Brexit – What do the politicians want?

As the Brexit deadlines approach, everything becomes more chaotic although nothing has really happened in the last 2 ½ years. The possible end points are still the same but if anything, the divisions among the electorate and MPs are even more entrenched; more information about what Brexit means has not led many to change their view. As a result, the UK continues to obsess about sideshows, such as votes of No Confidence, refusing to engage in the reality of Brexit and preferring to expend energy of infighting. We have seen that there is no clear mandate that can be given by the electorate. So, what do the politicians want and what will they do?

What are the options?

  • Remain – the path to Remain is simply to revoke Article 50. However, politicians may want the political cover of a referendum to be willing to do it.
  • Deal

The path to May’s Deal is for Parliament to vote for it.

  • No Deal

The path for No Deal is for nothing to happen i.e it’s the default option.


Tactics for each of the supporting groups


If you want No Deal, how can you get there?

  1. It is the default option – you have the significant advantage that, without action from Parliament, your preferred outcome will occur. Given the lack of any progress so far, you may find it reasonable for this to continue for just 3 more months. David Davis and Dominic Raab did an excellent job of making no progress towards any sort of deal. Brexiteer ultras will continue to cause confusion, block any attempt at making a deal and declare all debate to be a betrayal of democracy.
  2. Oust the PM and replace with a “No Deal” PM – this would have been a sure-fire way to No Deal, but given that May won a no confidence vote and cannot be challenged again, you need to get her to resign (seems unlikely)
  3. There is another Referendum with No Deal one of the options – No Deal has a real chance of winning

No Deal would be overwhelming favourite, if it were not for the fact that the government and the vast majority of MPs are against it and only 25% of the electorate rate it as their preferred outcome! Which of course should rule it out but unfortunately does not.


If you want Remain

  1. A major shift in Parliament – this may require a general election in which Labour win on a Referendum or even a Remain ticket.
  2. Referendum – the question is of great importance, ideally ensure that it is only a vote between Remain and May’s Deal, but it is not clear that this is achievable. If no Deal is included, it is not clear that the EU would agree to delay Brexit.

If you want May’s Deal

  1. The non-extreme outcome – It is important to recognise that you cannot persuade many people to the merits of the deal, compared to their preference of No Deal or Remain, so the appeal of this option is rather negative e.g. for No Dealers, if No Deal is off the table and if they do not support May’s deal then Remain is possible and vice-versa for Remainers.

The appeal of this option to the pragmatists and risk mitigaters (i.e. make sure that their least preferred outcome is avoided) but remains unpopular to the extreme believers on each side. The tactics around this are rather interesting, given that Theresa May wants this outcome.

  1. Another possible route to the Deal is via No deal. Given my view on the potential catastrophe of a No Deal then it will not be the end of the story. 2018 was the year people called 999 because KFC ran out of chicken. What will they do when hospitals run out of medicine?


Which is most likely?

As the deadlines approach, I expect to see a lot of late stage drama which leads either to No Deal or May’s Deal. I believe that Remain is by far the least likely as it requires a few separate miracles. No Deal always stays on the cards as it is the default option.

For May’s Deal to prevail, I cannot see the English nationalist wing of the Conservatives making a compromise to secure Brexit- it is not in their political interest to compromise. They will do better with their supporters to be seen to have failed fighting to the end for No Deal than to have compromised.

This leaves the possibility that deal needs to attract cross-party support and gain the votes of Labour MPs. The recent move by Amber Rudd to coordinate a cross-party alliance to vote for some form of deal is an example:

Q:
Why would Remainer Labour MPs vote for a Deal?

A: Rather than risk a No Deal Brexit and/or to avoid the wrath that comes with a referendum.

Problem: For the numbers this requires a large number of Labour MPs to vote for the Deal, against the wishes of their leader Corbyn and both their Brexiteer and Remainer constituents.

Q:
Why would Brexiteer Labour MPs vote for a Deal?

A: The ultras may never agree to a compromise Brexit, but there are plenty of Brexit supporting Labour MPs who could. Remember that to the extent that Labour has a Brexit policy, it is to leave with a slightly softer version of May’s deal (permanent membership of the Customs Union rather than just as a backstop)

Problem: For the numbers this requires a large number of Labour MPs to vote for the Deal, against the wishes of their leader Corbyn and both their Brexiteer and Remainer constituents. (see above!)

How to make progress

What we see is that there will always be a clear majority against any of the options while there are so many of them. But if the number of options could be narrowed to two then we would see a majority, most likely for the Deal.
For example, if the choice were No Deal vs Deal then I am confident Deal wins. Also, if Deal vs Remain then I also think Deal wins.

If the choices cannot be narrowed to two, then perhaps we simply crash out without a deal.

Brexit – The Will of the People

In this post, I would like to move away from discussion of the rights and wrongs of Brexit but instead concentrate on what outcome people currently prefer. What would be the democratic solution?


Condorcet Paradox

This is a useful part of economic theory that does not get enough attention when discussing democracy. It may seem a little dry but please bear with me because it is very important.

A central concept in economics is preferences:

  • I prefer Apples to Bananas (A > B)
  • I prefer Bananas to Carrots (B > C)

Given this, you would also expect that:

  • I also prefer Apples to Carrots (A > C)

This is called having “transitive” preferences and is a key part of what economists mean for behaviour to be “rational”.

The Condorcet Paradox (https://en.wikipedia.org/wiki/Condorcet_paradox) shows that even if individuals within a group have transitive preferences, the group as measured by majority preference may not have.

In the example above

  • A majority of people in a group may prefer Apples to Bananas
  • A majority of people also prefer Bananas to Carrots
  • However, a majority of people prefer Carrots to Apples

It is entirely possible and logical, even though its it rather counter-intuitive.

Application to Brexit

In Brexit terms, I would have transitive preferences:

  • I Prefer Remain to May’s Deal (R > M)
  • I prefer May’s Deal to No Deal (M > N)

and completely consistently:

  • I also prefer Remain to No Deal (R > N)

For the main groups within the population, let’s imagine 1st, 2nd and 3rd preferences for the various outcomes in the below table:

In my imagined universe:

  • Remainers – would prefer May’s Deal to No Deal
  • May-Dealers – would prefer No Deal to Remain
  • No-Dealers – would prefer Remain to May’s Deal
    It may seem an odd choice but, for example, this is Dominic Raab’s expressed view.
    It seems for some, defeat is emotionally more acceptable than compromise.

Now let’s have a contest and see who wins if we ran a Referendum on each pair of outcomes:

In this case, the overall population makes these choices:

  • Remain is preferred to May’s Deal
  • May’s deal is preferred to No Deal

You may think therefore that Remain is preferred to No Deal but this is not the case. Actually:

  • No Deal is preferred to Remain

In this imagined case, there is no overall preferred outcome.

What do people actually prefer?

Polling data in the UK is consistent with this problem. Support for the three options is pretty evenly split, and even taking into account second preference, we are no clearer. Each head-to-head matches would be too close to call contests.

How is this relevant?

If means the UK, as a whole, DOES NOT HAVE A PREFERENCE and therefore there is no single “democratic” correct answer. Representative democracy, with parties and elections, has been our way of dealing with issues like this. Having a referendum on an issue with more than 2 possible answers just leads to nonsense, just as happened in the initial Brexit referendum.

Identity politics vs Pragmatism

The Brexit ultras who want No Deal can be seen as being driven by identity politics. This means that national identity is overwhelmingly important compared to economics. If you are a Remainer for whom Brexit is a matter of identity politics then for you then wanting a referendum is very logical. That is the only feasible route to Remain and anything other than Remain is a loss.

For economic pragmatists supporting a referendum is very dangerous. Remain is by far the best outcome but No Deal Brexit is catastrophically worse than any deal and avoiding a catastrophe is the most important thing.

For political pragmatists supporting a referendum is very dangerous. The result will be close and will not close the issue. There will not be any clearer sense of legitimacy for the outcome and after another 6-month campaign our divisions will be even more entrenched.

Should we have another Referendum?

As an ardent Remainer, you would think that I support another Referendum. But I do not.
Partly given the logic above, I do not think Referenda are consistent with our democratic system and thus a sensible way to resolve a complex issue like this. But also more pragmatically, I think Remain may struggle to win again and there is a good chance No Deal is the eventual winner; or even if Remain were to win, it would not be by a sufficient margin to close the debate.

Brexit – What happens next?

This is the question I am most often asked and also the hardest one to answer.
I will try to provide a framework for the many overlapping threads:

The possible outcomes

  1. No Deal (Chaos Brexit)
    It is often said that there is no majority in Parliament for this, however there is also no majority for anything else. The key point is that, if nothing happens, on March 29th, the UK leaves the EU with No Deal, and there must be an Act of Parliament to stop it. It is the default option and, as such, this chaotic outcome should not be underestimated.

To avoid it, one of the other outcomes needs to find a way to a majority.

  1. May’s Deal
    This option will have be voted on in Parliament and is universally expected to fail.
    The fundamental problem is that this deal spells out that Brexit is clearly worse than Remain and clearly worse than Fantasy Brexit.But to be fair any Brexit deal would have the same problem.
  1. Remain
    With the news today that Labour may be attempting to form a coherent policy on Brexit, this option has gained a glimmer of a realistic chance.

Non-possible outcomes

  1. “Fantasy” or “Have cake and eat it” Brexit

Given that it would require more compromise from the EU, the EU is never going to offer anything like this and will not allow any renegotiation for this purpose.

  1. Delay Brexit while we work out what to do

A delay would need the unanimous agreement of all 27 EU countries, so it seems rather unlikely for them to do so.

 

If the options are so simple, why is it all so complicated?

The simplest answer is that this situation is unprecedented so there is no clear procedure to follow.
Here are some of the wild cards:

  • Vote of No Confidence in May.
    This requires letters from 48 Tory MPs. However, they have not managed it yet, and may never get there. Even if they manage to get enough to trigger a vote, it is likely that May would win and then she could not be challenged for another year, her position strengthened. But if May lost, then we head to a new leadership election which is a lengthy process, pretty much running down the clock to Mar 29th. This is why only the most hardline Chaos Brexiteers champion such a route.
  • Vote of No Confidence in the government.
    It is highly likely that Labour will call for one after May loses the vote on her deal (and probably if she lost a vote of No Confidence within the Tory party), but it unclear if they expect to win it. If they did and forced a general election, it would be fascinating to see what the manifestos would say. With May as leader, it seems likely she would stand on a platform of her deal. Do Brexiteer rebels have to honour the manifesto pledge? Note there is no time to replace her with another leader before an election!

There is another important reason this is so complex. A lot of UK politicians do not understand the EU because they have never tried to. They really believe the EU can be forced to renegotiate. Talking to politically engaged people here, I get the sense that they are so engrossed in Westminster and party politics, they miss the point by assuming that important decisions are made here in the UK, without considering the viewpoint of our negotiating partner. I have previously used the example of Greece; if you misunderstand the EU then you play chicken and lose. Unfortunately, political journalists seem to have the same issue. They are obsessed with covering domestic political gossip here in the UK and so the coverage focuses on Westminster intrigue and the related confusion, whilst simultaneously missing the issues that are relevant.

  • Another Referendum?
    I think that a large majority of MPs and the electorate do not want this, but it still may happen if Parliament cannot agree any deal. The important issue here would be what question is asked. One aspect of this that I have not seen discussed is that the EU would have to agree to a 6-month delay to Brexit to allow this to happen. Therefore, the EU would have to agree with the question posed; if the vote was between Remain and May’s Deal, they might agree; if No Deal were one of the options, I do not see why they would do this. 

 

My personal forecast

I still think that the most likely outcome is that something close to May’s deal is agreed.
Perhaps losing the first vote will actually help her bring the rebels into line?

  1. Voting pattern could resemble the TARP votes in the US in 2008
    i.e. the politicians want to make a statement that they hate the deal before reality strikes and they have to vote for it the second time
  2. Labour officially endorse a new referendum which brings the Brexiteers into line
  3. May renegotiates a softer Brexit (recent EFTA talk) and gets enough Labour MPs to support
  4. We crash out of the EU, have chaos for a short period and then ask the EU if we can have the deal please and they allow it.

How bad is No Deal Brexit?

We have all seen the headlines yesterday with Bank of England estimates of a 25% hit to the currency and the Brexiteers talking about how the economy will be better off.

I will try to lay out what drives their wide disparity.

1 . ‘No Deal Brexit’ will cause limited problems

This is the case made by people like Krugman. Essentially the value of UK exports to the EU is 15% of GDP. Even with a really disruptive Brexit, this would fall by at most 1/3 i.e. 33% loss of exports. Given domestic substitution, the case could be made that this is still far too high a number and so GDP would be less than 1% lower, depending on exact elasticities.

2 . ‘No Deal Brexit’ will cause no problem – it maybe even better than the current situation

Take the analysis above and add in fantastic trade deals with the rest of the world which will more than make up for the lost EU trade. Trade deals may well take a little while to negotiate so there will be a minor cost short term, but longer term the UK will be better off.

I could take issue with any number of assumptions in the argument above. In particular, the gravity model of trade makes a mockery of the idea that you can replace an enormous market on your doorstep with markets halfway across the globe. Furthermore, it is hard to see why the UK would get better trade deals than the EU currently gets; negotiating deals with reduced clout, it seems obvious such a deal will be worse.

But leaving this aside for now, we can see the order of magnitude of potential benefits of new trade agreements with the rest of the world as perhaps 1% of GDP at best.

3 . ‘No Deal Brexit’ is Chaos Brexit

The reason for this is we do trade with the EU is a simple manner – we have highly embedded supply chains across vast swathes of the economy.

The classic example is of course the car industry (https://www.theguardian.com/business/2017/mar/03/brexit-uk-car-industry-mini-britain-eu)

It is important to recognise that these movements of goods do not form part of the official figures for exports to the EU. National Accounts are based upon transactions – i.e. the final sale of goods. When a company moves parts around between different factories in the EU it is not doing a transaction. It does not sell them to itself. Imports within the EU are called “acquisitions” not imports. Note that they are recorded for VAT purposes however, based upon the change in value (value added at each stage in the process), but this does not give a sense of the importance of intra-company physical movement of goods across the border.

The mistake in the analysis of people like Krugman, is to have a very simplistic model in which the UK and the EU are the sole creators of goods and they trade with each other, much like a model of trade between two parties in an economic textbook. The reality is that the UK and EU are intertwined in the production process and the impact of this is grossly underestimated by only looking at the destination of the final product.

It is worth then considering the likely reaction of industry.

If making cars in the UK is subject to expensive issues and frictions in the supply chain with a possible tariff when you try to sell into the EU – then why make them in the UK at all? Make them entirely in the EU. Will there remain a UK car industry selling to UK buyers? Well possibly – but given the enormous economies of scale in manufacturing, it seems far more likely that production moves to the EU. Then we not only stop exporting cars, we have to import even more of them. With over 1 million people in the UK currently employed in the wider automotive industry that is a huge problem.

The way we get to a real economic catastrophe is very similar to what we saw in the financial crisis. You take a well-functioning system and smash it. Then stand back and be very surprised by the unintended consequences.

Brexit – The Endgame

Quick Recap thus far

The path of Brexit up to this point has been depressingly predictable. I have previously laid out the logic of the issues and nothing meaningful has changed in the past 2 years which is why I have found nothing new worth writing about. The EU has been very clear at all times on its approach whereas the UK seems yet to work out what it wants Brexit to mean.


Options for the UK

  1. Remain
  2. Leave EU but maintain very close economic ties
    This makes the UK a rule taker and is very similar to being in the EU except with no say. A clear loss of sovereignty with no obvious benefit i.e. Brexit means “Giving Up Control”
  3. Leave EU and break economic ties
    clear rise in independence but at a very severe economic cost. This could be

a.  Orderly i.e. a negotiated transition or

b.  Disorderly i.e. “No Deal” Brexit.

The current strategy of the UK is to move to a transition that leaves options 2 and 3 both open.
In this way many decisions are deferred, however the Irish border is an obstacle that makes it difficult to fudge.


The Irish Border Problem

The issue can be stated very simply, either

A. UK has no customs border with the EU
This is much the same as the current situation and so is unacceptable to the Brexiteers. May has committed that we will not do this.

B. UK has a customs border with the EU
If so where?

  • Around the UK i.e. a land border between Northern Ireland and the Republic
    This breaches the Good Friday Agreement and, as one of the red lines, is unacceptable to the EU. May has committed we will not do this.
  • Around Britain i.e. a border in the Irish Sea.
    This is unacceptable to the DUP. May has committed we will not do this.

You will notice that the UK government has strongly and categorically ruled out all possible options to appease different factions. How can this be resolved? The main approach so far appears to participate in magical thinking, but we fast approaching the point where choices have to be made. Furthermore, denial of the issues and refusing to make a choice at this stage becomes a choice with ramifications.

 

Brexiteer solution

It is important to recognise the Brexiteers do not form in any way a unified group with a plan. They are united in their opposition to the EU, not in their plans for what comes next.

  • Boris Johnson – resigned so he could continue to talk nonsense and magical thinking solutions from the side-lines. He will claim whatever happens was not his fault, would have worked out much better if he were in charge, and therefore should now be PM.
  • Michael Gove – wants the exit from the EU to be as smooth as possible e.g. temporary Norway, thereby not risking a 2nd referendum or a “no Brexit” but leaving the difficult issues for later. Presents himself as the pragmatic face of Brexit and therefore he becomes the next PM
  • Liam Fox – had tried to follow the pragmatic line of Gove but recently has been dragged into arguments on sovereignty, with the ECJ involvement in the Backstop quitting arrangement.
  • Jacob Rees Mogg – profoundly does not care about Ireland and thinks it is ridiculous that the independent future of England could be impacted as such. Taking his values from the 18th century, his attitude to the Irish is no different. The border is not important to him and he dismisses anyone who suggests it should be or that he should come up with a proposal.
  • The DUP – I do not have the foggiest clue as to what they want. A return to the Troubles perhaps?

Some of these factions are aligned with May in aiming for an agreement with the EU that fudges the Irish border issue (the EU are masters of drafting wording which can be interpreted any way you want). However, others are demanding clarity and will vote down any deal with does not have it, believing that a game of brinksmanship with the EU will lead to a better outcome.

This leaves us at a point of impending chaos which makes it the hardest stage to predict. I found this BBC graphic a helpful guide as to some of the possibilities (https://ichef.bbci.co.uk/news/624/cpsprodpb/125F1/production/_104294257_brexit_flow_chart_12_11_640-nc.png)

 

Brexit – where are we going? An alternative view

May says that the deal may be struck in the next 24 hours, and so at the risk of being immediately proved wrong, I will lay out another potential path, with the help of a little recent history

A Greek tragedy?

In all the analysis of the various complexities of the negotiations, I have not read anything which draws upon the similarities to the Greek financial crisis. This is surprising given the clear precedent on how the EU behaved during a negotiation and furthermore, how it reacted to a crisis.

 

Recap

Greece spiralled into a huge government debt crisis starting in 2009 and couldn’t contain it domestically. To fund the large ongoing budget deficits in addition to historic debt burden, it was forced to turn to the IMF and the EU for loans, resulting in the first Greek bailout package in 2010.

A key part of the bailout terms involved Greece submitting to austerity demands from the EU. This then developed into a narrative within Greece over the next few years (note the echoes for today)

  • Germans are the enemy – they are imposing this pain on us. Lots of references to World War 2 and reparations (read The Telegraph in the past 2 years?)
  • The EU needs us more than we need them. If we drive negotiations to the brink they will cave in and offer us better terms (listened to any Brexiteer in the last 3 years?)
  • Varoufakis claims his clever negotiating strategy (i.e. not engaging in any meaningful dialogue) will force the EU to give in and back down (David Davis past 2 years and still!?)

 

Pushback from Greece?

In 2011 amid public anger over austerity, the Greek Prime Minister called for a referendum on a second bailout, attempting to pushback on the EU’s demands. However, when it came to it, the Prime Minister called off the referendum and then resigned; Greece backed down and applied for a second even larger bailout with expanded austerity.

 

Crunch-time

  • Early 2015
    Having been elected in January on an anti-austerity ticket, the Greek government did not want to agree to the third bail out terms. The EU said there would be no improved offer and that any further deal would likely have harsher austerity conditions
  • 5 Jul 2015
    The Greek government calls a referendum, telling the electorate to reject the terms of the EU offer as it would give the government more leverage in negotiations and they would secure a far better deal.

The referendum votes down the bailout offer by 61% to 39%

EU does not improve its offer

Greece faces immediate economic collapse
(already in default after missing a payment on 30th June 2015)

EU banking system does not collapse.

EU allows Greece to choose to leave the Euro if it wants to.

  • 13th July 2015
    Greece accepts a revised bailout from the EU with harsher austerity conditions
  • Aftermath
    The Greeks seem to view all this as a great success in standing up to the Germans

 

What does this teach us?

It shows us that the EU is highly predictable. It does exactly what it says it will do. The EU does not back down in a game of chicken against a smaller nation. When the EU tells us that it would prefer “No Deal” to breaching its red lines, it means it.

The UK, on the other hand, will not be able to secure a better deal from the EU via a repeated game of brinkmanship. If the Greek saga is anything to go by, the deal will likely get worse.

It also shows that nations are capable of material self-harm in the name of independence. We should not assume that the UK will not end up with a “No Deal Brexit” just because it is horrific.

 

What happens if we are Greek?

  • May agrees a deal with the EU
  • Either the Cabinet or Parliament vote it down and we move towards No Deal.
  • Corbyn’s Opposition continues to fail to come up with any alternative plans and just wants to use the chaos to claim power.
  • We wait for the EU to offer us a better deal, which of course they don’t.
  • The market and economic implications start to bite, but perhaps not enough for us to agree to make the deal.
  • We drop out of the EU into chaos
  • After a week of chaos we go back to the EU and take whatever terms they offer us.
  • We call Brexit a triumph.

 

Project onto blanks

Keanu Reeves – good films, bad actor?

I read an interesting article recently on Keanu Reeves acting style. Apparently in the world of acting, his style is to present himself as a blank canvas, upon which viewers can project themselves. It helps explain why I love so many of his movies (Matrix, Point Break, John Wick, Bill & Ted), but struggle to understand why, as he doesn’t appear to be a very good actor.

This style of acting certainly makes sense in the context of watching a film, we gain particular pleasure from being able to imagine ourselves as a participant in the drama. Similarly, I have also read that men watching sport are essentially fantasizing that they are actually playing themselves.

Keanu’s aim is not to overwhelm, his voice and facial expressions are muted, the personality left somewhat undefined and given this lack of concrete character, we can overwrite with our own feelings. Although I’m less of a fan, it helps explain why Tom Cruise is such a successful leading man.

This concept does not just apply to sports and movies, it occurs to me to this has wider applications:

 

Extension to business

An area where I find I’m mindful of this issue is when I conduct an interview at work.

If I run an informal, unstructured interview then often my impression of a candidate will relate closely to my mood. If I am highly positive and energetic, then we are likely to have an energetic conversation and I will come out thinking this person has those qualities. I tend to think well of people and so am in danger of projecting the qualities I like onto them.

Over time, I have built a more structured interview and hiring process, with a prepared common list of questions and involving independent interviewers. This helps to highlight a candidate’s strengths and weaknesses in a more objective manner.

 

Extension to politics

The effect in politics is also interesting, perhaps increasingly so.

The marketing of politicians has evolved over the decades. It used to be that politicians had a set of views, often described in speeches and laid out in a manifesto.  Later it seems clear that to win an election you do not need to have coherent views and that the overall spin and marketing is what matters.  Now, it appears that elections have moved to another level.  Politicians are even more electable if their views are actively incoherent.  A politician is no longer required to be a well-rounded person with specific policies and characteristics which can be evaluated – it is more important to be an avatar for the emotions of their support base.

The outstanding recent example of this is of course Trump. But it also helps explain the behaviour of the leading Brexiteers, such as Boris Johnson. A lack of coherent viewpoints is not a flaw, it is the essence of their appeal. They are liked because of their incoherence, not in spite of it.  By making rambling, nonsensical speeches without the need to engage with any aspect of reality, they create a perfect blank upon which the emotions of their supporters can be projected. You do not need to look for the inconsistencies and incompatibilities within their support base, they are sure to exist. What’s more important is the common emotional need they all share, and wish to express.

This also means that whatever you think of Trump or Boris personally, they are not the real problem.
Without them, another avatar would be found to take their place. Boris will only remain the darling of the Telegraph as long as he continues talking gobbledygook in a manner they find amusing.  He knows that if he gave a serious speech acknowledging the trade-offs involved in Brexit, they would find another to take his place, so he happily makes speeches which he must know are full of lies and nonsense. It is very possible that Trump does not understand any of this or that he is not in control of his movement, or even his own identity. His candidate lost the recent Alabama primary to a candidate promoted as backed by the @realDonaldTrump. Steve Bannon told a rally “a vote for Judge Roy Moore is a vote for Donald J Trump”, while Trump himself was campaigning for Sen. Strange!

The movement existed before Trump and is merely using him as its current symbol. They are in a symbiotic relationship of mutual support, and have created a powerful and dangerous, political force.

A Black swan

This is a term commonly used – but I struggle to understand what people mean by it.

Types of probabilistic events?

In Taleb’s book of the same name, “Black Swan” appears to be used in a variety of ways:

  1. For a well-defined outcome with a low probability
    for example: selling lottery tickets or buying CDOs in 2006/7.
    (perhaps the people buying such CDOs did not understand that they were selling lottery tickets but they should have!)
  2. For general uncertainty
    We all know it is possible to have a currency crisis in the UK in the next 5 years but it is not very sensible to put a single number on it. This is concept of “uncertainty” from Knight and Keynes and many macro issues fit into this category. A frequentist approach to probability works for rolling dice but often not for rare events.
  3. For “fat tail” events
    Extreme events occur in reality more commonly than a normal distribution would suggest.
  4. For when the distribution is just unknown
    It is possible that it will be known at a later stage, but currently there is insufficient information.
  5. For an unknown, possible outcome
    This seems to be the new, popular meaning.

Numbers 1 through 4 are well-known and have perfectly good ways to describe them. I think that only number 5 really makes sense as a potential separate meaning for “Black Swan”.

Does number 5 actually exist?

This is also the meaning I have most problem with as I struggle to find real-world examples of it. There are many examples where people did not consider the possibility of a given outcome, but at the same time you can find many people who did and even had decent reasons to expect it to happen. At the individual level it makes some sense as being imaginative can be hard work! However, if some people are not surprised at the occurrence, then how can it be something which “is not even imagined as a possibility prior to its occurrence” unless as you say it is entirely subjective and individual.

It may have been unimaginable to Cheney that the Iraqi people did not embrace US troops as liberators in 2003. Does that mean it was a Black Swan as it was not conceived possible and was clearly important? Or does it just mean Cheney was wrong?

Common usage

Let’s consider what many see as the great Black Swan of 2008:

This is what I think people mean:

· 2008 was a massive drop in markets

· A great deal of common practice in managing risk was terrible

· They didn’t see it coming because it was unforeseeable

Therefore

· I should not feel bad about not predicting it

· Black Swans are very rare, so we should not expect it to happen again

· We should carry on pretty much as before

 

Why it annoys me

This version of events is just an excuse for being wrong, for not learning from it or changing behavior. It should be obvious that I find the term annoying in this way of excusing poor decision making and avoiding responsibility.

Alan Greenspan indeed said that the financial crisis was “unforeseeable”.

 

On Epistemology

Another confusion I had about the theory of the “Black swan” laid out in the book, is the way it sits at odds with the philosophy of science and specifically Popper. Popper, in fact, gets no mention in Taleb’s book, even though Popper’s key concept of falsifiability has long been linked and explained via the original example of black swans.

Quick aside on jargon

  • A conjecture – is an unproven proposition which appears correct
  • A hypothesis – is a testable statement

To illustrate Popper’s concept:
If your hypothesis is that all swans are white.
It would be disproved if you find a black swan.

Given its falsifiability, this is compatible with scientific enquiry

It is clear in this example, to be testable, you have to have considered what events would falsify it.

If we now put Taleb into similar language:

  • Taleb
    a Black Swan is an unimagined event for certain people which disproves their conjecture
  • Popper
    a Black Swan is a defined event which would falsify a hypothesis

Written this way, I think it show the two meanings are incompatible. Popper’s version makes sense and is useful. It is therefore such a shame that Taleb’s popularisation of the term “Black Swan” has taken something important and meaningful and turned it into nonsense.