Black Swan author Nassim Taleb linked to stock market flash crash

A black swan in the water, facing the camera

Black Swan author Nassim Taleb, who writes about improbable events like Wall Street's Flash Crash, was actually linked to last week's mass selloff. Flickr photo.

Black Swan is the title of a book that examines stuff no one thinks can happen, but does — like last week’s high speed trading meltdown of the Dow Jones Industrial Average. Nassim Taleb, author of “Black Swan: The Impact of the Highly Improbable,” describes the rise of the Internet and the September 11, 2001 attacks as examples of Black Swan Events. In Black Swan, Taleb’s argument is that since Black Swan events cannot be predicted, society should at least try to practice policies that may minimize the damage of events, like the Wall Street flash crash, when they do.

Wall Street’s Black Swan

Various media are calling last week’s stock market flash crash a Black Swan event. And in an interesting coincidence, The Wall Street Journal reports that a hedge fund Nassim Taleb advises made a big stock market bet that may be related to the near-catastrophic market selloff, when the Dow dropped nearly 1,000 points in a matter of minutes. In lieu of fast cash loans, Universa Investments LP purchased 50,000 options that would pay off if the stock market dropped off a cliff. According to the Journal, the buy may have contributed to the panicked selling. Investors were already running scared because of the Greek debt crisis, so all it took was one big bet on failure to send them running for the exits. High speed trading made them trample each other on the way out.

Black Swan author Nassim Taleb speaks

Black Swan author Nassim Taleb showed up on CNBC Wednesday to talk about the Wall Street Journal’s Black Swan theory and the flash crash. He dismissed the link between himself and Universa’s Wall Street gamble. “I don’t know anything about Thursday’s event,” he said. “I don’t have enough facts to say whether the collapse was a Black Swan event.” Taleb said things have changed for the worse since he quit everyday trading a year ago. His sentiment:

The world is vastly more fragile than it was when I left it. The crisis of 2008 was caused by debt, hidden risks and irresponsible risk management. We have more debt, more irresponsible risk management and a lower tax base and more hidden risks.”

The Black Swan surprise

Black Swan wasn’t coined by Nassim Taleb. The term has been around since ancient times to describe improbability. Swans are almost always white, but every now and then a black one is hatched for no apparent reason. Taleb uses the term to focus on the markets. In “Black Swan: The Impact of the Highly Improbable,” he seems to predict a global financial collapse. Taleb states that the globalization of the financial markets has created that threat. When one financial giant fails, the rest fall like dominoes.

The next Black Swan: predicting the unpredictable?

Taleb says that Black Swan events, given their unpredictability and improbability, cannot be prevented. But he appeared to have the ability to see into the future when he listed “Ten Principles for a Black Swan-proof World” in the Financial Times last year. But it may be too late for markets, governments and the public at large. On CNBC Thursday, he said the government should shoot for a surplus — definitely a Black Swan event. He also said the worst may be yet to come. To paraphrase:

The U.S. is going to have $5 trillion to $6 trillion to borrow in the next 10 years. It’s going to be competing with European governments and corporates. One day, you’re going to have a bad auction. And that day will be the start of something new.

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