What we are seeing worldwide

Monday, May 9th, 2016

Nassim Nicholas Taleb describes what we are seeing worldwide:

What we are seeing worldwide, from India to the UK to the US, is the rebellion against the inner circle of no-skin-in-the-game policymaking “clerks” and journalists-insiders, that class of paternalistic semi-intellectual experts with some Ivy league, Oxford-Cambridge, or similar label-driven education who are telling the rest of us 1) what to do, 2) what to eat, 3) how to speak, 4) how to think… and 5) who to vote for.

With psychology papers replicating less than 40%, dietary advice reversing after 30y of fatphobia, macroeconomic analysis working worse than astrology, microeconomic papers wrong 40% of the time, the appointment of Bernanke who was less than clueless of the risks, and pharmaceutical trials replicating only 1/5th of the time, people are perfectly entitled to rely on their own ancestral instinct and listen to their grandmothers with a better track record than these policymaking goons.

Protective, Fearful Parenting

Friday, February 19th, 2016

Jonathan Haidt describes what really worries him about college kids today:

The big thing that really worries me — the reason why I think things are going to get much, much worse — is that one of the causal factors here is the change in child-rearing that happened in America in the 1980s. With the rise in crime, amplified by the rise of cable TV, we saw much more protective, fearful parenting. Children since the 1980s have been raised very differently — protected as fragile. The key psychological idea, which should be mentioned in everything written about this, is Nassim Taleb’s concept of anti-fragility.


Bone is anti-fragile. If you treat it gently, it will get brittle and break. Bone actually needs to get banged around to toughen up. And so do children. I’m not saying they need to be spanked or beaten, but they need to have a lot of unsupervised time, to get in over their heads and get themselves out. And that greatly decreased in the 1980s. Anxiety, fragility and psychological weakness have skyrocketed in the last 15–20 years. So, I think millennials come to college with much thinner skins. And therefore, until that changes, I think we’re going to keep seeing these demands to never hear anything offensive.

What Book has the Most Page-for-Page Wisdom?

Thursday, July 16th, 2015

Shane Parrish (@farnamstreet) asked his Twitter followers, “What is page for page the book with the most wisdom you’ve ever read?”.

Tyler Cowen was not impressed with the resulting list, so he rattled off his own:

Cowen’s commenters love Pinker and both love and hate N.N. Taleb.

Retire Standard Deviation

Wednesday, January 22nd, 2014

“The statistician cannot evade the responsibility for understanding the process he applies or recommends,” Sir Ronald A. Fisher said, so it is time to retire standard deviation from common use and replace it with mean deviation, Nassim Nicholas Taleb suggests:

Standard deviation, STD, should be left to mathematicians, physicists and mathematical statisticians deriving limit theorems. There is no scientific reason to use it in statistical investigations in the age of the computer, as it does more harm than good — particularly with the growing class of people in social science mechanistically applying statistical tools to scientific problems.

Say someone just asked you to measure the “average daily variations” for the temperature of your town (or for the stock price of a company, or the blood pressure of your uncle) over the past five days. The five changes are: (–23, 7, –3, 20, –1). How do you do it?

Do you take every observation: square it, average the total, then take the square root? Or do you remove the sign and calculate the average? For there are serious differences between the two methods. The first produces an average of 10.8, the second 15.7. The first is technically called the root mean square deviation. The second is the mean absolute deviation, MAD. It corresponds to “real life” much better than the first — and to reality. In fact, whenever people make decisions after being supplied with the standard deviation number, they act as if it were the expected mean deviation.

It is all due to a historical accident: in 1893, the great Karl Pearson introduced the term “standard deviation” for what had been known as “root mean square error”. The confusion started then: people thought it meant mean deviation. The idea stuck: every time a newspaper has attempted to clarify the concept of market “volatility”, it defined it verbally as mean deviation yet produced the numerical measure of the (higher) standard deviation.

But it is not just journalists who fall for the mistake: I recall seeing official documents from the department of commerce and the Federal Reserve partaking of the conflation, even regulators in statements on market volatility. What is worse, Goldstein and I found that a high number of data scientists (many with PhDs) also get confused in real life.

34 Insights From Nassim Taleb

Monday, September 2nd, 2013

Shane Parrish shares 34 insights from Nassim Taleb:

  1. The artificial gives us hangovers, the natural inverse-hangovers.
  2. The only problem with the last laugh is that the winner has to laugh alone.
  3. Intelligence without imagination: a deadly combination.
  4. There is no more unmistakable sign of failure than that of a middle-aged man boasting of his successes in college.
  5. Never trust a journalist unless she’s your mother.
  6. One of life’s machinations is to make some people both rich and unhappy, that is, jointly fragile and deprived of hope.
  7. [If] someone is making an effort to ignore you he is not ignoring you.
  8. The danger of reading financial & other news (or econobullshit) is that things that don’t make sense at all start making sense to you after progressive immersion.
  9. It’s a sign of weakness to worry about showing signs of weakness.
  10. Friends, I wonder if someone has computed how much would be saved if we shut down economics and political science departments in universities. Those who need to research these subjects can do so on their private time.
  11. I trust those who trust me and distrust those who are suspicious of others.
  12. A good man is warm and respectful towards the waiter or people of lower rank.
  13. Journalists feel contempt for those who fear them and a deep resentment for those who don’t.
  14. When someone starts a sentence with the first half containing “I”, “not”, and “but”, the “not” should be removed and the “but” replaced with “therefore.”
  15. High Modernity: routine in place of physical effort, physical effort in place of mental expenditure, & mental expenditure in place of mental clarity.
  16. The only valid political system is one that can handle an imbecile in power without suffering from it.
  17. Journalists cannot grasp that what is interesting is not necessarily important; most cannot even grasp that what is sensational is not necessarily interesting.
  18. Never buy a product that the owner of the company that makes it doesn’t use, or, in the case of, say, medication, wouldn’t contingently use.
  19. Just realized that to politely get rid of someone people in Brooklyn say “call me if you need anything.”
  20. Injuries done to us by others tend to be acute; the self-inflicted ones tend to be chronic.
  21. We often benefit from harm done to us by others; almost never from self-inflicted injuries.
  22. You will never know if someone is an asshole until he becomes rich.
  23. When someone writes “I dislike you but I agree with you”, I read “I dislike you because I agree with you.”
  24. A great book eludes summaries. A great aphorism resists expansion. The rest is just communication.
  25. For a free person, the optimal – most opportunistic – route between two points should never be the shortest one.
  26. What counts is not *what* people say, it is *how much* energy they spend saying it.
  27. Used skillfully, a compliment will be much more offensive than any disparagement.
  28. I trust those who are greedy for money a thousand time more than those who are greedy for credentials.
  29. Just as eating cow-meat doesn’t turn you into a cow, studying philosophy doesn’t make you wiser.
  30. It is a great compliment for an honest person to be mistaken for a crook by a crook.
  31. Many want to learn how to memorize things; few seek that rare ability to forget.
  32. If you have something very important to say, whisper it.
  33. The ultimate freedom lies in not having to explain “why” you did something.
  34. A book that can be summarized should not be written as a book.

How Debt Ruins Systems

Wednesday, April 3rd, 2013

Taleb explains how debt ruins systems — in contrast to other, more flexible forms of financing:

You’re going to Aleppo, Syria, and Florence and you’re going to send me some silk. You trust me, and my correspondent in Aleppo would pay you the minute I get my silk — that kind of transaction. That’s called letter of credit, where you have debt conditional on some commercial transaction being completed. And it also allows people to finance some inventory, provided the buyer is a committed buyer. That kind of facilitation of commerce is how it all started — the letter of credit — and it developed very well.

Before that we had debt in society and it led to blowups in Babylon, and then they had to have debt jubilees. Then of course the Hebrews also had debt jubilees. And of course, they say neither a borrower nor a lender be. The Romans didn’t like debt. The Greeks didn’t like debt, except for a few intellectuals. Intellectuals for some reason, like Mr. Krugman, like debt.

Later on debt came back to Europe with the Reformation and it was mostly to finance wars. The industrial revolution was not financed by debt. California was not financed by debt; it was financed by equity. So debt is not necessary. You can use it for emergencies. Catholic societies — Aquinas was against debt and his statements were stronger than the Islamic fatwa against debt.

We have learned through history that debt in the form of leverage can blow things up. Debt fragilizes. Now what we have had in this economy is a growth of debt mostly financed indirectly by governments. Because if you blow up, we’re going to be behind you.

The Lindy effect

Saturday, March 23rd, 2013

The Lindy effect sounds like a short-lived fad from the 1930s, when really it describes such fads — or, rather, their lifetimes:

The longer a technology has been around, the longer it’s likely to stay around. This is a consequence of the Lindy effect. Nassim Taleb describes this effect in Antifragile but doesn’t provide much mathematical detail. Here I’ll fill in some detail.

Taleb, following Mandelbrot, says that the lifetimes of intellectual artifacts follow a power law distribution. So assume the survival time of a particular technology is a random variable X with a Pareto distribution. That is, X has a probability density of the form

f(t) = c/tc+1

for t ? 1 and for some c > 0. This is called a power law because the density is proportional to a power of t.

If c > 1, the expected value of X exists and equals c/(c-1). The conditional expectation of X given that X has survived for at least time k is ck/(c-1). This says that the expected additional life X is ck/(c-1) – k = k/(c-1), and so the expected additional life of X is proportional to the amount of life seen so far. The proportionality constant 1/(c-1) depends on the power c that controls the thickness of the tails. The closer c is to 1, the longer the tail and the larger the proportionality constant. If c = 2, the proportionality constant is 1. That is, the expected additional life equals the life seen so far.

Note that this derivation computed E( X | X > k ), i.e. it only conditions on knowing that X > k. If you have additional information, such as evidence that a technology is in decline, then you need to condition on that information. But if all you know is that a technology has survived a certain amount of time, you can estimate that it will survive about that much longer.

This says that technologies have different survival patterns than people or atoms. The older a person is, the fewer expected years he has left. That is because human lifetimes follow thin-tailed distributions. Atomic decay follows a medium-tailed exponential distribution. The expected additional time to decay is independent of how long an atom has been around. But for technologies follow a thick-tailed distribution.

Another way to look at this is to say that human survival times have an increasing hazard function and atoms have a constant hazard function. The hazard function for a Pareto distribution is c/t and so decreases with time.

The effect applies to many creative artifacts:

The previous post looked at technologies, but the Lindy effect would apply, for example, to books, music, or movies. This suggests the future will be something like a mirror of the present. People have listened to Beethoven for two centuries, the Beatles for about four decades, and Beyoncé for about a decade. So we might expect Beyoncé to fade into obscurity a decade from now, the Beatles four decades from now, and Beethoven a couple centuries from now.

This is in contrast to things that break down:

If you look at a 25 year-old car and a 3 year-old car, you expect the latter to be around longer. The same is true for a 25 year-old accountant and a 3 year-old toddler.

Ask Nassim Taleb Anything

Thursday, March 21st, 2013

I haven’t followed reddit in years, but Nassim Taleb is doing an ask me anything thread over there right now:

  • Rule: any company that would cause a national emergency requiring a bailout should it fail should be classified BAILABLE-OUT and employees should not be allowed to earn more than civil servants. That would force companies to 1) be small, 2) not leech off the taxpayer.
  • I share many things with Ayn Rand. But not selfishness. Rather to me honor to take risks and account for your action is the rule.
  • [Dawkins] doesn’t understand what belief means, and talks religion confusing pisteic (credere) and epistemic. Belief in religion is epiphenomenal. Religion is about practice. The real reason is that he doesn’t of course understand probability.
  • Antifragility is simply a local response. Complexity Science is about systems. My approach is less theoretical (more robust), but if I were to ascribe to a theory, I would subscribe to Complexity theory.
  • I came to realize that FU money was a state of mind. Many rich people never have it. A train conductor/intellectual I know had it.
  • I will be honest. I often discover books because people tell me that I am similar to the writer, and later start imagining that they were an influence. It looks like a backward process.
  • The general problem is that we are not made to control our environment, and we are designed for a degree of variability: in energy, temperature, food composition, sleep duration, exercise (by Jensen’s inequality). Depriving anyone of variations is silly. So we need to force periods of starvation or fasts, sleep deprivation, protein deprivation, etc. Religions force shabbats, fasts, etc. but we are no longer under the sway of religions. The solution is rules.

A commenter shared this systems theory translation by John Michael Greer of a passage from the Tao Te Ching:

A process as described is not the process as it exists;
The terms used to describe it are not the things they describe.
That which evades description is the wholeness of the system;
The act of description is merely a listing of its parts.
Without intentionality, you can experience the whole system;
With intentionality, you can comprehend its effects.
These two approach the same reality in different ways,
And the result appears confusing;
But accepting the apparent confusion
Gives access to the whole system.

The Long Peace

Tuesday, February 19th, 2013

During the so-called Great Moderation, markets moved toward fewer but deeper departures from the mean, Nassim Nicholas Taleb says.

Great Moderation

Now, to Taleb’s horror, Steven Pinker sees an analogous Long Peace:

The fact that nuclear bombs explode less often that regular shells does not make them safer.

Pinker conflates nonscalable Mediocristan (death from encounters with simple weapons) with scalable Extremistan (death from heavy shells and nuclear weapons). The two have markedly distinct statistical properties. Yet he uses statistics of one to make inferences about the other. And the book does not realize the core difference between scalable/nonscalable (although he tried to define powerlaws). He claims that crime has dropped, which does not mean anything concerning casualties from violent conflict.

Another way to see the conflation, Pinker works with a times series process without dealing with the notion of temporal homogeneity. Ancestral man had no nuclear weapons, so it is downright foolish to assume the statistics of conflicts in the 14th century can apply to the 21st. A mean person with a stick is categorically different from a mean person with a nuclear weapon, so the emphasis should be on the weapon and not exclusively on the psychological makup of the person.

Had a book proclaiming The Long Peace been published in 1913 it would carry similar arguments to those in Pinker’s book.

Learning to Love Volatility

Wednesday, November 21st, 2012

Nassim Nicholas Taleb shares his five rules for anti-fragility:

  1. Think of the economy as being more like a cat than a washing machine.
  2. Favor businesses that benefit from their own mistakes, not those whose mistakes percolate into the system.
  3. Small is beautiful, but it is also efficient.
  4. Trial and error beats academic knowledge.
  5. Decision makers must have skin in the game.

Some influential “texts”

Monday, March 22nd, 2010

Scott Sumner makes a point I alluded to, when he discusses some influential “texts”:

Perhaps you saw the movie Metropolitan. There is a scene where a young man is debating the merits of Jane Austen with a young woman at a New York cocktail party. Finally in exasperation she asks the guy “Which Jane Austen books have you actually read?” He replied “I don’t actually read novels, I read literary criticism.” I’m kind of like that asshole. I haven’t read a lot of the intellectual classics, but can spend 30 minutes telling you what is wrong with each of them. Yes, I’m quite aware of how unfair this is; I know that when you boil an argument down to its essentials the work can lose much of its persuasive power. But I did read Pride and Prejudice.

I haven’t read all of the books that I consider influential, but I have read extensively about them.

His point about history ties in with my own comment on the lesson of Taleb’s Fooled by Randomness:

I once read all the New York Times from 1928–38. History seems really different when it is actually happening. The people back then seemed just as smart as we are. Of course we have a bit more history to learn from, so we did a bit better with monetary policy this time around. But we still made many of the same mistakes, just to a lesser degree.

The class distinctions back then seemed bigger — which surprised me. I knew that was the case for African-Americans, but I didn’t realize that class divisions among whites were also much greater, and that the upper class was so uninterested in the suffering of average farmers and workers. Or how much wealth was concentrated in New York City at that time.

I also developed a much greater respect for the stock, bond, and commodity markets’ ability to forecast the economy. They reacted to lots of things that seemed very important at the time, and that I think actually were very important, which are totally ignored by historians. A good example is the gold panic of early 1937 and the dollar panic of late 1937.

Books That Have Influenced Me

Friday, March 19th, 2010

Tyler Cowen recently answered a reader’s question of which books have influenced his world view the most. Some of the works I don’t recognize, others I haven’t read, others I’ve read about in great detail, and a couple I have in fact read. In that last category, Plato certainly held my interest, but I can’t point to any lasting influence. (Camille Paglia neither held my interest nor had any lasting influence.)

Arnold Kling and Bryan Caplan produced their own lists, and Tyler has since compiled a list of lists.

Naturally I got to thinking that perhaps I should produce my own list. An e-mail prod from Aretae pushed me over the edge — and just before I unleashed my oh-so-clever idea, he went and beat me to it. Anyway, here’s my list

  • Advanced Dungeons & Dragons Monster Manual – If I’m going to be honest, I need to admit that I was profoundly influenced by D&D and many other related games, which introduced me at a very young age to the entire notion of simulation — of using more-or-less mathematical models to explore how things might play out — and thus to many of the flaws in such models. Sometimes a more detailed model is less realistic, and sometimes a human’s judgment is invaluable.
  • The Count of Monte Cristo, by Alexandre Dumas – I don’t mean to imply that Dumas’s novel furnished me with an unquenchable desire for vengeance. Rather, reading The Count of Monte Cristo in 11th grade clarified just how derivative most of the entertainment we consume really is — everything has been done better by Dumas, and he did it over a century ago — and it got me wondering why we don’t regularly enjoy the pop classics. We read new books, listen to new music, watch new TV shows, and wait in long lines to watch new movies, when most of the best works produced — best for our own middle-brow tastes — are still new to us. (It also reminded me that our public-school curriculum goes out of its way to avoid books that kids, especially boys, might enjoy, under the pretense that teenagers with no life experience will learn literary analysis by parroting back what the teacher said about The Scarlet Letter, or some other work that does not speak to them at all.)
  • “The Man Who Came Early”, by Poul Anderson – I suppose I could pick any number of science fiction novels or short stories here, but Poul Anderson’s “The Man Who Came Early” really stuck with me. If you’re not familiar, it’s the story of an American MP pseudo-scientifically transported back in time to Viking-era Iceland, where his knowledge of modern technology enables him to do… very little. Anderson’s story does an excellent job of conveying just how little modern specialized technical knowledge is worth without adequate infrastructure and just how foreign modern society would seem to anarchic medieval Icelanders.
  • Capitalism: The Unknown Ideal, by Ayn Rand – There seems to be an unwritten rule that anyone who cites Rand as an influence should cite Atlas Shrugged, but I came to her work first through her short collections of essays. This regrettably stripped her enormous novels of most of their novelty; I already knew what she was trying to say. Anyway, the experience of reading Rand as a teenager is one of looking up to where God isn’t and asking, Why isn’t anyone else saying these things?
  • Economics in One Lesson, by Henry Hazlitt – When I bought my college textbooks a few weeks before the start of my sophomore year, I wasn’t sure what to make of Hazlitt’s Economics in One Lesson, because I’d already been through one year of indoctrination, and I was terrified that my econ professor was going to refute this wonderful book that seemed too good to be true. I felt quite fortunate that school year.
  • The Selfish Gene, by Richard Dawkins – I had found evolution fascinating from long before I found Dawkins’ book, but his work took my understanding to another level and introduced so many fascinating concepts — or explained them in a much broader context, like his discussion of tit for tat and the natural balance of defectors in a lax population of cooperators.
  • The Bell Curve, by Charles Murray – The chief lesson of The Bell Curve is that if you put one small chapter on racial differences in your book, no one will talk about anything else. Far more interesting to me was the story of the shift in society from the old order, in which elite schools were filled with the social elite, to the modern meritocratic order, in which elite schools are filled with the academic elite — which has unintended consequences.
  • Law’s Order, by David Friedman – Aretae mentioned Friedman’s anarcho-capitalist Machinery of Freedom, which I enjoyed but didn’t find especially influential. I much preferred Law’s Order, which explores the nature of property rights and brings Coase’s theorem to life.
  • Guns, Germs, and Steel, by Jared Diamond – I don’t know to what degree his grand theory is true, but I certainly found it thought-provoking. So much of our “technology” is agricultural — domesticated plants and animals — and it’s far too easy to neglect something so vital.
  • The Discovery and Conquest of Mexico, by Bernal Diaz del Castillo – I picked up this first-hand account of the Spanish expedition that toppled the Aztec empire because Diamond had mentioned it in Guns, Germs, and Steel, and I was not disappointed. My primary take-away was this: Why didn’t we read this in school? Real history is nothing like school history. Oddly, real history is more like a swords-and-sorcery novel: evil priests, hair matted with blood, commit human sacrifices atop pyramids amidst a city built on a lake inside a volcanic crater; frenzied fighting ensues.
  • Fooled by Randomness, by Nassim Nicholas Taleb – Ironically, the chief lesson of Taleb’s book, and its sequel, is humility. Things that were “obviously” inevitable after the fact, like World War II, were not obvious at the time. The Lebanese “knew” that any fighting around Beirut would soon blow over; theirs was a country where Jews, Christians, and Muslims had lived in harmony for centuries.
  • A Farewell to Alms, by Gregory Clark – I was familiar with Malthus from high school biology, and I was familiar with the standard refutation by Simon vs. Ehrlich, et al. What Clark did was to explore the conditions under which the Malthusian Trap would hold, the conditions under which it would not, and how policies ideal for one situation would backfire in the other. In an agricultural society with little human capital, the plague can raise living standards. In a modern society? Not so much.

Taleb is a classic crank

Wednesday, August 19th, 2009

In Martin Gardner’s taxonomy, Eric Falkenstein explains, Nassim Nicholas Taleb is a classic crank:

  1. They have a profound intellectual superiority complex.
  2. They regard other researchers as idiotic, and always operate outside the peer review.
  3. They believe there is a campaign against their ideas, a campaign compared with the persecution of Galileo or Pasteur.
  4. They attack only the biggest theories and scientific figures.
  5. They attack only the biggest theories and scientific figures.

On his personal website, Taleb once described himself as being “an essayist, belletrist, literary-philosophical-mathematical flâneur,” a conception that some people finding endearing, me not so much. Literary-philosophical-mathematical types,- especially flâneurs – tend to be ‘full of themselves,’ supporting Gardner ’s characteristic #1. He prides himself on not submitting articles to refereed journals, considers most people who are indifferent to him as fools, and disdains editors, even spellcheckers (#2). He proudly notes that someone told him “in another time he would have been hanged [for what, inanity?].” Wilmott Magazine, a quant publication published by his colleague Paul Wilmott, wrote a fawning article about him in which they noted that he is “Wall Street’s principal dissident. Heretic! Calvin to finance’s Catholic Church” (#3). His website states his modest desire to understand chance from the viewpoint of “philosophy/epistemology, philosophy/ethics, mathematics, social science/finance, and cognitive science”, supporting #4. Lastly, for #5, he has gone so far as to print a glossary for his neologisms (eg, “epistemic arrogance” for “overconfidence”). In Martin Gardner’s taxonomy, Taleb is a classic crank.
Taleb is consistently amusing because his criticisms of others apply so neatly to himself: he claims he is an empiricist yet supports his points with anecdotes. The Black Swan makes fun of ‘experts’ with credentials, but he states he does not deign to engage with anyone not sufficiently expert; he states he is not interested in being a speaker-bureau commodity , but routinely travels the rubber chicken circuit; he derides forecasters who don’t give a full accounting of their prior forecasting history, yet delinks old remarks about Value-at-Risk, and recategorized his extinct Hedge Fund as a hedge, not a fund; he claims to prize humility, yet is most immodest; he argues against applying the law of large numbers, and also of inferring too much from small samples; people apply models to reality in biased manner, people naively extrapolate data without the appropriate theory; forward thinking is adaptive, forward thinking is error-laiden. Some people think inconsistency is a sign of genius; I think it just reflects confused thinking.

Read the whole thing. I skipped ahead to the punch-line. Falkenstein poked fun at Taleb earlier, too.

Nassim Nicholas Taleb to David Cameron

Tuesday, August 18th, 2009

Nassim Nicholas Taleb writes an open letter to David Cameron, leader of Britain’s Conservative party:

We live in an increasingly complex system and complexity causes Black Swans. How? The more interdependent we become, the harder it is to trace the cause of an event and the tougher to forecast accurately, meaning the traditional tools of economics will fail us. And since the spread of the internet, rumours go round the world in minutes. Consider the run on Icelandic banks. It took place at BlackBerry speed. So the economic variables, such as sales, commodity prices, unemployment or GDP growth, are subject to ever more extreme variations. The over-efficiency of the systems means things run smoothly, but are subject to rare but violent blow-ups.

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”). The combination of debt levels swollen from two decades of over-confidence with modern finance’s complex derivatives has been disastrous.

Be careful, too, of the so-called science of economics. Economists have been no better in their predictions than cab drivers. We have an “expert” problem, in which the expert provides you with misplaced confidence, but no information. Because we think, correctly, that the dermatologist, the baker, the chemist are true experts (they know more about their respective subjects than the rest of us), we swallow the canard that the economists at the International Monetary Fund, the World Bank, the Bank of England and the US Federal Reserve are also experts, without checking their record. This reliance on faux experts is, for the most part, what got us here. Now it is continuing with the build-up of government deficit and an increased reliance on flimsy forecasts by the Obama administration.

This problem with experts was particularly acute when it came to the “risk models” on which bankers built those positions that turned sour. So it is that you are coming under pressure to provide more regulation. Alas, the need for more regulation is a myth. I have been fighting risk models both as a Wall Street trader and as a professor and my worst nightmares were the results of regulators. It was they who promoted the reliance on ratings by credit agencies. The “value-at-risk” models regulators promoted made us take more risks.

If we are to have regulators, we need them to operate along conservative lines and conserve the rich knowledge and understanding of risk transmitted through generations of practice, of trial and error. We replaced the heuristics of the elders with arrogant (and incompetent) beliefs, breaking, in the name of science, the chain of knowledge. Old, conservative bankers and traders have been replaced by keen young mathematical analysts, yet anyone who listened to a grandmother who survived the Depression would have been warned against debt and been better prepared than Ben Bernanke and Alan Greenspan, respectively chairman and former chairman of America’s Federal Reserve.

The solution is obvious: build an economy that increases the role of well-tested traditions. Ban financial derivatives that require advanced mathematics rather than trial and error. Look at mother nature. There is a complex system built around sound principles that has insured both evolution and survival. It does not let anything get too big to fail. It breaks things early. I don’t understand why people who stand against tampering with nature accept tampering with the economy that would have organically grown too. 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).

The best blueprint is the very opposite of the Obama administration’s economic policies (its foreign policy is commendable). It has been administering pain-killers without addressing the cause of disease. Obama is strengthening those who do the wrong thing.

Ten principles for a Black Swan-proof world

Thursday, April 9th, 2009

Nassim Nicholas Taleb offers up ten principles for a Black Swan-proof world:

  1. What is fragile should break early while it is still small. Nothing should ever become too big to fail. Evolution in economic life helps those with the maximum amount of hidden risks — and hence the most fragile — become the biggest.
  2. No socialisation of losses and privatisation of gains. Whatever may need to be bailed out should be nationalised; whatever does not need a bail-out should be free, small and risk-bearing. We have managed to combine the worst of capitalism and socialism. In France in the 1980s, the socialists took over the banks. In the US in the 2000s, the banks took over the government. This is surreal.
  3. People who were driving a school bus blindfolded (and crashed it) should never be given a new bus. The economics establishment (universities, regulators, central bankers, government officials, various organisations staffed with economists) lost its legitimacy with the failure of the system. It is irresponsible and foolish to put our trust in the ability of such experts to get us out of this mess. Instead, find the smart people whose hands are clean.
  4. Do not let someone making an “incentive” bonus manage a nuclear plant — or your financial risks. Odds are he would cut every corner on safety to show “profits” while claiming to be “conservative”. Bonuses do not accommodate the hidden risks of blow-ups. It is the asymmetry of the bonus system that got us here. No incentives without disincentives: capitalism is about rewards and punishments, not just rewards.
  5. Counter-balance complexity with simplicity. Complexity from globalisation and highly networked economic life needs to be countered by simplicity in financial products. The complex economy is already a form of leverage: the leverage of efficiency. Such systems survive thanks to slack and redundancy; adding debt produces wild and dangerous gyrations and leaves no room for error. Capitalism cannot avoid fads and bubbles: equity bubbles (as in 2000) have proved to be mild; debt bubbles are vicious.
  6. Do not give children sticks of dynamite, even if they come with a warning. Complex derivatives need to be banned because nobody understands them and few are rational enough to know it. Citizens must be protected from themselves, from bankers selling them “hedging” products, and from gullible regulators who listen to economic theorists.
  7. Only Ponzi schemes should depend on confidence. Governments should never need to “restore confidence”. Cascading rumours are a product of complex systems. Governments cannot stop the rumours. Simply, we need to be in a position to shrug off rumours, be robust in the face of them.
  8. Do not give an addict more drugs if he has withdrawal pains. Using leverage to cure the problems of too much leverage is not homeopathy, it is denial. The debt crisis is not a temporary problem, it is a structural one. We need rehab.
  9. Citizens should not depend on financial assets or fallible “expert” advice for their retirement. Economic life should be definancialised. We should learn not to use markets as storehouses of value: they do not harbour the certainties that normal citizens require. Citizens should experience anxiety about their own businesses (which they control), not their investments (which they do not control).
  10. Make an omelette with the broken eggs. Finally, this crisis cannot be fixed with makeshift repairs, no more than a boat with a rotten hull can be fixed with ad-hoc patches. We need to rebuild the hull with new (stronger) materials; we will have to remake the system before it does so itself. Let us move voluntarily into Capitalism 2.0 by helping what needs to be broken break on its own, converting debt into equity, marginalising the economics and business school establishments, shutting down the “Nobel” in economics, banning leveraged buyouts, putting bankers where they belong, clawing back the bonuses of those who got us here, and teaching people to navigate a world with fewer certainties.