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Tuesday, October 09, 2007

Black Swan

I've noticed a bit of a buzz surrounding the book "The Black Swan: The Impact of the Highly Improbable" by Nassim Nicholas Taleb. I haven't read it but I think I understand the premise -- which asserts that straight probability and statistical analyses break down outside of a closed world assumption. In other words, when one considers that something odd can happen outside of the scope of your well understood reality, the infinite possibilities out there can bring about some surprising new eventualities. The classic case that Taleb brings up concerns the case of a previously undiscovered Australian black swan, of which European naturalists predicted would never occur, as the genetic probability of only white swans occurring amounted to 100%. But of course, the new species of black swan turned the old paradigm on its ear and the conventional math wisdom proved pointless.

Due to the popularity of The Black Swan book, a certain species of cornucopian tends to think the swan allegory portends optimism for our oil future. I first saw it here on TOD.

I assert that instead of a Black Swan representing new discoveries of oil, we have here a Black Passenger Pigeon. As I understand it, because of a large population of swans, you could get mutations leading to the evolution of a black species. I would consider this rare but mathematically possible. But it would seem vanishingly small to assume the possibility that a black passenger pigeon would suddenly appear as the overall population gets decimated and eventually becomes extinct. And this has nothing to do with a renewable resource like birds, but rather that we have pretty much scoped out every hiding area on the earth. See the Dispersive Discovery model to back this up. (note that the original TOD commenter said "couldn't follow I'm afraid" to my counter-allegory)

By the same token, the idea that large oil reservoirs get discovered first presents an optical illusion of sorts, if not another inverse Black Swan. The unlikely possibility of a huge new find hasn't as much to do with intuition, as to do with the fact that we have probed much of the potential volume. And large finds occur at the peak of the dispersively swept volume.

Looking at some of the Amazon reviews for The Black Swan, I have to agree with the author on the misapplication of the Normal distribution for many situations.
The whole point is that traditional stat, econ, finance techniques are mostly around the first moment (mean) but the distributions in finance tend to be non-normal and it's the risk that we should pay more attention to. That's a point few people would disagree with. What the author may not have known is that there are stat techniques out there that handle all the issues mentioned - while it's true that there's a lot of room for improvement, it's misleading to say that this is an area ignored by the academics and practitioners.
According to other reviews, the author disses math and religion in equal amounts -- something that displeases that wide a range of people must have some rhetorical substance and probably a worthwhile read (his earlier book "Fooled by Randomness" looks interesting as well).



As I type this I have got on the radio Sam Seder subbing for Mike Malloy talking to author Michael Klare, the author of several oil depletion books, including "Blood and Oil". Sam skewered Freddie Thompson and his presidential debate assertion that we have plenty of oil left.









14 Comments:

Professor Blogger odograph said...

Having read the book, I'd say that you aren't far wrong (you are pretty close in fact), but in reading it you could pick up some nuance.

Maybe the tidbit I'd add would be that true "prediction" only works for linear systems (and well-understood ones at that).

In non-linear domains (and ones for which we have an evolving understanding) we should accept some degree of uncertainty.

Consider Hubbert's method, at the core of peak oil. It is a predictor for a very non-linear system, and while we think it has utility, it certainly also has uncertainties in its results.

IMO it gets worse when we move from there to predictions about economies and societies post-peak. We take the output from one prediction, say oil production, and feed it into another prediction, say how economies will respond. From there we move to how politicians will respond, and back again to economies, etc.

I see great value in Hubbert's method but I wouldn't go past that to the kind of chain-of-prediction we so often see.

Someone like Kunstler essentially scripts a future by choosing responses for everyone over time.

Maybe Taleb is the anti-Prophet, and if you read the book, I think you'll find that he makes a good case. Again, not a case against tools like Hubber's, but against confidence and certainty for things like political futures.

7:03 AM  
Professor Blogger odograph said...

Oh, I just followed the TOD link and skimmed (I never go there anymore).

It is true that Taleb spends a chapter or two on the Gaussian. I'm not that math-oriented so I read it on a superficial level. He seemed to say though that Gaussian curves are rarely (never?) found in nature, and that the Gaussian assumption is often misplaced.

You should read that chapter for yourself. It might amount to nothing more than the reason we don't expect Hubber's method (or others) to produce an output with zero error.

7:08 AM  
Professor Blogger WHT said...

Thankee. I will definitely pick this book up.

11:09 PM  
Professor Blogger Step Back said...

Maybe Thompson is right?
We got plenty more left.
But like an aging actor, we can't get that more up anymore.

2:26 AM  
Professor Blogger Step Back said...

On the Black Swan thing, there is a reason why most of the major oil fields & finds are near the Equator. That is where most of the sunlight fell over the past millennia. And oil is biotic in origin. Oil creation is not a purely random process. There are not going to be any Black Swans appearing in the Laws of Thermodynamics. Energy found = energy where it was stored.

2:32 AM  
Professor Blogger WHT said...

StepBack has got it nailed. Use statistics with just plain logic. A lethal combination.

8:23 PM  
Professor Blogger odograph said...

Found a new book for everybody ... haven't got it yet myself ... Worst-Case Scenarios. I like the tag line quoted there:

"If you make a plan, God laughs. If you make two plans, God smiles."

Too many "one plan ponies" in this peak oil stuff ...

6:49 AM  
Professor Blogger Big Gav said...

What does God do if you have no plan :-)

If most oil forms near the equator, how do you explain the Alaskan north slope and the north sea ? (genuine question here, I'm not arguing with you)

And Odo - if you've abandoned TOD (weak hearted pornucopian that you are - I can't see why you'd leave a p[lace that heaps undeserved abuse on you) where do you hang out nowadays ?

3:26 AM  
Professor Blogger odograph said...

Hi Gav,

On "no plan," that's a good observation. The blurb for Worst-Case Scenarios from Publisher's Weekly says:

"Within the complex explanations, Sunstein does a reasonable job of achieving his three goals: to understand individual responses to worst-case scenarios (usually to plan far too much [or] far too little); to suggest more sensible public policy regarding low-probability risks of disaster; and to dispassionately evaluate CBA as a tool, especially as it pertains to policy making in the future (Nov.) "

I'd guess that "no plan" falls into the "plan far too little" category.

And people who read about Peak Oil every day (me still?) might be planning "far too much."

I rattle around some of the energy blogs, trying to stay one step from the doom community, but I'm trying to cut down ;-).

6:05 AM  
Professor Blogger odograph said...

P.S. - I've made no "equator" comments, that question is for someone else?

6:11 AM  
Professor Blogger WHT said...

I saw that equator comment inserted by Professor Step Back.

8:19 PM  
Professor Blogger Step Back said...

Hi Big Gav (& Odo),

I'm not a "geographer", but I recall a talk by a Swedish professor who calls himself a "geographer". He explained how the land masses of the Earth have drifted over the years and indicated that at one point Texas may have been much closer to Nigeria and the Oil rich Middle East. I suspect, but don't know, that the Alaskan fields may have originally been located far more South than they are today.

Anways, Odo; I suspect you are right that TOD has become much more of a doomer site. However, I still need a daily antitode for the cheery MSM news. :-)

4:34 PM  
Professor Blogger Big Gav said...

Sorry Odo - I mixed in a bunch of different questions before.

Professor Step Back - I guess the point I was trying to make is that as the continents drift, talking about oil being formed near the equator is kind of meaningless, as it then distributes itself semi-randomly around the globe over time.

Of course, as we all know oil is abiotic, the whole idea is nonsense, right :-)

As for planning, I decided I'm a skeptic about an imminent peak and my only form of planning is to agitate for lots of cleantech investment.

Living a walk or a bike ride away from almost all of my regular destinations makes that a fairly easy bet - and I figure Australia will collapse several years after many other places if the doomers are right, so I have some leeway to head for the hills if my hopes for a relatively gentle transition turn out to be misplaced :-)

7:33 AM  
Professor Blogger odograph said...

The MSM is doing a better job with this oil price rise than the politicos. News agencies talk about supply and demand, Asian growth, slow action by producers ...

Politicos talk about funding alternate energies, blah, blah, ...

9:22 AM  

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