A Thanksgiving Turkey Post-Mortem
I recently had a chance to re-read the updated version of The Black Swan by Nassim Taleb and I was reminded of the problem with induction. Taleb gives us his turkey analogy; for the first 1000 days, Mr. Turkey is really enjoying his life. He has a regular routine – fresh air, good food and maybe free range. Then, boom – it is all over. The point is that drawing conclusions exclusively from past data can be hazardous to one’s health. Taleb notes that “Mistaking a naive observation of the past as something definitive or representative of the future is the one and only cause of our inability to understand the Black Swan.” Clearly, a market riot due to the “fiscal cliff” cannot be classified as a Black Swan as everyone is aware of the problem. The turkeys in Washington will likely announce, before year-end, some agreement that kicks the can down the road. The agreement will be short on details but long on avoiding the debate in favour of more "thorough" analysis. That may be all the market needs for a Santa Claus rally. Once the real debate starts, I expect we will get the proverbial stuffing kicked out of us.
Of course you cannot have U.S. Thanksgiving without a Black Friday retail orgy. Whether it is a mad rush to save a few bucks on a smart phone or a Victoria’s Secret deal on thong underwear, these displays of madness are plain creepy. A recent article by Kevin Roose tried to explain this behaviour and offered up some thoughts (click here for details). What is incredible is that Black Friday online sales exceeded $1BN for the first time – a jump of over 25% from last year. That is the kind of stampede where at least nobody is trampled.
Taleb, Nassim Nicholas (2007), The Black Swan: The Impact of the Highly Improbable, Random House,