The Black Swan Event

[Ian Andrew]

I’ve recently become very interested in Nassim Taleb’s idea of The Black Swan. The Black Swan is an unforeseen and unpredictable event that has an enormous impact on society. There is no way to predict the coming of a black swan event, but history has shown us again and again that these events occur with regularity. What is unknown is when.

Many, through hindsight, have suggested that some events like the financial crisis of 2008 were predictable, but we all know even with hindsight that timing the event was impossible. Therefore even the most minor of the events remain completely unpredictable. As a quick aside I don’t agree that a Black Swan Event can be a positive event such as the birth of the internet since the impact is far to long term for my definition. Only a devastating event has enough impact to change the “known” landscape in an instant.

The reason I bring this up is one of the interesting ideas that goes along with this is the notion of collective blindness leading up to the event. I personally think that to a large degree we have seen collective blindness as a contributing factor to why we had the financial crisis. Everybody enjoyed the endless growth, but nobody was willing to step back far enough and ask whether it was sustainable and what would happen when the music stopped.

Taleb’s basic theory is that all consequential events come from the unexpected. So thinking of all of this, I find it fascinating to look at the current state of the golf design business. I was reading about the level of work in the Far East and reflecting on how many architects are concentrated and busy in this region. A high percentage of that work is being done in China with a large percent of that on Hainen Island in particular. I kept thinking about this concentration of architects and projects and wondering what if the music stopped tomorrow?
What would happen to the golf design business if the government of China “enforced” the ban on new golf courses? What if the real estate market collapsed since nobody appears to play the game?

[JESII]

Ian,

I can't speak with any knowledge of the golf design business, but to tackle your impression of Talib's basic theory..."Taleb’s basic theory is that all consequential events come from the unexpected...do you really have any questions what would happen to the firms very heavily reliant on Chinese development? Is it really all that unforseeable that this "boom" may bust?

I'll agree that timing it is the real key, but if one firm times it perfectly (gets out of China at the ideal time) and another fills their shoes, a real estate bust will have the same total impact to the industry, no?

"The Big Short" highlighted the stories/observations of a number of people who did see the financial crisis coming. Interesting and quick read.

[mike_malone]

 Taleb  suggests shock absorbers for  fragile systems. Since the Black Swan can't be predicted you need to make sure it doesn't take the system down.  For instance , he recommends banks be utilities rather than use government guaranteed deposits for risky ventures.
     While not a Black Swan event, some suggest that China will crash and burn and prove governments can't manage the economy.

[George Pazin]

There is a certain irony in someone who posits the unforeseen having such a great impact advocating shock absorbers.

With China, it's a matter of when, not if, major changes occur. And how the country handles that transition. We're in the same but different boat here in the US.

I'd argue all of these bubbles are the same - smart people not realizing or not accepting their own limitations. They seduce because the early folks make millions and billions, until the market eventually wakes up.

I haven't decided fully whether these are ultimately good or bad. Mostly I think they just are.

[David Kelly]

Many, through hindsight, have suggested that some events like the financial crisis of 2008 were predictable, but we all know even with hindsight that timing the event was impossible.

As Jim points out there were many people who saw the bust coming and some people made a ton of money betting on it. I didn't have the wherewithal or smarts to take advantage of the bust but I was in all cash by August 2008.

Also, to echo Jim, many people are talking about a Chinese real estate/construction bubble and if it happens what follows will not be a Black Swan event.

[David Harshbarger]

My understanding of the events of 2008 is that the Black Swan, if there was one, was the bankruptcy of Lehman Bros. That kicked off a period of such extreme market instability that, not so much around the devaluation of the housing market, aka the bubble, as the exposure to risk across pretty much every major world wide financial institution to the failure of other financial institutions.  Remember credit default swaps?  When Lehman went down, and the financial market went into wild gyrations, the powers that be concluded that if other financial institutions were allowed to fail, the CDS obligattions that institutions held would be realized, triggering a domino effect of failures.

The white swan was any company can go under, but the economic system will accommodate it.  The black swan was, hmm, maybe not.  Hence, 2 big 2 fail.

[David Kelly]

In fact the book was written in 2007 and reissued in 2010.  I haven't read the new edition so I don't know how Taleb applies his theory to 2008 but before the Lehman Bros. bankruptcy wasn't it the news or rumors of potential insolvency of Bear Stearns that was the triggering event? Not that the whole thing was sustainable anyway and needed a Black Swan event.

[David Harshbarger]

When Bear Stearns vanished I remember thinking "wow!" that's not good.  If you were in all cash by August you heard the clarion call.  I went to 50% cash in April pretty much for the same reason. 

With Lehman, the gov didn't step in.  The volatility that followed inaction, I believe, I was unexpected, esp. In the final stretch of an Presidential election.  The Black Swan of Lehman led to the realization that the system could not accommodate the failure of the major banks.   

Hence, the widely derided TARP, as I understand it, in an effort to forestall events that would trigger liabilities under the CDS contracts.

[Dan Herrmann]

Ian,
I don't know if it's a black swan, but I can certainly see the USA losing another 20% of golf courses in the next 10 years.  Who will be able to afford them?  I heard yesterday that the only jobs expecting to "grow" are cashiers, retail clerks, and another lower-paying job. 

The period from 2010-2020 may well be similar to the 1935-1945 era.  I just pray that we don't end up with another war at the end of it.

[Ron Farris]

Black Swan events are initially unpredictable and life changing.  Not all Black Swan events are bad.

Ironically, I have a company called BLACK SWAN SERVICE, Inc. and I was previously involved in a company that was called Black Swan Enterprises.  BSE was involved in air purification while BSS in a project management consulting firm, currently doing business in China.

I am involved with a company called WHITE HORSE.
You can get a decent burger in Beijing at the BLUE FROG.

I first red the Nissam Taleb book in 2007 and found it quite interesting.  I like the fact that while the events are unpredictable, life changing, and often the writing was on the wall they would happen.  

The Black Swan bird, while no longer rare, was once considered RARE & BEAUTIFUL.  I liked that aspect of Black Swan and it was the reasoning behind our naming.

The unpredictable has happened to me as I now have a company name associated with a movie with heavy lesbian content.  I have not seen the movie, so I cant say whether it is good or bad.

As for Black Swan events in golf, I suppose one could read a lot into that:  Augusta National , Sand Hills GC?.

[Dan Byrnes]

It's basically the flaws in historical analysis and statistics.  When you review a bunch of data say investment performance like historical stock market returns, there is a tremendous amount of occurrences that lead one to believe that the returns justify the risk vs the reward of those investments.  The "Black Swan" is the event you haven't seen, doesn't show up in your historical data.  While it's possible it exists since you have never seen one it is excluded from the possibilities, unfortunately they do exist and can cause a lot of damage to unprepared when they occur.

Depending on what you believe caused the present financial crisis it not clear that it was a "Black Swan" event as much as to much leverage in the system and poor analysis of the possible outcomes of cheap money and the housing boom.  For the mortgage backed securities business it was pretty much greed and failure to analyze sufficient data and use common sense. The belief that housing prices couldn't fall coupled with a do deals and ignore the obvious risks was a critical error but not a "Black Swan".

This happens all the time in the investment business with manager selection.  A new comer with say a 3 year track record is viewed as  superior  to a multi decade manager with some warts, bumps and bruises from their experience.  Typically as the new comer gains experience je to gets warts, bumps and bruises.  Some new comers suffer worse and investors would be in retospect been better off with the experienced guy warts and all vs playing roulette with the newcomerrs who's experience doesn't provide enough data to know if their short term success was luck or skill.

[RJ_Daley]

Interesting if you think of the concept of 'collective blindness' as a precursor to the 'black swan event' in evaluating the meltdown of 2008. 

There is another kind of blindness; 'Willful Blindness', which happens to be the name of a book by Margaret Heffernan. 

Collective blindness suggests a certain set of circumstances that naively blind the powers that be, or circumstances that just get away for vague and multiple circumstantial reasons reasonably calculated not to go wrong.  Willful Blindness is more a reckless tempting of fait, even the willful behavior that is understood will end up in disaster, yet for chance to string it out to pursue self interest or closely held ideology that they know is really wrong morally and historically was known didn't work then and won't work now, still break the rules, and let the other guy and the rest of society take it, arrogantly making the decision to go ahead with it anyway.  That is criminal, IMHO.

[Ryan Farrow]

What I take from 2008 was AIG's blindness in insuring all of these bad loans. They were responsible for putting this thing in a tailspin, and really, the only company that could not fail, if they couldn't pay out, they would have taken town every financial institution all for the prospect of making billions in fees thinking, there was no way the real estate market would turn.

I just don't see China's economy suffering the same fate. Like it or not, their communist government can actually make/change laws over night. And for the past few years they have been tweaking their laws, and regulating the way people can buy homes, how much money they have to put down, and at the end of the day, there is actually real money going into all this new construction. 90% of a new apartment complex might be empty, but you can count on 60% + of it actually being paid for in cold hard cash. Its not a sham economy based on bad loans and credit. The biggest challenges this country faces is corruption,  poor construction standards, pollution, and their drivers! I think you need to look for a blackswan in China elsewhere, not the economy.

Anyways, Ian, how many architects do you know of who have more than 2 or 3 courses under construction in China and are getting paid? My guess is not many. There is a lot of talk, even a lot of signed projects that will never happen.

[Sam Morrow]

Did anybody else see this and think it was about 2 hotties?

[Kalen Braley]

Did anybody else see this and think it was about 2 hotties?

Sam,

I must admit, I thought there was at least a possibilty of seeing Natalie Portman in this thread as well. 

However things being as they are, I think this is an excellent discussion as it pertains to both the world economy at large in addition to the golf course business.

[Dan Herrmann]

Another Black Swan could be unforeseen changes in climate.  One little-discussed affect of increased CO2 in the atmosphere could be a significant increase in precipitation levels. 

[Ian Andrew]

Anyways, Ian, how many architects do you know of who have more than 2 or 3 courses under construction in China and are getting paid? My guess is not many.

At a recent meeting of the ASGCA, the group was asked how many are working in China. It was most of the room. In conversations during the meeting I discovered that almost every new project anyone was working on was in the Far East. The concentration of work and architects staggered me. If they are not getting paid, would that not accomplish the same eventual shakeout as many of the other scenarios?


As an aside - history has been excessively clear from John Law to Alan Greenspan -  markets eventually decide their own fate. This will happen in China too.

[Ian Andrew]

I wanted to thank everyone for sharing their opinions and thoughts on this subject. When I posted it, I wondered if it was too off topic to be a golf thread. I have always thought it was wise to have a broad understanding of the bigger picture in order to make good decisions about running a golf design business.

I have some serious concerns for golf course architecture for the short term. I honestly don’t think we’ve had our Black Swan Event yet even though 10% of the architects have lost their jobs in the last 3 years. We might get lucky and the Chinese boom or an Olympic related resurgence may manage to smooth out this economic lull that appears likely to last the rest of the decade.

I guess I simply can’t get my head around Chinese Golf. The cost, the limited participation, the fact it appears to be only a real estate play, the fact that it’s illegal, that water has to be an issue, the politics, it all gets my spidey senses tingling….

As Jim points out there were many people who saw the bust coming and some people made a ton of money betting on it. I didn't have the wherewithal or smarts to take advantage of the bust but I was in all cash by August 2008.

David, I was “lucky” to be around for the last major bust in the Canadian Golf Industry where there was quite literally no work for three years. It provided me with a tremendous amount of perspective on the fact that we are a luxury and the first thing to be deemed unnecessary when the economy tanks. It also provided me with a set of warning signs to look for.

When I formed my own business I committed to staying small and only taking the work I can handle to remain as lean as possible. I “expected” a downturn to come relatively soon since all the warning signs were there already in 2006. I still have no ability to know when, but “it all looked the same as last time.”

I commend you for pulling money out as you saw events taking shape. I expect your financial knowledge is beyond mine. I did increase my cash holdings a bit, but since my focus is on growing dividends, I generally only add to holdings. I did invest a large amount (for us) money at the bottom because for dividend growth guy like me this was my Black Swan Event.


There are a few in the industry that believe a true Black Swan Event for golf course architecture would be the best thing that could ever happen. I’ve always wondered if they fully conceive of how much belt tightening the survivors will have to do while the shakeout occurs and everyone is still competing for the few jobs that are left. This is why the idea of a Black Swan Event in golf design has my interest.

[RJ_Daley]

Do any of you folks think any black swans will be landing on Aug 2?  Most rational folk think it is inconceivable that these 'negotiators' to raising the debt ceiling will take us over the brink.  Yet, if it is inconceivable and then happens, is that a black swan?  I would go back to 'willful blindness' in that case.  Even a global meltdown of financial credit markets is rescued after a week or so past the drop dead date of Aug 2., will that still be enough to signal that these folk in charge are so stupid that they will just kick the can and still a crisis of confidence settles in, creating a dark cloud over capital raising enterprises like GC development for quite sometime to come?  When ideologues will intentionally wreck a national and global economy to try and take down an administration on extreme partisan motivated malfeasance , we have a case of willful blindness to the extreme, where black swans will fly, IMHO.

[Mike Nuzzo]

I liked the book Ian
And believe in much of what he described

It won't happen tomorrow, at least I hope it doesn't... 

[mike_malone]

 In my opinion you can't predict a Black Swan; that's the whole idea. You can only assure that you can handle shocks. So, if you shut down your office in the US to open one in China you are increasing your risk.

[Jud_T]

You make Kung Pao Black Swan.

[David Harshbarger]

Tiger Woods emergence was almost literally a Black Swan event.  Not only did he challenge racial assumptions about golf, but he created interest in the game among large segments of the population who were not turning to CBS at 4 PM on Sunday before.

Maybe a Yao Ming or a great and compelling Mexican American player will change the demographic base underlying golf, and thus drive a new economic reality. 

Other Black Swans could come from radical equipment, political upheaval, agronomy, or anywhere there's a fundAmental assumption about the game that for some reason no longer holds.  Climate change could be one of those.  Ian, use much Papsalum, yet?

[Tim Martin]

Tiger Woods emergence was almost literally a Black Swan event.  Not only did he challenge racial assumptions about golf, but he created interest in the game among large segments of the population who were not turning to CBS at 4 PM on Sunday before.

Maybe a Yao Ming or a great and compelling Mexican American player will change the demographic base underlying golf, and thus drive a new economic reality. 

Other Black Swans could come from radical equipment, political upheaval, agronomy, or anywhere there's a fundAmental assumption about the game that for some reason no longer holds.  Climate change could be one of those.  Ian, use much Papsalum, yet?

David-Just to play devils advocate didn`t everyone know that Tiger would be the sensation that he became. After the 3 Juniors and 3 U S Ams pretty much everybody knew about Tiger and what he was capable of. 

[Ian Andrew]

Tiger Woods emergence was almost literally a Black Swan event.  Not only did he challenge racial assumptions about golf, but he created interest in the game among large segments of the population who were not turning to CBS at 4 PM on Sunday before.

I thought he was going to be a game changer, but I'd be curious to seeing whether that was actually the case.

Ian, use much Papsalum, yet?

Can't up where I live - we can only use cool season grasses.
Velvet Bent is the grass that keeps attracting experimenting in this small section of the World.

I do think Papsalum was a major step forward for golf.