DeepSeek, black swans and markets

In April 2007, Nassim Nicholas Taleb put forth his thoughts on rare events of substantial repercussions in his book Black Swan. It is an event that has, in the context of existing levels of knowledge in a society, a very small chance of occurring.

- SHAHID MEHMOOD

In April 2007, Nassim Nicholas Taleb put forth his thoughts on rare events of substantial repercussions in his book Black Swan. It is an event that has, in the context of existing levels of knowledge in a society, a very small chance of occurring. In technical lingo, it is a 'tail-end' event, with a minor probability of occurrence.

This has certain implications, one of which is system-wide overconfidence (the former chairman of the US Federal Reserve, Alan Greenspan, called such sentiments "irrational exuberance" while Taleb labels them "epistemic arrogance").

A few months after Taleb's book was published, the global economy was struck with a cataclysm that not even the best financial or economic model had forecasted. The Great Recession shook the global economy to its core; the US economy alone suffered 8.7 million job losses and its households saw $19 trillion of their net worth vanish. The Covid-19 pandemic and the Russo-Ukraine war are other recent examples of black swan events that put the global economy in a tailspin.

Anyways, overconfidence becomes a base for critical decisions, like sizeable investment research and development by entrepreneurs, and stock investors pumping their savings into promising new companies and their products (like ChatGPT), creating a sizeable market in the process.

"Irrational exuberance" was reflected in OpenAI CEO Sam Altman's talk while interacting with his audience on a trip to India. When asked about the possibility of an Indian entrepreneur developing software similar to ChatGPT for $10m or less, Altman brushed it aside (US companies like Google and Microsoft have invested millions and billions of dollars in AI-related developments).