Black Swans in Disguise

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Nassim Nicholas Taleb popularized the black swan theory around the time the financial system went south. Simply put, he argued that extremely rare events with serious consequences, like the Gulf blowout, do happen, but that we are almost never prepared to deal with them either before the event or afterward. Often, because the consequences are so large, these events can change the course of history.

In this case, we are seeing brown pelicans trying to survive the catastrophe, ending up as black, oil-soaked birds. Their appearance is all too close to the original metaphor that named Taleb’s theory. The same fate would have occurred to normally white swans, if they had lived in the Gulf. The photo shows a rare black, Australian swan that put the lie to the common aphorism that all swans are white, springing from a logical statement used in formal logic.

Taleb offers ten rules (free registration required) for dealing with black swans:

1. What is fragile should break early while it is still small. Nothing should ever become Too Big to Fail.
2. No socialisation of losses and privatisation of gains.
3. People who were driving a school bus blindfolded (and crashed it) should never be given a new bus.
4. Do not let someone making an “incentive” bonus manage a nuclear plant - or your financial risks.
5. Counter-balance complexity with simplicity.
6. Do not give children sticks of dynamite, even if they come with a warning.
7. Only Ponzi schemes should depend on confidence. Governments should never need to “restore confidence”.
8. Do not give an addict more drugs if he has withdrawal pains.
9. Citizens should not depend on financial assets or fallible “expert” advice for their retirement.
10. Make an omelette with the broken eggs.

Not all of these pertain directly to the blowout, but most have an almost ironic relevance, especially considering the Congressional hearings that are going on right now. The NYTimes ran a front page article, today, under the headline: “Oil Executives Tell Committee That BP Spill Is an Aberration.” What they meant was that it was a black swan, something that nobody, even the CEO, the regulators, the President would have expected to happen—so rare that nothing could have been done to prevent it. Several CEO’s from Exxon-Mobil and other major oil companies claimed that their companies were not likely to confront anything like this again. Without evidence, tellingly not provided, as to why nothing like this would happen in the future, one can only infer that they were saying the BP did not follow appropriate practices that they, of course, always do.

Ignoring the warnings of Taleb and others that understand that the most unlikely events in the context of an engineering mentality can happen simply out the complexity of the system, the firms blew this off and, on patriotic terms, argued the need to continue to allow the companies to engage in these risky practices.

Mr. McKay [the president of BP America], did, however, issue a plea for forbearance from Congressional and executive branch officials, saying: “America’s economy, security and standard of living today significantly depend upon domestic oil and gas production. Reducing our energy production, absent a concurrent reduction in consumption, would shift additional jobs and dollars offshore and place millions of additional barrels per day into tanker ships that must traverse the world’s oceans.”

If the hearings continue toward a useful and much needed end, the Representatives and their staff should pay particular heed to items 2, 3, 4, 6, 8, and 9. It would be much to difficult to make an omelette (#10) with the metaphorical broken eggs from the accident. Who would ever eat a pelican, even one without an oil coat? The simple (#5) alternate here would be to avoid drilling in fragile and sensitive areas altogether. Exactly the opposite of the CEO’s pleas.

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1 Comments

justmeint said:

this toxic devastation is terrible.....
Did You Know?
BP engineers alerted federal regulators at the Minerals Management Service that they were having difficulty controlling the Macondo well (Deepwater Horizon) six weeks before the disaster, according to e- mails released by the Energy and Commerce Committee.

“I don’t think this would have happened on Exxon’s watch,” Tom Bower, author of “The Squeeze: Oil, Money and Greed in the 21st Century,” said in a June 11 Bloomberg Television interview. “They’d be much more careful and much more conscious of the need to supervise subcontractors.”

WELL excuse me your sainted Exxon....... and Chevron and ConocoPhillips.

Let’s just take a look at a few of your past misdemeanours, and then we can consider again – if the moratorium on deepwater drilling should be lifted, and place it all firmly back into your nice clean hands!

http://just-me-in-t.blogspot.com/2010/06/fairy-stories-about-oil-companies.html