Friday, August 03, 2007

Black Swans expecting the unexpected

A black swan is an outlier, an event that lies beyond the realm of normal expectations. Most people expect all swans to be white because that’s what their experience tells them; a black swan is by definition a surprise. Nevertheless, people tend to concoct explanations for them after the fact, which makes them appear more predictable, and less random, than they are. Our minds are designed to retain, for efficient storage, past information that fits into a compressed narrative. This distortion, called the hindsight bias, prevents us from adequately learning from the past.

Black swans occur when there are significant mismatches between the models people use to understand the world and the subsequent expectations that those models produce and observations. In other words, black swans are model errors.

As wired magazine in an interview explains

From Wall Street to Washington, we're constantly being told that the future can be forecast, that the world is knowable, and that risk can be measured and managed. Nassim Nicholas Taleb is having none of this. In his new book, The Black Swan, the finance guru and author of the surprise hit Fooled by Randomness argues that history is dominated not by the predictable but by the highly improbable — disruptive, unforeseeable events that Taleb calls Black Swans. The effects of wars, market crashes, and radical technological innovations are magnified precisely because they confound our expectations of the universe as an orderly place. In a world of Black Swans, the first step is understanding just how much we will never understand.

Wired: If Black Swans are the crucial determining events in history, why do we think we can predict anything at all?

Taleb: After they happen, in retrospect, we think that Black Swans were predictable. We think that if we can explain why something happened in the past, we can explain what will happen in the future.

But with better models and more computational power, won't we get better at predicting Black Swans?

We know from chaos theory that even if you had a perfect model of the world, you'd need infinite precision in order to predict future events. With sociopolitical or economic phenomena, we don't have anything like that. And things are getting worse, not better, because the growing complexity of the world dwarfs any improvement in sophistication or computational power.

So what do we do? If we can't forecast the really important things, how do we act?
You need to ask, "If the Black Swan hits me, will it help me or hurt me?" You cannot figure out the probability of a Black Swan hitting. But if you're in a business that's prone to negative Black Swans, like catastrophe insurance, I advise you not to take your forecasting seriously — and to think about getting into a different business. You don't want to be a sucker. What you want are situations where you can have as much of the good uncertainty as possible, where nothing too bad can happen to you, and where you have what I call free options. All of technology, really, is about maximizing free options. It's like venture capital: Most of the money you make is from things you weren't looking for. But you find them only if you search.

We see the greening of the corporate world in the UK, some of these companies now claim to be setting higher standards than any government would dare to impose on them. For example, Marks and Spencer (one of the largest clothing retailers and a multi-billion-pound food retailer in the U.K.) has promised to become carbon neutral, to cease sending waste to landfill by 2012, and to stop stocking any fish, wood, or paper which has not been sustainable sourced. Tesco (the world's third-largest grocery retailer) promises to attach a carbon label to all its goods.

Food miles has been discussed by the marketing departments of these organizations as one option in “sustainable carbon neutral purchasing”,

As we know the NZ agriculture outputs are more efficient and productive then either European or US subsidised farm outputs. We can also identify they are more carbon neutral then comparative UK manufacturers.

News from Lincoln University

New `food miles´ report shows NZ dairying still more efficient than UK, greenhouse gases included

The "food miles" efficiency of the New Zealand dairy industry in producing and delivering products for the British market has received new confirmation from a Lincoln University report released today. (27 July)

The report shows that in the production of New Zealand dairy product the generation of greenhouse gases - carbon dioxide, methane and nitrous oxide, all implicated in global climate change - is less than in the British dairy system.

The Lincoln study´s central finding is that the UK produces 35 percent more emissions per kilogram of milk solid than New Zealand and 31 percent more emissions per hectare than New Zealand - even including transportation from New Zealand to Britain and the carbon dioxide generated in that process.

But as we have seen above with the black swans and “the expect the unexpected rule of outliers” we can now observe the future carbon output of UK farms to be the highest in the world by many magnitudes.


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