Posts Tagged ‘Nassim Taleb’

Just requoting Paul Kedrosky’s post today:

What people don’t get about sovereign debt is that countries are sharks when it comes to debt and default. That is the real lesson of research and writing and history in this area – that countries have been messing around, defaulting and restructuring in debt markets for hundreds and hundreds of years. Defaults, busted banks and the like is what happens when you lend to countries that have much more experience and cynicism about their use of debt than you think they do.

This blogger through firsthand experience in a commercial bank’s risk and asset division, is witness to the financial wizardry the modern financial system employs to build the mountain of debt on which our capitalist societies exist on. In the news we are also witness to the horrors that mismanagement of debt and currency can create.

Kedrosky is not a lone voice here. We’ve captured the sentiments of others
like Gerald Celente, Max Kaiser, and Peter Schiff all of whom have put up credible arguments about how tentative and fragile a system based on debt is.

Not all who understand the system are speaking up vehemently against it. Our favorite speculator George Soros certainly understands the goings-on but is content to “game” the system for profit (and successfully too).

What this blogger finds interesting is despite all these critiques, the system continues unabated–notwithstanding the ever increasing magnitude of crises that recur. The arguments put forth by the pundits are actually dated–these sentiments have been around for as long as a monetary system has been around. Our favorite skeptical empiricist, Nassim Taleb, blames moral hazards for perpetuating the flawed system, but even the question of moral hazards isn’t new.

After all isn’t rewarding someone for “bad” behaviour the crux and aspiration of prosperity and decadence? The whole system is rigged to feed on itself! So far the common alternatives to the flawed system, barring a return to primitive times, propounded by the pundits range from a form of “modified capitalism” (shades of the Austrian School) to more “radical socialism” (e.g. Zeitgeist, Venus Project).

Which is why it far from surprises this blogger that “experience and cynicism” are the placeholders that Kedrosky chose to describe what underpins the motive of governments regarding debt. There are those who complain and those who game, but the last bucket are those who still choose to participate in the system–maybe in a fit of realism, maybe fatalism.

Meanwhile someone please buzz this blogger when and if we decide to let go of this monetary system and its sydstem of debt.

“Sent from my BlackBerry® wireless handheld”

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Black Swan author Nassim Nicholas Taleb teams up with the authors of Dance With Chance: Spyros Makridakis, Robin Hogarth and Anil Gaba — and discusses with them key concepts common amongst all of them. The four authors are advocating a certain kind of activism to bring the public to awarness of irrational expertise, our overreliance on experts, and how we naturally downplay the role of luck and randomness in our lives.

Apart from financial markets, they cite healthcare and medicine as potentially affected fields where the ‘expert problem’ is rampant.

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A couple of months ago, Nassim Taleb spoke out in Bloomberg about the “reforms” taking place in the financial system under the Obama and Geithner plans. He expressed his disgust and disappointment that not only are governments bailing out failed institutions but the new accounting standards being proposed after the crisis allow for even less transparency in reporting of gains and losses.

Towards the latter part of his interview Taleb briefly touched on a two-tier concept for the financial system: one side solely for utilitarian purposes but very low risk (banks), the other side solely for risk taking (hedge funds). The key to making this system work is that governments will be very protective of the banks for as long as they are not allowed to freely take risk, whilst the hedge funds can take on as much speculation as they wish, but are not subject to bailout. This would reduce moral hazard and would provide a more robust financial system. In a speaking engagement in Germany, Taleb specifically describes this two-tiered idea.

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Nassim Taleb speaks out in Davos, Switzerland, about how crises keep repeating because of the moral hazard of bailing out bad financial practices. Only if a system of punishment is in place (as it is in Switzerland) will future crises be averted.

In the same conference, Taleb records an impromptu video for Youtube to express his views. Great insights from our favorite skeptical empiricist.

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Nouriel Roubini (Dr. Doom) and our favorite skeptical empiricist Nassim Taleb (The Black Swan) appeared on CNBC to discuss the current financial crisis.

Taleb makes a bold declaration: much of the causes of the crisis are still present: the same people who did not see the crisis coming are still in office. Roubini criticizes the actions taken to solve the problem–bailing out the bad institutions are not going to solve the problem.

Taleb also makes a crucial point about asymmetric payoffs: how bankers are compensated by taking unreasonable risks, which the journalists completely miss–and instead harp hopelessly on investment tips rather than absorb the deeper implication of what is being presented to them.

The reporters end by pinning the two down as “bears” in the face of the recently rising markets.  If you can get past the interruptions of the journalists, the two pessimists actually have crucial insights to share. However, this clip is an example of how soundbite journalism takes the place of expert advice (watch how the CNBC anchors talk about Roubini and Taleb as “rockstars”).

For me, give this CNBC clip a capital “F” for frustrating.

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In these clips, the first from his exposition for the Long Now Foundation, the second from CNBC, Nassim Taleb outlines the characteristics of the term he has injected into popular culture: The Black Swan, or the rare event.His experiences draw heavily from history, economics and financial markets. Nassim Taleb was a former derivatives trader now turned philosopher and pundit. Taleb criticizes conventional economic thought and attitudes to risk management which are all based on a notion that rare harmful events almost never happen–when in fact they do.

His ideas represent the school of skeptical empiricism which differs slightly from conventional empiricism in its treatment of empirical evidence: an empiricist in general would place value on evidence as a confirmation of a statement, while a skeptical empiricist would consider the existing evidence only as one opinion and is not exhaustive of all other possibilities, however evidence that contradicted a statement would be considered as a credible basis to disprove it. A naive empiricist, would look at evidence and reject any other possibility not represented by the evidence.

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Our favorite skeptical empiricist Nassim Taleb is interviewed by financial journalist, Consuelo Mack, where he shared his insights about history and rare events. He provides a definition of his most popular phrase “The Black Swan” which he uses to describe rare, unpredictable events that have unexpectedly large and widespread consequences for society. He cites as examples: The World Wars, the rise of the internet, Google, and stock market crashes. All these events were unexpected and unpredictable but had tremendous consequences for society after they happened.

He continues to explain that some fields and areas are more prone to Black Swans than others, in this case: economics, finance, technology, and history. Taleb describes how people in general do not understand the impact of rare events on their lives.

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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.

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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.

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One thing that remains odd in people’s thinking is that generally people are selective in their skepticism and treat different topics with varying levels of critical thinking. An investor can be critical for instance of news and information he receives about his favorite stocks, but every Sunday listens to a religious sermon without question. On the flip side, you can have Atheists who are skeptical of the idea of a God but are taken hook-line-and-sinker by CNBC and Bloomberg analysts on the direction of the economy.

If you doubt science and the laws of physics, how can you ride an airplane without being a hypocrite? If you consider yourself critical of religion, how can you read and believe the newspapers and mass media and economic analysis at face value without being a hypocrite?

Nassim Taleb has written books on these very subjects and the topic of randomness, luck, and philosophy and how it affects people’s decision making. Taleb asserts that on some level, beliefs take over where critical thinking should, and this is where luck and randomness can play big tricks on people if they are not careful.

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