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Don’t be a Turkey
There are limits to what we can learn from observation alone. In The Black Swan: The Impact of the Highly Improbable, statistician and former derivatives trader Nassim Nicholas Taleb illustrates this point with a turkey.
Every day, the turkey is fed by a farmer. With each meal, its confidence grows that the farmer is looking out for his best interest. On the Wednesday before Thanksgiving, there’s a nasty surprise:
The hand that feeds you may have ulterior motives. Speaking to the danger of extrapolation, Taleb writes:
What can a turkey learn about what is in store for it tomorrow from the events of yesterday? A lot, perhaps, but certainly a little less than it thinks, and it is that “little less” that makes all the difference.
Minsky Moments
The turkey feels the safest right before he heads off to the butcher. Its confidence and its risk rise in tandem. This setup wouldn’t feel foreign to Hyman Minsky, a mid-twentieth-century American economist who studied financial crises.
During his lifetime, Minsky’s theories sat around collecting dust. He passed away in 1996 a relatively obscure economist. This changed in the fall of 2007 when his theories began to resonate amid the subprime mortgage meltdown. Today, Minsky is best known for his Financial Instability Hypothesis. At its…
