Lunch With The FT : Nassim Nicholas Taleb

Wednesday, April 2, 2008

I am sure I am going to dislike Nassim Nicholas Taleb.  In his books on the importance of the improbable – Fooled by Randomness and The Black Swan – he adopts an unpleasantly sneering tone towards the fools who just don’t get it.  He spreads his contempt around liberally.  But he is particularly dismissive of economists, businessmen, the French and financial journalists in suits.  As a financial journalist in a suit, I am spoiling for a fight…..After working on Wall Street for 20 years, Taleb is scathing about its risk management and forecasting models which are more “therapy” than anything useful.  This is because they rely on past experience, like the Europeans who thought all swans were white until they discovered black swans in Australia.  Taleb, 48, who has studied at the University of Pennsylvania’s Wharton School and the University of Paris, goes after some big targets.  These include Myron Scholes, the Nobel prizewinner behind the Black-Scholes model, a cornerstone of mathematical finance.  Scholes’ lofty response to the attacks was that he did not want to “glorify” Taleb by refuting what he said…..Although most attention tends to focus on “bad” Black Swans, there are also good Black Swans, he says, for instance in scientific research and drug discovery.  “There is a lot more randomness in biotechnology and any form of medical discovery.  The role of design is overestimated.  Every time we plan on trying to find a drug we don’t because it closes our mind.  How are we discovering drugs?  From the side-effects of other drugs.”  Researchers very often “change their story” when they discover something by accident to give the impression it was by design.  “The biggest discovery in cancer came from a mustard gas accident in Italy, not from the 130,000 compounds systematically tested by the National Cancer Institute.  They were not looking to improve the lives of older men when they discovered Viagra.” 

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As a Wall Street trader, Taleb focused on arbitrage, making money by exploiting tiny pricing anomalies between different markets.  He became convinced that the financial markets systematically underestimated the risk of big improbable events and says he made a fortune for his then employer – First Boston – when the stock market crashed in October 1987…..Taleb says his scepticism was influenced by the cultural complexity of his childhood. His parents were Greek-Orthodox, French citizens living in Lebanon, where he grew up during the civil war.  “If you are an Arabic-speaking, Greek-Orthodox going to a French school it makes you deeply sceptical if you have to listen to three different accounts of the Crusades – one from the Muslim side, one from the Greek side and one from the Catholic side.”  This triggered a very simple idea that he has been thinking about all his life.  “That is that things in the real world are far messier that in recorded history or in memory.”  But we find it hard to live with such messiness so we tend to look for causes and patterns that do not exist, what he terms the “narrative fallacy”…..His heroes are “erudites”, those who want to know more.  “The people I go after are the false experts, those who do not accept the limits of their knowledge.”…..So what has he got against…journalists?  “Lots of my friends are journalists,” he says with a straight face.  But they are under constant pressure to clarify a chaotic world.  The real villains are those whose refusal to admit the limits of their knowledge can cause serious damage.  These include economists “predicting 30 years of social security deficits when we don’t know what we are going to have for lunch tomorrow” and the doctors who thought they knew more than they did and killed their patients.  “Until the 20th century, the risk of dying was increased by going to a doctor, particularly in a hospital.”  Some of his critics have claimed that, taken to its logical conclusion, Taleb’s scepticism would lead to a kind of passive nihilism.  Not so, he says.  He is not arguing that all forecasting is pointless, for example.  “I am saying that we should first know the error rate and then make the prediction.  Because the error rate is far more relevant that the prediction.”  I ask how his views have shaped his life.  The key is to separate “the domain of the empirical and the domain of the sacred” he replies.  “I select a very small number of things to be sceptical about, such as markets, and on these I am hypersceptic.  But I want to be fooled by randomness in art.  I want the ceremonial of religion, we are made for it.”  Taleb is conducting experiments to test his theory that we can only cope with so much scepticism and that people who are sceptical about religion are gullible in other ways.  “Most people are sceptical about the wrong things and gullible about the wrong things.”  He admits his extreme scepticism can lead to extreme conservatism.  “I believe it is dangerous to mess with complex systems and traditional things, such as religion or the environment.”…..By this stage I have been completely won over if not completely convinced…..

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