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Monday, August 20, 2012

Frankel: 'Black Swan' Should Refer to Something Else

Jeff Frankel argues that thinking of black swans as "events of inconceivably tiny probability" is incorrect:

A Flock of Black Swans, by Jeffrey Frankel, Commentary, Project Syndicate: Throughout history, major political and economic shocks have often occurred in August, when leaders have gone on vacation believing that world affairs are quiet. Consider World War I’s outbreak in 1914, the Nazi-Soviet pact in 1939, the Sputnik launch in 1957, the Berlin Wall in 1961, and the failed coup in Moscow of 1991. Then there was the Nixon shock of 1971 (when the American president took the dollar off the gold standard and imposed wage, price, and trade controls), the 1982 international debt crisis in Mexico, the 1992 crisis in the European Exchange Rate Mechanism, and the 2007 subprime mortgage crisis in the United States.
Many of these shocks constituted events that had previously been considered unthinkable. They were not even on the radar screen. Such developments have been called “black swans” – events of inconceivably tiny probability.
But, in my view, “black swan” should refer to something else: an event that is considered virtually impossible by those whose frame of reference is limited in time and geographical area, but not by those who consider other countries and other decades or centuries.
The origin of the black swan metaphor was the belief that all swans are white, a conclusion that a nineteenth-century Englishman might have reached based on a lifetime of personal observation and David Hume’s principle of induction. But ornithologists already knew that black swans existed in Australia, having discovered them in 1697.  They should not have been viewed as “unthinkable.” ...

He goes on to explain why many recent events labeled as black swans "should not have surprised anyone." [See also Gavyn Davies on Keynes and unknown unknowns: The Plague of Economic Uncertainty.]

    Posted by on Monday, August 20, 2012 at 09:56 AM in Economics | Permalink  Comments (30)


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