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Black Swan or Big Turkey?

Much has been said about black swan events, how financial disasters strike without warning. But do they really?

It was Ludwig von Mises who wrote, “Facts per se can neither prove nor refute anything. Everything is decided by the interpretation and explanation of the facts, by the ideas and the theories.” Perhaps investors and traders should pay more attention to the plight of a random turkey.

Consider a turkey that is fed every day. Every single feeding will firm up the bird’s belief that it is the general rule of life to be fed every day by friendly members of the human race “looking out for its best interests,” as a politician would say. On the afternoon of the Wednesday before Thanksgiving, something unexpected will happen to the turkey. It will incur a revision of belief.

N. N. Taleb, The Black Swan, 2nd Ed.

“What can a turkey learn about what is in store for it tomorrow from the events of yesterday?” Taleb continues, “A lot, perhaps, but certainly a little less than it thinks, and it is just that “little less” that may make all the difference.”

Taleb’s turkey problem shows us that “the same hand that feeds you can be the one that wrings your neck,” that the lesson learned by the turkey from its daily feeding is not only of no value, but “a negative value.”

In much the same way, Georg Hegel admonished readers.

Rulers, Statesmen, Nations, are wont to be emphatically commended to the teaching which experience offers in history. But what experience and history teach is this – that peoples and governments never have learned anything from history, or acted on principles deduced from it. Each period is involved in such peculiar circumstances, exhibits a condition of things so strictly idiosyncratic, that its conduct must be regulated by considerations connected with itself, and itself alone. Amid the pressure of great events, a general principle gives no help. It is useless to revert to similar circumstances in the Past. The pallid shades of memory struggle in vain with the life and freedom of the Present.

G. W. F. Hegel, Philosophy of History, 1837

If we cannot count on history repeating and none of us can predict the future, then how do we make money in the market?

In a nutshell, successful investing and trading requires a deep understanding of human nature because behavior is what drives the investor sentiment cycle. We must also devise and use tools to quantify and reduce risk. And finally, we always consider trade-offs between price and information risk. This is what the AiM Personal Strategist service provides.