8 ms·

Nassim Taleb (Black Swan) open letter to David Cameron

71 points by keven 17y ago

keven 17y ago
"Work on building a "robust" society, capable of withstanding errors, in which the role of finance (hence debt) would be minimal. We want a society in which people can make mistakes without risk of total collapse. Silicon Valley offers a good example, where people have the chance to fail fast (and repeatedly)."
- cwan 17y ago
  Impressively scathing of both the Obama and former Bush administrations. I'm not sure how he would go about implementing some of his ideas since on one hand he argues against additional regulations and on the other he argues for a ban certain types of complex financial products (ie who would be the arbiter of what he calls a return to products that dependend on trial and error?). He is however a great writer and more importantly, he, even more than Peter Schiff was right (from an FT article that echoes some of his points in the letter and in some cases is a bit more specific - http://www.fooledbyrandomness.com/tenprinciples.pdf http://www.fooledbyrandomness.com/tenprinciples.pdf) : "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." Having been on both sides of the coin, I do wonder how much those who allocate the capital (bankers) should make relative to those who generate the ideas and innovation - but clearly in recent years, it was skewed towards the former. Lots more from Taleb at his site: http://www.fooledbyrandomness.com/ http://www.fooledbyrandomness.com/
  - neilk 17y ago
    Taleb wants financial services to come in two flavors: boring, predictable, public banking utiliies; and no-safety-net no-bailout risk-taking investment. He sees current regulation as helping to create the monsters we have now, where the risk-takers are allowed to play with the money that's supposed to be stable.
    - cwan 17y ago
      "Taleb wants financial services to come in two flavors: boring, predictable, public banking utiliies; and no-safety-net no-bailout risk-taking investment." But how do you get there? How do you make sure they don't spin out of control or even how do you decide which firms to break up and how? (I don't disagree, I am genuinely interested in learning how he sees it can be implemented and without new significant regulations no less).
      - zupatol 17y ago
        One way to make banks boring and predictable would be to define precisely what kind of products they are allowed to sell. This sounds like what Taleb would want, but it don't think it would be good to entirely eliminate innovation. But if regulators would forbid any product valued by models they don't understand, it would probably be a good start.
        MaysonL 17y ago
        Taleb has no problem with innovation - as long as the risk of the innovation is borne by the innovators, or investors putting their own money at risk. The problem occurs when people bet other people's money, reaping nost of the rewards when the bet pays off, and incurring little loss when the bet goes wrong.
  - euroclydon 17y ago
    "I'm not sure how he would go about implementing some of his ideas" Mocking the young math-geek (I studied math) analysts, bankers, derivative creators or whatever their titles are, is a good start. I heard it somewhere that over the past decade or two, everyone's mom went from wanting their kid to be a doctor or lawyer to instead be a Wall Street I-banker. All we really need is for society to trust elaborate investment and debt schemes less. I'm not sure if the moms had it right the first time though, because we have too many lawyers and doctors are taking a beating now from Obama,
drewcrawford 17y ago
> It is a low-probability, high-impact event that, because of its rarity and the instability of the environment, cannot be scientifically evaluated in terms of risk and return. I stopped reading here. The only objective evaluation of economic matters is in scientific, risk-and-return terms. Anything else is quackery, fear-mongering, or worse. A great deal of evil has been done in the last decade or so in the name of protecting us against horrible things. We are told that much good has come of it, because nothing horrible has happened. While I'm sure this is partly true, I wouldn't mind trading a few more horrible things for a little more autonomy.
- CamperBob 17y ago
  I think if you put that statement in context, bin Taleb is saying that such "black swan" events can't be understood in the absence of a suitable behavioral model for the economy -- and furthermore, you don't want to rely on any global behavior models because they ultimately prove limiting. Communism anyone? There is a lot going on in finance every day that simply cannot be objectively modeled or understood in scientific terms. That's a problem, but we also need to accept that there may not be a globally valid solution. Viewing complexity as the enemy sounds like as good an approach as any.
- oakmac 17y ago
  Black Swan theory isn't about denying science; it's about recognizing the limits of science. Taleb's position (and argument in this paper) is that we need to recognize instances where we don't know the answer instead of making decisions based on assumptions that we do.
  - TriinT 17y ago
    "Taleb's position (and argument in this paper) is that we need to recognize instances where we don't know the answer instead of making decisions based on assumptions that we do." Have you ever worked at an investment bank? I suspect you have not. Wall Street does not run on the scientific method. It runs on greed, fear and politics. The ones who check the assumptions and know the limits of their models don't have the power to make the decisions. This is the problem. And the Taleban apparently haven't yet figured it out. Quoting Janet Tavakoli: "malfeasance, not models, disrupted the global economy, and Taleb still gets that part wrong." Last but not least: there's not such thing as a "blackswan theory". You can't steal ideas from probability theory and statistics that have been known for centuries, rename them, wrap them up nicely, and call them new or original.
compay 17y ago
Unless you're an entrenched partisan, I think it's still a tad too early to call Obama's economic policies "disastrous" or "calamitous."
- cwan 17y ago
  I'm pretty sure that Taleb isn't a partisan - having also been pretty critical of Bush/Republicans (though he did point out the Obama administration's spending is magnitudes larger than his predecessor(s)). In the lead up to the crisis, Taleb was one of maybe only a couple people who not only forecasted the crisis but bet right on how it might occur. He used similarly dire language and was laughed at by many of his detractors. For this reason alone he shouldn't be so quickly dismissed.
  - nostrademons 17y ago
    "For this reason alone he shouldn't be so quickly dismissed." I'm not sure he'd agree with you. Taleb's books repeatedly stress the importance of survivorship bias. In any population, they'll be someone forecasting just about any conceivable event. No matter how unlikely events turn out to be, somebody is eventually going to be right, and then that person is lauded as a genius for having forecasted correctly. When really they've done no such thing; rather, people have just retrospectively picked out the person who happened to guess right. I think Taleb would say you shouldn't dismiss him because there's ample evidence throughout history that he's right, not because he happened to guess right this time. Whenever debt levels have risen to what they are now, it's resulted in economic instability and chaotic behavior. It's not just this century: you can find examples back to Roman times.
- neilk 17y ago
  I think Taleb's main complaint is that Obama has not changed the incentives for Wall Streeters to put the economy at risk. Instead, we've had a big and apparently permanent transfer of risk from private to public, exacerbating the situation. A Goldman Sachs executive just boasted that their business methods hadn't changed at all from before the crash. Think about that for a second.
sh1mmer 17y ago
Having not read his book, was I the only person annoyed that he used the phrase "black swan" a dozen times in the first paragraph without qualifying it? He could have been saying "You and your party may be the only hope we have for a resilient society insulated from negative oranges and in which everyone has the opportunity to benefit from positive oranges." for all the difference it makes to me.
- dtf 17y ago
  I cringed too - especially at the capitalization. I shall cringe again when Cameron starts using it. Forced memes like "black swan", "outlier" and "tipping point" are like little mini-advertisements for their books and their authors. Getting them into the vocabulary of politicians and business leaders is the ultimate marketing ploy.
  - pbhjpbhj 17y ago
    I honestly don't know what memes you're referring too (nor the books) but outlier and tipping point have basic meanings without interpretation: tipping point is a cusp or specifically the point at which the force vector originating at the centre-of-gravity passes outside the foot of a body causing it to tip over. Outliers are statistical anomalies or unexpected results that are usually ignored as if they are insignificant. Black swans on the other hand are birds with a particular pigment. Now what are the additional layers of meaning, we see black swans referring to apparently unlikely events that nevertheless will occur (that's possibly not the definition given by this guy), but what about the super-definitions for the others?
- ErrantX 17y ago
  That was my hang up too. Then when he did get round to the definition it's clear he needs a bit more than a sentence to qualify what he means: because call me a gambler but Black Swan's sound pretty much like something we should avoid planning for or risk getting paranoid. (and even though I did start reading his book and do sort of know what he's on about I still cant get away from that feeling. Why cant he say "lets not be arrogant and high risk" without having to qualify it with IMO a poor reason (surely the sentence alone should be enough):(
jkuria 17y ago
Taleb needs to find something new to talk about. In his book Fooled By Randomness, he takes a paragraph and makes it a chapter. Takes a chapter and makes it a book, talking endlessly about black swans, how people who are successful are successful because they got lucky and repeating analogy after analogy to make the same basic point. In this post he makes sweeping statements about debt being bad, based on wisdom from Babylonian times and Roman proverbs: "David, you must counter this complexity by lowering indebtedness. We have known since Babylonian times that debt is treacherous and allows no room for mistakes: felix qui nihil debet goes the Roman proverb ("happy is he who owes nothing")." He sounds like Ahmedinejan in his letter to former president Bush advising him to embrace the ways of the prophets of old :) There are many situations where debt is your friend but like all good things it can be abused. Common Taleb, find something new to talk about! Black Swan is so 2002!
- cia_plant 17y ago
  Isn't it better to have one idea that is insightful and correct, than to have many ideas which are wrong, like most commentators?
  - katamole 17y ago
    Not when it keeps being rehashed ad nauseum.
    - tc 17y ago
      Maybe he intends to keep rehashing it until people understand. Good ideas, it seems, need to be repeated.
      - biohacker42 17y ago
        It wasn't that great of an idea: http://www.stat.berkeley.edu/~aldous/157/Books/taleb.html http://www.stat.berkeley.edu/~aldous/157/Books/taleb.html
      - katamole 17y ago
adnam 17y ago
Submarine.
dankjaergaard 17y ago
I think Taleb makes an excellent point with his Black Swan theory. The point is, that we don't know what will happen. We don't know and governments don't know. Problem is, governments spend like they know :-)
andyjenn 17y ago
I wonder how Taleb reconciles his views on probability with respect to Cameron winning the next election in May?
joubert 17y ago
Before one gets hysterical, consider debt as a function of GDP. http://en.wikipedia.org/wiki/File:USDebt.png http://en.wikipedia.org/wiki/File:USDebt.png http://en.wikipedia.org/wiki/United_States_public_debt http://en.wikipedia.org/wiki/United_States_public_debt
- bwd2 17y ago
  Yeah, but the problem is that the rest of the world is not currently blown to smithereens and in need of American labor and capital to rebuild it the way it was in 1945 (not to mention deeply indebted to the United States as well). The trough of that graph is about the point where Western Europe and Japan managed to rebuild their economies to the point where they could actually compete effectively. The United States has no such competitive advantage at this point.
  - joubert 17y ago
    So where is all the US output going?
Estragon 17y ago
This is ridiculous. The financial crisis was not a "black swan." Many people saw it coming and prepared accordingly. It was only groupthink and willful ignorance which kept most people from doing so.
- Rexxar 17y ago
  It's not a black swan for everybody but it's a black swan for a lot of people.
movix 17y ago
Forget the Black Swan, please God just deliver us from Cameron. Margaret Thatcher when asked what was her greatest political achivement - 'Tony Blair' she replied. Isn't Cameron just a more greasy version of the slimy Blair, Black Swan spotter or not?

71 points by keven 17y ago

keven 17y ago

"Work on building a "robust" society, capable of withstanding errors, in which the role of finance (hence debt) would be minimal. We want a society in which people can make mistakes without risk of total collapse. Silicon Valley offers a good example, where people have the chance to fail fast (and repeatedly)."

cwan 17y ago
Impressively scathing of both the Obama and former Bush administrations. I'm not sure how he would go about implementing some of his ideas since on one hand he argues against additional regulations and on the other he argues for a ban certain types of complex financial products (ie who would be the arbiter of what he calls a return to products that dependend on trial and error?). He is however a great writer and more importantly, he, even more than Peter Schiff was right (from an FT article that echoes some of his points in the letter and in some cases is a bit more specific - http://www.fooledbyrandomness.com/tenprinciples.pdf http://www.fooledbyrandomness.com/tenprinciples.pdf) : "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." Having been on both sides of the coin, I do wonder how much those who allocate the capital (bankers) should make relative to those who generate the ideas and innovation - but clearly in recent years, it was skewed towards the former. Lots more from Taleb at his site: http://www.fooledbyrandomness.com/ http://www.fooledbyrandomness.com/
- neilk 17y ago
  Taleb wants financial services to come in two flavors: boring, predictable, public banking utiliies; and no-safety-net no-bailout risk-taking investment. He sees current regulation as helping to create the monsters we have now, where the risk-takers are allowed to play with the money that's supposed to be stable.
  - cwan 17y ago
    "Taleb wants financial services to come in two flavors: boring, predictable, public banking utiliies; and no-safety-net no-bailout risk-taking investment." But how do you get there? How do you make sure they don't spin out of control or even how do you decide which firms to break up and how? (I don't disagree, I am genuinely interested in learning how he sees it can be implemented and without new significant regulations no less).
    - zupatol 17y ago
      One way to make banks boring and predictable would be to define precisely what kind of products they are allowed to sell. This sounds like what Taleb would want, but it don't think it would be good to entirely eliminate innovation. But if regulators would forbid any product valued by models they don't understand, it would probably be a good start.
      - MaysonL 17y ago
        Taleb has no problem with innovation - as long as the risk of the innovation is borne by the innovators, or investors putting their own money at risk. The problem occurs when people bet other people's money, reaping nost of the rewards when the bet pays off, and incurring little loss when the bet goes wrong.
- euroclydon 17y ago
  "I'm not sure how he would go about implementing some of his ideas" Mocking the young math-geek (I studied math) analysts, bankers, derivative creators or whatever their titles are, is a good start. I heard it somewhere that over the past decade or two, everyone's mom went from wanting their kid to be a doctor or lawyer to instead be a Wall Street I-banker. All we really need is for society to trust elaborate investment and debt schemes less. I'm not sure if the moms had it right the first time though, because we have too many lawyers and doctors are taking a beating now from Obama,

drewcrawford 17y ago

> It is a low-probability, high-impact event that, because of its rarity and the instability of the environment, cannot be scientifically evaluated in terms of risk and return. I stopped reading here. The only objective evaluation of economic matters is in scientific, risk-and-return terms. Anything else is quackery, fear-mongering, or worse. A great deal of evil has been done in the last decade or so in the name of protecting us against horrible things. We are told that much good has come of it, because nothing horrible has happened. While I'm sure this is partly true, I wouldn't mind trading a few more horrible things for a little more autonomy.

CamperBob 17y ago
I think if you put that statement in context, bin Taleb is saying that such "black swan" events can't be understood in the absence of a suitable behavioral model for the economy -- and furthermore, you don't want to rely on any global behavior models because they ultimately prove limiting. Communism anyone? There is a lot going on in finance every day that simply cannot be objectively modeled or understood in scientific terms. That's a problem, but we also need to accept that there may not be a globally valid solution. Viewing complexity as the enemy sounds like as good an approach as any.
oakmac 17y ago
Black Swan theory isn't about denying science; it's about recognizing the limits of science. Taleb's position (and argument in this paper) is that we need to recognize instances where we don't know the answer instead of making decisions based on assumptions that we do.
- TriinT 17y ago
  "Taleb's position (and argument in this paper) is that we need to recognize instances where we don't know the answer instead of making decisions based on assumptions that we do." Have you ever worked at an investment bank? I suspect you have not. Wall Street does not run on the scientific method. It runs on greed, fear and politics. The ones who check the assumptions and know the limits of their models don't have the power to make the decisions. This is the problem. And the Taleban apparently haven't yet figured it out. Quoting Janet Tavakoli: "malfeasance, not models, disrupted the global economy, and Taleb still gets that part wrong." Last but not least: there's not such thing as a "blackswan theory". You can't steal ideas from probability theory and statistics that have been known for centuries, rename them, wrap them up nicely, and call them new or original.

compay 17y ago

Unless you're an entrenched partisan, I think it's still a tad too early to call Obama's economic policies "disastrous" or "calamitous."

cwan 17y ago
I'm pretty sure that Taleb isn't a partisan - having also been pretty critical of Bush/Republicans (though he did point out the Obama administration's spending is magnitudes larger than his predecessor(s)). In the lead up to the crisis, Taleb was one of maybe only a couple people who not only forecasted the crisis but bet right on how it might occur. He used similarly dire language and was laughed at by many of his detractors. For this reason alone he shouldn't be so quickly dismissed.
- nostrademons 17y ago
  "For this reason alone he shouldn't be so quickly dismissed." I'm not sure he'd agree with you. Taleb's books repeatedly stress the importance of survivorship bias. In any population, they'll be someone forecasting just about any conceivable event. No matter how unlikely events turn out to be, somebody is eventually going to be right, and then that person is lauded as a genius for having forecasted correctly. When really they've done no such thing; rather, people have just retrospectively picked out the person who happened to guess right. I think Taleb would say you shouldn't dismiss him because there's ample evidence throughout history that he's right, not because he happened to guess right this time. Whenever debt levels have risen to what they are now, it's resulted in economic instability and chaotic behavior. It's not just this century: you can find examples back to Roman times.
neilk 17y ago
I think Taleb's main complaint is that Obama has not changed the incentives for Wall Streeters to put the economy at risk. Instead, we've had a big and apparently permanent transfer of risk from private to public, exacerbating the situation. A Goldman Sachs executive just boasted that their business methods hadn't changed at all from before the crash. Think about that for a second.

sh1mmer 17y ago

Having not read his book, was I the only person annoyed that he used the phrase "black swan" a dozen times in the first paragraph without qualifying it? He could have been saying "You and your party may be the only hope we have for a resilient society insulated from negative oranges and in which everyone has the opportunity to benefit from positive oranges." for all the difference it makes to me.

dtf 17y ago
I cringed too - especially at the capitalization. I shall cringe again when Cameron starts using it. Forced memes like "black swan", "outlier" and "tipping point" are like little mini-advertisements for their books and their authors. Getting them into the vocabulary of politicians and business leaders is the ultimate marketing ploy.
- pbhjpbhj 17y ago
  I honestly don't know what memes you're referring too (nor the books) but outlier and tipping point have basic meanings without interpretation: tipping point is a cusp or specifically the point at which the force vector originating at the centre-of-gravity passes outside the foot of a body causing it to tip over. Outliers are statistical anomalies or unexpected results that are usually ignored as if they are insignificant. Black swans on the other hand are birds with a particular pigment. Now what are the additional layers of meaning, we see black swans referring to apparently unlikely events that nevertheless will occur (that's possibly not the definition given by this guy), but what about the super-definitions for the others?
ErrantX 17y ago
That was my hang up too. Then when he did get round to the definition it's clear he needs a bit more than a sentence to qualify what he means: because call me a gambler but Black Swan's sound pretty much like something we should avoid planning for or risk getting paranoid. (and even though I did start reading his book and do sort of know what he's on about I still cant get away from that feeling. Why cant he say "lets not be arrogant and high risk" without having to qualify it with IMO a poor reason (surely the sentence alone should be enough):(

jkuria 17y ago

Taleb needs to find something new to talk about. In his book Fooled By Randomness, he takes a paragraph and makes it a chapter. Takes a chapter and makes it a book, talking endlessly about black swans, how people who are successful are successful because they got lucky and repeating analogy after analogy to make the same basic point. In this post he makes sweeping statements about debt being bad, based on wisdom from Babylonian times and Roman proverbs: "David, you must counter this complexity by lowering indebtedness. We have known since Babylonian times that debt is treacherous and allows no room for mistakes: felix qui nihil debet goes the Roman proverb ("happy is he who owes nothing")." He sounds like Ahmedinejan in his letter to former president Bush advising him to embrace the ways of the prophets of old :) There are many situations where debt is your friend but like all good things it can be abused. Common Taleb, find something new to talk about! Black Swan is so 2002!

cia_plant 17y ago
Isn't it better to have one idea that is insightful and correct, than to have many ideas which are wrong, like most commentators?
- katamole 17y ago
  Not when it keeps being rehashed ad nauseum.
  - tc 17y ago
    Maybe he intends to keep rehashing it until people understand. Good ideas, it seems, need to be repeated.
    - biohacker42 17y ago
      It wasn't that great of an idea: http://www.stat.berkeley.edu/~aldous/157/Books/taleb.html http://www.stat.berkeley.edu/~aldous/157/Books/taleb.html
    - katamole 17y ago

adnam 17y ago

Submarine.

dankjaergaard 17y ago

I think Taleb makes an excellent point with his Black Swan theory. The point is, that we don't know what will happen. We don't know and governments don't know. Problem is, governments spend like they know :-)

andyjenn 17y ago

I wonder how Taleb reconciles his views on probability with respect to Cameron winning the next election in May?

joubert 17y ago

Before one gets hysterical, consider debt as a function of GDP. http://en.wikipedia.org/wiki/File:USDebt.png http://en.wikipedia.org/wiki/File:USDebt.png http://en.wikipedia.org/wiki/United_States_public_debt http://en.wikipedia.org/wiki/United_States_public_debt

bwd2 17y ago
Yeah, but the problem is that the rest of the world is not currently blown to smithereens and in need of American labor and capital to rebuild it the way it was in 1945 (not to mention deeply indebted to the United States as well). The trough of that graph is about the point where Western Europe and Japan managed to rebuild their economies to the point where they could actually compete effectively. The United States has no such competitive advantage at this point.
- joubert 17y ago
  So where is all the US output going?

Estragon 17y ago

This is ridiculous. The financial crisis was not a "black swan." Many people saw it coming and prepared accordingly. It was only groupthink and willful ignorance which kept most people from doing so.

Rexxar 17y ago
It's not a black swan for everybody but it's a black swan for a lot of people.

movix 17y ago

Forget the Black Swan, please God just deliver us from Cameron. Margaret Thatcher when asked what was her greatest political achivement - 'Tony Blair' she replied. Isn't Cameron just a more greasy version of the slimy Blair, Black Swan spotter or not?