[mynameishere]

You can't discount the apocalypse. You just can't. And this pan-phobic concept "black swan" is just various degrees of unknowable apocalypses that we are supposed to account for based upon their very unaccountableness. I don't buy it. Read the tea leaves first, then tell me about swan feathers.

The housing bubble was BLATANT. No black swans involved. I remember talking about it with friends in 2005. No big deal, really.

[frossie]

"The housing bubble was BLATANT. No black swans involved."

Yes, but what was not blatant was that the housing bubble popping would kill Lehman Brothers, cause runs on banks and almost bring down the whole world economy.

Taleb's point is that you can't go around behaving like any system is, to borrow a phrase "too big to fail" - or rather too cleverly thought out/regulated to fail. To some extent this is simple engineering. I can test the resilience of my cluster to network failure by pulling out an ethernet cable and see what happens - maybe there's a small hiccup while systems fall back onto local resources, maybe nothing fails over properly and I am hosed for 12 hours. As I understand Taleb, his argument is that the economic powers (bankers, traders, politicans) spend too much time trying to figure out how to prevent network failure, rather than making sure that when the network does go out, it doesn't take your whole mission down with it. Because, no matter how well you think you have engineered the system, the chance of your network going out somehow, sometime is non-zero.

I do agree with the posters that Taleb overstates the cleverness of his own insight; but unfortunately, in his field, it seems that people really were too dumb/greedy to grasp this. Irrespective of what you think of his interpretation of events or the validity of his suggestions (and I too question them), I think as systems engineers we can appreciate the risk of designing political and economic systems under the assumption that they can't fail.

[nazgulnarsil]

the problem isn't that people were too dumb/greedy to notice. it's that they weren't punished for not noticing it. you'd be amazed what a little incentive does to people's willingness to self educate.

[lutorm]

If it really was that blatant, why did it happen? Doesn't the fact that it burst by definition mean that most people did not recognize it?

But Taleb makes a different point: Discounting the apocalypse is exactly what he's arguing against, because this is essentially what LTCM et al were doing with their models. They calculated probabilities to make sure that the estimated payoff was greater than the estimated loss, but they got the distributions wrong. What you should try to do is make sure that the apocalypse can't happen, that you aren't exposed so that one outlier will take you down. Because due to the nature of the system (there is only a sample of one of the world economy) you simply can't gather data that can pin down the wings of the distributions to the precision you need.

According to the models used at the time, the Black Monday 1987 was something like a 30-sigma event. If the distributions truly were gaussian, such an event should never happen in the history of the Universe. So you have a choice between thinking that we just had an incredibly bad luck, or the model is wrong. I'd go with the latter.

[nostrademons]

"If it really was that blatant, why did it happen? Doesn't the fact that it burst by definition mean that most people did not recognize it?"

Some data, some math, and an interpretation you won't hear every day:

http://quickfacts.census.gov/qfd/states/00000.html

http://photos1.blogger.com/photoInclude/x/blogger/2825/754/1...

There are 127 million housing units in the U.S. At the peak of the bubble, 7 million houses/year were sold. A total of roughly 30 million houses were sold in the boom years of 2002-2007, assuming there's no double-counting (people who sold a house multiple times), which is probably a pessimistic assumption. That means that over half of U.S. households took absolutely no part in the bubble - they just sat tight.

Now look at the inventory numbers from the last two years. They go up rather dramatically. This means there were more sellers than buyers, i.e. a large number of people realized that home prices were selling for more than they thought the house was worth, and quickly put their house on the market to take advantage of this. Sure looks like people recognized the bubble to me, it's just that by definition they can't all get out before it bursts.

My interpretation is that most people did recognize the bubble - it's just that they're not the ones that the New York Times writes stories about. They held onto their home and neither bought nor sold, instead just going about their business. Or they sold at the peak, rented for a bit, and are now buying back in at half price and pocketing a few hundred grand. Smart people tend not to brag about how they just made a killing off other people's stupidity. It prevents people from being stupid again, which limits the opportunities for future killings. Besides, it tends to kill the mood at parties.

[neilk]

Many people knew there was a housing bubble, but few predicted it would have such wide-reaching effects. Did you?

[mynameishere]

I had all my money in the foreign markets, and got out in late 2007 when it spiked down,

http://finance.yahoo.com/q/bc?s=VEIEX&t=5y

...I wouldn't have made any connection to US housing and foreign equities, but I was looking at both, and I knew both were bubbly. I've since lost money on a few stupid trades, so it's not like I'm an expert or anything. But the fundamentals are usually clear to all. Right now, the macros on S&P PEs, long-term treasuries, and high-yield,

http://finance.yahoo.com/q/bc?s=JNK&t=2y

...are clear, and they all scream "avoid". And that's the extent of my trading strategy right now.