Agree with the author of the article. The U.S. real estate bubble had been addressed long, long before the subprime, notably by Professor Robert Schiller. I presume many investors anticipated the burst coming sooner or later, yet until when keep riding the bubble and when to jump off, hopefully right before it bursts, is almost impossible to figure out......
The Short View: Black Swan
By John Authers, Investment Editor
Published: May 13 2008 18:42 | Last updated: May 13 2008 18:42
Black swans have taken their place in the investment menagerie, alongside bulls, bears and dead cats. It is barely a year since Nassim Nicholas Taleb’s best-selling book Black Swan was published, but the phrase has worked its way into the investment language.
And like other market concepts, it is already subject to abuse. Taleb took his title from the shock that Europeans experienced when they discovered black swans in Australia. Until then, their data told them that all swans were white, so the discovery was unexpected.
A black swan in markets is an event that has not occurred in the past, thus rendering useless risk management models based on historic data. Such a risk model would assume that all swans were white.
Mr Taleb suggests his idea has been misunderstood. The problem, he told the CFA Institute this week, is not that black swans occur often. Rather, it is that they have truly catastrophic and unpredictable effects when they do happen, and so risk managers should concentrate on guarding against them.
His concept caught on so quickly in large part because the financial crisis that started in August last year revealed, as predicted, that the investment industry’s risk management systems were inadequate.
But is the subprime crisis truly a black swan? To call it that might be a convenient excuse. It had been widely noted for more than a year that credit spreads were untenably narrow; US homebuilders’ stocks peaked and started to fall in late 2005; and subprime lenders’ bankruptcies hit the headlines in February last year. This looks like ample warning for a crisis that started in August.
It should have been much easier for risk managers to foresee the credit crisis than it was for European explorers to predict the existence of black swans in Australia.
Copyright The Financial Times Limited 2008
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