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BY COSTA VAYENAS
Parlous times often breed towering personalities. The Great Depression saw John Maynard Keynes become the leading economist and one of the most prominent public intellectuals of his generation and beyond. So far, the current crisis hasn’t produced anyone whose stature is comparable to that of Keynes. But there is one candidate who may someday join him in the economists' pantheon, an individual who in any case will surely have a lasting influence on the profession of economics: Nassim Nicholas Taleb.
Taleb is one of the very few pundits who can fairly say, "I told you so," in the wake of the financial crisis. His books, "Fooled by Randomness" and "The Black Swan," have not only been bestsellers; they are truly seminal works in the theory of finance. Especially with "The Black Swan," whose title has entered our everyday language, Taleb has become required reading for anyone who wants to dismantle the inherited inaccuracies of financial theory.
The main message of "The Black Swan" is that improbable, exceptional and extreme events occur far more often than we dare to think. The potent consequence of this conclusion is that reality is more complicated and unpredictable than we generally assume it to be. Black swans, by the way, were discovered in Australia in the 18th century and the book's title plays on the assumption, employed in treatises on logic since Aristotle, that "all swans are white."
The financial crisis is a splendid example of a fully-fledged black swan. Few thought such a meltdown was possible in the developed economies of the modern financial system; even fewer saw it coming. And now, after the fact, many economists are trying to save face by employing the kind of logical gamesmanship that Taleb so coolly punctures.
For example, some economists have adopted "hindsight bias" to suggest that the crisis was, of course, predictable; or they have succumbed to "narrative fallacy," wherein an inexplicable event is folded neatly into a fluid story line to make it seem self-evident, albeit after the fact. Taleb's point is that people, including economists, actively resist acknowledging that events can overwhelm their comfortable cognitive preconceptions; they (we) are highly creative and all-too-successful at painting any disturbing black swans white, which is how we like them to be, after all.
Add to this the media's penchant for airing extreme opinions rather than more moderate views, and the aftermath of the financial crisis has the punditocracy spouting a steady stream of doomsday scenarios. It seems that since most economists were wrong-footed by the crisis, none wants to miss the next black swan, which is certainly swimming out there somewhere.
But this creates a paradox: If black swans really are sighted everywhere, then they are no longer exceptional. Grim predictions invoking runaway high inflation, or a deflationary, Japanese-style paralysis, or the impossibility of central banks smoothly exiting their stimulus programs, or the catastrophic consequences of the massive new debt on government balance sheets are becoming the norm. But the norm, by definition, cannot be a true black swan.
Indeed, the black swan today would be the scenario of a seamless return to the "great moderation" of the previous 25 years, with low inflation and high growth. Admittedly, this is a highly improbable, even extreme prospect after such a profound crisis. But bear in mind, extraordinary events are not necessarily negative in nature and black swans must not always be bleak.
Costa Vayenas is Head of Emerging Markets at UBS Wealth Management Research.
