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Posts Tagged ‘Nassim Taleb’

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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