Baruch has been forced out of (possibly temporarily) blogging hibernation by this piece, by one Sly Observer, who writes:
Nassim Taleb’s increasingly shrill followers have been yelling “black swan, black swan!” all year. This has irked me . . . I read Nassim Taleb’s book “The Black Swan” mainly to see what all the yelling was about and was unimpressed. The book can be summed up in the sentence “Options are under priced.” I found his open disdain for commerce very distasteful.
Baruch read this post, and got cross; as a fully paid up member of the Talebian revolt, he took it personally. Beware, Sly Observer, irked or not, you have raised the Ire of Baruch!
We can dismiss the “shrill” — a lazy, silly word, a cheap polemical trick unworthy of a response. But I take issue with the ”yelling ‘black swan, black swan!’” It is certainly not what thoughtful followers of Taleb have been doing. In fact we have mostly stayed quiet, as far as I can see, deeply worried in general, and slightly embarrassed at the increasing visibility of what has become a catchphrase.
When Sly says he read Black Swan and thought the main message was “options are underpriced” I am reminded of pseudo-intellectual Otto (Kevin Kline) in A Fish Called Wanda, who says in response to Wanda’s accusation that he is an ape: “Apes don’t read philosophy!” Wanda says “Yes they do, Otto, they just don’t understand it.” “Options are underpriced” was actually a key message of Fooled by Randomness, Taleb’s first book. Black Swan is much more about the Gaussian fallacy, how financial strategies (not just financial) based on bell-curved distributions are not just incorrect but dangerous.
In case you have not read the book, or you did and didn’t understand it, the Gaussian fallacy is the idea that financial markets follow a standard, normal, mean-reverting, predictable distribution we can consistently exploit for fun and steady profit. Taleb would be the first to point out that some things do indeed follow Gaussian bell-curved distributions. Shoe sizes would be a good example. But in terms of trading markets the Gaussian ideal is very often a fallacy; big events, single days with big point moves in indices and stocks tend to be much more important in determining profit and loss over long periods, than the days when not much happens. Taleb’s key point is that very often, relying on a normal distribution holding true to make small but regular amounts of money is a big mistake; while we may only lose money rarely, when we do we can lose more than everything we made when things were good. He uses the metaphor of “picking up nickels in front of steamrollers.” It’s very apt.
We, and it seems capitalism itself, have just been flattened by the steamroller. We call our current mess the result of the housing bubble. But we could equally view it as the aftermath of a bubble in Gaussian strategies. The villains we point to on TV are the regulators, the hedge funds, the banks and, my favourite, the over-extended, ignorant home owners, but this is like blaming the water in the tidal wave for swamping the village. The set of ideas that justified their actions, the fake science, the epistemological error was what helped create the conditions for the wave itself. Amazingly, that this is the key error does not seem to be grasped yet, and as such is not going away. This, more than anything is what makes Baruch cross, and as such, focussing his Ire on a hapless blogger, of whom we should not expect too much (and who is a bit nicer about Taleb later in the post), may be unfair. Continue reading →
