The title of this post comes from an excerpt of Nassim Nicholas Taleb's excellent book, The Black Swan, which explores the role of highly improbable events in shaping our lives more definitively than recurring, predictable events tend to do.
Taleb uses it to refer to a phenomenon he witnessed firsthand during the outbreak of Civil War along religious lines in Lebanon in the 1980s. Those who believed the war would be over in a matter of days packed a light suitcase and headed to countries in the West to wait out the blip. It turned out the blip lasted 17 years, and those who expected a temporary situation were inexplicably blind to the greatest change of their adult lives.
Taleb seemed to suggest that by middle age, our anchoring bias toward lived experience has taken root to create a persuasive self-delusion.
This is how it will be because this is what I have known as normal until now.
Therefore, this is how it will be forever.
So any deviation from what I know must be temporary until it reverts to my expectation.
He observes the same phenomenon in refugees from any civil disruption to their concept of normal, and makes the case that Cuban refugees who expected Castro to be a one-week wonder were in a similar (balsa?) boat as his Lebanese family, friends and acquaintances.
All of this begs the question of whether our financial well-being is confined to similarly ignorant thinking. Because we invest based on our experience, going so far as creating elaborate Monte Carlo simulations that use past data as a basis for predicting future behavior of our portfolios, we are victims of our own lack of imagination.
I've already seen evidence of my faulty assumptions starting to crumble in the face of COVID.
Bias: Cash-flowing real estate is recession proof. Everyone needs a place to live, guaranteeing the viability of being a landlord.
Reality: Legislators have already intervened to keep renters in their homes without paying rent, potentially leaving landlords underwater.
I recently called an agent about a multifamily unit that had been listed on the MLS that very day. She seemed quite confident that the place would go above asking price. Then she informed me that of 4 tenants, 3 were delinquent on paying rent.
Her assumption flies in the face of current realities. No lender will assume that kind of risk right now, with local and state legislators poised to pass additional anti-eviction legislation in the midst of a pandemic.
Once you start to go down this path, there are many other ways to conceive of additional Rumsfeldian unknown unknowns:
- American exceptionalism at home and abroad has been and will continue to be a constant.
- Ditto American economic power, and the dollar as the world's reserve currency of choice.
- The market always goes up.
- Fascism as a viable political movement has been banished from existence.
- The religious or cultural minority I belong to or originate from has always been welcome in my current country of residence.
It's hard to conceive of situations beyond one's personal experience. But learning to do so, and learning to hedge your bets accordingly, might just offset the type of blindness that results in exile or worse.
Comments 2
When I think of Cuba I think of all those wonderful people whose lives have been turned into a living (for the lucky ones) Hell on earth by this dictatorial Socialist regime.
God bless Cuba and the amazing Cuban People.
Oh My The delusion is pierced. I just read a headline. Every 17 seconds there is one death in Europe as of today. I read another article from Denmark, a controlled randomized study of whether mask wearing v Covid as an effective prophylactic tactic. According to the article it is not statistically better to wear a mask. The bottom line is we have no control. We merely pretend we have control. Covid will spread until the potential energy involved in mixing between human and virus reaches zero and it will not abate before that time.
We operate under narratives. We tell ourselves stories that we believe to be a more or less accurate representation of reality but in the end they are just stories, that may turn out to be illusion, delusion or real. We are trained to believe in stories. All of advertising is based on getting you to buy a story. News media is the same. Education is the same. Financial advice is the same.
When volatility (the variation in the story) is small things are predictable. Being 5% wrong on the future doesn’t matter much unless the critical error is 4%. A 5% error in Normal times means you are right 19/20. Buying a 20% wrong narrative on the future or a 100% wrong narrative can be catastrophic. 100% wrong means the volatility is exponential. The volatility will ALWAYS lead you to the truth. If you live on the mean the volatility doesn’t matter. If you live off the mean, depending on the direction, the vol will eat your lunch. Sometimes vol is your friend but even that friendly vol is a delusion compared to the truth. The most dangerous is when the mean is no longer the mean, because a once reliable narrative is no longer reliable. Castro is an example of the mean no longer being the mean. Lebanon the same. I believe a person dying every 17 seconds plus the concomitant morbidity to those who don’t die will also result in the destruction of being able to mean revert, and a new mean will be established. This is what creative destruction is all about.
People will always need houses. Whether you can devise a profitable business around that narrative is another story. If your nut is 10K/mo and your take is 8k/mo, the needs of people don’t change. What changed is the ability of people to meet YOUR need. To run a Monte Carlo you have to ask the right question. The right question in the case of buying a building is what is the probability my tenants can exceed my nut.
The same is true of the 60/40 portfolio. Over the long term bonds have paid 5% and have been uncorrelated to stocks. In that narrative a 4% withdrawal has worked over 30 years. What happens in a narrative where bonds cost you money to own instead of paying you money? In a narrative where stocks and bonds are in fact correlated?
Welcome to my world!