NationStates Jolt Archive

So, I'm a total Nasim Taleb (http://en.wikipedia.org/wiki/Nassim_taleb) fan boy. He was largely ignored until it was too late. Complaining about the past does no good, so perhaps we should start taking his advice now. I'm a big fan of 2, 3, 4, 5, 6, 9, and 10. Are these common sense solutions to a sustainable long-term financial market, or are they ineffective and impractical?

http://www.ft.com/cms/s/0/5d5aa24e-23a4-11de-996a-00144feabdc0.html?nclick_check=1

Ten principles for a Black Swan-proof world1. 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.

Then we will see an economic life closer to our biological environment: smaller companies, richer ecology, no leverage. A world in which entrepreneurs, not bankers, take the risks and companies are born and die every day without making the news.

In other words, a place more resistant to black swans.

Austrianism or bust

1. No such thing as "too big to fail" - failure means you're done. Quit or start over.

2. No nationalization of anything. No bailouts for anyone.

3. OK, as long as no government official says who can do what.

4. OK

5. Looks mostly OK. I agree that the financial system based on debt and the monetized nature of debt is bad.

6. Monetizing debt into investment products is a bad idea, but shouldn't the buyer be allowed to take risks if he wants?

7. OK

8. OK

9. How the hell do you "definancialise" any aspect of the economy? True, stocks and bonds should not be the entire scope of an investment plan, but how can you tell someone they are not allowed to invest for their future as they see fit? Of course all advise should be cross-checked - to do otherwise is irresponsible.

10. Mostly NO! No central control.

*edit* Walter Williams, Lew Rockwell, and Murray Rothbard each pwn Nassim Taleb

I like Nassim and agree with a lot of what he says. But he should add that mutual funds and managed tax deferred accounts (403k/b &c) should be eliminated.

Self directed IRAs with no trading restrictions should be the only vehicle. (Though I would increase the amount that can be deferred from wages).

I'm sorry, but number 9 (number 9, number 9, number 9...) is utterly ridiculous. He must realize that everyone has varying levels of risk tolerance and risk aversion, and he makes a mighty big assumption about who "normal citizens" are, and what "normal citizens" want--that seems almost more like a normal statement than anything.

And ten...I'm sorry. Marginalizing the economics and business school establishments? Abolishing the Nobel Prize in economics (is that because he's never gotten it?)? And where the hell do bankers "belong"? This one just sounds like nothing more than populist claptrap.

These two being so ridiculous that it's hard to take Mr. Taleb seriously.

I'm sorry, but number 9 (number 9, number 9, number 9...) is utterly ridiculous. He must realize that everyone has varying levels of risk tolerance and risk aversion, and he makes a mighty big assumption about who "normal citizens" are, and what "normal citizens" want--that seems almost more like a normal statement than anything.

And ten...I'm sorry. Marginalizing the economics and business school establishments? Abolishing the Nobel Prize in economics (is that because he's never gotten it?)? And where the hell do bankers "belong"? This one just sounds like nothing more than populist claptrap.

These two being so ridiculous that it's hard to take Mr. Taleb seriously.

I think what he's trying to say is that the average investor has been misled by "experts" into believing that their investments were very conservative when, in reality, they were very risky.

Business schools continue to teach Modern Portfolio Theory and Quantitative Risk Management, which he objects to. He dislikes the Nobel prize in economics because some of the winners theories have caused a large part of the current mess. http://en.wikipedia.org/wiki/Black_scholes http://en.wikipedia.org/wiki/David_X._Li

I think Taleb is a hypocritical and incredibly hateful douche, who seriously overates his own intelligence.

hypocritical how?

hypocritical how?

Whining at economists and statisticians (so many articles I've read from statisticians, completely tearing apart this person, since he doesn't have a clue) for devising predictive models on markets and making his whining seem like an original revelation (nothing he ever said was original), whilst at the same time in other instances writing about how superior his own predictive models were when he was a market trader (I bet he was no better than the other traders he melodramatically demonizes, like a drama-queen).

Although that isn't to say I disagree with EVERYTHING he says. He does make some good points.

Whining at economists and statisticians (so many articles I've read from statisticians, completely tearing apart this person, since he doesn't have a clue) for devising predictive models on markets and making his whining seem like an original revelation (nothing he ever said was original), whilst at the same time in other instances writing about how superior his own predictive models were when he was a market trader (I bet he was no better than the other traders he melodramatically demonizes, like a drama-queen).

He doesn't have any predictive models :/ that's his whole point.

He doesn't have any predictive models :/ that's his whole point.

No, he does, and even talked about how his was better. Although he's probably sweeped all them under the rug now.

It's also funny to see socialists support him.

No, he does, and even talked about how his was better. Although he's probably sweeped all them under the rug now.
No, he doesn't. If you're talking about his investment strategy, he had a computer select out of the money options for him, but he never forecasted or predicted market movements. If you read his book, he explains that no models are predictive when you test them empirically, not Gaussian and not even Mandelbrotian.
It's also funny to see socialists support him.

SOCIALISM!?!?!?!

No, he doesn't. If you're talking about his investment strategy, he had a computer select out of the money options for him, but he never forecasted or predicted market movements. If you read his book, he explains that no models are predictive when you test them empirically.


Wait there, I'll see if I can find the source I'm talking about.



SOCIALISM!?!?!?!

Yes, socialists support this man, who I sometimes think is probably just a nutty anarcho-cappy who would love to play golf with fellows at the mises institute, but wont come out of the closet.

Also might as well say which ones I agree with: 1 agree, 2 agree, 3 agree (but then we obviously have different opinions on who's hands are clean), 4 is meaningless, 5 is also meaningless rhetoric, 6 is bullshit and Taleb being a drama-queen, 7 indifferent, 8 indifferent, 9 disagree, agree with some of 10, disagree with other bits.

Ok I can't find the bloody debate. Anyway, in the meantime NotnotgnimmiJymmiJ, I suggest you read some Roubini, he's like a good version of Taleb.

Ok I can't find the bloody debate. Anyway, in the meantime NotnotgnimmiJymmiJ, I suggest you read some Roubini, he's like a good version of Taleb.

I saw an interview with Roubini and Taleb either during or shortly after Davos, they seemed to be getting along pretty well.

Here's my investment strategy

http://data.fuskbugg.se/skalman01/ecde297e7d63d4f520ea90ec29e0a620.png

I've started ignoring Taleb these days. There's value in pointing out flaws, but the problem with his position is that he can't possibly make a consistent statement about anything at any time. It would contradict his own values, which say we don't know anything, we can't know anything and we should invest like he does: badly, while waiting for luck to take us through.

If you read the story of how he came to where he is now, you'll realise that there isn't much to him.

I've started ignoring Taleb these days. There's value in pointing out flaws, but the problem with his position is that he can't possibly make a consistent statement about anything at any time. It would contradict his own values, which say we don't know anything, we can't know anything and we should invest like he does: badly, while waiting for luck to take us through.


Actually, is that so inconsistent with MPT?

And I'm not sure he waits for luck.

In any event, if he is fraud, he's fooled so many of the big banks. So his existence is a statement in itself.

(Not that I really want to defend him, but it's interesting to see the amount of anger he creates).

Ok I can't find the bloody debate. Anyway, in the meantime NotnotgnimmiJymmiJ, I suggest you read some Roubini, he's like a good version of Taleb.

Not really. Though Dr. Doom raises some good points.

I think all of them have it wrong fundamentally though. It comes down to the fact that they are all making faulty assumptions. In short:

1. Post 1946 it has not been a free market economy. In fact, at that time, the anglosphere economies were structured to produce relatively vast surpluses which would not be returned to the domestic consumption sphere directly. (Let's call it overproduction with government intermediation).

2. Risk/reward mismatch in the management of financial intermediaries that have been running this thing since 86.

3. Even the smartest people don't understand the difference between investment and speculation.

Actually, is that so inconsistent with MPT?
Well, yeah. MPT is rational, in the sense that we consider likely probabilities of various events happening when we put things together.

Taleb doesn't believe in probability, or indeed maths. And some of his criticisms have merit, because they remind people of the limits of what statistical analysis and the like can tell you. But he goes further than that: he attacks, quite violently, the whole idea of statistics and using probability distributions. So what do we have when not that? Absolutely nothing, he is one of those types who deny knowledge in itself. And I disagree with that not just for practical reasons.

And I'm not sure he waits for luck.
Sure he does. His MO is quite simple: buy lots of super-cheap options that are extremely unlikely to ever be in the money. Then wait. Most of the time he'll lose money, and then occasionally some big event means they might pay out. He doesn't do any analysis on what sort of big event that might be, he really does nothing but wait for a lucky break. Hence why people invest in him purely as a hedge, and presumably to humour their more eccentric clients.

(Not that I really want to defend him, but it's interesting to see the amount of anger he creates).
It's not really anger in my case, I just think he's no more of an investment guru than those people trying to sell you "how to win big on the stockmarket" tapes.

Taleb doesn't believe in probability, or indeed maths. And some of his criticisms have merit, because they remind people of the limits of what statistical analysis and the like can tell you. But he goes further than that: he attacks, quite violently, the whole idea of statistics and using probability distributions. So what do we have when not that? Absolutely nothing, he is one of those types who deny knowledge in itself. And I disagree with that not just for practical reasons.

No: That's not what he says. In fact, if you asked him I'm sure he'd say that he quite believes in probability. He just doesn't believe that things like a normal distribution captures price behavior - or some shit. Fat tails and heteroskedasticity and shit like that I'd guess.

In any event, he's been right and the arbs have been wrong, so I'd listen to him.


Sure he does. His MO is quite simple: buy lots of super-cheap options that are extremely unlikely to ever be in the money. Then wait. Most of the time he'll lose money, and then occasionally some big event means they might pay out. He doesn't do any analysis on what sort of big event that might be, he really does nothing but wait for a lucky break. Hence why people invest in him purely as a hedge, and presumably to humour their more eccentric clients.

Eh? His thesis is that people both underprice high risk and overprice low risk, so splitting between the two will generate a superior return. And he makes the superior return. So I don't know why you are discarding it. Frankly he's done a lot better over the last decade than all the smarty pants. (If there is a greater destroyer of wealth than financial engineering I'd like to know what it is so I can strangle it in its cradle).

But whatever, it's not 'luck'.


It's not really anger in my case, I just think he's no more of an investment guru than those people trying to sell you "how to win big on the stockmarket" tapes.

Well true, it's not like he breaks the law all the time like goldman sachs. So he's a bit poor in high level circles.

Eh? His thesis is that people both underprice high risk and overprice low risk, so splitting between the two will generate a superior return. And he makes the superior return. So I don't know why you are discarding it. Frankly he's done a lot better over the last decade than all the smarty pants. (If there is a greater destroyer of wealth than financial engineering I'd like to know what it is so I can strangle it in its cradle).

But whatever, it's not 'luck'.


Isn't it? I mean some whiney trader and academic nobody makes a load of money using his own predictive model (whilst scorning others for using doing the same thing). One guy, that's not much of a sample is it. I mean, there are plenty of people using the traditional methods who have made an incredibly high return.

Isn't it? I mean some whiney trader and academic nobody makes a load of money using his own predictive model (whilst scorning others for using doing the same thing) and makes a lot of money. One guy, that's not much of a sample is it. I mean, there are plenty of people using the traditional methods who have made an incredibly high return.

Well, look, it is in a certain sense all luck, because these are all high beta operations, so the volatility in price can kill you even if you are right. To make them come true you need patience, a lot of margin, and steadfast certainty that you will be proven right before you die.

But I think if you look at the behavior of quants over the past decade - since the black and scholes model has become acceptable - then they have been sellers of premium into the markets, and on balance it's all ended up working out exactly like Nassim said it would - i.e, they are systematically underpricing premium because their model fails to capture the fat tails that actually exist.

I think the thing that people get confused with is that he is not interested in the underlying, per se, but rather the cost of premium, which has, in retrospect obviously been underpriced.

I'd say that if you look at his investment strategy from the point of the underlying, you are missing the point.

And remember, he advises that the bulk of capital should be held in risk free return instruments. He's not saying everything should be put in OTM options.

(And the reason why he is buying far out OTM is to capture the most premium).

It just looks like gambling.

No: That's not what he says. In fact, if you asked him I'm sure he'd say that he quite believes in probability. He just doesn't believe that things like a normal distribution captures price behavior - or some shit. Fat tails and heteroskedasticity and shit like that I'd guess.
All that stuff can be corrected for, but we'd still be making the same assumptions he says we shouldn't make. You'll see a lot of quants taking the new data into account and changing their portfolios accordingly. But at the core of his argument is the idea that we can't judge what will happen in the future by looking at the past.

And I would agree that it of course isn't a certain way of doing it. But not using stats based on past experiences leaves us with nothing.

Eh? His thesis is that people both underprice high risk and overprice low risk, so splitting between the two will generate a superior return. And he makes the superior return. So I don't know why you are discarding it.
His treatment of risk as a concept is just not very good. The sort of risks he bets on aren't probabilities of certain chains of events happening, because he has no idea what these events might be. He can't do any analysis, any thinking of any form, because he must start with the presumption that he can't know. Occasionally a blind hen will find a grain of corn, but making that your career? And then telling everyone else how much better you are?

But whatever, it's not 'luck'.
Well, what is it? He's reliant on unlikely events, and he doesn't know what these events are or when they'll happen.

And for the record, I don't particularly like pure quant strategies either, and I positively loathe technical trading. If I make a call, I make it because I analyse something and believe that a certain string of events will happen. I'd only really feel comfortable making a big investment based on fundamentals. If I'm wrong, that's fine, but it's unlikely.

That's where my disagreement with Taleb comes from: the belief that you can just close your eyes and stumble through life because any effort to the contrary is pointless anyways. That's the philosophy behind what he says, and that's what I disagree with. Anything else he says just follows from proclaiming that other people are wrong for thinking they can understand the world.

I'd say that if you look at his investment strategy from the point of the underlying, you are missing the point.
I think any investment strategy that doesn't look at the underlying is missing the point.

Anyways, what you're saying and what he's saying doesn't add up. Quants can easily correct their distributions slightly, and his premium disappears. But that wouldn't address any of the arguments he's making about stats and quants at the moment.

Well, yeah. MPT is rational, in the sense that we consider likely probabilities of various events happening when we put things together.Except that risk managers don't know the probability of events occurring.

Taleb doesn't believe in probability, or indeed maths. And some of his criticisms have merit, because they remind people of the limits of what statistical analysis and the like can tell you.He does believe in probability. He just doesn't believe in it's misuse. If you take a predictive model and back test it 2 years, and the results are wildly different than if you had back tested it for 20 years, or 40 years, then there's a serious problem with that. Let's say you generate a model that you believe can predict the future. You back test it for 5 years, and find that if you had started investing with it 5 years ago, you would have made bundles of money and been quite wealthy by now because it accurately predicted market movements almost perfectly. So, you decide to go forward with it, because you have empirical evidence supporting your model. But Taleb comes along and says, "I back tested your model for 20 years, and you wouldn't have made any money at all!" Should you still go forward with it? (guess who I'm quoting in my sig!) Think of it in the context of medicine. What if you're testing a new drug on 100 people with no ill effects, you're drug is perfect. Once you release it to the general public and a few people start dying because of it, should you continue saying your experiments show no evidence of any danger, or should you pull it off the market?
But he goes further than that: he attacks, quite violently, the whole idea of statistics and using probability distributions. So what do we have when not that? Absolutely nothing, he is one of those types who deny knowledge in itself. And I disagree with that not just for practical reasons.you don't see the self-parody in this statement?


Sure he does. His MO is quite simple: buy lots of super-cheap options that are extremely unlikely to ever be in the money. Then wait. Most of the time he'll lose money, and then occasionally some big event means they might pay out. He doesn't do any analysis on what sort of big event that might be, he really does nothing but wait for a lucky break. Hence why people invest in him purely as a hedge, and presumably to humour their more eccentric clients.hey, if it works, it works.


It's not really anger in my case, I just think he's no more of an investment guru than those people trying to sell you "how to win big on the stockmarket" tapes.He's not trying to tell people how to get rich quick though. He was telling people to invest 90% of their portfolio in treasuries for the longest time. I know my parents 401k's would have been better off right now following that strategy. Even if the other 10% goes into thin air, you're still left with 90% in your pocket. Better to not risk what you need to survive.

Isn't it? I mean some whiney trader and academic nobody makes a load of money using his own predictive model (whilst scorning others for using doing the same thing) and makes a lot of money.He doesn't use a predictive model. He claims that predictive models can't predict anything. One guy, that's not much of a sample is it. I mean, there are plenty of people using the traditional methods who have made an incredibly high return. THAT'S EXACTLY RIGHT. If 10 million people are investing using the "traditional methods" and even a few hundred of them make lots of money, but the other several millions of them do NOT make money, then why would you trust those methods?

All that stuff can be corrected for, but we'd still be making the same assumptions he says we shouldn't make. You'll see a lot of quants taking the new data into account and changing their portfolios accordingly. But at the core of his argument is the idea that we can't judge what will happen in the future by looking at the past.

And I would agree that it of course isn't a certain way of doing it. But not using stats based on past experiences leaves us with nothing.

Yes, it can be corrected for. But the fact is that in practice it usually isn't so the market doesn't reflect those corrections.

Secondly, it's not certain, as you say. And he is saying that the lack of certainty is consistently underestimated. Now what is wrong with that position. It's not controversial.

His treatment of risk as a concept is just not very good. The sort of risks he bets on aren't probabilities of certain chains of events happening, because he has no idea what these events might be. He can't do any analysis, any thinking of any form, because he must start with the presumption that he can't know. Occasionally a blind hen will find a grain of corn, but making that your career? And then telling everyone else how much better you are?

He's not treating risk that way. He's not a risk manager. All he is saying is that the mathematical models systematically underprice options premia. And they do! Large funds have been net sellers at a loss. Buyers of premia have been winners.

It has nothing to do with the underlying behavior of the reference security. I really don't know why you have a problem with this. We've gone from a VIX of low teens to persistently over 40. Hell, it doesn't matter what you bought the OTM options on in general, last oct, nov, made you fuck you money.

Well, what is it? He's reliant on unlikely events, and he doesn't know what these events are or when they'll happen.

He's not reliant on 'events'. He's reliant on people underestimating their occurrence. In other words lack of capture of Beta - or someshit.

And for the record, I don't particularly like pure quant strategies either, and I positively loathe technical trading. If I make a call, I make it because I analyse something and believe that a certain string of events will happen. I'd only really feel comfortable making a big investment based on fundamentals. If I'm wrong, that's fine, but it's unlikely.

You'll lose all your moneys trading on fundamentals. Srys. Don't work that way.

That's where my disagreement with Taleb comes from: the belief that you can just close your eyes and stumble through life because any effort to the contrary is pointless anyways. That's the philosophy behind what he says, and that's what I disagree with. Anything else he says just follows from proclaiming that other people are wrong for thinking they can understand the world.

That's not what he says. And he is an active trader himself. What he is suggesting is that for most people who have a non-active investment strategy, it is better to buy at the fat tails because they are relatively cheaper.

I think any investment strategy that doesn't look at the underlying is missing the point.

Anyways, what you're saying and what he's saying doesn't add up. Quants can easily correct their distributions slightly, and his premium disappears. But that wouldn't address any of the arguments he's making about stats and quants at the moment.


No, buy premium last Jan was an excellent strat.

Also, quants can, but there is institutional inertia. So they don't.

Hence we rally now.

I think what he's trying to say is that the average investor has been misled by "experts" into believing that their investments were very conservative when, in reality, they were very risky.

Mmm-hmmm..."experts".

Business schools continue to teach Modern Portfolio Theory and Quantitative Risk Management, which he objects to.

Business schools--and economics schools--teach a whole lot more than just those theories.

He dislikes the Nobel prize in economics because some of the winners theories have caused a large part of the current mess. http://en.wikipedia.org/wiki/Black_scholes http://en.wikipedia.org/wiki/David_X._Li

And Adolph Hitler was Time Magazine's Man of the Year--doesn't mean we should abolish that award.

Mmm-hmmm..."experts". ...



Business schools--and economics schools--teach a whole lot more than just those theories. I know, I attend one.



And Adolph Hitler was Time Magazine's Man of the Year--doesn't mean we should abolish that award.

Poor choice to make a comparison. http://en.wikipedia.org/wiki/Time_man_of_the_year for better or for worse, ...has done the most to influence the events of the year.

http://en.wikipedia.org/wiki/Nobel_prize_in_economics#Award_nomination_and_selection_processan award for outstanding contributions in the field of economics and is generally considered one of the most prestigious awards in that field.

Anyway, I stopped paying attention to the Time man of the year prize after they had the BS award to "you." What a ridiculous cop out.