Saturday, September 21, 2013

Black Swans and Climate Change: fragile experts abound

Thanks to the excellent recommendations of a reader some time back, I finally delved into the works of Nassim Nicholas Taleb, a Lebanese-American thinker (there really is no term that captures all of what Taleb is) who has become well known for his writings on Black Swans--unpredictable/improbable events with huge consequences--and his rather blunt habit of calling out academics of all sorts for the charlatans that they are. Taleb's arguments--found in his books The Black Swan: Second Edition: The Impact of the Highly Improbable: With a new section: "On Robustness and Fragility" and Antifragile: Things That Gain from Disorder--are devastating ones for many practitioners of various "sciences," especially those whose work involves statistical analysis and attempts to model the future, from stock markets to political change to world wide weather patterns.

The path to understanding Taleb is a treacherous one; many who read him who are already skeptics to some degree--like yours truly--will quickly find confirmation of their own skepticism in his analysis and parables. But there is a deeply embedded problem in this regard: confirmation bias is exactly what Taleb is trying to rip apart. I read what Taleb writes about the Financial Crisis of 2007/2008, about how the "risk management" of the financial industry is nothing but smoke and mirrors, and for me it is an "aha! moment." For of course I knew it was all nonsense, I knew there was a looming catastrophe, just like Taleb knew.

I steel myself with Taleb's own point on Black Swans, that they are specific in their existence to points of view, to frameworks of reality. Thus, what may be a Black Swan Event for one group may not be so for another (because the latter were less blind to such a possibility).

But when I do that, I err. Badly. For I am doing exactly what Taleb is saying is wrong, I'm using an event that I most certainly could not and did not predict to justify my own point of view.

This is, I know, I difficult thing to grasp, even for people who understand the bulk of Taleb's writings (which I imagine, intellectual snob that I am, is but a small percentage of those who have read him).

Here is a prime example of someone who thinks they understand Taleb but is actually way out of his depth. The piece is by one Joseph Romm, a darling of the Climate Change crowd and deeply passionate leftist. With degrees from MIT--including a PhD in physics--one would think he would know what he was talking about. But alas. Of Taleb's Black Swans, Romm says:
One of the defining characteristics of humans is our ability to ignore or downplay facts that would shatter or overturn our world view. At the same time, we tend to favor or selectively recall information that confirms our preconceptions, which is called “confirmation bias.”

I bring that up because, these days, pretty much everything that seems anomalous is called a “Black Swan,” a term popularized by Nassim Nicholas Taleb in writings such as, “The Black Swan: The Impact of the Highly Improbable.”
And he has a fair point, the assignment of the term "Black Swan" occurs far too frequently these days, not unlike the term "perfect storm." Of course--not unexpectedly--Romm has no problem with such terminology when it goes along with his worldview. But back to the Swans in our midst.

As I said, Romm recognizes the overuse of the term and indeed even cops to his own misuse of it some years back (a smart move that, as it heads off the obvious rebuttal). But from there, he pursues an ill-fated course in trying to show why pretty much nothing is actually a Black Swan because there is always a Cassandra available with a doom and gloom prediction.

The point of all this is an attempt to show how Climate Change, itself, is not actually a Black Swan event. To which I would reply--as would Taleb, I think--of course not, you clueless modeling monkey! Climate Change--as a worldview--is exactly the opposite of a Black Swan Event. It's a future path being predicted by people armed with computers and slide rules, a path that is supposedly near-certain unless steps are taken--as envisioned by the "experts" among us--to avert it, to create a new path.

Within the Climate Change debate, there are potential Black Swans aplenty, but the potential for those Swans exist because of people like Romm, because of "experts" who want to script the future, who want to direct the course of human agency throughout the world. No one--right now--can say with any degree of certainty whatsoever what those Swans might be, that's the whole point! Taking the controlled, top-down approach desired by people like Romm is the fundamentally creative first step to their (the Swans) move from potential to actuality.

At least one Climate Change scientist now appears prepared to understand this, none other than Judith Curry who once predicted a growth in Hurricane strength and frequency due to Climate Change (or Global Warming, as it was known then). The above NPR piece paints Curry as something of a reformed Climate Change fear-monger. Yet, Curry was still wrongly fixated on Black Swan Events as primarily natural events at the same time as Romm was busy trying to intellectually remove Black Swans from the Climate Change lexicon. She obviously is still not quite there, but there is at least hope for her, since her mind is open.

In that regard, let's look more carefully at Taleb's definition of a Black Swan Event, as cited by both Romm and Curry:
What we call here a Black Swan (and capitalize it) is an event with the following three attributes. First, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility. Second, it carries an extreme impact. Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable.
Romm would have us believe there is some sort of trickery going on here, that Taleb's definition is flawed because it makes the faulty assumption that an outlier--in the sense used by Taleb--has not and will not be predicted. And with that, Romm's intellectual fragility is laid bare: he seeks a "gotcha" moment and imagines he has found one, because he begins his inquiry intending to prove his assumption at all costs. And in so doing, he falls flat on his face. Taleb is most clearly using "outlier" in an extreme sense. The point is--for Taleb--that such events fall outside predictions by definition, even when those predictions themselves involve new limits.

This was the very problem that lead to the Financial Collapse, a dependence on risk tolerance measurements that supposedly allowed enough room for extreme and unpredicted changes. It wasn't that no room was allowed for the unexpected, it's that the room was still far too small, even though experts insisted it was far larger than necessary.

Romm is at pains to point out that Climate Change is no Black Swan--and he is surely right about this--but fails to recognize, to allow for such a potential of such events, even within his own wrong-headed worldview. If, for instance, worldwide temperatures shot up (or down) by twenty degrees in the next six months (an extinction-level event, to be sure) this would be a Black Swan Event. Because it is far beyond the current perceived limits in this regard, as tabulated by experts like Romm.

For her part, Curry seems to understand this to some degree, as she recognizes that the character of a future Black Swan is every bit as problematic as its scope. But she--like Romm--is still looking at Black Swans with regard to weather, alone.

Thus, both ultimately fail to appreciate what the real Black Swan problem is, with regard to Climate Change (though Romm's failure is orders of magnitide greater; Curry knows enough to say she does not know enough).

Look at Taleb's principles for a Black Swan-robust society, meaning a society that is more or less Black Swan proof, one in which such unpredicted events carry no "extreme impact" with them:
What is fragile should break early while it's still small: Nothing should ever become too big to fail. Evolution in economic life helps those with the maximum amount of hidden risks become the biggest. 
No socialisation of losses and privatisation of gains: Whatever may need to be bailed out should be nationalised; whatever does not need a bailout should be free, small and risk-bearing. We got ourselves into the worst of capitalism and socialism. In France, in the 1980s, the Socialists took over the banks. In the US in the 2000s, the banks took over the government. This is surreal.

People who drove a school bus blindfolded (and crashed it) should never be given a new bus: The economics establishment lost its legitimacy with the failure of the system in 2008. Find the smart people whose hands are clean to get us out of this mess.

Don't let someone making an "incentive" bonus manage a nuclear plant - or your financial risks: Odds are he would cut every corner on safety to show "profits" from these savings while claiming to be "conservative". Bonuses don't accommodate the hidden risks of blow-ups. It is the asymmetry of the bonus system that got us here. No incentives without disincentives.

Compensate complexity with simplicity: Complexity from globalisation and highly networked economic life needs to be countered by simplicity in financial products. Complex systems survive thanks to slack and redundancy, not debt and optimisation.

Do not give children sticks of dynamite, even if they come with a warning label: Complex financial products need to be banned because nobody understands them, and few are rational enough to know it. We need to protect citizens from themselves, from bankers selling them "hedging" products, and from gullible regulators who listen to economic theorists.

Only Ponzi schemes should depend on confidence: Governments should never need to "restore confidence". Cascading rumours are a product of complex systems. Governments cannot stop the rumours. We just need to be able to shrug off rumours, to be robust to them.
 
Do not give an addict more drugs if he has withdrawal pains: Using leverage to cure the problems of too much leverage is not homoeopathy, it's denial. The debt crisis is not a temporary problem, it's a structural one. We need rehab.  
Citizens should not depend on financial assets as a repository of value and rely on fallible "expert" advice for their retirement: Economic life should be definancialised. We should learn not to use markets as warehouses of value.

Make an omelette with the broken eggs: The crisis of 2008 was not a problem to fix with makeshift repairs. We will have to remake the system before it does so itself. Let us move voluntarily into a robust economy by helping what needs to be broken break on its own, converting debt into equity, marginalising the economics and business school establishments, banning leveraged buyouts, putting bankers where they belong, clawing back the bonuses of those who got us here and teaching people to navigate a world with fewer certainties. Then we will see an economic life closer to our biological environment: smaller firms and no leverage - a world in which entrepreneurs, not bankers, take the risks, and in which companies are born and die every day without making the news.
This is all largely about financial systems and economics, but the applicability of these principles extend into all aspects of government policy, because government policy tends to impact financial systems and economics as a matter of course.

What needs to be understand in the context of Climate Change and Black Swans is that the realm of unpredictability is not limited to the natural climate, alone. It extends to the consequences of the solutions offered by those predicting future cataclysms. Such solutions--intended to "fix" the problem--can have unpredictable consequences for both the climate and mankind, as a whole. What are these consequences? We don't know. That's the point.

Experts tell that a failure to act, to make massive changes to the nature of global society, will have disastrous consequences because of what their models tell them about the future climate, but they tell us nothing about what the results will be from following such a course of action. Setting aside their consistent failings to get the future right when it comes to such forecasting and their inability to explain these failings, what they never explore is the potential impact of trying to manage--from on high--an open, complex, and largely organic system: the world's economy, the total civilization of mankind.

By empowering world organizations to direct these things, to dictate the limits of economic activity based on assumptions about the future climate, we establish a new paradigm for the production of future Black Swan Events, because we create a new hierarchy based on this highly fragile system. Such an operation requires near-perfect knowledge of the future. Because what happens if all the "correct" steps are taken, if the world is "adjusted" to the satisfaction of the experts and then the future does not go according to plan? A new adjustment? And then another? All on a global scale and all full of even more potential Black Swans. Why? Because the scope of the paradigm, of the controlling system is too big.

What is fragile should break early while it's still small.

Problems encountered with climate changes must necessarily be addressed at more local levels, as a matter of course. That's the real lesson here. Small steps, incremental actions as a response to incremental failures, that's the prescription (one that proponents of Obamacare should learn, but that's a different discussion, kind of). This kind of response is the fundamental safeguard against Black Swans for it allows, indeed it invites, errors to be made. And through such errors, information is gained allowing small adjustments, new errors, and so on. The Big Fix, as it were, is the road to a world of more Black Swans (just as it is the road to serfdom).

Cheers, all.

2 comments:

  1. Romm is a propagandist hack that pushes a line despite knowing the facts are not on his side. Roger Pielke Jr. takes him to task frequently on the issues of Extreme weather.

    Curry has a very good blog that I read. http://judithcurry.com/
    She started it after Climategate, and she is very open-minded. I don't agree with her fully on the science, but it is extremely good to have somebody like her allowing room for debate and for genuine disagreements. For which, of course, she is branded a heretic, a "denier" and stuff by the very nice people like Romm (same goes for Pielkes).

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  2. Yes, it's fascinating to see Curry get hammered for acting like a real scientist, isn't it?

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