Feeds:
Posts
Comments

Archive for January 14th, 2009

Skeptical empiricist Nassim Taleb joins one of his mentors: Benoit Mandelbrot, who pioneered fractal geometry and contributed to Chaos Theory, in criticizing the existing tenuous situation of the financial markets and the global economy. They highlight some of the key fallacies that economists and bankers believe–which is precisely the mindset that has prevented the financial industry from correctly appreciating risk and anticipating the current crisis:

  • People believe that changes in history and in markets happen in small gradual increments, when the truth is that most of the time nearly nothing changes, and then all of a sudden a large unexpected change in the dynamics occurs which no one correctly predicted.
  • People estimate risk based on historical experience of defaults and losses, this makes them totally unprepared for an unexpected and larger risk that will happen in the future.
  • People think that consolidation and mergers of banks into larger entities makes them safer–but in reality this makes the whole financial system more delicate since it is now dependent on fewer entities, so a mistake by a large bank damages the system more than a mistake by a couple of smaller banks.
  • People are inherently optimistic and underestimate the extent of the crisis. Both Taleb and Mandelbrot think the crisis is very likely worse than people are thinking.

Eeriely, both their sentiments about markets suffering a quick and larger crash than people expect is analogous to an observation by Dr. Jared Diamond which we featured earlier about the collapse of human societies: normally after long periods of growth, suddenly without warning a society suffers a quick decline.

Advertisements

Read Full Post »

Former derivatives trader turned skeptical philosopher, Nassim Taleb, vents his frustration at the world financial system for allowing hindsight bias to fool them into a false sense of security which has now led to the worldwide financial crisis and recession.

Taleb criticizes economists for relying on theoretical models that have little bearing on the real-world appreciation of risk, and blames banks for throwing large amounts of capital on academics and PhDs whose economic theories were widely off the mark in anticipating the global crash.

(It’s just too bad the journalist couldn’t formulate better questions to appreciate the thinking of this guy. (Next to economists and academics, Taleb despises journalists too.)

We discussed some of Taleb’s ideas here before, notably the Platonic fallacy and fallacy of history, which are dangerous human tendencies that can lead to a grave misunderstanding of events which is exactly how he describes the current financial crisis.

Taleb is a skeptical empiricist: or one who considers historical evidence only as a PARTIAL indicator of probabilities, as opposed to naive empiricists who consider historical evidence as the complete basis for predicting future events. Skeptical empiricists like Taleb never admit to knowing the truth fully, and only fully consider evidence that DISPUTES a claim, while evidence that SUPPORTS a claim can never be fully accepted.

He was inspired by skeptical thinkers like Karl Popper whose theory of falsification we feature in this website. Popper also inspired the investment styles of other investors such as George Soros and Jim Rogers.

Read Full Post »

 

Barely a day after my decidedly negative post about Collectivism, I came across a good counter-point. My last words on the subject:

The catch: to be truly collectivist and erase all individuality is to become totally removed from what we can consider “human society” and be closer to an insect hive. Very successful, very efficient, very alien.

Well, David Brooks reporting from Chengdu, China thinks very differently. To David Brooks, the important thing to consider when comparing Collectivism with Individualism is context:

This is a divide that goes deeper than economics into the way people perceive the world. If you show an American an image of a fish tank, the American will usually describe the biggest fish in the tank and what it is doing. If you ask a Chinese person to describe a fish tank, the Chinese will usually describe the context in which the fish swim.

Reading David’s article brought to mind Nassim Taleb, whom we featured recently, and his fallacy of history. When we consider criticisms of Collectivism, we almost automatically associate it with the past experiences of Communism, Socialism, and Fascism, and how the societies based on these collectivist systems we’ve seen have either failed or stagnated. However, that individualistic societies have performed better in history is only half an insight–and by no means completely rules out the value of collectivism. However, this half-insight is practically the empirical basis supporting all anti-collectivist rhetoric.

David is quick to remind us of this, and of the alternative that we have all been quick to rule out, and more importantly, in 2008 he already has a historical context: China.

We in the West have a narrative that involves the development of individual reason and conscience during the Renaissance and the Enlightenment, and then the subsequent flourishing of capitalism. According to this narrative, societies get more individualistic as they develop.

But what happens if collectivist societies snap out of their economic stagnation? What happens if collectivist societies, especially those in Asia, rise economically and come to rival the West? A new sort of global conversation develops.

The opening ceremony in Beijing was a statement in that conversation. It was part of China’s assertion that development doesn’t come only through Western, liberal means, but also through Eastern and collective ones.

From here we can appreciate that hindsight bias may be 20/20 but it is also hopelessly myopic about future developments. Meanwhile, David also brings to our focus other thoughts that are helping to support a second look at Collectivism:

For one thing, there are relatively few individualistic societies on earth. For another, the essence of a lot of the latest scientific research is that the Western idea of individual choice is an illusion and the Chinese are right to put first emphasis on social contexts.

Scientists have delighted to show that so-called rational choice is shaped by a whole range of subconscious influences, like emotional contagions and priming effects (people who think of a professor before taking a test do better than people who think of a criminal). Meanwhile, human brains turn out to be extremely permeable (they naturally mimic the neural firings of people around them). Relationships are the key to happiness. People who live in the densest social networks tend to flourish, while people who live with few social bonds are much more prone to depression and suicide.

The rise of China isn’t only an economic event. It’s a cultural one. The ideal of a harmonious collective may turn out to be as attractive as the ideal of the American Dream.

Taleb calls history a fallacy and history is the only case against Collectivism. This only makes it more poignant to be students of history, and of the wide possibilities for how society can develop.

In my previous post I mentioned that the critics of Collectivism and Individualism seem to have a common fear: that of society degenerating to serve the interests of a minority. This suggests that both lines of thought are capable of creating that horror.

Thankfully, what David’s article shows is that just as importantly: both lines of thought are just as possibly capable of creating a better world instead.

Read Full Post »