Tuesday, February 21, 2006

Braudel's event-based history and Taleb's "Fooled by Randomness"

There is strong parallel between Taleb's principle that "news is noise" in his book Fooled by Randomness and Braudel's "histoire événementielle" (event-based history).

According to Braudel, the history of events is a history of "surface disturbances, crests of foam that the tides of history carry on their strong backs...resounding events are often only momentary outbursts, surface manifestations of...larger movements and explicable only in terms of them.'

Braudel's history of events resembles the market volatility of economist Robert Shiller (invoked by Taleb) in which "prices swing more than the fundamentals they are supposed to reflect, they visibly overreact by being too high at times (when their price overshoots the good news or when they go up without any marked reason) or too low at others."

Shiller argues that "if a stock price is the estimated value of 'something' (say the discounted cash flows from a corporation), then market prices are way too volatile in relation to tangible manifestations of that 'something' (he used dividends as proxy)." (Taleb (2005) "Fooled by Randomness," 2nd edition, p. 61)

[Note: Other ways to express this mathematical idea include: "prices did not rationally reflect the long-term value of securities and were overshooting in either direction," that there was a "volatility differential between prices and information," meaning that markets were not as efficient as theorized by financial theory (see efficient markets hypothesis).]

The similar argument that Braudel made was that 'events', the subject matter of traditional history, were relatively insignificant in history, and individuals, even those as apparently powerful as Phillip II of Spain, were severely limited and constrained in what they could do by broader, and deeper structures beyond their control. In the Preface to the 1st edn of The Mediterranean, Braudel wrote that statesmen such as Phillip II, `despite their illusions [were] more acted on than actors' (David Moon, "Fernand Braudel and the Annales School")

"Braudel devoted the 3rd and final part of the book to an analysis of the war in the second half of the C16th between the Spanish Empire of Philip II that dominated the western end of `The Mediterranean World' and the Ottoman or Turkish Empire that dominated the eastern end. This part includes sketches of the individuals involved as well as descriptions of the battles, diplomacy, treaties etc. The key battle was that of Lepanto, between the Spanish and Turkish fleets, in 1571. The Spanish fleet emerged victorious but, Braudel argues, Phillip II of Spain was not able to follow up the victory and establish dominance over the whole Mediterranean World. Indeed, by the end of the C16, the Spanish Empire had turned its attention to the West, to the Atlantic World, and to its growing empire in the New World."

"In order to explain why Phillip II was not able to turn the Spanish victory at Lepanto into dominance of the Mediterranean World, Braudel referred back to the previous two parts of the book."

"He drew attention to the financial exhaustion of the Spanish economy, which greatly limited Phillip II's options, even after the victory at Lepanto. This part of his explanation referred back to part 2 on the economic, social and political structures of the Mediterranean World."

"He also drew attention to the difficulties of communications across the vast Spanish Empire in limiting the options open to Phillip II even after the Turkish fleet had been defeated. Thus, he referred back to part 1 of the book on the geography of the Mediterranean World."

Quoting from Olivia Harris(2004) "Braudel: Historical Time and the Horror of Discontinuity," History Workshop Journal 57 (2004) 161-174 :

"The vision of long-term continuities is the cornerstone of his philosophy of history, and his own craft as a historian. The longue durée has for him an 'exceptional value'. It is usually contrasted with event-based history, or political history (histoire événementielle), that privileges 'a short time span, proportionate to individuals, to daily life, to our illusions, to our hasty awareness - above all the time of the chronicle and the journalist'. However the longue durée can also be understood as an alternative to a history that privileges crisis and sudden breaks. It is grounded in 'inertia' ('one of the great artisans of history').

With his attention to the long-term fundamentals of a company, Warren Buffet seems to use the long-term deterministic structure of Braudel in his investment strategy.

Finally, in the era that this weblog addresses, during the period (c. 1350-1600) warfare and politics took place in a world even more subject to probability and chance, with a differential between information and reality even greater to what Shiller found in modern financial markets.

Along the Tai-Yunnan frontier there were both long-term deterministic factors (geography, environment) as well as short-term chance factors at work. Chance factors were rooted in the communication difficulties between the frontier and the political centers of the two large neighboring polities, Ming China and Burmese Ava. This created an information gap along the frontier where chance played a greater role in history.