2011.03.05 00:43
On Friday March 4, 2011, 4:19 pm EST The concept of black swan events was popularized by the writer Nassim Nicholas Taleb in his book, Black Swans, Markets and Human Behavior Implications for Markets and Investing But the point is, we all want to know the future, but we can't. We can model and predict some things For example, even if we correctly predict some things that impact on the stock and other financial To illustrate the unpredictability of these events, we'll look at past wars. On the one hand, there was Complex Models May Be Pointless This happens in medicine too. Doctors stick to known and familiar treatments, even when a bit of lateral thinking, imagination and prudent risk-taking would be appropriate in a particular case. Complex models (such as Pareto optimality) are often no better than intuition. Such models only work in certain conditions, such that the (complex) human brain is often more effective. Having more information does not always help, and getting it can be expensive and slow. A laboratory situation is very different - here, complexity can be handled and controlled. Conversely, it is highly unsatisfactory and very risky simply to ignore the potential for black swan events to occur. To take the view that we cannot predict them, so we will plan and model for our financial future without them, is looking for trouble. And yet, this is often precisely what is done by firms, individuals and even governments. Diversification and Harry Markowitz In the 2008 and 2009 crisis years, the standard asset allocation models did not work well at all. One still needs to diversify, but intuitive approaches are arguably just as good as complicated models which simply cannot integrate black swan events in any meaningful manner. Other Implications Avoid hindsight bias. Be realistic about what you really knew back then, and don't bank on it happening again, certainly not exactly the same way. Take uncertainty seriously, it is the way of the world. No computer program can forecast it away. Don't place too much faith in predictions. But markets can be too clearly too high or too low. It is not as if we know nothing, but really reliable, accurate forecasts that you can bank on, are just a fantasy. Conclusion This does not mean that modeling and prognoses cannot or should not be done. But we cannot and should not rely on them all that much. We also need to rely on intuition, common sense and simplicity. Furthermore, investment portfolios need to be made as crisis and black-swan-proof as possible. Our old friends, diversification, ongoing monitoring, rebalancing and so on are less likely to let us down than models that are fundamentally incapable of taking everything into account. In fact, the most reliable prediction is probably that the future will continue to remain a mystery, at least in part. |
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It sums up very good in conclusion,Dr. Lee!
I like this phrase especially,
Out of all the complexity of investment tools,
"we need to rely on our intuition,common sense
and simplicity".
Also, I like '盡人事 待天命' attitude as well.
Thanks for the article. KJ