Posts Tagged ‘randomness’

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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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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