Market meltdowns that scorch investors, 100-year floods that occur every 10 years and terrorist attacks such as 9/11.
Nassim Taleb, an author, lecturer and big thinker, calls such unforeseen events “black swans,” borrowing from a tale about 17th Century European seafarers who landed on Australia and, much to their surprise, learned that not all swans were white.
Such shocks occur, Taleb says, because even experts fail to consider the likelihood of extreme scenarios. That’s why his theory, outlined in his book, “The Black Swan: The Impact of the Highly Improbable,” is so intriguing to Chicago’s trading community, which seeks to lessen risk by exchanging futures and options. His ideas have earned him cachet with investment bankers as well as rock ‘n’ rollers.
Radiohead frontman Thom Yorke sings during “Black Swan”: “This is your blind spot, blind spot. It should be obvious, but it’s not.”
Taleb considers investment to be an art form, not a mathematical science that can shield investors from disasters.
“It’s better to do art than fraud,” he told an audience of more than 200 at the Chicago Mercantile Exchange Friday.
As a former commodities trader at the Merc, his speech was a homecoming of sorts that meshed the lessons of the classroom with the realities of the trading pit. The University of Illinois at Chicago and the University of Chicago, sponsors of his lecture, noted that the combination has generated controversy.
Editors at The American Statistician, the profession’s leading academic journal, said in August that if forecasting events is impossible, “then we might as well assume that the future will be populated with only beautiful white swans.” They compared his theory with statements by former U.S. Secretary of Defense Donald Rumsfeld, who famously responded to prewar doubts about whether Iraq supplied weapons to terrorists as “unknown unknowns.” His ideas even have riled the godfather of modern options trading, Myron Scholes.
Scholes shared the 1997 Nobel Memorial Prize in Economic Sciences for his work on the Black-Scholes formula, which the Chicago Board Options Exchange adopted more than 30 years ago to determine the value of options traded in quick bursts on its floor. Options provide the right to buy a stock at a prearranged price in the future, presumably helping to protect buyers from black swans.