Showing posts with label Nassim Taleb. Show all posts
Showing posts with label Nassim Taleb. Show all posts

Tuesday, July 14, 2009

Literature and the Real World

This came to my attention through Zero Hedge (On a Long Enough Timeline, the Survival Rate for Everyone Drops to Zero) a blog I’ve mentioned before, one that has become a first source for a skeptical view of our political and economic world. When reading Zero Hedge I think of the American Revolutionary War pamphleteers; Thomas Paine would be proud of this independent, pseudonymous voice and its mission statement. No wonder traditional media are concerned about the power of the new press.

Zero Hedge pointed to a fascinating interview between Nassim Taleb, the mathematician, hedge fund manager, philosopher, and writer, author of The Black Swan, and Rolf Dobelli “a Swiss novelist and entrepreneur." I read Taleb’s book earlier this year and while I had my own skeptical view of applying his philosophy to the investment world, I was impressed by his intellect and in particular his theory of “naïve empiricism,” a “natural tendency to look for instances that confirm our story or our vision of the world.”

So it is not surprising that I was immediately swept into this interview with Taleb’s statement “Newspapers have officially the right facts, but their interpretations are imaginary –and their choice of facts are arbitrary. They lie with right facts; a novelist says the truth with wrong facts.” In effect, fiction is a notch above “truth.” How often have I thought that while reading the novelists I’ve mention in this blog? How often have I felt that a novel was portraying the real world, the one I know and understand? As Taleb says, “Literature belongs to the holy. You can do fiction, nonfiction, a mixture, who cares. Literature is above the distinction. It is sacred.”

Wednesday, February 4, 2009


It’s been called “draconian” by compensation “experts,” the same ones that are employed by the financial services industry – a proposed cap of $500,000 for the “top executives” of companies receiving the TARP funds. Pass the collection hat for the CEOs of Bank of America, Citigroup, and General Motors who pocketed more than $37 million in total compensation in 2007, probably the peak year of the chimerical financial derivative.

But what about the rouges gallery of financial wizards who misrepresented risks to investors and yet cumulatively pulled down hundreds of $millions from an unsuspecting public and fled the scene, such as John Thain, Stan O’Neal, Robert Rubin, Chuck Prince, Dick Fuld, et al.?

To the rescue, a grass roots “claw-back” movement is underway, orchestrated by Nouriel Roubini, the NYU economist who warned about the current crisis years ago and Nassim Taleb, author of “The Black Swan: The Impact of the Highly Improbable.”

Unless Rubin and others like him are made to mandatorily return their bonuses or are given some other punishment, the system that regrettably emerges is one "in which it’s the worst of capitalism and socialism, a situation in which profits were privatized and losses were socialized. We taxpayers have the worst."


Monday, January 5, 2009

Black Swan Reveries

As a change of pace – away from my normal interest in literature and biography -- I read Nassim Taleb’s The Black Swan; The Impact of the Highly Improbable. He basically argues that experience and therefore planning counts for little. We are all governed by extraordinary effects of unanticipated extraordinary events and not by planning the minutia from the observed experience of the past. Essentially, our planning tools, the normal statistical methods we use are only effective in “Mediocristan" a world in which extremes are limited, such as the normal height of human beings, and therefore a random selection of that particular universe is anticipatable and measurable. He contrasts Mediocristan with "Extremistan" the world in which chaotic extremes reign and therefore a random sampling will not be representative. Hence, it is fruitless to plan for such extremes. So much for free will.

We are left with a world we can plan for “inside the box” but the true impact to that world occurs outside the box.

It’s sort of an in your face, edgy presentation by Taleb, very cynical in some respects. I empathize with the latter because of years of corporate planning. With the development of, first, VisiCalc, then Lotus 123, and now Excel, this kind of planning has been taken to such an extreme that the process itself probably keeps half of corporate America employed. It always amused me; I used to call it the battle of the spreadsheets – central corporate vs. the operating companies.

Part of that “planning” involves associating or connecting past events and “making sense” out of them. He calls that “naïve empiricism,” a “natural tendency to look for instances that confirm our story or our vision of the world….Alas, with tools, and fools, anything can be easy to find. You take past instances that corroborate your theories and treat them as evidence.” Even more profound is his observation: “We humans are the victims of an asymmetry in the perception of random events. We attribute our successes to our skills, and our failures to external events outside our control, namely to randomness. We feel responsible for the good stuff, but not for the bad. This causes us to think that we are better than others at whatever we do for a living.” Decades of corporate life leave me saying Amen to that.

But, isn’t the existence of the worlds of Mediocristan vs. Extremistan self-evident? Obviously, we can only think within the box when dealing with processes such as sales forecasting, budgeting, etc., basing them on the past statistics from Mediocristan. And a “black swan event” is going to have a profound impact on the world of Mediocristan. We mere humans do not have much control over an asteroid hitting our planet. Taleb’s problem with the foregoing is that we think we do.

Besides being a mathematician and philosopher, Taleb is a hedge fund manager. I was therefore interested in how he translates his philosophy to investment. Essentially, he takes the position that 85% of one’s portfolio should be allocated to “risk free investments,” specifically US Treasury Bills and the remaining 15% into very high risk investments that could have an exponential payoff in a Black Swan event from the world of Extremistan. So after a very convincing and sometimes disturbing philosophical argument the author seems to fall victim to the very blindness he decries. Are T-Bills “risk free,” especially as the US seems to be on a course to guarantee every debt and every major corporate shortfall, not to mention the twin time bombs of Social Security and Medicare/Medicaid as the baby boomers retire and unemployment rises? Now there is a Black Swan.