Welcome to Extremistan : interview with Nassim Nicholas Taleb
Ari
from naked capitalism by Yves Smith
Reader Michael called to my attention a wide-ranging interview with Nassim Nicholas Taleb, author of the Black Swan and professional iconoclast, in the Times of London. The article is colorful, wide-ranging, and a bit long, so I've excerpted some of the most provocative bits. Needless to say, I am particularly taken by his dim view of academic economics as practiced in the US, which tends to place a premium on abstraction and models:
A noisy cafe in Newport Beach, California.
Nassim Nicholas Taleb is eating three successive salads, carefully picking out
anything with a high carbohydrate content.
He is telling me how to live. “The only way you can say ‘F***
you’ to fate is by saying it’s not going to affect how I live. So
if somebody puts you to death, make sure you shave.”...
The world is random, intrinsically unknowable. “You will never,” he
says, “be able to control randomness.”
To explain: black swans were discovered in Australia. Before that, any
reasonable person could assume the all-swans-are-white theory was unassailable.
But the sight of just one black swan detonated that theory. Every theory we
have about the human world and about the future is vulnerable to the black
swan, the unexpected event. We sail in fragile vessels across a raging sea of
uncertainty. “The world we live in is vastly different from the world we
think we live in.”
Last May, Taleb published The Black Swan: The Impact of the Highly Improbable.
It said, among many other things, that most economists, and almost all bankers,
are subhuman and very, very dangerous. They live in a fantasy world in which
the future can be controlled by sophisticated mathematical models and elaborate
risk-management systems. Bankers and economists scorned and raged at Taleb. He
didn’t understand, they said. A few months later, the full global
implications of the sub-prime-driven credit crunch became clear. The world
banking system still teeters on the edge of meltdown. Taleb had been
vindicated. “It was my greatest vindication. But to me that wasn’t
a black swan; it was a white swan. I knew it would happen and I said so. It was
a black swan to Ben Bernanke [the chairman of the Federal Reserve]. I
wouldn’t use him to drive my car. These guys are dangerous. They’re
not qualified in their own field.”
In December he lectured bankers at Société
Générale, France’s
second biggest bank. He told them they were sitting on a mountain of risks
– a menagerie of black swans. They didn’t believe him. Six weeks
later the rogue trader and black swan Jérôme Kerviel landed them with $7.2
billion of losses.
As a result, Taleb is now the hottest thinker in the world. He has a $4m
advance on his next book. He gives about 30 presentations a year to bankers,
economists, traders, even to Nasa, the US Fire Administration and the
Department of Homeland Security. But he doesn’t tell them what to do
– he doesn’t know. He just tells them how the world is.
“I’m not a guru. I’m just describing a problem and saying,
‘You deal with it.’”...
He has rules. In California
he hires bikes, not cars. He doesn’t usually carry his BlackBerry because
he hates distraction and he really hates phone charges. But he does carry an
Apple laptop everywhere and constantly uses it to illustrate complex points and
seek out references. He says he answers every e-mail. He is sent thousands. He
reads for 60 hours a week, but almost never a newspaper, and he never watches
television.
“If something is going on, I hear about it. I like to talk to people, I
socialise. Television is a waste of time. Human contact is what
matters.”...
Startlingly, this great sceptic, this non-guru who believes in nothing, is
still a practising Christian. He regards with some contempt the militant
atheism movement led by Richard Dawkins.
“Scientists don’t know what they are talking about when they talk
about religion. Religion has nothing to do with belief, and I don’t
believe it has any negative impact on people’s lives outside of
intolerance. Why do I go to church? It’s like asking, why did you marry
that woman? You make up reasons, but it’s probably just smell. I love the
smell of candles. It’s an aesthetic thing.”
Take away religion, he says, and people start believing in nationalism, which
has killed far more people. Religion is also a good way of handling
uncertainty. It lowers blood pressure. He’s convinced that religious
people take fewer financial risks...
But, crucially, he also learnt from a very early age that grown-ups have a
dodgy grasp of probability...For the non-mathematician, probability is an
indecipherably complex field. But Taleb makes it easy by proving all the
mathematics wrong. Let me introduce you to Brooklyn-born Fat Tony and
academically inclined Dr John, two of Taleb’s creations. You toss a coin
40 times and it comes up heads every time. What is the chance of it coming up
heads the 41st time? Dr John gives the answer drummed into the heads of every
statistic student: 50/50. Fat Tony shakes his head and says the chances are no
more than 1%. “You are either full of crap,” he says, “or a
pure sucker to buy that 50% business. The coin gotta be loaded.”
The chances of a coin coming up heads 41 times are so small as to be
effectively impossible in this universe. It is far, far more likely that
somebody is cheating. Fat Tony wins. Dr John is the sucker. And the one thing
that drives Taleb more than anything else is the determination not to be a
sucker. Dr John is the economist or banker who thinks he can manage risk
through mathematics. Fat Tony relies only on what happens in the real world.
In 1985, Taleb discovered how he could play Fat Tony in the markets. France, Germany,
Japan, Britain and America signed an agreement to push
down the value of the dollar. Taleb was working as an options trader at a
French bank. He held options that had cost him almost nothing and that bet on
the dollar’s decline. Suddenly they were worth a fortune. He became
obsessed with buying “out of the money” options. He had realised
that when markets rise they tend to rise by small amounts, but when they fall
– usually hit by a black swan – they fall a long way.
The big payoff came on October 19, 1987 – Black Monday. It was the
biggest market drop in modern history. “That had vastly more influence on
my thought than any other event in history.”
It was a huge black swan – nobody had expected it, not even Taleb. But
the point was, he was ready. He was sitting on a pile of out-of-the-money
eurodollar options. So, while others were considering suicide, Taleb was
sitting on profits of $35m to $40m. He had what he calls his “f***-off
money”, money that would allow him to walk away from any job and support
him in his long-term desire to be a writer and philosopher.
He stayed on Wall Street until he got bored and moved to Chicago to become a trader in the pit, the
open-outcry market run by the world’s most sceptical people, all Fat
Tonys. This he understood.....
In the midst of this came his purest vindication prior to sub-prime. Long-Term
Capital Management was a hedge fund set up in 1994 by, among others, Myron
Scholes and Robert C Merton, joint winners of the 1997 Nobel prize in
economics. It had the grandest of all possible credentials and used the most
sophisticated academic theories of portfolio management. It went bust in 1998
and, because it had positions worth $1.25 trillion outstanding, it almost took
the financial system down with it. Modern portfolio theory had not accounted
for the black swan, the Russian financial crisis of that year. Taleb regards
the Nobel prize in economics as a disgrace, a laughable endorsement of the
worst kind of Dr John economics. Fat Tony should get the Nobel, but he’s
too smart. “People say to me, ‘If economists are so incompetent,
why do people listen to them?’ I say, ‘They don’t listen,
they’re just teaching birds how to fly.’ ”....
And what he knows does not sound good. The sub-prime crisis is not over and
could get worse. Even if the US
economy survives this one, it will remain a mountain of risk and delusion.
“America
is the greatest financial risk you can think of.”
Its primary problem is that both banks and government are staffed by academic
economists running their deluded models. Britain
and Europe have better prospects because our
economists tend to be more pragmatic, adapting to conditions rather than
following models. But still we are dependent on American folly.
The central point is that we have created a world we don’t understand.
There’s a place he calls Mediocristan. This was where early humans lived.
Most events happened within a narrow range of probabilities – within the
bell-curve distribution still taught to statistics students. But we don’t
live there any more. We live in Extremistan, where black swans proliferate,
winners tend to take all and the rest get nothing – there’s Bill
Gates, Steve Jobs and a lot of software writers living in a garage,
there’s Domingo and a thousand opera singers working in Starbucks. Our
systems are complex but over-efficient. They have no redundancy, so a black
swan strikes everybody at once. The banking system is the worst of all.
“Complex systems don’t allow for slack and everybody protects that
system. The banking system doesn’t have that slack. In a normal ecology,
banks go bankrupt every day. But in a complex system there is a tendency to
cluster around powerful units. Every bank becomes the same bank so they can all
go bust together.”
He points out, chillingly, that banks make money from two sources. They take
interest on our current accounts and charge us for services. This is easy, safe
money. But they also take risks, big risks, with the whole panoply of loans,
mortgages, derivatives and any other weird scam they can dream up. “Banks
have never made a penny out of this, not a penny. They do well for a while and
then lose it all in a big crash.”
On top of that, Taleb has shown that increased economic concentration has
raised our vulnerability to natural disasters. The Kobe
earthquake of 1995 cost a lot more than the Tokyo earthquake of 1923. And there are
countless other ways in which we have built a world ruled by black swans
– some good but mostly bad. So what do we do as individuals and the
world? In the case of the world, Taleb doesn’t know. He doesn’t
make predictions, he insults people paid to do so by telling them to get
another job. All forecasts about the oil price, for example, are always wrong,
though people keep doing it. But he knows how the world will end.
“Governments and policy makers don’t understand the world in which
we live, so if somebody is going to destroy the world, it is the Bank of
England saving Northern Rock. The biggest danger to human society comes from
civil servants in an environment like this. In their attempt to control the
ecology, they don’t understand that the link between action and
consequences can be more vicious. Civil servants say they need to make
forecasts, but it’s totally irresponsible to make people rely on you
without telling them you’re incompetent.”
Bear Stearns – the US Northern Rock – was another vindication for Taleb.
He’s always said that whatever deal you do, you always end up dealing
with J P Morgan. It was JPM that picked up Bear at a bargain-basement price.
Banks should be more like New York
restaurants. They come and go but the restaurant business as a whole survives
and thrives and the food gets better. Banks fail but bankers still get millions
in bonuses for applying their useless models. Restaurants tinker, they work by
trial and error and watch real results in the real world. Taleb believes in
tinkering – it was to be the title of his next book. Trial and error will
save us from ourselves because they capture benign black swans. Look at the
three big inventions of our time: lasers, computers and the internet. They were
all produced by tinkering and none of them ended up doing what their inventors
intended them to do. All were black swans. The big hope for the world is that,
as we tinker, we have a capacity for choosing the best outcomes.
“We have the ability to identify our mistakes eventually better than
average; that’s what saves us.” We choose the iPod over the
Walkman. Medicine improved exponentially when the tinkering barber surgeons
took over from the high theorists. They just went with what worked,
irrespective of why it worked. Our sense of the good tinker is not infallible,
but it might be just enough to turn away from the apocalypse that now threatens
Extremistan.
He also wants to see diplomats dying of cirrhosis of the liver. It means
they’re talking and drinking and not going to war. Parties are among the
great good things in Taleb’s world.
And you and me? Well, the good investment strategy is to put 90% of your money
in the safest possible government securities and the remaining 10% in a large
number of high-risk ventures. This insulates you from bad black swans and
exposes you to the possibility of good ones. Your smallest investment could go
“convex” – explode – and make you rich. High-tech
companies are the best. The downside risk is low if you get in at the start and
the upside very high. Banks are the worst – all the risk is downside.
Don’t be tempted to play the stock market – “If people knew
the risks they’d never invest.”
There’s much more to Taleb’s view of the world than that. He is
reluctant to talk about matters of human nature, ethics or any of the
traditional concerns of philosophy because he says he hasn’t read enough.
But, when pressed, he comes alive.
“You have to worry about things you can do something about. I worry about
people not being there and I want to make them aware.” We should be
mistrustful of knowledge. It is bad for us. Give a bookie 10 pieces of
information about a race and he’ll pick his horses. Give him 50 and his
picks will be no better, but he will, fatally, be more confident.
We should be ecologically conservative – global warming may or may not be
happening but why pollute the planet? – and probablistically
conservative. The latter, however, has its limits. Nobody, not even Taleb, can
live the sceptical life all the time – “It’s an art,
it’s hard work.” So he doesn’t worry about crossing the road
and doesn’t lock his front door – “I can’t start
getting paranoid about that stuff.” His wife locks it, however.
He believes in aristocratic – though not, he insists, elitist –
values: elegance of manner and mind, grace under pressure, which is why you
must shave before being executed. He believes in the Mediterranean way of
talking and listening. One piece of advice he gives everybody is: go to lots of
parties and listen, you might learn something by exposing yourself to black
swans.
I ask him what he thinks are the primary human virtues, and eventually he comes
up with magnanimity – punish your enemies but don’t bear grudges;
compassion – fairness always trumps efficiency; courage – very few
people have this; and tenacity – tinker until it works for you.
“Let’s be human the way we are human. Homo sum – I am a man.
Don’t accept any Olympian view of man and you will do better in
society.”...
Taleb's top life tips
1 Scepticism is effortful and costly. It is better to be sceptical about
matters of large consequences, and be imperfect, foolish and human in the small
and the aesthetic.
2 Go to parties. You can’t even start to know what you may find on the
envelope of serendipity. If you suffer from agoraphobia, send colleagues.
3 It’s not a good idea to take a forecast from someone wearing a tie. If
possible, tease people who take themselves and their knowledge too seriously.
4 Wear your best for your execution and stand dignified. Your last recourse
against randomness is how you act — if you can’t control outcomes,
you can control the elegance of your behaviour. You will always have the last
word.
5 Don’t disturb complicated systems that have been around for a very long
time. We don’t understand their logic. Don’t pollute the planet.
Leave it the way we found it, regardless of scientific ‘evidence’.
6 Learn to fail with pride — and do so fast and cleanly. Maximise trial
and error — by mastering the error part.
7 Avoid losers. If you hear someone use the words ‘impossible’,
‘never’, ‘too difficult’ too often, drop him or her
from your social network. Never take ‘no’ for an answer
(conversely, take most ‘yeses’ as ‘most probably’).
8 Don’t read newspapers for the news (just for the gossip and, of course,
profiles of authors). The best filter to know if the news matters is if you
hear it in cafes, restaurants... or (again) parties.
9 Hard work will get you a professorship or a BMW. You need both work and luck
for a Booker, a Nobel or a private jet.
10 Answer e-mails from junior people before more senior ones. Junior people have
further to go and tend to remember who slighted them.
kevin....@japan.bnpparibas.com
during his career in BNP, he did not make any money (i asked his ex-boss),
he makes more money writing a book than trading. (except for one lucky
session at CFSB).
However I aggree with what he said below
9 Hard work will get you a professorship or a BMW. You need both work and
luck for a Booker, a Nobel or a private jet.
hypertokyo@gma
il.com To
ic...@googlegroups.com
Sent by: cc
ic-jp@googlegr
oups.com Subject
[Milis ICJ] Welcome to Extremistan :
06/03/2008 interview with Nassim Nicholas Taleb
10:13 AM
have further to go and tend to remember who slighted them.
(Japanese)
この電子メールおよび添付物（以下「本メッセージ」といいます）
は、名宛人にのみ宛てられた秘密情報です。もしもあなたが
名宛人でない場合は、ただちに本メッセージを破棄して発信者
にご連絡下さい。本メッセージの目的外の使用、配布および
開示は、たとえそれが一部であっても許可のない限り禁じられて
います。また、インターネットを通じて本メッセージを送信する場合、
情報の全部または一部が正確に伝わらない可能性があります。
従って、ビー・エヌ・ピー・パリバおよびその子会社は、本メッセージ
に修正が加えられた場合の責任は負いかねますのでご了承下さい。
また環境問題に配慮し、印刷はできる限り必要最小限とするよう
ご協力をお願いいたします。
(English)
This message and any attachments (the "message") is
intended solely for the addressees and is confidential.
If you receive this message in error, please delete it and
immediately notify the sender. Any use not in accord with
its purpose, any dissemination or disclosure, either whole
or partial, is prohibited except formal approval. The internet
can not guarantee the integrity of this message.
BNP PARIBAS (and its subsidiaries) shall (will) not
therefore be liable for the message if modified.
Do not print this message unless it is necessary,
please consider the environment.
Eddy.S...@barclayscapital.com
by his own admission, this random black swan event is the only way one can make money in the market.
This e-mail may contain information that is confidential, privileged or otherwise protected from disclosure. If you are not an intended recipient of this e-mail, do not duplicate or redistribute it by any means. Please delete it and any attachments and notify the sender that you have received it in error. Unless specifically indicated, this e-mail is not an offer to buy or sell or a solicitation to buy or sell any securities, investment products or other financial product or service, an official confirmation of any transaction, or an official statement of Barclays. Any views or opinions presented are solely those of the author and do not necessarily represent those of Barclays. This e-mail is subject to terms available at the following link: www.barcap.com/emaildisclaimer. By messaging with Barclays you consent to the foregoing. Barclays Capital is the investment banking division of Barclays Bank PLC, a company registered in England (number 1026167) with its registered office at 1 Churchill Place, London, E14 5HP. This email may relate to or be sent from other members of the Barclays Group.
_______________________________________________
Kowen WANG
|------------------------------
| <Eddy.Sunarto@bar
| clayscapital.com>
| Sent by:
| ic-jp@googlegroup
| s.com
|
|
| 06/03/2008 10:40
| AM
|
To
<kevin....@japan.bnppar
ibas.com>,
<hyper...@gmail.com>
cc
This message and any attachments (the "message") are confidential, intended
solely for the addressee(s), and may contain legally privileged information.
Any unauthorised use or dissemination is prohibited. E-mails are susceptible
to alteration. Neither SOCIETE GENERALE nor any of its subsidiaries or
affiliates shall be liable for the message if altered, changed or falsified.
******************************************************************************