Monday, November 30, 2015

An Economic Parable At Thanksgiving.......

An Economic Parable At Thanksgiving

The Black Swan Theory is used to explain the existence and occurrence of high-impact, hard-to-predict, and rare events that are beyond the realm of normal expectations. 

One example often put forth is the life and times of the Thanksgiving Turkey.

The turkey spends the majority of its life enjoying daily feedings from a caring farmer. Weeks go by, and it's the same thing day-in-day-out for the Turkey. Free food. Open range grazing. Good times all around.  IMAGINE THAT THE FED IS THE FARMER....

The thinking turkey may even surmise that the farmer has a vested interest in keeping the turkey alive. For the turkey, it is a symbiotic relationship. "The farmer feeds me and keeps me happy, and I keep the farmer happy," says the turkey. "The farmer needs me, otherwise, why would he be taking care of me?"

This goes on for a 1,000 days.

Then, two days before Thanksgiving on Day 1,001, the farmer shows up again.

But this time he doesn't come bearing food, but rather, he's wielding an ax.

This is a black swan event — for the turkey.

By definition, it is a high-impact, hard-to-predict, and rare event for the turkey, who not only never saw it coming, and never even contemplated the possibility that it could occur.

For the farmer, on the other hand, this was not a black swan event. The farmer knew all along why he was feeding the turkey, and what the end result would be. AGAIN, THINK ABOUT THE FED.

The very nature of black swan events make them almost impossible to predict. The point of this parable is to put forth the idea that sometimes we are the Thanksgiving turkey and understanding this may make it easier to begin to, at the very least, contemplate the possibility of far-from-equilibrium events.

But why worry - you know you and your adviser are all smarter than the average investor, right? Just don't forget the lesson from The Thanksgiving Day Turkey... THE FED COULDN'T POSSIBLY HAVE ANY ULTERIOR MOTIVES, THEY WORK FOR US DON'T THEY?

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