that Black Swans are unpredictable, we have to conforme to its existence.

Generate (yourself) new opportunities

3 January, 2015 0 No tags 0

We create new opportunities constantly, allowing us to increase our chances of success.

To play the nonlinearity must be prepared. We have difficulty with the test/ fail method. We have difficulty in accepting that the series of small failures (with comments and jabs generated by our environment), are necessary in life. You need not vex you lose, and ignore anyone.

The bottom line is this: if you do not risk to have small losses, never get a big win . Our grandmothers say “nothing ventured not cross the sea.”

We rely less on top-down planning and focus more on the most to recognize opportunities when they arise, and tinker with them. As long as this game is governed by the principle: be willing to bleed without bursting. That is, as long as the toy with new opportunities not involve excessive leverage or investment (in money, time, effort…), which not profitably lead us to ruin (the cemetery).

If you do not risk anything, you cannot win anything. “Try your luck” from time to time, understanding the game, is very reasonable. “Relying on luck” as a systematic policy to follow, it’s stupid.

happy new year!