Note to Nassim Taleb: You Can't Kill Off Black Swans 25 comments
an article to
-
Font Size:
-
Print
- TweetThis
Finally self-styled investment prophet Nassim Taleb is hearing some criticism from various corners. He recently wrote an opinion piece for the Financial Times entitled Ten Principles for a Black Swan-Proof World. A few folks responded, including Felix Salmon, Connor Clarke and, most notably Charles Davi, who laments The Unbearable Lightness of Nassim Taleb.
While we enjoyed Taleb's original book, Fooled by Randomness, in which he discussed the illusion of causality and aptly invoked "black swans," did he really need to put out another book to expound on those black swans? Of course, by the time the second book became an option, black swans had become fashionable in the world of finance, so why not ring the register one more time?
One doesn't need to read Taleb's Ten Principles for a Black-Swan Proof World to wonder how in the world one can black-swan proof anything by following a list. After all, black swans are not literally little black animals swimming on lakes. They are unpredictable, out-of-the-ordinary events, or what the former defense secretary might call "unknown unknowns." To have the father of the black swan theory essentially say that we can do away with black swans by following a recipe flies in the face of everything he has asserted about black swans. His recipe destroys the credibility of his entire previous train of thought.
(Not) to pile on, we observe that Taleb the investment manager appeared to be advocating losing a bit of money in your investments in normal times, presumably by buying out-of-the-money put options and the like. Then the "black swan" would come and you would make a killing -- or certainly enough to retire to a tropical island and to never be seen on the talk show circuit again. Unfortunately, there have been a few sightings of Taleb the investment manager here, here, here, here, here, here and here (no, those are not tropical islands). If he is not tanning in the Caribbean following the biggest black swan since the Great Depression, then what kind of black swan will it take? Or are we simply dealing with another author whose 15 minutes of fame have been stretched a bit too far?
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most active
Instabloggers.-
1
David Fry
-
2
TraderMark
-
3
Don Dion
-
4
Cliff Wachtel
-
5
Mike Havrilla
Top Instabloggers » -
1
-
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
Krugman may or may not be relevant in a few years. Winning a Nobel prize is not all it is cracked up to be (even in Economics). If you do a little research on how the prizes are awarded it is completely political and doesn't have anywhere near as much to do with actual accomplishments or research as people think it does. (Yasir Arafat getting the Peace Prize springs to mind here).
Long term, we shall see if any of these people remain relevant. Including Krugman.
On Apr 18 07:18 AM Isam Laroui wrote:
> As an aside, it falls under common sense that all the "heroes" of
> this financial crisis, the Talebs, Roubinis and Meredith Whitneys
> of this world will have faded into irrelevance and self-parody by
> the time it is over. Krugman on the other hand is here to stay in
> my opinion. He is a Nobel Prize winner after all and a deft political
> animal to boot. I might be wrong though.
On Apr 15 05:32 PM dcb wrote:
> the two main point he made, which I agree with is to reduce leverage
> in the system. if I am buying on margin, I have forced selling. the
> entire system. th second is get rid of too big to fail. third is
> get rid derivatives. all are good. he (since he was a trader) understand
> that the smart folks at banks will figure out ways around regulation.
> therefore, make it simple stupid. I agree with most of what he wants
> to do.
For instance, in Wall St. arguments are routinely settled by the net worth rule ("He has x billion dollars, how many do you have? Thus, he must be right).
It is only a more elaborate way of pointing out that most successful people are a product of the bull market. Having said that, since most people don't get it, I think FBR should be mandatory reading in high school.
On the other hand, The BS points out the obvious fact that it is dangerous to attempt to predict the future based on statistical information that is necessarily based on the past. The banks, took on huge leverage based on that notion resulting in the current crisis.
In other words, most of the predictive analysis people rely on, like "real estate prices can never go down nation wide" is based on the belief that coincidence equals causality. How else can you justify the assertion that housing prices could never go down nation-wide BECAUSE they never had?
For all the mathematical tools we now have, the economy continues to be a complex multi-variable social system. Thus, like or not, predicting particular outcomes will remain more art than science. Even for NNT.
It is actually the "The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel", which dates from 1968. The real Nobel Prizes were first awarded in 1901, and were commissioned in Alfred Nobel's will in 1895.
Real Nobel Prizes are awarded for physics, chemistry, physiology or medicine, literature and for peace.
The peace prize is of course political because peace is a political process.
On Apr 18 09:45 AM History Buff 24/7 wrote:
> Isam,
>
> Krugman may or may not be relevant in a few years. Winning a Nobel
> prize is not all it is cracked up to be (even in Economics). If
> you do a little research on how the prizes are awarded it is completely
> political and doesn't have anywhere near as much to do with actual
> accomplishments or research as people think it does. (Yasir Arafat
> getting the Peace Prize springs to mind here).
>
> Long term, we shall see if any of these people remain relevant.
> Including Krugman.
Consider the rule "All swans are white".
Well that worked great until people started visiting Australia, where black swans are indigenous.
A black swan event is in reality a disproof of a rule developed via inductive logic by a counter-example.
Black swan events don't merely invalidate a statistical analysis, they case the collapse of a belief system based on inductive logic. Since all of modern science and technology is based on laws justified this way, such an event can shatter entire belief systems.
Unfortunately Taleb corrupted the concept in his book; instead of using the long-established meaning of black swan he took the idea and corrupted it for his own uses.
On Apr 18 04:37 PM Harry Tuttle wrote:
> FBR was a brilliant concept for a book. People routinely equate
> outcome with success when outcome is heavily influenced by the set
> of exogenous events we call luck.
>
> For instance, in Wall St. arguments are routinely settled by the
> net worth rule ("He has x billion dollars, how many do you have?
> Thus, he must be right).
>
> It is only a more elaborate way of pointing out that most successful
> people are a product of the bull market. Having said that, since
> most people don't get it, I think FBR should be mandatory reading
> in high school.
>
> On the other hand, The BS points out the obvious fact that it is
> dangerous to attempt to predict the future based on statistical information
> that is necessarily based on the past. The banks, took on huge leverage
> based on that notion resulting in the current crisis.
>
> In other words, most of the predictive analysis people rely on, like
> "real estate prices can never go down nation wide" is based on the
> belief that coincidence equals causality. How else can you justify
> the assertion that housing prices could never go down nation-wide
> BECAUSE they never had?
>
> For all the mathematical tools we now have, the economy continues
> to be a complex multi-variable social system. Thus, like or not,
> predicting particular outcomes will remain more art than science.
> Even for NNT.
Thanks for the clarification
On Apr 18 05:18 PM bricki wrote:
> The concept of a black swan is more fundamental than the failure
> of statistical models to predict the future. It is based on the idea
> that many of the laws we base our system of beliefs are based on
> inductive logic.
>
> Consider the rule "All swans are white".
>
> Well that worked great until people started visiting Australia, where
> black swans are indigenous.
>
> A black swan event is in reality a disproof of a rule developed via
> inductive logic by a counter-example.
>
> Black swan events don't merely invalidate a statistical analysis,
> they case the collapse of a belief system based on inductive logic.
> Since all of modern science and technology is based on laws justified
> this way, such an event can shatter entire belief systems.
>
> Unfortunately Taleb corrupted the concept in his book; instead of
> using the long-established meaning of black swan he took the idea
> and corrupted it for his own uses.
>
> On Apr 18 04:37 PM Harry Tuttle wrote:
but was able to buckle down and read the entire 10 things list.
cnbc is hiring.
keep trading, genius.
voting doesn't do it. complaining (in numbers) hardly makes a dent. tea parties may be a start but Americans have no recourse from the momentum of bad ideas and bad policy coming from the seat of government.
so maybe Taleb's "right"--what good does it do other than assuage some feelings of angst and impotence? maybe the traders making money are the only people who are indulging in the Realpolitik of these economic times. more power to them.
A first step towards intelligent conversation for Mr. Hakimogolu would be to acknowledge his own fallibility.
On Apr 18 07:27 AM dcb wrote:
> Cetin may I ask what your credentials are? The three people in your
> comment have gained fame by accurately predicting many of the events
> of the current crisis. Having predicted them when others didn't
> believe it could happen makes them very qualified to work on solutions
> (At least I think so).
...
> I would appreciate it if you would be so kind so explain in detail
> to me how people maxed out on credit card debt, no longer able to
> tap into their home for additional income, and falling real wages
> since the 70's will support your goldilocks economy.
but J have to admit I have taken things a bit too far and my actions have been wrong at times towards him.
what upsets me the most is if you go look at his blog, and I have, is that he has been a perma bull even at the peak of the market, has failed to even acknowledge that we have a crisis, and has been stating all along "buy the dips".
Additionally he admits on his site his plans to gain traffic by posting on open forums such as this. To me that is an abuse of something.
The follow on ideas are not a great contribution as the author of this posting suggests. They do contain some merit worth considering.
I remember a passage in a book I read more than 10 (yes, ten) years ago:
quote
“…and yet, paradoxically, the bonds you bought were worth less than your own obligations. A little financial wizardry, combined with the screwy AAA ratings, could create a perpetual money maker…”
unquote
Prof. Frank Partnoy, in his book FIASCO, described precisely, already a decade ago, the Ponzi games that got us into today s mess. On a much grander scale, to say the least, but the blueprint and the actual tools were all there for all to see.
Since reality is sometimes worse than the trashiest fiction, his book was talked down, at the time, as another WS boulevard piece of revenge of a failed trader. But then the content was, in my opinion, so explosive that, if not true, it would have been easy for the law to shut him up. So my conclusion was that if “they” could not fight it in the courts and try instead to marginalize and ridicule him, his message must be taken very seriously indeed. And am I glad I did. It helped me to a healthy dose of mistrust concerning WS and get educated about their basic mission: To rip off faces and see blood in the street. To be fair, this also applies to what is commonly referred to as Eurotrash in the financial capitals across the Atlantic and elsewhere.
The most recent Wall Street amok is endemic. It is bound to keep repeating itself as long as we have an utterly perverse version of capitalism that – yes, let s repeat it ad nauseam – keeps on privatizing profits and socializing losses, accepts “to big to fail”. It is the worst kind of system. It is sinister socialism in thinly veiled disguise, akin to the inner workings of the old USSR with its privileged nomenclature, beyond the control of the people and the law. I guess the major difference is that their palatial Dacha s are now located in the Hampton s.
And yes, I am a true believer that America has all the ingredients to be a strong economic and moral leader if she goes a good way back to the future and re-applies at least some real capitalist libertarian principles again. Let s hope.
Have a good day
We've got more on the black swan issue over at our blog:
moneyneversleepsblog.b...
Love his work but will Taleb still be relevent when the economy/market recovers?