Tuesday, March 22, 2011

The Black Swan Theory

Recently, there are a few "unimaginable" events one after another unfolding before our eyes. The 2008-2009 global financial crisis, the recent Middle East wars and the Japanese “Black Swan” 9.0 earthquake. I call these events “unimaginable” not so much because they are illogical but rather because they fall outside the normal range of experience and prediction. The surprise, in other words, arises from a failure of human imagination.

The Black Swan Theory was developed by Nassim Nichalas Taleb in 2007 where he described many historical events as black swans, be it scientific new discoveries, wars, financial crisis or natural disasters as black swan events. Examples of such events are: World War 1, internet development, 911 World Trade Centre terrorist attack, the subprime financial crisis and so on.

According to Wikipedia, “ the Theory of Black Swan Events is a metaphor that encapsulates the concept that the event is a surprise (to the observer) and has a major impact. After the fact, the event is rationalized by hindsight.”

Japan's recent disaster fits this pattern. In hindsight there was only a single "black swan" anomaly: the 9.0 earthquake. That such an event, once it had happened, would trigger an enormous tsunami was surely predictable, as was the impact on nuclear facilities that were designed to withstand only more limited shocks and the sickening human and social devastation that would ensue. The political, economic, and strategic implications of the continuing disaster are likewise more foreseeable than was the disaster itself.

No matter what it is, there is certainly an impact on our Bursa Malaysia. I was expecting the KLCI to fall more but it didn’t. This makes me realise that our bursa has more value investors than I thought which is good news for us. That means if I continue to promote value investing, we’ll have less shocks to our stock market, which is why people are saying our Bursa Malaysia is a low beta stock market.

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Happy investing,
Pauline Yong

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