Thermodynamics vs Kinetics, part two

The previous post was inspired the writings and public statements of Nassim Nicholas Taleb. I've read his books and watched pretty much every interview he's given that's available on the internet. I like to try to express other's ideas in my own way, so that's what I'm trying to do here.

In many interviews he gives, especially on CNBC, the questioner inevitably asks him, "So what's the next Black Swan?" I'm not sure how he holds back his rage every single time, but Taleb politely responds that by definition, a Black Swan is something that is not predictable by most people, and if a lot of people predict it before it comes true, it's not a Black Swan. He usually adds something along the lines of, "I can't predict when and in what form the next Black Swan event will take place. What I can tell you is that financial system is extremely fragile right now."

Tying this into the prior post, the interviewer is asking a question about kinetics--when, and how? Taleb, though, responds with an answer about thermodynamics. The current state of the economy is fragile-- that's probably a better word than "unstable", but means something very similar. The system is extremely susceptible to insults, and by extension, a Black Swan event. If such an event were to occur, the economy would suffer tremendously. Taleb doesn't know when such an event might occur; it could be tomorrow, a year from now, or ten years from now.

He mentions in this interview that he wrote a new section in the 2nd edition of The Black Swan just to explain this point--the relevant part is about four minutes in.

"Fragility" and "robustness"--the latter being the ability to withstand Black Swans--are thermodynamic concepts.

Share this

It's certainly undeniable

It's certainly undeniable that pointing out that something is fragile is a meaningful statement even without being a specific prediction about precisely when the fragile thing will break. Anyone should be able to see this by analogy with familiar fragile objects. If you let a bunch of young boys loose in an upper middle class living room filled with fragile objects d'art sooner or later one of the boys is going to tip over something and it's going to break. This is a perfectly meaningful, valid, and true (or at least probable) prediction, even though it does not include any statement about the precise moment at which this will happen. It would be erroneous to object to claim on the grounds that it is meaningless or is a cheat to fail to predict the exact moment at which the inevitable finally happens.

This also provides one answer to the question asked of economists, "if you're so smart, why aren't you rich?" Timing is a big part of getting rich, and timing is one thing that it's often hard-to-impossible to get right when it comes to the economy, for reasons analogous to the reasons it's hard to predict exactly when the first fragile object in your living room will break, and which object it will be.

"if you're so smart, why aren't you rich?"

Excellent! I made that a part of a discussion I was having with some friends last night.

Good read gents.

Show me the math

Thermo was invented for the purpose of building more efficient steam engines. It is math intensive subject. It is meaningless without the math. People who claim to teach or use thermo without math are blowing smoke.