Black swans are everywhere suddenly

Nassim Nicholas Taleb, author most recently of The Black Swan: The Impact of the Highly Improbable and subject of one of Malcolm Gladwell’s best-ever pieces in the New Yorker, is much in demand these days. It seems that few if any of the biggest hedge fund managers in the world were paying attention to Taleb when he described their highly-leverage, computer-concocted quantitative investment strategies as “picking up nickels in front of steamrollers.” In other words, computer models can’t foresee events which had never happened before and so all the funds’ small profits were destined to be wiped out when one of these previously unknown major calamities struck.

And that’s exactly what seems to have happened to Goldman Sachs, Barclays Global Investors, Sowood Capital and on and on. Virtually none of the losses suffered by these sophisticated players came directly from investments in subprime mortgages or related securities. Instead, it was the resulting run-for-exits behavior of many investors cutting back on borrowing and risky positions that hit the computer models below the belt. And of course you get the absurd statements, like Goldman’s CEO claiming the markets were hit by a once in 25,000 year storm. Not exactly.