data economics

The Unknowable

My life on Wall Street was short lived.  I had the good fortune of starting a money management career at a major firm in 2006. My particular species wouldn’t survive the extinction event that was the 2008 financial crisis though.  Luckily-I think,  I was recalled back to active duty in the navy six months before it all happened so to some degree, I was spared the pain of the death spiral that my colleagues suffered through.  I had the simpler fate of getting sent to Iraq one more time instead.  I don’t remember many positive things about my brief time in the financial management world.  But there was one particular conversation-one sided statement actually-that I’ve never really been able to shake.   It was the beginning of an incomplete thought that has grown over the last decade.  And it’s helped form the foundation for how I look at the world, most recently the 2016 presidential election.

A few days after I started at the firm, the site director who hired me was introducing me to the rest of the team.  He walked me down to one of the corner offices in the high-rise that looked out over the city.  We poked our heads in to see two of the oldest and most successful money managers at the firm.  They were old school.  No mutual funds, no synthetically structured investments-just straight buying and selling stocks.  Sitting at two desks facing each other, separated by three monitors strung together with a massive display of market prices, were two guys who looked like they should be sitting in the balcony at the Muppet Show. One of them broke his gaze on the screen just long enough to turn to me and say. “Sell insurance kid. You’ll live longer. A stock is good ’til it’s bad…”  We quickly ducked out of the office and I never spoke to either of them again. A year later, the firm, in business as a global financial powerhouse for over a century, was bankrupt.  A stock is good, ’til it’s bad right?

A few years later, stuck on an overnight layover when our plain broke down in Dubai, I found myself wandering the massive airport. The frustration of being stuck in a city like Dubai, and not be allowed to leave the airport, is a special one. After a few pints at an Irish Pub, (with real Irish people) I wandered into a bookstore and saw a book on the shelf that would complete that thought that old trader put in my head. It was called The Black Swan and it was written by a man named Nassim Talib. The first paragraph of prologue read:

“Before the discovery of Australia, people in the Old World were convinced that all swans were white, an unassailable belief as it seemed completely confirmed by empirical evidence. The sighting of the first black swan might have been an interesting surprise for a few ornithologists (and others extremely concerned with the coloring of birds) but that is not where the significance of the story lies. It illustrates a severe limitation to our learning from observations or experience and the fragility of our knowledge.  One single observation can invalidate a general statement derived from millennia of confirmatory sightings of millions of white swans.”

Translation: We don’t know anything about the future.  At least not anything that matters.

Nassim Talib built financial models for a living prior to writing the book.  And like the poor souls sitting in the corner office trading stocks, came to the realization that these models he was building were entirely based on historical information to make future decisions. And that was dangerously flawed.  Because everything works fine, until it doesn’t.  Until something unexpected happens like Russia suddenly defaults on their debt,  which happened in 1996, sinking the hedge fund Long-Term Capital Management, triggering a massive government bail out and endless case studies for business school students for the next 20 years.  The best laid plans to manage the future are unprepared for the only things that require the most management, because those plans are entirely devoid of the one thing you need to know to plan-which thing that hasn’t happened before could possibly happen again. It’s broken logic.  The chances that a thing is going to happen are minimal.  The chances that something is going to happen is certain. And that’s the problem.

Talib continued with examples. The world was a safe place until someone flew a couple of 767’s into the World Trade Center on national television. His home country of Lebanon was a tourist hub and beacon of the eastern Mediterranean until it suddenly descended into a horrible civil war in the 1980’s that is still being fought, in some lesser form today.  The civilization and society that existed was destroyed with little hope of ever returning.  No one was prepared.  Because you can’t be prepared for the impossible. Because the possible in the human mind is a collection of those things we’ve observed in our past. But that’s really not the case.  As Monte Python taught us, “No one expects the Spanish Inquisition.” A stock is good, ’til it’s bad. The things that pivot the trajectory of mankind, are the ones we never see coming. That’s the thought…completed.

Let’s take that thought and apply it to the current political landscape in America.  We are sifting through what is happening in the 2016 presidential election as best we can, trying to figure out what is going to happen next, using what we’ve seen before.  And it’s going horribly wrong.  Donald Trump is a political black swan.  And try as we might to find instances in the past that are similar enough to the present to help us chart a course for what lies ahead, we are failing miserably. Donald Trump isn’t Barry Goldwater in 1964 running on an anti-civil rights legislation platform. He’s not George Wallace in 1968 running as an independent on a segregation platform. He’s not Ross Perot. And he’s not Hitler, or Mussolini. From time to time, he’ll look or sound like one of them, and the forces that move him into prominence in our political discourse may be similar, but it’s not something we’ve seen before. So, predicting the demise of the Republican party or the rise of a fascist state or a white supremacy motivated political movement isn’t really useful.  Because as we’ve seen with black swans of the past, they are inherently impossible to prepare for. So I’d like to suggest another approach.

“Those who forget the past are doomed to repeat it.” said the Spanish born philosopher George Santayana. It’s a famous quote. But it’s flawed. Repeating the past isn’t really where the risk is. Sure we can fail by not learning from our mistakes, but the planet killing asteroids are the ones we can’t remember. Because they haven’t happened. That doesn’t mean that history is useless. Quite the contrary.  It’s critically important. But not for predicting things. When you use the past to predict the future, you end up successfully predicting the past. And sometimes you get it right.  But not on purpose.  The real purpose of history is to provide context to understand the present. And it’s the understanding that starts to inform our opinions of what to do next. Which is really where we should start to spend a little more time. I don’t know what’s going to happen next. If Donald Trump’s head split open and an alien popped out of it, I’d be a slightly more surprised than if he were elected president. Frankly, I’m hoping for the former. But that’s not the point.

What’s my point? It’s this-be wary of people telling you what’s going to happen. And be wary of arguments against ideas that may solve things that include warnings of catastrophic outcomes. Because when you get right down to it, we know very little about the future that actually matters. So try this instead. When it comes to selecting the next leader of the free world, go ahead and evaluate them on the things you actually can evaluate-their character, their past performance and the principles for how they approach problems.  Look at their capacity to serve others and compromise. How do they meet the three layered test of principle, compassion and pragmatism? These are much better questions to ask yourself then “what’s going to happen?”

So stay away from the unhelpful thought processes of predicting nebulous change.  Because a stock is good, ’til it’s bad. And all you’ve got left to lean on when it goes south, is the people you’ve selected to lead you through it. So choose wisely.