Don’t be a Turkey for Black Swans

All to often we see history in some form used as a indicator of future outcomes, wether it be in the market using/measuring volatility or relying solely on Technical Indicators (most lagging, using past price, volume and volatility) to aid in predicting future outcomes. Other examples may be found in government legislation based on past outcomes or Supreme Court Rulings based on previous case outcomes. Stress testing business models is based on the worst past recession or depression or conceivable outcome but the risk models do not account for the future being worse or having more bleak consequences, as most times it is the case. Another great example of this is water levels tested in areas with swelling bodies during seasonal periods (rivers, streams, dams), using past water level averages not accounting for the once in a 1000 year storm that floods the entire city and is not included in the data set.

Statistical probabilities extrapolated from past data may be beneficial for guiding the captain through the form of a map, but should not be used as the ship, controlling where the researcher/captain travels.

A black swan for a turkey may not be a black swan for the butcher. The butcher routinely feeds the turkey every morning over a period of time, as each day passes the turkey grows even more trusting in the hand that feeds him and the life in which he lives. At the height of the turkeys trust (the night before slaughter) it is actually the period of time that possesses the higher risk for the turkey. All the while the butcher has been fully aware of the future outcomes of the turkeys life while the turkey became more naive and complacent. In the end the black swan event for the turkey was not a black swan for the butcher (it was a delicious meal or profit).

Using past data or outcomes to shape our judgements may be harmful if you are not aware of the biases that contribute to those interpretations of the events/data (I.e. Hindsight bias or confirmation bias) or the unknown & unknowable risk that is so often “calculated & understood.”

Remember the story of the Turkey next time you use past outcomes or data to estimate future events and outcomes, not all is how it seems or seemed.

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Used from “AntiFragile” by Nassim Taleb

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