Archive for the 'black swans' Category

I don’t know much about Lévy flights, and I don’t know much about Artie Shaw.  While I don’t have any Artie Shaw recordings (yet) he is a little bit of a hero of mine.

The standard biographical narrative of Shaw was that his performing career — which experienced some of the highest peaks in 20th century commercial musical achievement — was punctuated by periods of creative and physical exhaustion, including revulsion toward his popular success.  So, not many similarities to the Knackered Hack’s experience, except the downside elements, I admit.

In one of his later periods of retreat, it seems that Shaw was preoccupied with studying high-level mathematics.  I wonder if his creativity could perhaps be defined by the concept of Lévy flights?  Now, if you think I’m talking Jackson Pollocks here, you might indeed be right. For the distribution of paint by the very same may have been following some form of fractal pattern:-

There are two revolutionary aspects to Pollock’s application of paint and both have potential to introduce chaos. The first is his motion around the canvas. In contrast to traditional brush-canvas contact techniques, where the artist’s motions are limited to hand and arm movements, Pollock used his whole body to introduce a wide range of length scales into his painting motion. In doing so, Pollock’s dashes around the canvas possibly followed Levy flights: a special distribution of movements, first investigated by Paul Levy in 1936, which has recently been used to describe the statistics of chaotic systems.

I understand there is a risk of seeing heavy-tailed distributions everywhere, particularly to my untrained eye.  But with the creative arts — the clustering of success — it does seem to follow.

I wonder too if it explains, at a very banal level, the frequency of my blog posting, about which I know a few of you are concerned.  To illustrate the two extremes of recent Knackered Hack experience, some Artie Shaw to entertain you.  In the meantime, I will be trying to produce a cluster of posts.  Shaw fans can correct me, but the first piece below reflected the essence of the man, while the second was what people liked him for.  The titles will amuse Mandelbrotian students of markets.  And Shaw’s exuberant swing music flourished in the depression.

At the end of this one, Artie Shaw and sidekicks explore bounded rationality and sum up the perennial challenge for all businesses.

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Frost

I imagine that, at the moment of first freezing, the pattern of frost is set.  So should a mutant, winter-dwelling butterfly flap its wings near your windscreen, a different pattern would appear than if it had not.  Dirt and debris on the screen, the micro-climate around the vehicle, the shapes of eddies: they must make for the variety of possibilities.  It’s about turbulence.

In an October interview, Benoit Mandelbrot said this:-

The word turbulence is one which is actually common to physics and to social sciences–to economics. Everything that involves turbulence is enormously more complicated: not just a little bit more complicated, not just one year more schooling; it’s enormously more complicated….

The behaviour of economic phenomena is far more complicated than the behaviour of liquids or gases.”

In the same joint-interview, Nassim Taleb said this:-

Never in the history of the world have we faced so much complexity combined with so much incompetence in understanding its properties….

You may have chain reactions we never imagined before. These come from intricate relationships in a system we don’t understand.”

So I guess we should beware of those who tell us confidently to expect future economic events to follow a familiar pattern.  They tend to be the same people who did not expect the current situation.

Frost

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For those who did not catch the original video, here it is:-

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toxic waste

12Feb09

Lifeblog post

Anyone who has read Gerd Gigerenzer’s Gut Feelings will recall the description in Chapter 10 of how the pressure to conform creates moral hazard. A powerful heuristic or default seems to operate: “don’t break ranks”. Failure to adhere can result in peer hostility. The experience of Paul Moore in trying to restrain HBOS executives reveals just how powerful and enduring a force that can be, assuming he is an accurate witness to his own experience at the bank. It goes some way to explain how groupthink can operate in the face of compelling contrary evidence. To quote from his memo to Tuesday’s Treasury Select Committee hearing:-

I am still toxic waste now for having spoken out all those years ago!

This might also reflect why today’s FT report leaking of an “independent inquiry” into Paul Moore’s allegations contained the following observations from the HBOS directors of his behaviour. A case of shooting the messenger?

They told KPMG that while Mr Moore’s technical abilities were “recognised as strong” and he gave his team a “strong sense of purpose”, they doubted his ability to work with his colleagues. His behaviour in one meeting was described by people interviewed by KPMG as “ranging from prickly to ranting to extraordinary to outrageous”.

For those not following these events, Moore was the head of Group Regulatory Risk Management for HBOS until 2005. He alleges that he argued with the board that HBOS’s sales culture was running out of control, creating huge risk for the bank should the economy and housing market turn downwards, and that there was a reluctance on the part of executives to have their decisions or behaviour challenged. At the time, HBOS CEO James Crosby dismissed his concerns and terminated his employment. Crosby then moved on to become deputy chairman of the Financial Services Authority. He resigned yesterday morning.

The full text of Moore’s memo is here. For the time being, it may be one of the most readable and historic documents of modern finance. One suspects there will be others.

Well, in his deposition to the Treasury Select Committee Moore mentions it, but I doubt that this five-minute module is mandatory yet at any business school. Let me know if I’m wrong.

Photo credit: Tim Penn

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Tweet Nassim Taleb and Nouriel Roubini are trying something on Facebook.  With a self-styled “J’accuse,” they seek your friendship to support a campaign to get the bailout bankers to repay their bonuses.  Although I normally apply the Groucho Marx heuristic when it comes to joining clubs, I’ve signed up to this one.  They want it […]

Tweet I wonder if Malcolm Gladwell’s Outliers: The Story of Success is going to inadvertently create a popular misunderstanding about success similar in form to my previously stated fear about what a superficial reading of Gut Feelings and The Wisdom of Crowds would do for effective decision-making. In a few Twitter exchanges yesterday, the notion […]


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