Nassim Taleb on Black Swans (interview-profile)

note: I support Taleb’s theory of ‘apparent randomness”.But he is only looking at the physical plane, the surfae events, not the energetic reality, in which the totality of nature maintains equilibrium. The short dramatic events that disrupt order are what Taoists would call the periodic return to chaos, necessary part of the creative process of the universe. Alchemy is a method for getting in touch with that underlying order and the apparent “void” or “chaos” of the pre-natal realm. But the pre-natal realm is also ordered by yin yang and5 phases…..Michael

Nassim Nicholas Taleb’s Website:
http://www.fooledbyrandomness.com/

Wikipedia On Nassim Nicholas Taleb:
http://en.wikipedia.org/wiki/Nassim_Taleb

Nassim Nicholas Taleb On Charlie Rose:
http://video.google.com/videoplay?docid=-1393776214264698170

————

NASSIM NICHOLAS TALEB: THE PROPHET OF BOOM AND DOOM
By Bryan Appleyard
The Sunday Times
June 1, 2008

When this man said the world’s economy was heading for disaster, he was
scorned. Now traders, economists, even Nasa, are clamouring to hear him
speak.

…………..

A noisy cafe in Newport Beach, California. Nassim Nicholas Taleb is eating
three successive salads, carefully picking out anything with a high
carbohydrate content.

He is telling me how to live. “The only way you can say ‘F*** you’ to fate
is by saying it’s not going to affect how I live. So if somebody puts you to
death, make sure you shave.”

After lunch he takes me to Circuit City to buy two Olympus voice recorders,
one for me and one for him. The one for him is to record his lectures — he
charges about $60,000 for speaking engagements, so the $100 recorder is
probably worth it. The one for me is because the day before he had drowned
my Olympus with earl grey tea and, as he keeps saying, “I owe you.” It
didn’t matter because I always use two recorders and, anyway, I had bought a
replacement the next morning.

But it’s important and it’s not, strictly speaking, a cost to him. Every
year he puts a few thousand dollars aside for contingencies — parking
tickets, tea spills — and at the end of the year he gives what’s left to
charity. The money is gone from day one, so unexpected losses cause no pain.
Now I have three Olympus recorders.

He spilt the tea — bear with me; this is important — while grabbing at his
BlackBerry. He was agitated, reading every incoming e-mail, because the
Indian consulate in New York had held on to his passport and he needed it to
fly to Bermuda. People were being mobilised in New York and, for some
reason, France, to get the passport.

The important thing is this: the lost passport and the spilt tea were black
swans, bad birds that are always lurking, just out of sight, to catch you
unawares and wreck your plans. Sometimes, however, they are good birds. The
recorders cost $20 less than the marked price owing to a labelling screw-up
at Circuit City. Stuff happens. The world is random, intrinsically
unknowable. “You will never,” he says, “be able to control randomness.”

To explain: black swans were discovered in Australia. Before that, any
reasonable person could assume the all-swans-are-white theory was
unassailable. But the sight of just one black swan detonated that theory.
Every theory we have about the human world and about the future is
vulnerable to the black swan, the unexpected event. We sail in fragile
vessels across a raging sea of uncertainty. “The world we live in is vastly
different from the world we think we live in.”

Last May, Taleb published The Black Swan: The Impact of the Highly
Improbable. It said, among many other things, that most economists, and
almost all bankers, are subhuman and very, very dangerous. They live in a
fantasy world in which the future can be controlled by sophisticated
mathematical models and elaborate risk-management systems. Bankers and
economists scorned and raged at Taleb. He didn’t understand, they said. A
few months later, the full global implications of the sub-prime-driven
credit crunch became clear. The world banking system still teeters on the
edge of meltdown. Taleb had been vindicated. “It was my greatest
vindication. But to me that wasn’t a black swan; it was a white swan. I knew
it would happen and I said so. It was a black swan to Ben Bernanke [the
chairman of the Federal Reserve]. I wouldn’t use him to drive my car. These
guys are dangerous. They’re not qualified in their own field.”

In December he lectured bankers at Société Générale, France’s second biggest
bank. He told them they were sitting on a mountain of risks — a menagerie
of black swans. They didn’t believe him. Six weeks later the rogue trader
and black swan Jérôme Kerviel landed them with $7.2 billion of losses.

As a result, Taleb is now the hottest thinker in the world. He has a $4m
advance on his next book. He gives about 30 presentations a year to bankers,
economists, traders, even to Nasa, the US Fire Administration and the
Department of Homeland Security. But he doesn’t tell them what to do — he
doesn’t know. He just tells them how the world is. “I’m not a guru. I’m just
describing a problem and saying, ‘You deal with it.’”

Getting to know Taleb is a highly immersive experience. Everything matters.
“Why are you not dressed Californian?” he asks at our first meeting.
Everything in Newport Beach is very Californian. I’m wearing a jacket: it’s
cold. He’s wearing shorts and a polo shirt. Clothes matter; they send
signals. He warns against trusting anybody who wears a tie — “You have to
ask, ‘Why is he wearing a tie?’”

He has rules. In California he hires bikes, not cars. He doesn’t usually
carry his BlackBerry because he hates distraction and he really hates phone
charges. But he does carry an Apple laptop everywhere and constantly uses it
to illustrate complex points and seek out references. He says he answers
every e-mail. He is sent thousands. He reads for 60 hours a week, but almost
never a newspaper, and he never watches television.

“If something is going on, I hear about it. I like to talk to people, I
socialise. Television is a waste of time. Human contact is what matters.”

But the biggest rule of all is his eccentric and punishing diet and exercise
programme. He’s been on it for three months and he’s lost 20lb. He’s
following the thinking of Arthur De Vany, an economist — of the acceptable
type — turned fitness guru. The theory is that we eat and exercise
according to our evolved natures. Early man did not eat carbs, so they’re
out. He did not exercise regularly and he did not suffer long-term stress by
having an annoying boss. Exercise must be irregular and ferocious — Taleb
often does four hours in the gym or 360 press-ups and then nothing for 10
days. Jogging is useless; sprinting is good. He likes to knacker himself
completely before a long flight. Stress should also be irregular and
ferocious — early men did not have bad bosses, but they did occasionally
run into lions.

He’s always hungry. At both lunches he orders three salads, which he makes
me share. Our conversation swings from high philosophy and low economics
back to dietary matters like mangoes — bad — and apples — good as long as
they are of an old variety. New ones are bred for sugar content. His regime
works. He looks great — springy and fit. He shows me an old identity card.
He is fat and middle-aged in the photo. He looks 10 years younger than that.
“Look at me! That photo was taken seven years ago. No carbs!”

This is risk management — facing up to those aspects of randomness about
which something can be done. Some years ago he narrowly survived throat
cancer. The change in his voice was at first misdiagnosed as damaged vocal
cords from his time on the trading floor. It can recur. Also he has a high
familial risk of diabetes. He is convinced the diet of civilisation — full
of carbs and sugar — is the problem. The grand doctors who once announced
that complex carbohydrates are good for you are, to him, criminals
responsible for thousands of deaths.

So, you are wondering, who is this guy? He was born in 1960 in Lebanon,
though he casts doubt on both these “facts”. The year is “close enough” —
he doesn’t like to give out his birth date because of identity theft and he
doesn’t believe in national character. He has, however, a regional identity;
he calls himself a Levantine, a member of the indecipherably complex eastern
Mediterranean civilisation. “My body and soul are Mediterranean.”

Both maternal and paternal antecedents are grand, privileged and politically
prominent. They are also Christian — Greek Orthodox. Startlingly, this
great sceptic, this non-guru who believes in nothing, is still a practising
Christian. He regards with some contempt the militant atheism movement led
by Richard Dawkins.

“Scientists don’t know what they are talking about when they talk about
religion. Religion has nothing to do with belief, and I don’t believe it has
any negative impact on people’s lives outside of intolerance. Why do I go to
church? It’s like asking, why did you marry that woman? You make up reasons,
but it’s probably just smell. I love the smell of candles. It’s an aesthetic
thing.”

Take away religion, he says, and people start believing in nationalism,
which has killed far more people. Religion is also a good way of handling
uncertainty. It lowers blood pressure. He’s convinced that religious people
take fewer financial risks.

He was educated at a French school. Three traditions formed him: Greek
Orthodox, French Catholic and Arab. They also taught him to disbelieve
conventional wisdom. Each tradition had a different history of the crusades,
utterly different. This led him to disbelieve historians almost as much as
he does bankers.

But, crucially, he also learnt from a very early age that grown-ups have a
dodgy grasp of probability. It was in the midst of the Lebanese civil war
and, hiding from the guns and bombs, he heard adults repeatedly say the war
would soon be over. It lasted 15 years. He became obsessed with probability
and, after a degree in management from the Wharton business school at
Pennsylvania University, he focused on probability for his PhD at the
University of Paris.

For the non-mathematician, probability is an indecipherably complex field.
But Taleb makes it easy by proving all the mathematics wrong. Let me
introduce you to Brooklyn-born Fat Tony and academically inclined Dr John,
two of Taleb’s creations. You toss a coin 40 times and it comes up heads
every time. What is the chance of it coming up heads the 41st time? Dr John
gives the answer drummed into the heads of every statistic student: 50/50.
Fat Tony shakes his head and says the chances are no more than 1%. “You are
either full of crap,” he says, “or a pure sucker to buy that 50% business.
The coin gotta be loaded.”

The chances of a coin coming up heads 41 times are so small as to be
effectively impossible in this universe. It is far, far more likely that
somebody is cheating. Fat Tony wins. Dr John is the sucker. And the one
thing that drives Taleb more than anything else is the determination not to
be a sucker. Dr John is the economist or banker who thinks he can manage
risk through mathematics. Fat Tony relies only on what happens in the real
world.

In 1985, Taleb discovered how he could play Fat Tony in the markets. France,
Germany, Japan, Britain and America signed an agreement to push down the
value of the dollar. Taleb was working as an options trader at a French
bank. He held options that had cost him almost nothing and that bet on the
dollar’s decline. Suddenly they were worth a fortune. He became obsessed
with buying “out of the money” options. He had realised that when markets
rise they tend to rise by small amounts, but when they fall — usually hit
by a black swan — they fall a long way.

The big payoff came on October 19, 1987 — Black Monday. It was the biggest
market drop in modern history. “That had vastly more influence on my thought
than any other event in history.”

It was a huge black swan — nobody had expected it, not even Taleb. But the
point was, he was ready. He was sitting on a pile of out-of-the-money
eurodollar options. So, while others were considering suicide, Taleb was
sitting on profits of $35m to $40m. He had what he calls his “f***-off
money”, money that would allow him to walk away from any job and support him
in his long-term desire to be a writer and philosopher.

He stayed on Wall Street until he got bored and moved to Chicago to become a
trader in the pit, the open-outcry market run by the world’s most sceptical
people, all Fat Tonys. This he understood.

His first book, Dynamic Hedging: Managing Vanilla and Exotic Options, came
out in 1997. He was moving away from being a pure trader, or “quant” — a
quantitative analyst who applies sophisticated maths to investments — to
being the philosopher he wanted to be. He was using the vast data pool
provided by the markets and combining it with a sophisticated grasp of
epistemology, the study of how and what we know, to form a synthesis unique
in the modern world.

In the midst of this came his purest vindication prior to sub-prime.
Long-Term Capital Management was a hedge fund set up in 1994 by, among
others, Myron Scholes and Robert C Merton, joint winners of the 1997 Nobel
prize in economics. It had the grandest of all possible credentials and used
the most sophisticated academic theories of portfolio management. It went
bust in 1998 and, because it had positions worth $1.25 trillion outstanding,
it almost took the financial system down with it. Modern portfolio theory
had not accounted for the black swan, the Russian financial crisis of that
year. Taleb regards the Nobel prize in economics as a disgrace, a laughable
endorsement of the worst kind of Dr John economics. Fat Tony should get the
Nobel, but he’s too smart. “People say to me, ‘If economists are so
incompetent, why do people listen to them?’ I say, ‘They don’t listen,
they’re just teaching birds how to fly.’ ”

Taleb created his own hedge fund, Empirica, designed to help other hedge
funds hedge their risks by using a refined form of his options wins —
running small losses in quiet times and winning big in turbulent markets. It
did okay but, after a good first year, performed poorly when the market went
though a quiet spell. He’s still involved in the markets, but mainly as a
hobby — “like chess”.

Finally, with two books — Fooled by Randomness: The Hidden Role of Chance
in the Markets and in Life, and The Black Swan — and a stream of academic
papers, he turned himself into one of the giants of modern thought. They’re
still trying to tear him down, of course; last year The American
Statistician journal devoted a whole issue to attacking The Black Swan. But
I wouldn’t bother. A bad but rather ignorant review in The New York Times
resulted in such a savage rebuttal from Taleb on his website,
http://www.fooledbyrandomness.com, that reviewers across the US pulled out in fear
of his wrath. He knows his stuff and he keeps being right.

And what he knows does not sound good. The sub-prime crisis is not over and
could get worse. Even if the US economy survives this one, it will remain a
mountain of risk and delusion. “America is the greatest financial risk you
can think of.”

Its primary problem is that both banks and government are staffed by
academic economists running their deluded models. Britain and Europe have
better prospects because our economists tend to be more pragmatic, adapting
to conditions rather than following models. But still we are dependent on
American folly.

The central point is that we have created a world we don’t understand.
There’s a place he calls Mediocristan. This was where early humans lived.
Most events happened within a narrow range of probabilities — within the
bell-curve distribution still taught to statistics students. But we don’t
live there any more. We live in Extremistan, where black swans proliferate,
winners tend to take all and the rest get nothing — there’s Bill Gates,
Steve Jobs and a lot of software writers living in a garage, there’s Domingo
and a thousand opera singers working in Starbucks. Our systems are complex
but over-efficient. They have no redundancy, so a black swan strikes
everybody at once. The banking system is the worst of all.

“Complex systems don’t allow for slack and everybody protects that system.
The banking system doesn’t have that slack. In a normal ecology, banks go
bankrupt every day. But in a complex system there is a tendency to cluster
around powerful units. Every bank becomes the same bank so they can all go
bust together.”

He points out, chillingly, that banks make money from two sources. They take
interest on our current accounts and charge us for services. This is easy,
safe money. But they also take risks, big risks, with the whole panoply of
loans, mortgages, derivatives and any other weird scam they can dream up.
“Banks have never made a penny out of this, not a penny. They do well for a
while and then lose it all in a big crash.”

On top of that, Taleb has shown that increased economic concentration has
raised our vulnerability to natural disasters. The Kobe earthquake of 1995
cost a lot more than the Tokyo earthquake of 1923. And there are countless
other ways in which we have built a world ruled by black swans — some good
but mostly bad. So what do we do as individuals and the world? In the case
of the world, Taleb doesn’t know. He doesn’t make predictions, he insults
people paid to do so by telling them to get another job. All forecasts about
the oil price, for example, are always wrong, though people keep doing it.
But he knows how the world will end.

“Governments and policy makers don’t understand the world in which we live,
so if somebody is going to destroy the world, it is the Bank of England
saving Northern Rock. The biggest danger to human society comes from civil
servants in an environment like this. In their attempt to control the
ecology, they don’t understand that the link between action and consequences
can be more vicious. Civil servants say they need to make forecasts, but
it’s totally irresponsible to make people rely on you without telling them
you’re incompetent.”

Bear Stearns — the US Northern Rock — was another vindication for Taleb.
He’s always said that whatever deal you do, you always end up dealing with J
P Morgan. It was JPM that picked up Bear at a bargain-basement price. Banks
should be more like New York restaurants. They come and go but the
restaurant business as a whole survives and thrives and the food gets
better. Banks fail but bankers still get millions in bonuses for applying
their useless models. Restaurants tinker, they work by trial and error and
watch real results in the real world. Taleb believes in tinkering — it was
to be the title of his next book. Trial and error will save us from
ourselves because they capture benign black swans. Look at the three big
inventions of our time: lasers, computers and the internet. They were all
produced by tinkering and none of them ended up doing what their inventors
intended them to do. All were black swans. The big hope for the world is
that, as we tinker, we have a capacity for choosing the best outcomes.

“We have the ability to identify our mistakes eventually better than
average; that’s what saves us.” We choose the iPod over the Walkman.
Medicine improved exponentially when the tinkering barber surgeons took over
from the high theorists. They just went with what worked, irrespective of
why it worked. Our sense of the good tinker is not infallible, but it might
be just enough to turn away from the apocalypse that now threatens
Extremistan.

He also wants to see diplomats dying of cirrhosis of the liver. It means
they’re talking and drinking and not going to war. Parties are among the
great good things in Taleb’s world.

And you and me? Well, the good investment strategy is to put 90% of your
money in the safest possible government securities and the remaining 10% in
a large number of high-risk ventures. This insulates you from bad black
swans and exposes you to the possibility of good ones. Your smallest
investment could go “convex” — explode — and make you rich. High-tech
companies are the best. The downside risk is low if you get in at the start
and the upside very high. Banks are the worst — all the risk is downside.
Don’t be tempted to play the stock market — “If people knew the risks
they’d never invest.”

There’s much more to Taleb’s view of the world than that. He is reluctant to
talk about matters of human nature, ethics or any of the traditional
concerns of philosophy because he says he hasn’t read enough. But, when
pressed, he comes alive.

“You have to worry about things you can do something about. I worry about
people not being there and I want to make them aware.” We should be
mistrustful of knowledge. It is bad for us. Give a bookie 10 pieces of
information about a race and he’ll pick his horses. Give him 50 and his
picks will be no better, but he will, fatally, be more confident.

We should be ecologically conservative — global warming may or may not be
happening but why pollute the planet? — and probablistically conservative.
The latter, however, has its limits. Nobody, not even Taleb, can live the
sceptical life all the time — “It’s an art, it’s hard work.” So he doesn’t
worry about crossing the road and doesn’t lock his front door — “I can’t
start getting paranoid about that stuff.” His wife locks it, however.

He believes in aristocratic — though not, he insists, elitist — values:
elegance of manner and mind, grace under pressure, which is why you must
shave before being executed. He believes in the Mediterranean way of talking
and listening. One piece of advice he gives everybody is: go to lots of
parties and listen, you might learn something by exposing yourself to black
swans.

I ask him what he thinks are the primary human virtues, and eventually he
comes up with magnanimity — punish your enemies but don’t bear grudges;
compassion — fairness always trumps efficiency; courage — very few people
have this; and tenacity — tinker until it works for you.

“Let’s be human the way we are human. Homo sum — I am a man. Don’t accept
any Olympian view of man and you will do better in society.”

Above all, accept randomness. Accept that the world is opaque, majestically
unknown and unknowable. From its depths emerge the black swans that can
destroy us or make us free. Right now they’re killing us, so remember to
shave. But we can tinker our way out of it. It’s what we do best. Listen to
Taleb, an ancient figure, one of the great Mediterranean minds, when he
says: “You find peace by coming to terms with what you don’t know.” Oh, and
watch those carbs.

…………..

TALEB’S TOP LIFE TIPS:

1. Scepticism is effortful and costly. It is better to be sceptical about
matters of large consequences, and be imperfect, foolish and human in the
small and the aesthetic.

2. Go to parties. You can’t even start to know what you may find on the
envelope of serendipity. If you suffer from agoraphobia, send colleagues.

3. It’s not a good idea to take a forecast from someone wearing a tie. If
possible, tease people who take themselves and their knowledge too
seriously.

4. Wear your best for your execution and stand dignified. Your last recourse
against randomness is how you act — if you can’t control outcomes, you can
control the elegance of your behaviour. You will always have the last word.

5. Don’t disturb complicated systems that have been around for a very long
time. We don’t understand their logic. Don’t pollute the planet. Leave it
the way we found it, regardless of scientific ‘evidence’.

6. Learn to fail with pride — and do so fast and cleanly. Maximise trial
and error — by mastering the error part.

7. Avoid losers. If you hear someone use the words ‘impossible’, ‘never’,
‘too difficult’ too often, drop him or her from your social network. Never
take ‘no’ for an answer (conversely, take most ‘yeses’ as ‘most probably’).

8. Don’t read newspapers for the news (just for the gossip and, of course,
profiles of authors). The best filter to know if the news matters is if you
hear it in cafes, restaurants… or (again) parties.

9. Hard work will get you a professorship or a BMW. You need both work and
luck for a Booker, a Nobel or a private jet.

10. Answer e-mails from junior people before more senior ones. Junior people
have further to go and tend to remember who slighted them.