Stalking the Black Swan: Research and Decision Making in a World of Extreme Volatility (Columbia Business School Publishing) [Hardcover]

Kenneth A. Posner (Author)

Book Description

Publication Date: March 31, 2010 | Series: Columbia Business School Publishing

Kenneth A. Posner spent close to two decades as a Wall Street analyst, tracking the so-called "specialty finance" sector, which included controversial companies such as Countrywide, Fannie Mae, Freddie Mac, CIT, and MasterCard—many of which were caught in the subprime mortgage and capital markets crisis of 2007. While extreme volatility is nothing new in finance, the recent downturn caught many off guard, indicating that the traditional approach to decision making had let them down. Introducing a new framework for handling and evaluating extreme risk, Posner draws on years of experience to show how decision makers can best cope with the "Black Swans" of our time.

Posner's shrewd assessment combines the classic fundamental research approach of Benjamin Graham and David Dodd with more recent developments in cognitive science, computational theory, and quantitative finance. He outlines a probabilistic approach to decision making that involves forecasting across a range of scenarios, and he explains how to balance confidence, react accurately to fast-breaking information, overcome information overload, zero in on the critical issues, penetrate the information asymmetry shielding corporate executives, and integrate the power of human intuition with sophisticated analytics. Emphasizing the computational resources we already have at our disposal—our computers and our minds—Posner offers a new track to decision making for analysts, investors, traders, corporate executives, risk managers, regulators, policymakers, journalists, and anyone who faces a world of extreme volatility.

Editorial Reviews

Review

As a respected equity analyst, Kenneth A. Posner has seen firsthand what it means to be blindsided by black swans. In this deeply thoughtful and heartfelt book, he traces out the sources of what we think of as 'surprise events' and offers a pragmatic approach for confronting and hopefully mitigating their adverse effects. Along the way, there are many beautifully elaborated stories depicting how swans often won the day, as well as descriptions of the all-too-rare positive outcomes. This is a valuable book for anyone who treads a path through an uncertain world (hint: that should be everyone!).

(Martin Leibowitz, managing director, Morgan Stanley, and coauthor of The Endowment Model of Investing )

How do highly intelligent bankers and investors get surprised and brought down by financial crises created by their own interactions? Why can't formulaic rules and regulations prevent such crises? How can sophisticated models be so far off? How can one cope with the 'the unpredictability of collective action'? Posner provides insightful, honest, and very instructive real-world adventures in how 'to learn to live with extreme volatility,' as financial markets marched, trumpets blaring, into the quicksands of recursiveness.

(Alex J. Pollock, American Enterprise Institute, and former president and CEO of the Federal Home Loan Bank of Chicago )

Posner's Stalking the Black Swan is an insightful integration of the emerging field of behavioral economics with real-world insights about financial markets. Posner combines true intellect, a fascinating professional background, and a critical mind to help us understand where laboratory insights hold up and where they might not. This book will be a valuable read for anyone interested in the role of behavioral economics in predicting market behavior.

(Max H. Bazerman, Straus Professor, Harvard Business School, and author of Negotiation Genius (with Deepak Malhotra) and Judgment in Managerial Decision Making (with Don A. Moore) )

Posner has drawn on his extensive experience as a first-rate analyst to examine the clues leading up to the recent meltdown of a number of once-respected financial institutions. But this is not a financial retrospective. He shows us how to combine numbers crunching with intuition, and he provides us with a set of disciplines to use in anticipating future Black Swan events—both positive and negative—and to profit accordingly.

(Byron R. Wien, Blackstone Advisory Partners LP )

If you are looking for a well-written book which seeks to merge quantitative analysis, fundamental research, and human psychology, Stalking the Black Swanprovides a great resource to help you fine tune your investing framework for the volatile environment of our times.

(Wall Street Cheat Sheet 6/2/2010)

a wonderful read on how to think about, analyze, and react to extreme events.

(Motley Fool 6/4/2010)

Stalking the Black Swan provides a great resource to help you fine tune your investing framework for the volatile environment of our times.

(Damien Hoffman Wall St. Cheat Sheet 6/2/10)

Stalking the Black Swan doesn't attempt to explain why or how the crisis happened, but instead offers practical, crisis-tested advice on methods for uncovering a similar looming disaster in your own portfolio.

(Seeking Alpha 4/4/2011)

Review

A unique combination of psychology, statistics, and economics that will engage the reader unwilling to settle for quick answers.

(Aswath Damodaran, New York University )

See all Editorial Reviews

Product Details

• Hardcover: 288 pages
• Publisher: Columbia University Press (March 31, 2010)
• Language: English
• ISBN-10: 0231150482
• ISBN-13: 978-0231150484
• Product Dimensions: 6 x 1.1 x 9 inches
• Shipping Weight: 1.2 pounds (View shipping rates and policies)
• Average Customer Review: 4.1 out of 5 stars  See all reviews (17 customer reviews)
• Amazon Best Sellers Rank: #299,426 in Books (See Top 100 in Books)

More About the Author

Currently involved in a start-up company seeking to invest in the US financial services industry, Posner spent 15 years at Morgan Stanley, where he was managing director, senior research analyst, and head of the financial services research team. The stocks he researched included Fannie Mae, Freddie Mac, Countrywide, American Express, Discover, MasterCard, CIT Group, and others in the so-called "specialty finance" industry, one of the most volatile segments of the financial services sector. His work received high rankings from Institutional Investor and Greenwich Associates. A graduate of Yale University and the University of Chicago Graduate School of Business, he has also earned the Certified Public Accountant, Chartered Financial Analyst, and Financial Risk Manager designations.

Posner has recently published op-eds in the Washington Post, Financial Times, and Fortune on topics including Goldman Sachs' response to the SEC lawsuit, choices in reforming Fannie Mae and Freddie Mac, and the use of "contingent capital" to automatically recapitalize systemically important financial institutions during a crisis.

Find more information or contact the author at www.stalkingtheblackswan.com

Most Helpful Customer Reviews

29 of 33 people found the following review helpful

4.0 out of 5 stars Insights on Making Decisions from a Respected Wall Street Analyst April 5, 2010

By M. Simon

Format:Hardcover

If you are serious about picking stocks, or making decisions generally, read this book. I am a portfolio manager that has valued the insights of Ken Posner for over a decade. I have long believed that the best and most useful analysts on Wall Street are the precious few that simply ask important questions about the companies they cover and set out to answer those questions without passion or prejudice. Peppered with what Charlie Munger calls "mental models", Ken explains how he does just that...and more. He reveals how he deals with the inevitable uncertainty in the answers he finds and, importantly, how he adjusts his conclusions for new information. Perhaps most interesting is the privilege of going along with Ken on his journey to revisit the recommendations he made on some of the most controversial financial companies during one of the most volatile times in modern financial history; essentially, a concentrated education in decision making during extreme uncertainty and volatility. Refreshingly, Ken balances academic contributions against the realities of a practitioner without jabbing at either side. The book is an essential read for all directors of research on both the "buyside" and "sellside" but also has broad appeal as a rare look into the mind of an effective decision-maker.

20 of 22 people found the following review helpful

5.0 out of 5 stars Not Just a Book on Black Swans - A Must Read for Investors Looking for a Sustainable "Edge" April 25, 2010

By E. Pachman

Format:Hardcover

A few years ago I had the privilege of interning with Ken Posner for three months. My short time with Ken did more to influence me as an investor than the education I received in two years in business school and through dozens of investing books. Now as a hedge fund analyst, I firmly believe that my "edge" in this hyper-competitive business came largely from adopting Ken's way of thinking about investing. That's why the release of this book was somewhat bittersweet for me. The altruistic part of me realized that a book capturing Ken's investing philosophy was the only practical way to help numerous people become more consistently successful investors (not everyone can be lucky enough to have worked with the author). However, the selfish part of me was a bit disappointed that my invaluable learning experience could now be obtained for under $20 on Amazon.

So what is so unique about Ken's investing philosophy? The concepts of value investing, information assimilation, behavioral finance, and probabilistic thinking are certainly not new - but the way he effectively stitches them together into an easy to understand and apply framework is. Most importantly, Ken's framework is far from static, and in my view, the biggest accomplishment of this book is that the reader comes away with a basic understanding of how to adapt Ken's framework based on the different analytic needs of each stock, rather than applying it mindlessly in checklist fashion. So while I view most other investing books as individual "tools" that investors can add to their investing "toolbox", Ken's book is the entire toolbox along with embedded knowledge on how to select the appropriate set of tools for each different job.

Ken also tackles core issues in investing that are frequently neglected by most popular investing books such as confidence/conviction, how to handle information overload, and how to ask management questions to maximize the information you get from their answers (or non-answers) - the last topic is well worth the price of the book alone.

This book is a must-read for any investor that wants a sustainable edge in this business. While it takes a lot of hard work and discipline to follow Ken's philosophy, I am convinced that adhering to the core concepts of this book will maximize the reader's chance of having a long and successful investing career.

6 of 6 people found the following review helpful

5.0 out of 5 stars What makes this book valuable July 20, 2010

By Stephen Sexauer

Format:Hardcover

Ken Posner's Stalking the Black Swan takes us a step forward in dealing with a world - brilliantly introduced to investors by Nassim Taleb in Fooled by Randomness and The Black Swan - that is episodic, that is capable of large and unpredictable changes, and that can deliver extreme failure to those who count on a smooth and normal (Gaussian) world.

How do you deal with a world where the standard measure of volatility, the standard deviation, is ruled to be infinite and dangerous to rely upon for decision making? The Taleb solution is to hold mostly risk-free assets, buy out-of-the-money options, and wait. While this strategy may work for an individual, especially one with Taleb's skills, it cannot work for investors as a whole, for two reasons.

First, as soon as we all try to buy the out-of-the-money options, the return expected in Taleb's strategy will be arbitraged away. Second, returns come from owning assets with a claim on economic growth. Economic growth comes from productivity, which comes from innovation and change. Innovation and change bring risk--for both the innovators and the incumbent firms. If everyone holds the mostly risk-free-Taleb portfolio, who invests (owns) in risky assets?

It is here where Posner's book moves us forward. The book applies the steps of a classical approach: enumeration of outcomes, assignment of probabilities, incorporation of posterior information, and the application of prudent judgment to decisions that must be made in an uncertain world. To aid these judgments, Posner provides valuable insights into the human processing engine, an engine that is locked in constant battle with tidal waves of data and a default wiring scheme that tends to lead to the Kahneman-and-Tversky-type decision shortcoming of framing, overconfidence, and anchoring.

To deal with Taleb's Black Swans, Posner brings us back to the world of Pascal, Fermat, and Bayes. What really matters is the judgment and structure used to define outcomes and to assign a probability to each. (The book's exhibits 5.8 to 5.11 wonderfully illustrate this). This approach works for an individual, it works collectively for the economy, and it is workable in the real world of wild variances and Black Swans. This is what makes Stalking the Black Swan a valuable book.