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Posts tagged with catastrophe

Charlie Lloyd Knows Weather.

http://i.imgur.com/uUphG.png

(I had to look up MLLW—it means mean lower low water. As in there’s a lower high tide, a higher low tide, a lower low tide, and a higher high tide.) Normal tide cycle from Wikipedia:
http://upload.wikimedia.org/wikipedia/en/0/00/Tide_type.gif

9449880 Friday Harbor, WA water level/meterological data plot

http://upload.wikimedia.org/wikipedia/commons/e/e8/Sloshrun.gif

http://www.hpc.ncep.noaa.gov/sfc/lrgnamsfcwbg.gif

(Source: basecase.org)




Antifragility

Nassim Taleb wants us all to go long vol — not just be able to withstand volatility, but to actively seek it out.

He can certainly bet that way (and does — though it’s not paying off), but it’s a bad idea to make society anti-fragile.

Let me define a few words describing potential responses to volatility:

  • fragile — Taleb means systems that break when catastrophic volatility is applied; he’s thinking of people who deep short volatility or at least indirectly bet on stability
  • robust — like a bridge, or an earthquake-resistant building: built to withstand shocks
  • agile — able to adapt to shocks
  • anti-fragile — shock-loving; shock-seeking; volatility-loving; risk-avid

Taleb points out that there is no word for “the opposite of fragile”; only for “not fragile”. True.

But we really shouldn’t try to make the system break in the case of no catastrophes. Imagine a bridge that shattered only-and-always, when no cars drove on it. Or a building that toppled only-and-always, when no earthquakes were shaking it. (Those would be anti-fragile things.)

It would be stupid to build things that way. Same with the financial system — we want to be prepared for bad times but also, ready to capitalise on good times. A mouse who’s so afraid of cats that it never goes to look for food, will die.

What makes anti-fragility an especially bad idea in finance, is that people might try to sabotage, tweak, or influence the system to make their bet pay off. Let’s say some powerful crook is long volatility — that is, s/he will only get paid if some huge catastrophe happens within the next year. Maybe s/he will engineer a catastrophe. That could be truly terrible.

UPDATE: @nntaleb has clarified on twitter that he does intend “antifragility” to mean “long gamma”.

UPDATE 2: Jared (@condoroptions) suggests at minute 30 of this Volatility View podcast that @nntaleb must mean long convexity, not long gamma. I interpret that to mean buying stability, selling normal levels of volatility, and buying extreme levels of volatility. In other words things will usually stay the same, but when they change they’ll change more than people expect.
That answers the finance part. I still don’t see how to practically design real things to be antifragile without giving up normal functionality under typical circumstances.




Richard Posner has made a name for himself applying cost-benefit analysis to the law. In this book he asks how we should think about very very unlikely scenarios that are very, very bad. In Catastrophe, Posner wonders what the law says / should say about very very bad things that are very very unlikely. In American torts, “If someone has been hurt, then whoever harmed them has to pay.” That’s tough in many cases, like torrent downloads, and … unlikely catastrophes. Atom Smashers For example, the Relativistic Heavy Ion Collider. Built in New York state a decade before Geneva’s Large Hadron Collider, some worried that the Earth would be completely destroyed by RHIC’s experiments. Either a mini-black-hole would swallow us, or a strangelet (made of strange quarks) would rapidly accrete everything in the world onto itself, and in less than a second people, plants, and the molten iron core would be gone, gone, gone: not with a bang but with a slurp. Despite how awesome that would be, some were against the RHC and death-by-strangelet. But how do you assess the chance that those high-energy physicists could actually destroy the rock we live on? The judge in New York heard testimony from scientists who basically said, “These bombardments have been going on for æons on the moon, and the moon’s fine. We’re gonna be fine.” The Senate also convened hearings. Senator: So … are you guys going to destroy everything? Physicist: Nope. Senator: Um. Are you sure? Physicist: Yep. Senator: But … like … how sure are you? Sure sure? Or just sure? Physicist: I’m sure. Turns out they were right. The RHIC ran without destroying the world and the LHC has also not destroyed the world. (Even though it would be so much cooler if one of them did.) Jurisdiction But, like, who are these scientists to testify about the fate of us all? And who is the judge to decide? Who is the US Senate to decide? At the very least, there are jurisdictional issues. New York probably shouldn’t preside over the fate of the world, even though most people in Manhattan aren’t aware that anybody outside New York actually exists. Risk Aversion & Prospect Theory People are averse to risk. They’re also averse to losses. (By risk I mean the chance of a loss; by loss I mean the certainty of a loss.) Suppose just one person was affected by a catastrophe. No bargaining or interpersonal tradeoffs necessary. To reason correctly about what’s good for that person, you must know his/her risk preferences and loss aversion. Definitely no measurements can be made about people’s real reaction to these galactically improbable events. Interpersonal Tradeoffs But suppose you knew every single person’s risk preference. Still, would that tell you how to weigh these choices? Wrap Up Just fathoming this stuff is difficult. Trying to weigh the morality of the options is difficult. Let’s pretend that all imprecision in climatologists’ estimate of the chances of global warming is erased tomorrow. Now we know exactly the chance of 1 degree global warming, of 2 degrees global warming, and so on. And we know exactly what x degrees of warming would mean for the livelihoods of Norwegians, Indonesians, Oregonians, Argentinians, everybody. Still! What would you do? How could we come to an agreement? Even if people could agree on what’s the relative value of an Indonesian’s well-being versus an Oregonian’s? How. Would. You. Know. What to do. How do you make sense of unfathomably large damage with unfathomably small probability?

Richard Posner has made a name for himself applying cost-benefit analysis to the law. In this book he asks how we should think about very very unlikely scenarios that are very, very bad.

In Catastrophe, Posner wonders what the law says / should say about very very bad things that are very very unlikely.

In American torts, “If someone has been hurt, then whoever harmed them has to pay.” That’s tough in many cases, like torrent downloads, and … unlikely catastrophes.

Atom Smashers

For example, the Relativistic Heavy Ion Collider. Built in New York state a decade before Geneva’s Large Hadron Collider, some worried that the Earth would be completely destroyed by RHIC’s experiments. Either a mini-black-hole would swallow us, or a strangelet (made of strange quarks) would rapidly accrete everything in the world onto itself, and in less than a second people, plants, and the molten iron core would be gone, gone, gone: not with a bang but with a slurp.

Despite how awesome that would be, some were against the RHC and death-by-strangelet. But how do you assess the chance that those high-energy physicists could actually destroy the rock we live on?

The judge in New York heard testimony from scientists who basically said, “These bombardments have been going on for æons on the moon, and the moon’s fine. We’re gonna be fine.”

The Senate also convened hearings.

  • Senator: So … are you guys going to destroy everything?
  • Physicist: Nope.
  • Senator: Um. Are you sure?
  • Physicist: Yep.
  • Senator: But … like … how sure are you? Sure sure? Or just sure?
  • Physicist: I’m sure.

Turns out they were right. The RHIC ran without destroying the world and the LHC has also not destroyed the world. (Even though it would be so much cooler if one of them did.)

Jurisdiction

But, like, who are these scientists to testify about the fate of us all? And who is the judge to decide? Who is the US Senate to decide? At the very least, there are jurisdictional issues. New York probably shouldn’t preside over the fate of the world, even though most people in Manhattan aren’t aware that anybody outside New York actually exists.

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