Bryan Appleyard, writing in the Times, calls Nassim Nicholas Taleb the prophet of boom and doom:
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.’”
It seems he has embraced an important criticism of his work and presented it as a strength: he describes the hubris of quantitative analysts, but he doesn’t suggest a better way to analyze the world.
Anyway, as much as I enjoyed The Black Swan, I can’t say it added much to Fooled by Randomness, which leaves me wondering how much his next book — which has earned him a $4-million advance — will add to the previous two.
The writer, Appleyard, is clearly fascinated by Taleb’s evolutionary fitness routine, which he picked up from Art De Vany:
But the biggest rule of all is his eccentric and punishing diet and exercise programme. He’s been on it for three months and he’s lost 20lb. He’s following the thinking of Arthur De Vany, an economist – of the acceptable type – turned fitness guru. The theory is that we eat and exercise according to our evolved natures. Early man did not eat carbs, so they’re out. He did not exercise regularly and he did not suffer long-term stress by having an annoying boss. Exercise must be irregular and ferocious – Taleb often does four hours in the gym or 360 press-ups and then nothing for 10 days. Jogging is useless; sprinting is good. He likes to knacker himself completely before a long flight. Stress should also be irregular and ferocious – early men did not have bad bosses, but they did occasionally run into lions.
He’s always hungry. At both lunches he orders three salads, which he makes me share. Our conversation swings from high philosophy and low economics back to dietary matters like mangoes – bad – and apples – good as long as they are of an old variety. New ones are bred for sugar content. His regime works. He looks great – springy and fit. He shows me an old identity card. He is fat and middle-aged in the photo. He looks 10 years younger than that. “Look at me! That photo was taken seven years ago. No carbs!”
I wouldn’t describe an evolutionary fitness routine as “eccentric and punishing” — because it’s not particularly punishing at all.
This is odd:
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.
This parable is silly, almost trite, but instructive:
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.”
Here’s how Taleb stumbled into his millions:
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.
In the middle of a crisis, this certainly seems true:
“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.”
“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.
So, what does Taleb recommend?
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.”
The article ends with Taleb’s top life tips:
- 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.
- 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.
- 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.
- 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.
- 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’.
- Learn to fail with pride — and do so fast and cleanly. Maximise trial and error — by mastering the error part.
- 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’).
- 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.
- 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.
- Answer e-mails from junior people before more senior ones. Junior people have further to go and tend to remember who slighted them.
I find it mildly ironic that a man who rails against hubris asks us to “avoid losers” who say things are too difficult.