Every Investor's Arch-Enemy: The Butterfly
BOSTON (MainStreet) -- Science fiction writers have long loved plot devices that fall into the category of "The Butterfly Effect," a term that describes the convoluted connections about seemingly random events.
The term, coined by Edward Norton Lorenz, the mathematician and meteorologist who pioneered chaos theory, is often described with a cliche: A butterfly flutters its wings in China, triggering an ever-rippling chain of events that causes a tornado or hurricane half a world away.
Throughout the financial meltdown that began in 2007, a variation called Black Swan Theory was bandied about frequently, inspired by the writings of Nassim Nicholas Taleb, a former hedge fund manager and Wall Street trader who warned of the potential for economic crisis.In his 2007 book The Black Swan: The Impact of the Highly Improbable (Random House), he speaks of Black Swan events as being surprising, unpredicted events of major consequence that are later rationalized through the benefit of hindsight. To carry out the metaphor: Black Swans are easy to spot in the wild, not so easy to predict as they gestate, hidden in an egg. The Butterfly Effect can be used either for serious prediction or treated as an academic parlor game, a mental exercise of connecting dots and asking, "what if?" We took a look at some of the ways those proverbial butterfly wings may have worked their magic in the worlds of business and investing:
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