Nassim Taleb (Black Swan) open letter to David Cameron

http://www.guardian.co.uk/commentisfree/2009/aug/16/nassim-nicholas-taleb-economics-cameron

by keven • 17 years ago

71 64 17 years ago

guardian.co.uk

keven• 17 years ago

"Work on building a "robust" society, capable of withstanding errors, in which the role of finance (hence debt) would be minimal. We want a society in which people can make mistakes without risk of total collapse. Silicon Valley offers a good example, where people have the chance to fail fast (and repeatedly)."

cwan3• 17 years ago

Impressively scathing of both the Obama and former Bush administrations. I'm not sure how he would go about implementing some of his ideas since on one hand he argues against additional regulations and on the other he argues for a ban certain types of complex financial products (ie who would be the arbiter of what he calls a return to products that dependend on trial and error?). He is however a great writer and more importantly, he, even more than Peter Schiff was right (from an FT article that echoes some of his points in the letter and in some cases is a bit more specific - http://www.fooledbyrandomness.com/tenprinciples.pdf) :

"Then we will see an economic life closer to our biological environment: smaller companies, richer ecology, no leverage. A world in which entrepreneurs, not bankers, take the risks and companies are born and die every day without making the news."

Having been on both sides of the coin, I do wonder how much those who allocate the capital (bankers) should make relative to those who generate the ideas and innovation - but clearly in recent years, it was skewed towards the former. Lots more from Taleb at his site: http://www.fooledbyrandomness.com/

neilk5• 17 years ago

Taleb wants financial services to come in two flavors: boring, predictable, public banking utiliies; and no-safety-net no-bailout risk-taking investment.

He sees current regulation as helping to create the monsters we have now, where the risk-takers are allowed to play with the money that's supposed to be stable.

euroclydon• 17 years ago

"I'm not sure how he would go about implementing some of his ideas"

Mocking the young math-geek (I studied math) analysts, bankers, derivative creators or whatever their titles are, is a good start. I heard it somewhere that over the past decade or two, everyone's mom went from wanting their kid to be a doctor or lawyer to instead be a Wall Street I-banker. All we really need is for society to trust elaborate investment and debt schemes less.

I'm not sure if the moms had it right the first time though, because we have too many lawyers and doctors are taking a beating now from Obama,

drewcrawford• 17 years ago

> It is a low-probability, high-impact event that, because of its rarity and the instability of the environment, cannot be scientifically evaluated in terms of risk and return.

I stopped reading here. The only objective evaluation of economic matters is in scientific, risk-and-return terms. Anything else is quackery, fear-mongering, or worse.

A great deal of evil has been done in the last decade or so in the name of protecting us against horrible things. We are told that much good has come of it, because nothing horrible has happened. While I'm sure this is partly true, I wouldn't mind trading a few more horrible things for a little more autonomy.

CamperBob• 17 years ago

I think if you put that statement in context, bin Taleb is saying that such "black swan" events can't be understood in the absence of a suitable behavioral model for the economy -- and furthermore, you don't want to rely on any global behavior models because they ultimately prove limiting. Communism anyone?

There is a lot going on in finance every day that simply cannot be objectively modeled or understood in scientific terms. That's a problem, but we also need to accept that there may not be a globally valid solution. Viewing complexity as the enemy sounds like as good an approach as any.

oakmac• 17 years ago

Black Swan theory isn't about denying science; it's about recognizing the limits of science.

Taleb's position (and argument in this paper) is that we need to recognize instances where we don't know the answer instead of making decisions based on assumptions that we do.

TriinT3• 17 years ago

"Taleb's position (and argument in this paper) is that we need to recognize instances where we don't know the answer instead of making decisions based on assumptions that we do."

Have you ever worked at an investment bank? I suspect you have not. Wall Street does not run on the scientific method. It runs on greed, fear and politics. The ones who check the assumptions and know the limits of their models don't have the power to make the decisions. This is the problem. And the Taleban apparently haven't yet figured it out. Quoting Janet Tavakoli: "malfeasance, not models, disrupted the global economy, and Taleb still gets that part wrong."

Last but not least: there's not such thing as a "blackswan theory". You can't steal ideas from probability theory and statistics that have been known for centuries, rename them, wrap them up nicely, and call them new or original.

mynameishere2• 17 years ago

You can't discount the apocalypse. You just can't. And this pan-phobic concept "black swan" is just various degrees of unknowable apocalypses that we are supposed to account for based upon their very unaccountableness. I don't buy it. Read the tea leaves first, then tell me about swan feathers.

The housing bubble was BLATANT. No black swans involved. I remember talking about it with friends in 2005. No big deal, really.

jerf2• 17 years ago

"The only objective evaluation of economic matters is in scientific, risk-and-return terms."

That's not the problem; I suggest you read up on his theories. His point is, to put it more mathematically, that using inappropriate statistical models to try to model future events can lead to catastrophe. In particular, assuming something is a normal Gaussian process when in fact it's something that's almost a normal Gaussian but has a slight propensity towards total disasters that occur more often (and much stronger) than the Gaussian distribution would imply can result in you creating a system that is terribly brittle when those "black swans" occur.

"Scientifically" applying the Gaussian distribution or other advanced mathematical constructs when they manifestly do not apply is the real quackery, if Taleb is right. And it's hard to look at the evidence and conclude he's wrong here; it's simply objective fact that many of the interesting distributions are in fact prone to "black swans", there's a statistical test that shows it (kurtosis) quite clearly. It's really more a question of what we are going to do about his point than whether or not he's correct about the distribution. (There's no guarantee that his prescription is correct, but it's probably a better idea than listening to the "experts" who advise you to mortgage to the hilt because the worst case scenario can't possibly happen and you are 99.9% percently likely to be fine. You know, that worst case scenario that just happened and we're still living through. Yeah, that scenario that can't possibly happen.)

fauigerzigerk• 17 years ago

I agree about the statistical issues he highlights, but his anti expert stance is kind of odd. I mean we listen to this guy because he used to be a wall street trader. His books were published because he was accepted as some kind of an expert himself. So is he wrong because he's an expert?

He says: "We replaced the heuristics of the elders with arrogant (and incompetent) beliefs, breaking, in the name of science, the chain of knowledge."

In europe we had fascisim and stalinism within the past 100 years. That's three or four generations. Before the dawn of liberalism, capitalism, enlightenment and the industrial revolution we had 1000 years of depression caused by religious fanatics. We had to break that chain of "knowledge".

The heuristics of the elders are little more than mature, cultivated cliches of what past experts and ideologues told them. Taleb is correct, it's incredibly difficult to make predictions in a complex system. However, I don't see how a blanket condemnation of science and a blanket approval of crude traditions helps us to become better at that.

compay• 17 years ago

Unless you're an entrenched partisan, I think it's still a tad too early to call Obama's economic policies "disastrous" or "calamitous."

cwan3• 17 years ago

I'm pretty sure that Taleb isn't a partisan - having also been pretty critical of Bush/Republicans (though he did point out the Obama administration's spending is magnitudes larger than his predecessor(s)). In the lead up to the crisis, Taleb was one of maybe only a couple people who not only forecasted the crisis but bet right on how it might occur. He used similarly dire language and was laughed at by many of his detractors. For this reason alone he shouldn't be so quickly dismissed.

nostrademons2• 17 years ago

"For this reason alone he shouldn't be so quickly dismissed."

I'm not sure he'd agree with you. Taleb's books repeatedly stress the importance of survivorship bias. In any population, they'll be someone forecasting just about any conceivable event. No matter how unlikely events turn out to be, somebody is eventually going to be right, and then that person is lauded as a genius for having forecasted correctly. When really they've done no such thing; rather, people have just retrospectively picked out the person who happened to guess right.

I think Taleb would say you shouldn't dismiss him because there's ample evidence throughout history that he's right, not because he happened to guess right this time. Whenever debt levels have risen to what they are now, it's resulted in economic instability and chaotic behavior. It's not just this century: you can find examples back to Roman times.

neilk5• 17 years ago

I think Taleb's main complaint is that Obama has not changed the incentives for Wall Streeters to put the economy at risk. Instead, we've had a big and apparently permanent transfer of risk from private to public, exacerbating the situation.

A Goldman Sachs executive just boasted that their business methods hadn't changed at all from before the crash. Think about that for a second.

BrentRitterbeck4• 17 years ago

I hear this from people all the time. From a financial viewpoint, the markets exist to transfer capital from those that have it to those that need it. In addition to that, the markets exist to transfer risk from one party to another. People outside of finance need to realize that companies like Goldman, when they are speculating, serve a legitimate purpose. They provide a mass of liquidity that otherwise wouldn't be there. So, before you start thinking about changing the way things work, imagine what things would be like if you attempt to remove speculators from the market. If you tie Wall Street's hands too much, last year's freezing of the credit market would look like a nice summer day.

sh1mmer• 17 years ago

Having not read his book, was I the only person annoyed that he used the phrase "black swan" a dozen times in the first paragraph without qualifying it?

He could have been saying "You and your party may be the only hope we have for a resilient society insulated from negative oranges and in which everyone has the opportunity to benefit from positive oranges." for all the difference it makes to me.

dtf• 17 years ago

I cringed too - especially at the capitalization. I shall cringe again when Cameron starts using it. Forced memes like "black swan", "outlier" and "tipping point" are like little mini-advertisements for their books and their authors. Getting them into the vocabulary of politicians and business leaders is the ultimate marketing ploy.

pbhjpbhj• 17 years ago

I honestly don't know what memes you're referring too (nor the books) but outlier and tipping point have basic meanings without interpretation: tipping point is a cusp or specifically the point at which the force vector originating at the centre-of-gravity passes outside the foot of a body causing it to tip over. Outliers are statistical anomalies or unexpected results that are usually ignored as if they are insignificant.

Black swans on the other hand are birds with a particular pigment.

Now what are the additional layers of meaning, we see black swans referring to apparently unlikely events that nevertheless will occur (that's possibly not the definition given by this guy), but what about the super-definitions for the others?

ErrantX• 17 years ago

That was my hang up too. Then when he did get round to the definition it's clear he needs a bit more than a sentence to qualify what he means: because call me a gambler but Black Swan's sound pretty much like something we should avoid planning for or risk getting paranoid.

(and even though I did start reading his book and do sort of know what he's on about I still cant get away from that feeling. Why cant he say "lets not be arrogant and high risk" without having to qualify it with IMO a poor reason (surely the sentence alone should be enough):(

jpcx01• 17 years ago

Ditto. I read his book, and liked it. But this letter seems to try to force the point a little much.

jkuria• 17 years ago

Taleb needs to find something new to talk about. In his book Fooled By Randomness, he takes a paragraph and makes it a chapter. Takes a chapter and makes it a book, talking endlessly about black swans, how people who are successful are successful because they got lucky and repeating analogy after analogy to make the same basic point. In this post he makes sweeping statements about debt being bad, based on wisdom from Babylonian times and Roman proverbs:

"David, you must counter this complexity by lowering indebtedness. We have known since Babylonian times that debt is treacherous and allows no room for mistakes: felix qui nihil debet goes the Roman proverb ("happy is he who owes nothing")."

He sounds like Ahmedinejan in his letter to former president Bush advising him to embrace the ways of the prophets of old :)

There are many situations where debt is your friend but like all good things it can be abused. Common Taleb, find something new to talk about! Black Swan is so 2002!

cia_plant• 17 years ago

Isn't it better to have one idea that is insightful and correct, than to have many ideas which are wrong, like most commentators?

katamole2• 17 years ago

Not when it keeps being rehashed ad nauseum.

jacobolus• 17 years ago

Isn’t being better than most commentators an awfully unambitious goal?

huntse• 17 years ago

Well perhaps. So let's think about it. Black swans are not rare, they were thought to be completely impossible, and then people found them not to be impossible. So far maybe not so correct.

Secondly, regarding insight. This idea which everyone credits to Taleb is of course described all over the place. For example, as "the impossibility of inductive reasoning in the natural sciences" in The Mathematical Experience. As far as fat tails are concerned, every textbook on financial maths I own talks about fat tails the corrections that must be made to account for them, and they were all published before either of Taleb's books.

bendtheblock• 17 years ago

It's a letter to the leader of the opposition and, potentially, the next primeminster. Taleb must be concise with his argument - it's not new to us because many of us have read The Black Swan or Fooled by Randomness.

I agree that commercial debt can be used for investment and is therefore useful. I think he is commenting on national debt. The problem is that the UK and US hold a magnitude of debt that will not be re-paid for several generations. Most of us would agree this is not healthy.

Further to this, his point about debt is that it is used to prevent the old institutions from failing and the resulting tax increases are hindering the next wave entrepreneurs. The financial crisis should have sped up the next wave of creative/destructive innovation in the financial sector but instead we are pretty much back to the status quo in The City and on Wall Street.

giardini• 17 years ago

Have you read either of his books?

adnam• 17 years ago

Submarine.

dankjaergaard• 17 years ago

I think Taleb makes an excellent point with his Black Swan theory. The point is, that we don't know what will happen. We don't know and governments don't know. Problem is, governments spend like they know :-)

andyjenn• 17 years ago

I wonder how Taleb reconciles his views on probability with respect to Cameron winning the next election in May?

joubert2• 17 years ago

Before one gets hysterical, consider debt as a function of GDP.

http://en.wikipedia.org/wiki/File:USDebt.png http://en.wikipedia.org/wiki/United_States_public_debt

bwd2• 17 years ago

Yeah, but the problem is that the rest of the world is not currently blown to smithereens and in need of American labor and capital to rebuild it the way it was in 1945 (not to mention deeply indebted to the United States as well). The trough of that graph is about the point where Western Europe and Japan managed to rebuild their economies to the point where they could actually compete effectively. The United States has no such competitive advantage at this point.

joubert2• 17 years ago

So where is all the US output going?

Estragon• 17 years ago

This is ridiculous. The financial crisis was not a "black swan." Many people saw it coming and prepared accordingly. It was only groupthink and willful ignorance which kept most people from doing so.

Rexxar• 17 years ago

It's not a black swan for everybody but it's a black swan for a lot of people.

movix• 17 years ago

Forget the Black Swan, please God just deliver us from Cameron.

Margaret Thatcher when asked what was her greatest political achivement - 'Tony Blair' she replied. Isn't Cameron just a more greasy version of the slimy Blair, Black Swan spotter or not?

Nassim Taleb (Black Swan) open letter to David Cameron

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