Locklin on science

Nassim Taleb: clown of quantitative finance

Posted in finance journalism by Scott Locklin on July 17, 2009

One of my fundamental realizations in life is that popular media in the 20th and 21st century is no better at conveying information than the “yellow journalism” of the Robber Baron era. A corollary to this is that most popular science “experts” are clowns. I realized this almost immediately in physics, as I had the good fortune to meet a couple of the charlatans I admired as a youth. It would be incredibly solipsistic of me to assume that this was only true in physics, but that is in fact what I assumed. Until I gained enough expertise in other fields to see through the impostures.

The most popular pop-writer in quantitative finance at present is Nassim Taleb. His latest screed in the Financial Times is what spurred me to write this post. The article wasn’t entirely written by Taleb -though I guess the other guy is his fund partner, so it is no surprise that it suffers from all the mush headed absurdity of Taleb’s other articles and books. I won’t pick on the other guy; or even mention his name: he’s got a job to do, and he has the good manners to not make himself a public figure.Taleb, on the other hand, is sort of the Paul Feyerabend of quantitative finance. Like Feyerabend, he is well read, a good writer and quite charming. Like Feyerabend, Taleb seems to earn his daily bread by showing up and being kind of witty. Finally, both Feyerabend and Taleb are very much Against Method. This means, effectively, they’re both intellectual nihilists. Feyerabend thought we couldn’t know anything for various reasons too silly to get into right now. Taleb thinks all of quantitative finance is nonsense and we should do away with quants. I am guessing the former’s delusions had something to do with drinking the same Berkeley tapwater in the 1960s which made everyone else believe in crazy things, but Taleb was a trader, and it’s a common prejudice of traders to dislike quants for cutting into their P/L.

nassimtalebauthorrose

A lot of what Taleb says is kind of sensible, and even obvious. Many models used in quantitative finance are bad models. Virtually all models used in quantitative finance are nowhere near as statistically sound as, say, models in physics, or even models in a subject as squishy as psychometry. That is no reason to discard the idea of models, yet it seems to be something Taleb repeatedly suggests. If you can’t be bothered to register for Taleb’s FT diatribe, I will regale you with a few choice quotes. It’s a disjointed and bizarre screed, though at least he nails “excessive debt” as the root of the present crisis -this is correct and has plenty of historical precedent. But then, as Taleb generally does, he takes a fairly reasonable statement and uses it as an excuse to careen off into cloud cuckoo land:

Taleb: “…homeowners and others have been recklessly amassing debt. Such non-linearity makes the mathematics used by economists rather useless. Our research shows that economic papers that rely on mathematics are not scientifically valid. Not only do they underestimate the possibility of “black swans” but they are unaware that we do not have any ability to deal with the mathematics of extreme events..”

Um, where did the nonlinearity come from? I’m assuming from a bad editing job. The larger issue is rather more alarming: one rather wonders if he used mathematics in his research on the scientific validity of these “economics papers that rely on mathematics.” I agree that many economics papers are silly. Since economic papers often involve math, his reasoning seems to be something along the lines of “we must do away with mathematics and instead base economic policy on chicken entrails and pixie dust.” It seems to me, sticking some well motivated error bars on economic models is going to get you farther than the chicken entrails approach. Sure, a lot of it will end up as chicken entrails anyway, but it seems utile to use models as a sort of starting point for understanding the world rather than, you know, actual chicken entrails. You can argue about the validity of a mathematical model -if you’re just using chicken guts, there is little hope. Perhaps a more reasonable approach to doing away with bad economics papers would be to insist all economics papers be written in High Church Latin, since most of the bad ones are presently written in English. Restricting economics papers to people who are familiar with the classics would filter out a lot of shallow thinkers. While I can’t prove this is a more “scientific” approach by Taleb’s lights, I’m pretty sure “write economics papers in Latin” is going have a lot more win than “no more math for economists.” If nothing else, latin means less people will read them, which ought to cure some of Taleb’s dyspepsia.

Later, Taleb, presumably unencumbered with any troublesome mathematical thought, informs us he has come up with a solution to the economic crisis:

Taleb: “The only solution is to transform debt into equity across all sectors, in an organised and systematic way. Instead of sending hate mail to near-insolvent homeowners, banks should reach out to borrowers and offer lower interest payments in exchange for equity.”

By jingo, that’s it! We’ll just transform the debt to equity! Hey, wait a minute … what exactly is this “equity” of which Taleb speaks? In return for lowering interest rates on insolvent home owners … the banks get “equity…” in the form of what? A warrant on the front porch? So in 30 years, when the loan is payed off, Bank of America can open a branch office on your porch? Or do you have to go pay off the warrant too? In the latter case -dude, you’re just making the loan term longer: why not just make the term longer? In that case, why not let t->infinity on everyone’s loans and just pay rent to the bank? We’ll all be rich! Or serfs, depending on how you look at things. Since Taleb and friend never tell us what kind of equity they’re talking about, it is rather difficult to assess this proposal. I guess since they never bothered doing so, we can just assume they are merely waving words around. I fear for America should anyone attempt to implement a solution which is based on waving words around. Oh, wait a minute… too late!

Mountebanks like Taleb sell their wares by making the regular jamoke reading his books and essays feel fiendishly intelligent for understanding the concept of fat tails at the expense of all those pointy headed Ph.D.’s in the back room with their slide rules and white laboratory jackets. I think there would be a lot of social equity in doing this, except, the dudes in the white laboratory jackets are well aware of those fat tails. As such, Taleb is merely setting himself up as some sort of heretical alpha monkey of the quants for stating the obvious, the misleading, and occasionally the gratuitously wrong-headed and untrue. One of the annoying things about all this, is his fame has given him access to vast amounts of capital … capital which would be better off invested in T-bills. His strategy of betting on the fat tails has a miniscule Sharpe ratio, though it is hard to tell how bad, as his returns don’t get published in the IASG. Sure, his strat looks like genius during the occasional downturn, but the rest of the time (which is most of the time!) he looks like a plain old bear in a bull market. There are far more successful and long lived funds, as I have already pointed out which trade the inverse of the Taleb “swan strategy” at very high Sharpe ratios. They even win in “black swan” events if they manage their money correctly. Taleb’s strat will only strike paydirt when the poop hits the prop. The poop doesn’t hit the prop very often, almost by definition, no matter what kind of fat tail your black duck has.

black_swans

So why do people listen to this guy? Part of it is doubtless the “famous for being famous” effect. Taleb is witty and clever, and ruthlessly promoted himself as a public figure after his trading days were over. Not a bad strat for success in the modern media culture: grab the megaphone and declare yourself a genius. Everyone wants to think they’re more of a mental bigshot than the eggheads who run things. Plus, it’s not like Jim Simons has time to write Financial Times articles. He’s too busy making money more or less proving people like Taleb wrong.

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202 Responses

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  1. RSM said, on July 18, 2009 at 1:46 am

    I never got that guy before (good call on the Feyerabend — concentrating on “black swans” to disprove the rule is very counter-inductive logic) but transforming consumer debt into equity is insane enough to get me to write in. Converting corporate debt to equity is all the rage right now but the problem is, as you note, that you can own a piece of a corporate borrower but aren’t there laws against indenturing consumers?

    • Scott Locklin said, on July 18, 2009 at 4:12 am

      Taleb’s proposal is truly frightening -especially since I know for a fact there are very powerful people listening to this ding dong. I have otherwise sensible friends who hang on his every word. As old Virgil said (in Latin, dammit!)
      “Quicquid id est, timeo Danaos et dona ferentis.”
      “I fear the Greeks even when they bring gifts”

      • Michael Griffiths said, on August 26, 2009 at 3:03 am

        It’s been over 10 years since I took Latin – and only to GSCE level – but I think that quote really says:

        “Whatever it is, I fear the Greeks and the gifts they bring.”

        Not that it matters. Your translation is colloquial.

        Also: subscribed (in Google Reader).

        Best line:

        “Mountebanks like Taleb sell their wares by making the regular jamoke reading his books and essays feel fiendishly intelligent for understanding the concept of fat tails at the expense of all those pointy headed Ph.D.’s in the back room with their slide rules and white laboratory jackets.”

        Hilarious! And true; then again, a lot of business books read like that.

        • frint frinterson said, on October 8, 2011 at 9:38 am

          utile? Really?

    • paul said, on November 17, 2009 at 4:54 pm

      What about bank’s debt converted into equity ??!!! This was after all the quantitative easing, only Taleb transferred the concept to individual consumers.

      While many of his statements may be outright obvious, so it was the use of CDS’s and financing the federal defficit…both of which propelled us into a massive crisis that was benefficial to the few that were networked in a criminal joint….since money are nevr lost, they just change hands….

    • BW said, on January 18, 2011 at 8:05 am

      Hey Scott-

      First time reader here, and I can’t tell you how glad I am to have found this post.

      Why is it so hard to find readers who aren’t standing with an arm extended, cup in hand, ready to catch the torrential downpour of word slobber that rains from this guy’s mouth.

      The Black Swan book? Really, it’s like Taleb found a way to fill his publisher’s ink cartridges with crap before having the manuscript sent to the printers.

      Should it really take anyone 300 pages to articulate something so obvious as the fact that we operate on limited, sometimes flawed information and consequently events which we didn’t or couldn’t foresee eventually (actually, frequently) come to pass?

      Look, I’m in agreement with Taleb in general. Intellectual skepticism needs more advocates and, well, so does reading for that matter. But Good Lord! I found only about 4 actual ideas between the front and back covers and as far as I could tell none of them were original.

      It’s clear the guy is well read and knows a few languages but…

      Well, I don’t know…

      Maybe Taleb IS in fact the genius he sets out to prove himself to be. After all, he did come up with a seemingly valid formula:

      An obviously true thesis + a good hiding spot deep within a jungle of the names and ideas of too many historical figures + an unprecedented amount of pretentious intellectual peacocking + target readers who have likely devoted most of their time in school to figuring out how to make money rather than thinking = a boring book + the the praise of status hungry dullards at cocktail parties + financial success.

      For his next book, a treatise on the etymology of the word ‘prolix’…

    • tom j said, on January 29, 2011 at 3:02 pm

      …the counter idea is exactly what? Massive foreclosures? Is the idea that corporate debt should be taken away by taxpayers through bailouts without some equity on the taxpayers part, some deal, something to stipulate terms rather than to give away with no rules? Or the collapse of the economy?

      I think people really do not get Taleb. There is already equity by lenders when they make the loan to homeowners. So rather than foreclosure a renegotiated equity. Surely this is better than chaos and the resultant domino of debt passed on to taxpayers and pension funds and school systems and city and state governments that have idiotically invested in risky schemes.

      Social chaos such as 8000 people living in the woods around Orlando Florida is going to produce what?

      Indenturing consumers and taxpayers is already happening though things like the national debt…wrecking the entire finance and governmental system is not an alternative to trying to do something rational even if it is distasteful.

      Who wants to take equity in shaky loans? Someone who would prefer something to nothing.

  2. RSM said, on July 18, 2009 at 1:48 am

    I will grant Feyerabend that hot wife though.

  3. Tom said, on July 19, 2009 at 9:52 pm

    Finance is not physics. Home mortgages or credit card debt do not behave like atoms or billiard balls. Treating debt like a force of nature was inappropriate. True risk was minimized by the numb of the math and hidden relationships, like hedges.

    This is a big and unfair game. An example came to mind recently of an early indicator of what the sharks could do. The clip is from the LA Times. I live in Viginia

    Nation IN BRIEF – VIRGINIA – Syndicate to Get Big Lottery Prize – March 10, 1992

    Virginia lottery officials have decided to award a $27-million jackpot to an Australian gambling syndicate after concluding that the winning ticket was not bought in violation of lottery rules, state officials said. That means the bold gamble by the Melbourne-based group of 2,500 investors to buy out the record Feb. 15 drawing paid off, even though the group fell short of buying all 7 million possible ticket combinations.


    Isn’t that cool – buy all the combinations of tickets and you will have the winning ticker. The logistics of buying at 7-11 kept them from getting every combination, but they still got the ticked. Lottery officials later put in place rules that limited the number of tickets that anyone could buy at once. I think it was called Glass-Stiegel.

    With the right formulas, the market can be moved, manipulated and milked for the big money. That is a fine application of mathematics.

    Oh that’s right, people kill people, math doesn’t.

    • Scott Locklin said, on July 19, 2009 at 10:25 pm

      Smart people will always prey on stupid people or things like lotteries wouldn’t exist. I still don’t think we should enslave ourselves to banks via “equity.”

    • Peter said, on December 19, 2010 at 2:37 pm

      I’m sorry, where is the mathematics here and what is your proposal? Disarmament? Lobotomies? Might it not be a better idea to level the playing field, or convince our legislators that mathematics can be used for something other than price obfuscation (sorry, I meant to say ratings)?

      I suppose the ‘math’ becomes marginally more counter-intuitive in the case where there is no jackpot. Then depending on the ‘take’ and the relative number of investors versus combinations you can still win thanks to Jensen’s inequality (look it up). The non-mathy explanation is this: if you buy lots of distinct tickets you have information about the distribution of lottery tickets already bought (namely, your own) so your remaining bets can be over the odds.

      -Peter

      PS: Hang in there Scott and click through to your Christmas present. Remix as you wish.

  4. wilderr said, on July 20, 2009 at 4:20 pm

    When I originally read the piece I actually laughed out loud @ “Such non-linearity”.

  5. [...] do people listen to Nassim Taleb?  (Locklin on science via [...]

  6. Marci said, on July 20, 2009 at 6:40 pm

    Thank you, this was a very satisfying putdown. It echoes my sentiments in full, while putting it much more eloquently than I could.

    Would you be up for doing the same for Taibbi’s Vampire Squid article or would that be too much like taking a kid’s lunch money?

    • Scott Locklin said, on July 20, 2009 at 7:28 pm

      Taibbi is a rabble rouser, and the things he says are occasionally annoying, but let’s face it; Exile and Rolling Stone, as entertaining as they may be, are for people who sniff glue and wank to Chomsky essays rather than make financial policy. Taleb is supposed to be for the smart kids.

      While the Vampire Squid essay wasn’t terrible, the more recent one, decrying Goldman for not exploding and taking the economy with it, was just stupid.

      Thanks for the kind words.

  7. Tom said, on July 20, 2009 at 7:34 pm

    We are already enslaved by global banking. We’ve been honored to serve them by paying for their losses so they could continue playing with the market and creating unpayable long term debt for the benefit of their upfront fees and monthly fees on individual perpetual debt. This is where, it seems, the models failed. They could not recognize unpayable debt.

    The old rule was you could afford to buy a house 2.5 times your annual income. It required a 5% to 20% down payment. If you didn’t have the savings or the income to qualify, you rented, sharing with friends or family. Letting that rule slide, enabled exorbitant debt to be created. If you can build a home for $150,000 and sell it for $300,000 – lots of profit in the short term. But, housing is a commodity. Overbuild based on households having multiple homes, speculation, etc. and the commodity value can drop when the market is overbuilt. All those inflated, speculative assessments retreat as “real need” gets back in the picture. Families do not really need 4,000 square feet. In fact, they can get by with 850 to 2,000 sq. ft., as was done in the very recent past.

    The upward trend was enabled by easy credit. The unreality of the trend could not be understood by those in its midst. Some recognized it was a bubble and danced with it, but got caught when the music stopped. So, many “smart” people have been hung out to dry along with their families in this crisis. Some may be living with their parents or in their cars.

    Lotteries are long shot gambling bets, but the States that run them do have the means to pay off the winners. Bookies need enough to cover their payouts too. Their customers can be as rough as they are. Those that placed bets on Wall Street were not so lucky because there was/is no “house” that was making sure that all bets were covered. We taxpayers have had to cover big debts under threat of collapse of the financial system. This is the ultimate protection racket.

    Taleb saw the risk – wrote about it. I read his books early, but really did not understand. Once the credit markets froze up, Jim Cramer explained it best when he noted on air that stocks were falling because “people were selling their good assets to cover their bad bets.” Many then learned the true meaning of illiquid assets. When everyone is selling and there are few buyers, prices drop. Markets could really drop on low volume days. Few buyers and those that had to sell took the price offered, low ball or not.

    Markets had bid up the value of assets with easy credit. Too much debt was created. To avoid complete deflation, government policies are pumping out money to reinflate markets. A lot of that money is now showing up in the stock market indexes, because it has no real place to go.

    Businesses are hard to start, maintain and grow. Overnight success takes 20 years or more. Persistence with intelligence can lead to financial success in relatively stable environments. There is also dumb luck. Smart or stupid? If the system has been compromised, who can really know?
    We live on an experimental planet. Human skills at organizing for perpetuation of the Human Race are coming up a bit short. An evolutionary system where the strong dominate the weak sounds fine if you are among the strong, but strength is not permanent and weakness is relative. Taleb saw the problems, as did a few others. They don’t necessarily have the ability to come up with the solutions.

    Max Keiser said “banks can’t make money in daylight.” Transparency may be the solution, but arguments for trade secrets and proprietary knowledge protections will block access to the smoke and mirrors.

    That’s why firewall prohibitions like Glass-Stiegel were put in place. A governor on a motor keeps it from running too fast. Why? lf it runs too fast it may blow up, wear out prematurely, lead to a crash, etc. It is to manage risk. People who do not have the experience of the downside, won’t appreciate the risk.

    Efforts to manage risk in cars, like seat belts, air bags, better breaks, better roads – lead to higher risk taking by those who feel safer. We are in the play out of an economic wreck. Many say we’ve never been here before – its not like the 1930’s. The finance industry hasn’t even had the Steve Urkel moment of semi-awareness to ask, “Did I do that?”

    In terms of failure of intelligence, it seems that the economists are at the top of the heap because they were unable to understand the financial manipulation of markets. The statistics like CPI were modified over time to hide and minimize the inflation that was being experienced.

    Kevin Phillips has documented the history of financial engineering and in: “Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism,” wrote:

    “Between 1987 and 2007, debt—in all flavors, from credit card and mortgage to staid U.S. treasury and exotic Wall Street—became one of the nation’s largest, fastest-growing businesses. Over those two decades, so-called credit market debt roughly quadrupled from nearly $11 trillion to $48 trillion. This was abetted by a revolution in marketing, packaging, and propaganda—in reality, public debt wasn’t the big ballooner, private debt was. Without much publicity, the financial services sector—banks, broker-dealers, consumer finance, insurance, and mortgage finance— muscled past manufacturing in the 1990s to become the largest sector of the U.S. private economy. By 2004–6, financial services represented 20 to 21 percent of gross domestic product, manufacturing just 12 to 13 percent. And finance enjoyed an even bigger share of corporate profits.

    “‘Risky’ doesn’t begin to describe this new focus in the American economy. Bingeing on debt is reckless, and financialization has a long record of being an unhealthy late stage in the trajectory of previous leading world economic powers. Moving money around instead of making things is always dicey, and the U.S. transformation has been the most grandiose to date.” http://www.bad-money.com/excerpt

    Again: Smart or stupid? If the financial system has been compromised, who can really know?

    Knowing that the modern financial system players only wants everyone to be eternally in debt and paying fees can help people say “Know” or the executive summary “no.”

    There was a SNL sketch with Steve Martin that captures the idea:

    Transcript: http://snltranscripts.jt.org/05/05lbuy.phtml

    • Scott Locklin said, on July 20, 2009 at 8:07 pm

      I think Steve Martin sums it up well. I don’t really feel like I’m enslaved to banks, as I didn’t march out and buy a levered house along with all the other lemmings. As such I also don’t think that “Cross of Gold” speeches are justified. The problem of excessive national debt has its roots in individual choice, character and democracy. Americans want lots of stuff, services, and to live like the rich and famous without actually working for it. This is a structural problem with democracy and human nature well attested to by the founding fathers. Personally, as one of the 10% that pays for everyone else’s government services, I feel much more put upon by the continued existence of idiocy like the “department of education” than banks. $100 billion a year for a bureaucracy which didn’t exist until the 1980s … and education was better then. Yet, the very idea of getting rid of a worthless, and possibly harmful bureaucracy seems like heresy, because it contains the holy word, “education.”

      Taleb is certainly setting himself up to sound like a sort of modern day Isaiah because it gets him on television, but the fact of the matter is, he didn’t foresee what happened any more than anyone else did. That’s why you “didn’t understand” what he was saying: he never said it. The fact that there aren’t any prophets was one of the few valid points of his first book, and it’s annoying as hell that he’s setting himself up as one now. Yes, excessive cheap debt is a problem, along with doing away with short uptick rules, changing leverage rules, changing home equity rules, and a whole host of other regulatory things that went pear shaped in the last decade.

      • Steve said, on August 2, 2009 at 4:29 pm

        “The fact that there aren’t any prophets was one of the few valid points of his first book, and it’s annoying as hell that he’s setting himself up as one now.”

        I believe the entire book is valid. Please negate one of his other views, I’m curious.

        The advice Taleb gives is simply his visions from the black swan applied to the real world. Note that he’s mostly saying what NOT to do any longer. He’s mentioning mechanisms that are too risky and need to be cut out of existence.

        It’s amazing how many people have been willing to lend credibility to crackpot models for years while this guy has been pointing out the flaws in them. Now that it’s all gone bust and the guy proposes a few ways to change, again no-one listens. It’s just sad..

      • Marsnotheplanet said, on September 21, 2011 at 9:19 pm

        Yet his skeptical position could make him appear as “less wrong”, as recognizing one’s knowledge limits is better than put them on a faulty model. It’s an effort to distinguish the map to the territory, as i understand. Plus, you’re telling me it’s supposed to be written in a kinda ‘buisness book’ stile – which would only add.

    • Daniel Reeves said, on August 19, 2009 at 6:00 pm

      “The statistics like CPI were modified over time to hide and minimize the inflation that was being experienced.”

      No. The CPI methodology was only modified once. By the Hoskin commission, because the CPI overstated inflation. Other than that, have fun finding any evidence that economists are tinkering with the methodology for collecting basic statistics like that.

  8. David Harper said, on July 20, 2009 at 10:18 pm

    First, your writing is brilliant, you have mad skills. i am laughing and i am looking words up (mountebank, jamoke? hilarious! … am i supposed to know ‘jamoke’ … when the poop hits the prop…what a fun read)

    Second, absolute nails sentiment that Taleb engenders, I”ve read his books and i’ve listened to him, but he never seems to get beyond the obvious (fat tails, gaussian distribution…yes…we know that…thanks…) he didn’t convince me that he actually is a true quant with a meaningful, progressive self-critique. This makes sense of the posturing.

    David Harper

    • Scott Locklin said, on July 20, 2009 at 10:39 pm

      Well, to his credit, Taleb wrote a book on volatility trading which was pretty good for its day. More a collection of notes and Mathematica plots than a real book, but whatever: nobody else wrote one. Now that we have Euan Sinclair’s book, it’s kind of irrelevant.

      Thanks for the kind words. I’ve honed my writing for years, making fun of idjits on the interbutts. I’m trying to turn my bad habits into something more constructive these days. It offends me deeply that people pay attention to clowns like Taleb; someone has to put the red nose on this bozo’s schnozz.

  9. Keating Willcox said, on July 20, 2009 at 11:00 pm

    The true hero is not Taleb, but Reddy, the master of India’s banks, who kept sanity during an insane time. India and China are doing fine, thanks very much, due to their restraint and maturity. Taleb’s point is simply to identify the flaw in quant models that kept regulation from doing its job in the last decade.

    Had George Bush called all the major banks and firms from Wall Street together in 2002, and said, if any of you manipulate prices, or pass through bad loans, or undermine our system’s integrity, we will force a run on that bank, jail its owners, destroy it, and distribute its assets to its competitors…..that would have stopped the manipulation and run up of gas in 2008 by GS, it would have stopped toxic assets, and it would have limited damage due to derivatives abuse.

    I hold Bush responsible for all of this…Taleb’s book is entertaining. Where is the book from India that talked about Reddy adn his ideas. That’s the book we needed.

    • Scott Locklin said, on July 20, 2009 at 11:11 pm

      Taleb never to my knowledge pointed out a flaw in any quant model dealing with financial regulations. To my knowledge, he never complained about the insane leverage rules, the death of the short uptick rule, or even excessive consumer debt. He was too busy talking about pigmented chickens, how VaR don’t work, and telling the world that quants are stupid. Quants didn’t make the mess; if you want to demonize a group, demonize Ivy League MBAs and corrupt regulatory practices. Also, all those idiots who spent all the equity in their houses.

      Had George Bush or anyone else been prescient, they might have spoken up when Wall Street creeps decided that they didn’t need any stinking regulations. The fact of the matter is, nobody noticed what they were doing. The present administration shows no signs they’re interested in any of these problems either, marching in goose step fashion to whatever Goldie Stix tells them what to do.

      I don’t know this Indian fellow, but if what you say is true, his bank will soon own America anyway. Problem solved.

      • Anshuman Mishra said, on July 27, 2009 at 12:25 am

        Reddy doesn’t own a bank; he runs India’s central bank. Sort of like Bernanke.

        Great article btw. I used to adore Taleb’s FBR, but that was before I entered the world of finance and trading. Taleb tends to repeat the obvious, and so TBS didn’t do too much for me.

    • jbr said, on July 21, 2009 at 12:33 am

      Uh oh….

      Yes, Reddy’s handling of the regulations were much better. But, India’s central bank is too conservative. The central bank also manages the public debt so there are institutional problems and folks have been crying for reforms since forever. 70% of India’s banks are nationalized anyway for the last few decades and now they have an excuse to keep them nationalized.

      Regarding China. On govt order, most of their stimulus is pushed out by state owned banks as low (0%) interest rate loans. Ofcourse they are doing “fine”! But please don’t say its because of restraint and maturity.

      Its amazing how people in the US have started looking towards India/China with the feeling that whatever they are doing is good and correct. Remember, those are emerging economies and given the low absolute level they are at, high growth there is not the same thing as what that growth would imply for a developed economy.

      • Abhi 2.0 said, on May 30, 2011 at 6:29 pm

        Hi,

        1. As an Indian business journalist I’m not sure if I agree that the ossified Reserve Bank of India deserves great praise (their confusion about regulating PayPal in India being a point in case). There’s a saying that a broken clock is correct twice a day ie. even if you don’t do ANYTHING, you might land up looking better than the rest every now and then since zero is higher than negative! So basically by being ULTRA conservative they didn’t get screwed – but the Indian economy probably didn’t enjoy some of the growth that it could have.

        2. In Taleb’s defence, yes BS (ironic acronym in light of this post) was repetitive and possibly simplistic for the audience of this blog but his point has always been that it’s a “literary work” and is PRECISELY for the non-academic, non-quant, possibly non-smart audience. It’s like saying Feynman was an idiot because he wrote popular, often goofy books… that doesn’t mean the Nobel isn’t legit! Taleb’s academic papers/writing have not been found wanting (to my knowledge).

        3. Modern media IS a circus and to get attention you HAVE to be a clown. So when Cramer does his antics on CNBC it’s not because he was a lousy trader (aren’t his funds’ records widely available?) but because he has an added skill of knowing how to be an entertaining clown. If Taleb’s goal IS to give his message to more people, then being a clown is pretty much the right strategy. As a computational physics student in college back in 2001, I found Fooled By Randomness to be a terrific read. Now as a journalist, I find BS to be a terrific pop book …

        • Abhi 2.0 said, on May 30, 2011 at 6:36 pm

          Read *case in point* in second sentence of comment above! 2PM blog trolling #FAIL :)

  10. Charlie Lefaux said, on July 20, 2009 at 11:28 pm

    I completely agree. Taleb is useless.

  11. jbr said, on July 21, 2009 at 12:20 am

    I am not looking to defend Taleb but I have a couple of comments on the issues under question. I don’t like his self-aggrandizing either and think he’s just selling his books when appearing in the media… but on the flip side, too many people who present themselves well have sold the wrong ideas and I find his ideas better than most.

    Scott, you are not fully quoting his passage on the non-linearity jibe. Agreed that the point is not put across well at all. But, he is talking about the probability of extreme events. Typically, financial time series obey power laws and so have infinite variance (and infinite higher moments). His argument is that one can’t really do much mathematically when the variance is infinite. Most econ papers talk about variance and that is pointless – of course his article does not give the context and does not make this point properly.

    Secondly, I’m not sure that conversion of debt to equity is absolutely a nutty idea. Couldn’t banks take equity and then create distressed asset funds that can be invested in? Couldn’t this be done as the PPIP with government oversight? The question would be if it is a better option than foreclosing (which is conversion to equity anyway) in terms of getting better prices (investor interest?) and slowing the price spiral down. Maybe its a bad idea because it sounds too much like the prior securitization and packaging of the loans in the first place? :)

    Lastly, Taleb takes a course at NYU’s financial math program and hires from NYU for his funds as well so he can’t be against fin math completely. He has most of the time railed against MBA risk courses instead. It may drive you livid to find him teaching students but atleast he’s chaperoned by Jim Gatheral. :)

    http://www.math.nyu.edu/fellows_fin_math/gatheral/case_studies.html

    • Scott Locklin said, on July 21, 2009 at 2:40 am

      Tail probability and non-linearity are not even orthogonal to each other. I could quote the whole article, and it still doesn’t make any sense.

      As for banks “taking equity” in order to even have this discussion, we need to answer my question of exactly what equity are they taking? They’re already repackaging loans; that hasn’t changed, and won’t change. What is this “equity” of which you speak? If it was a corporate loan, it would be something like a warrant on the assets of the company. But he’s specifically talking about homeowners. Bank already gets the house if you stop making payments: what else are you offering them to lower their rates? Kidneys? First born children? Mineral rights?

      • jbr said, on July 21, 2009 at 3:06 am

        Why? equity in the house – to reduce the loan value for the loan holder.

        As you say the bank already gets the house on foreclosure. But, the point is to avoid foreclosures and the price spiral that happens along with it since the banks have to sell on short notice, cannot maintain properties for long, etc. So, the bank might prefer to reduce the loan value by 10% if that keeps the loan holder in the house in exchange for 10% ownership (which the bank can sell to others). Instead, if a foreclosure happened maybe the bank would have had to mark down 20% so they benefit. When the house is re-sold, the bank gets 10%.

        • Shane Dempsey said, on May 22, 2010 at 12:50 pm

          To be honest, I read this article and thought the exact same thing. Taleb is an economic blunderbuss but he actually makes some good points when you get beyond his hyperbolic way of putting the point across. It is arguably economically desirable to keep the home owners paying for a reduced equity stake in the property as a) there’s a greater write-down and legal costs to evict them b) evictions contribute to socioeconomic uncertainty which impedes growth c) the bank can sell on the equity. Taleb isn’t seriously suggesting the bank opens a branch on your porch. His response makes even more sense in the context of countries with different personal bankruptcy laws thank the US.
          Taleb can’t be against mathematics as he hires mathematicians in his company. What he objects to most, from my reading, is those who will happily calculate pricing based on black-scholes and treat the result as sacrosanct. He attacks the quants but most engineers I know are reasoanble and understand the tolerances of their work. The blame is more easily levelled at managers who want soothsayer accuracy to justify even more aggrressive trading rather than reasonable models.

          He uses the term “non linear” to refer to equations of chaotic systems and he often refers in direct or indirect ways to mandelbrot’s work on fractaline behaviour in cotton prices. jbr points out that Taleb makes the points badly but it’s his usual way of making that point which is big on idiom and low on specifics.

          It’s a funny article definitely & I agree that Taleb acts the clown but he’s no without his good points. It will be interesting to see if his collaboration with Mandlebrot bears any fruit. What would be interesting is re-evaluating Black Scholes in the context of fractal (rather than geometric) brownian motion. There’s quite a bit of research in this area already but Taleb’s team doesn’t appear to be contributing to it. There’s a neat example on the wolfram demonstrations site at http://demonstrations.wolfram.com/OptionPricesUnderTheFractionalBlackScholesModel/

          • Scott Locklin said, on May 22, 2010 at 6:15 pm

            One of the problems with references to chaos is it doesn’t really apply to financial prices. Tons of work on this in the 80s and 90s when the chaos boys were short of work and hoping to get hired the way the stat mech dudes were. The conclusion is pretty much universally, “too much random noise: no chaos.” It should have been obvious from the start, really. I admit it wasn’t to me, hence my reading in this subject.
            Fractional B-S … meh. Nobody really uses Black Scholes for what people say it’s used for anyway. B-S is more of an idea than something for calculating prices. One of Taleb’s few valid points is most options traders don’t know a thing about stochastic calculus, and they actually *make money* on pricing options.

            • Leon said, on December 22, 2010 at 1:59 am

              I’m a non-finance guy, but I have been interested in the idea of Black Swans in general life terms.
              I think Taleb has a verbose and somewhat incomprehensible way about him that maybe comes from having English as a second (or third?) language. I have friends with a similar tone, where what on the surface seems gibberish actually has some sense to it if you dig deeper into the possibly misused terminology (non-linear, fr’instance).
              As to his ideas: most of his argument seems to be that people don’t know nearly as much as they think they do and all the big changes + or – catch us unawares. From historical evidence I think this is hard to refute, and the regular clusterfark occuring on Wall St and beyond would seem to argue that the world of finance is more rather than less prone.
              I dunno, I put my money in the bank and rent.

  12. [...] out Scott Locklin’s brutal takedown of our favorite blowhard, Nassim Taleb. The only part I disagree with it where Locklin calls Taleb [...]

  13. Malkhos said, on July 21, 2009 at 4:29 am

    Actually, you look at sheep’s entrails. With chickens, you observe whether and what they eat and drink, and in general how their behavior varies from their routine.

  14. Cassandra's boyfriend said, on July 21, 2009 at 4:44 am

    Taleb gives the impression that quant models said bet the house, and so the suits went ahead and bet the house. Rather, the suits wanted to place big bets and milk the system, and told the quants to supply ass coverage. Many quants did that, altho’ some balked and were told to shut up and go back to their workstations.

    Easy credit led to a house price bubble. That bubble made life much harder for first time home buyers, but generated large unrealized capital gains for those who already owned are residence. The latter far outnumber the former, so that house price bubbles are popular. Those who point out that such bubbles are a fool’s paradise, driven by easy mortgage money, are Cassandras, and we all know what happened to her.

    I don’t necessarily defend Taleb’s equity suggestion, but here’s how it could work. In exchange for reduced monthly payments, the bank would receive x% of the proceeds from the eventual sale of the house. I think it’s feasible. It could also be intensely unpopular.

    Taleb is trying to make money by appealing to the populist rubes who rightly hate the arrogance and easy money of the finance industry types. Same sort of people who read and enjoyed Liar’s Poker. Some of his argument are well taken. But I doubt that the best way forward out of the present morass is to adopt Taleb-speak wholesale.
    The problem is that Black Swans always come out of left field, and so are hard to think about in quant terms.

    Because equity is the only insurance against Blacks Swans, I make the following simpler suggestion. All OECD economies should pass a law requiring that the down payment on the purchase of a house or condo be at least 20% of the buying price. Furthermore, the Board of Governors of the central bank should have the standby authority to raise that percentage at its sole discretion.

    • Scott Locklin said, on July 21, 2009 at 4:31 pm

      Those are solid proposals that people can talk about. Congratulations: you deserve to be a financial pundit a lot more than NNT does.

      I guess if I were in foreclosure, that sort of warrant on my house might be appealing, depending on its size and whether or not it ever expires. But mostly that doesn’t look like a very good deal. A point off my rate in return for $100k or whatever? In real life, that’s not a point of my rate; again, it looks a lot like some weird form of debt slavery. Also, you ain’t an unemployed structurer are you? Securitizing that kind of equity looks like a perpetual employment program for propellor heads!

  15. SP said, on July 21, 2009 at 10:25 am

    You can’t use the Sharpe Ratio to discuss anything so your arguments in the last paragraph are meaningless…. If you understand (which I doubt) anything about scaleable finance you know not to mix gaussian and non-gaussian….. but this is all probably over your head

    • Scott Locklin said, on July 21, 2009 at 4:09 pm

      OMG, Nassim; you found my LJ, I iz undone!

      • Anshuman Mishra said, on July 27, 2009 at 12:29 am

        Hahhahaha! Hilarious…

  16. [...] 21, 2009 · Leave a Comment …sez Scott Locklin in a rather amusing and devastating takedown of Nassim Taleb and his writings. A nice antidote against the rising dogma of Black Swan-ism: One of my [...]

  17. [...] 21, 2009 Scott Locklin dismisses Taleb in a recent post. I won’t get into the quant debate, as I’m not qualified to judge, but I will pick up [...]

  18. bevo said, on July 21, 2009 at 3:23 pm

    You have provided an interesting comment to Taleb, but there are several things you are missing.

    For example, Feyerabend. Actually, you should lump in his less revolutionary contemporary Kuhn because both philosophers ushered in relativism, which took root in many social sciences but not economics. Feyerabend’s writing is turgid at best. His logic is nearly absent.

    However, Taleb is not a relativist nor is he logical positivist, which is what most economics faculty are. He is a falsificationist. In my limited experience, most research methodologists are falsificationists.

    Now, you may believe that Taleb’s logic and writing are comparable in lack of substance and ability Feyerabend. That’s your belief. Your implicit argument, though, is that they are kindred philosophical spirits. And that is simply incorrect.

    If you want to make that argument, then you need to look at Popper. Indeed, Taleb’s writing and logic are much closer to Popper than any of the relativists.

    Another problematic example comes from Taleb’s disdain for mathematics in economics. He has misstated his case. A minority of economics, finance, and marketing faculty believe that economics has become nothing more than calculus. Taleb’s disdain comes from falsificationists’ philosophy. There are two types of theories: theories that have been disproved (e.g., Newtonian physics) and theories that cannot be disproved given current research methods.

    Economics, and by direct extension, finance’s (over) reliance on calculus reduces the world to the first derivative. Unfortunately, much of the world cannot be quantified. If something is not quantifiable, then you cannot take the first derivative. Now, we are getting to the heart of Taleb’s argument.

    Many economists and, by direct extension, financiers thought they had quantified all forms of risk. By quantifying all forms of risk, you can compute the first derivative. Taleb and scores of others argued that all risk cannot be quantified. Taleb made this argument long before the publication of Black Swan.

    Indeed, scientific empiricists joined the fray because they too like the falsificationists understood the limits of these calculus based models. Further, other economics and, by direct extension, finance models rely on a variant of regression, or econometrics, which is a system of simultaneous equations.

    However, like their calculus-based brethren, regression as used by economists and, by direct extension, financiers, as well as econometrics rely on table data. When was the last time, an economists or financier actually collected survey data? Go back for the last 30 years in any economics, any finance, and certain marketing journals. You will find a complete removal of data collected by survey. It is all table data.

    The falsificationists howl in protest because other tools such as survey would disprove some theories as well as many assumptions made in economics, and, by direct extension, finance. Scientific empiricists yell foul because the knowledge in economics and, by direct extension, finance has ossified caused by this measurement rigidity.

    Researchers can examine risk with a simultaneous equation that includes latent constructs instead of only formative constructs that are used exclusively by economics and, by direct extension, finance models. Indeed, MIMIC or mixed use models that include both latent and formative constructs have gained acceptance for, among other purposes, understanding the nature of risk.

    To find these models and discussion, you have to look beyond economics and, by direct extension, finance. Taleb has made his mark because he is one of the first in his discipline to raise these points. It helps that he has a strong ability write and craft a story.

    There are issues with Taleb. His arguments miss steps. He assumes the reader knows more than is likely. Most Americans have never taken a philosophy of science. Few bothered to take a statistics course, and almost none complete a statistics course that goes beyond OLS regression. How many Americans completed a research methods course that included or focused on junk models and the misuse of data?

    Let’s assume that 20% (and I being generous with that figure) of Americans who completed a bachelors’ degree (and the majority of Americans lack a bachelors’ degree) completed higher levels of statistics, a philosophy of science course, and a research methods class. How many of those 20% actually understood the class? Not many.

    Yet, Taleb’s writing makes all those assumptions. If you can fill in the missing steps, then you will find that Taleb provides a strong argument for why and how we got to this point.

    • Scott Locklin said, on July 21, 2009 at 4:15 pm

      Yeah, I could make up a whole story “filling in the blanks” about how Taleb actually is the clever monkey he says he is. Or I could make up a whole story “filling in the blanks” of how we’re not in an economic crisis. Or I could just concentrate on what Taleb actually said in both his books, essays and his wacky Financial Times article.

      I disagree with your comparison of Taleb to Popper. Popper would write things which occasionally made sense. Feyeraband and Taleb seem to be more of the “makin’ raspberries” school of disputation. Throwing Kuhn in there … at least Kuhn eventually repented of his sins.

      • Kyle said, on July 21, 2009 at 5:44 pm

        The remark that Kuhn “eventually repented of his sins” is an overstatement (not to mention a smugly biased representation of Kuhn’s original arguments). What Kuhn actually said later was that things were more complicated than he had argued way back in the 50’s (when he originally developed the ideas in _Structure of Scientific Revolutions_) — a not-unusual development as one’s career as a scholar unfolds through the years.

        Also, bevo’s calling the writing of Feyerabend “turgid at best” is a bald generalization, and is of course as wrong as most bald generalizations. The lucidity or turgidness of Feyerabend’s writing varies depending on the type of text you’re reading and what period of his career the text is from. Unwise to make sweeping generalizations like that if you haven’t read the body of work as a whole.

        Then again, bevo’s remark about Feyerabend probably isn’t as silly as those by Scott himself in his original post. The idea that Feyerabend was saying “we [can’t] know anything” is pretty far off the mark. I suppose one can come away with that impression if you’re reading him very superficially but, in that case, I can’t help but wonder if the evaluations of Taleb are just as superficial (which I’m not in a position to know, since I’ve never read Taleb). Finally, the suggestion that Feyerabend’s signature positions were dependent on the climate of Berkeley in the 60’s is also muddled: he had begun to develop the line of thinking found in _Against Method_ long before he got to Berkeley. It reaches as far back as his time as a student with Popper, and his own experiences as a physicist leading him to the conviction that Popper had it wrong. (There’s more to it than that, obviously, but the roots of his thought go at least that far back.)

      • Scott Locklin said, on July 21, 2009 at 6:06 pm

        Heaven help us for using turgid generalizations! Seriously dude: have you ever been paid to do useful work, or are you one of those basement dwellers who refuses to leave academia for fear your only potential contribution to society is a passing familiarity with multi-syllabic words?

        Doubtless *many* 1960s Berkeley nitwits were having their, um, “realizations” before the 1960s, you apparently can’t read, and you are adding nothing to this discussion.

      • Kyle said, on July 21, 2009 at 6:20 pm

        Ha! I was being paid to do (hard) useful (non-academic) work long before you learned to bring clever, erudite idioms like “seriously, dude” so reflexively to the tongue (or fingers).

        No matter — you’ve revealed your true colors. It becomes clear that Mr. Locklin’s ace-in-the-hole argumentative strategy is … the ever-popular ad hominem.

      • Scott Locklin said, on July 21, 2009 at 6:34 pm

        I don’t know why you’re upset: you post a 3 paragraph straw man attack that has nothing to do with anything I’ve written, and cast aspersions on my character … and you expect, what? Sloppy wet kisses from me? You’re an idiot: get off my blog until you have something relevant to say.

        • nasseem taleb said, on October 17, 2009 at 8:05 pm

          come on scott ,
          they are fairly sound and reasonable comments from kyle ….
          maybe he gets personal a bit quick … if you are wrong you should learn from it …if you are not you should reply with a little more care ……

  19. lmk89 said, on July 21, 2009 at 3:56 pm

    The FT piece makes more sense if you are familiar with Taleb’s other work. The main idea behind everything he writes is that we don’t know whether we are dealing with normally distributed data in real life. It’s an oversimplification, but he has a point that Black-Scholes and other staples of quantitative finance rely on Gaussian distributions.

    That’s the argument that needs to be thoroughly considered.

    • Scott Locklin said, on July 21, 2009 at 4:20 pm

      It’s an argument that’s well known, and pretty much irrelevant. As Aaron Brown put it, “(Taleb’s book) reads as if Taleb has never heard of nonparametric methods, data analysis, visualization tools or robust estimation”

      I don’t know, maybe he never heard of these things. Non-normality is why I’ve made myself a minor expert in Kernel regression. If I had listened to Taleb, I’d have thrown up my hands and gone back to physics.

      • jbr said, on July 21, 2009 at 6:26 pm

        “Non-normality is why I’ve made myself a minor expert in Kernel regression. If I had listened to Taleb, I’d have thrown up my hands and gone back to physics.”

        That is contradictory. Taleb also talks about non-normality – you happen to agree with him rather than disagree?

      • Scott Locklin said, on July 21, 2009 at 6:36 pm

        I also agree with Taleb that ducks are occasionally black and that water is generall wet. That doesn’t make the rest of what he says less idiotic. Go back and read what I wrote.

  20. [...] Nassim Taleb: clown of quantitative finance « Locklin on science – As such, Taleb is merely setting himself up as some sort of heretical alpha monkey of the quants for stating the obvious, the misleading, and occasionally the gratuitously wrong-headed and untrue. – LOL HERETICAL ALPHA MONKEY OF THE QUANTS [...]

  21. pwg said, on July 21, 2009 at 5:25 pm

    I don’t have a problem with your comments about Taleb, because he’s never interested me enough to pay attention to what he has to say.

    But I think you make yourself part of the problem rather than the solution when you call Feyerabend an intellectual nihilist. I had never heard of Feyerabend before following a link here, but his views strike me as both obvious and a continuation of millennia of methodological critique. Can’t you see that if economists and financial academics were able to approach their paradigms critically rather than as indoctrinated sheep, they could have prevented the banks from abusing the paradigms by simply deriding the approach as ridiculous and unscientific?

    This has nothing to do with Taleb and everything to do with genuine intellectual inquiry. If academics were thinkers rather than followers, it would be possible to prevent the gross abuse of paradigms.

    • Scott Locklin said, on July 21, 2009 at 5:35 pm

      If you’re concerned with genuine intellectual inquiry, maybe you should go out and read Feyerabend’s book rather than a wakipedia entry.

      How do you think a bank works? I’ll give you a hint: it ain’t the symposium of Plato: more like the Athenian meat market. Banks hire nerds. Nerds attempt to give guidance to traders using math. Traders do whatever the hell they want to do. Quant nerds can deride the trader as “unscientific” all the live long day, and it won’t do anyone any good. For what it is worth, Taleb is one of those traders who wants to do whatever the hell he wants to without any input from nerds. This is one of the great ironies of Taleb.

      • pwg said, on July 21, 2009 at 5:40 pm

        Now really. If there hadn’t been people abusing models and claiming to be able to price CDOs and misusing models to give management cover that they weren’t taking on excessive risk — those traders would never have been allowed to do what they did.

        Traders are managed — or mismanaged. Pretending models played no role in this mismanagement is simply wrong.

      • Scott Locklin said, on July 21, 2009 at 5:48 pm

        I have already gone on record that models had little or nothing to do with the present economic woes.

        You have also obviously never worked in a bank or on a trading desk. Go look at the wakipedia entry on “Nick Leeson.”

      • pwg said, on July 21, 2009 at 5:59 pm

        You’re right that I never worked on a trading desk, but GS and JPM are proof positive that traders’ antics can be controlled by management — if management chooses to take longer-run profits into account.

      • jbr said, on July 21, 2009 at 6:29 pm

        Wrong – he teaches in fin math programs at NYU, teaches courses with Wilmott and Jim Gatheral and hires graduates from NYU’s fin math program for his company. He is not against nerds or quants.

        I suggest it would be far more constructive and useful to argue against the points he makes rather than to take down the person.

      • Scott Locklin said, on July 21, 2009 at 6:37 pm

        Are you telling me that PWG is NNT? If so, how come he just admitted he never worked at a trading desk? Or are you simply more interested in being contradictory than you are in parsing english?

  22. [...] had thought that truly great polemic was dead and gone. I was wrong. it’s directed at Nassim Taleb, the Black Swan guy and here’s a sample: Mountebanks [...]

  23. Brian Gilstrap said, on July 21, 2009 at 9:01 pm

    Thank you for a very entertaining piece of fiction. It’s one of the best written bits of nonsensical blathering I’ve read in quite some time. I enjoyed the word play so much I managed to finish it, despite the amazing number of misconceptions/mis-statements/lies in it.

    Please, write another one!

    • Scott Locklin said, on July 21, 2009 at 9:12 pm

      Thanks for your utterly substanceless comment, tai chi boy. At least you used your real name.

      • Brian Gilstrap said, on July 21, 2009 at 9:17 pm

        Excellent! Another entertaining piece of fiction. Much shorter than the first, but since I’m a complete unknown and Taleb is well-known that’s only appropriate.

        Keep it up and you should make writer for Jerry Springer in no time!

  24. Lawrence D. Loeb said, on July 21, 2009 at 10:05 pm

    I agree that what he wrote, in the way that he’s written it, doesn’t hold together very well.

    I think that the thesis expressed here, in order to be expressed clearly, would have taken at least 10 pages (possibly 50 or more).

    As a synopsis, this is simply unacceptable.

    I suspect his argument about the mathematics of finance and economics have to do with the use of normal curves and the assumptions of rational behavior (neither assumption holds with the regularity implied in the models).

    The equity thing with mortgages would only make sense as a claw back of the homeowner’s existing equity (assuming the loan didn’t exceed the value of the home).

    The concept of the bank becoming your equity partner in your home is more than a little bizarre. I don’t know what that would mean.

    In the case where the loan value exceeds the value of the property, I would think he’d suggest the bank write the loan value down to the property value; then lower the interest rate to the existing owner – allowing them to rebuild their equity without losing their home.

    Not his best work.

    • Scott Locklin said, on July 22, 2009 at 2:51 am

      I’m sure it would make more sense if I were moving in the correct relativistic frame of reference, but Taleb has raised my blood pressure before, and so he deserves it with both barrels on this one. Presumably the FT paid for this dreck. For shame.

  25. Alex K. said, on July 23, 2009 at 2:09 pm

    It seems kind of stupid to agree with Taleb that fat-tails are a problem which is not accounted well by widely used models — and then criticize his being critical of such widely used models. The whole point is that while people know that the models are wrong, they keep on using them. Babbling about non-parametric methods is completely irrelevant if these methods are not –and often can not be– used instead of the flawed models.

    It is also very stupid to say that quant models had no major role to play in the crisis. Surely if the models used by the quants are something more than charlatanism and pseudo-science dressed up in mathematics, the quant –or quant influenced– traders would not have been so surprised about the whole crisis.
    Instead, the quant financial models –leeching on the reverence accorded to more serious science, but being charlatanism and pseudo-science — provided a false sense of security which lead directly to the over-leveraging which made this crisis as bad as it is.

    I think you can have a legitimate criticism of Taleb, that he is sometimes a little more hysterical than proper manners would require. But when the criticism he faces is as stupid as yours, his antics become quite understandable.

    • Scott Locklin said, on July 23, 2009 at 6:53 pm

      Taleb’s antics are what he sells. Nobody actually cares about his criticisms of specific models: it’s rare that he actually makes any. Were Taleb out there criticizing actual quant models, you know, by naming them, then stating in clear unequivocal terms where they don’t work and why, and maybe even points out a useful alternative, I would be a Taleb fan. Hell, in that event, I would be a Taleb sahabah; companion to the prophet. Instead Taleb goes on television and the FT and blurts out that “nobody knows nuthin.” As such, the just argument against a stupid head is a clenched fist.

      Quant models had no more to do with this crisis than four masted sailing ships had to do with the South Sea Bubble. The dynamics of bubbles is all the same. Incidentally, go look at the south sea bubble, and then go back and read Taleb’s article about converting to equity. You will soon see this genius hasn’t not read his basic financial history.

      • Faust said, on December 1, 2009 at 5:43 am

        Of course Taleb would not offer a useful alternative. He says repeatedly that there is no useful alternative. Throw them all away!!!!

        • Scott Locklin said, on December 1, 2009 at 5:47 am

          Throwing away everything you know is not a useful alternative. As I have recently pointed out: physics kind of sucks too, but I’m not suggesting throwing it away. I’m suggesting working in productive directions.

  26. fuzzykisser said, on July 23, 2009 at 4:10 pm

    Confused as it is Taleb does have one “point,” perhaps his only one: market data e.g. prices, do not have a finite variance. Models that use the variance, or worse yet that compute the variance under the assumption of normalicy are “therefore” nonsense.

    Making a reputation by beating this drum seems his biggest talent.

    • Scott Locklin said, on July 23, 2009 at 7:00 pm

      Mandelbrot, who occasionally wearily appears on television with Taleb, made the point a lot more usefully. Hurst exponents and such are things you can actually talk about. Of course, they’re not real helpful in making actual calculations, but at least he’s suggesting something. He’s also not managing other people’s money.

  27. Kuas said, on July 23, 2009 at 5:10 pm

    C’mon, name the physics charlatans of your youth!

    • Scott Locklin said, on July 23, 2009 at 6:57 pm

      I’d rather make fun of RIchard Dawkins and his “tough guy” version of Darwinism. Physics charlatans are minor jokes. There are worse evils running around shooting their mouths off causing problems in society. Also, Drexler hasn’t been making much noise lately, and I hate to kick a sleeping dog.

  28. Nick Patterson said, on July 23, 2009 at 5:53 pm

    <Plus, it’s not like Jim Simons has time to write Financial Times
    <articles. He’s too busy making money more or less proving people like
    <Taleb wrong.

    I was a senior quant at Renaissance (Simons' outfit) working
    on options among other things. What's annoying about Taleb is the
    overtones that every one else in the business is a moron. Does he
    really think that Simons believes market moves are normally
    distributed? Indeed I wrote a paper internal to Renaissance on the distribution of tail area moves. Taleb seems to think that
    these can't be modeled, but I have never understood his reasons for thinking
    that. There is a whole area of statistics ("Extreme value theory") which seemed to me to apply well to financial data. Our data in Renaissance yielded quite
    good models, which I've no reason to think have broken down with the
    market crash.

    • Scott Locklin said, on August 19, 2009 at 12:50 am

      Thanks for posting, and my apologies you were stuck in my spam queue for so long: it’s always interesting to hear from people who have seen behind the door in Xanadu. I’ve met a couple thus far.

      Yeah, like I said: I have nothing against pointing out that statistics are non-gaussian: they often ain’t. I mean, this isn’t even original for pop science writers: Mandelbrot has been writing about this topic for a lot longer, and even has the decency to make *real suggestions* as to how to fix things. And many of us deal with this sort of thing on a daily basis.

    • Ilya said, on October 4, 2009 at 12:45 am

      Dear Dr. Patterson,

      I’ve always wanted to speak with a high-up at RenTec. What can you tell us about yourself and the work you did and your findings before Jim Simons sends ninjas after you?

      • Scott Locklin said, on October 4, 2009 at 1:19 am

        I don’t know if he’ll answer, but this is one of my all time favorite comments on my blog.

    • Marcus said, on January 23, 2012 at 2:16 am

      I checked it. Taleb actually mentions extreme value theory and as far as I can remember gives it some credits. His main point of critic is that “future” small probability x high magnitude events do not exist in past data. Think of 9.11. It was new and unique. A 9.11 never happened before. And to ponder around future new 9.11 events would be futile as those new 9.11 events would not happen the way the 2001 9.11 happened.
      I give him credit for that, but one can always think of possible black swans events and make them grey ( grey swans) and feed them into a model or whatever loose framework. However this could lead to illusion of control as one might think one might be less black swan exposed when one actually is more prone to get hit by one. Or one of the grey swans one feed in the model shows up…

  29. Brendan said, on July 23, 2009 at 10:39 pm

    The fact you largely resort to attacking straw men rather than Taleb’s actual arguments says everything.

    If Taleb’s arguments were obvious in the way you suggest, clearly there would not be a market for them. Simple.

    It’s also rather pathetic that you frame him as a trader with innate opposition to quants, without acknowledging quants will also be innately opposed to those skeptical of the “knowledge” they generate.

    Great work, big shot.

    • Scott Locklin said, on July 23, 2009 at 11:28 pm

      Thank you, Sparky, for your reasoned and coherent criticism of exactly nothing I said. Is this like cheering your favorite ruggers team or something?
      Ah, the markets. Clearly acupuncture and new age pablum like “the secret” must also be true and valid since the markets favor them. I suggest we let an acupuncturist publish their opinions on the Feng Shui of the financial markets next, since acupuncture is clearly more favored by the markets than Nassim’s bilge is.

      • Brendan said, on July 24, 2009 at 5:01 am

        It seems you love to parlay your straw man antics into an ad hominem arguments. You really must be a just lovely chap.

        Your unwillingness to stick to substance says much about the quality of your ideas.

        Your original claim was many of Taleb’s ideas were merely stating the obvious. The presence of a market for an idea does not guarantee the idea is accurate, but it does indicate it is non-obvious and resonates with its consumers.

      • Scott Locklin said, on July 24, 2009 at 6:24 am

        The appeal of any popular mountebank is best summed up by P.T. Barnum: there is one born every minute. Had Taleb been an honest writer, he might have educated his readers on the concept of “sample bias.” But if Taleb were an honest writer, nobody would read his stuff. Smugness is a lot cheaper than understanding.

  30. Kuas said, on July 23, 2009 at 10:56 pm

    Ah yes, Drexler, I had forgotten about him. Watched him give a seminar at SLAC once, got ripped to shreds by real physicists who weren’t awed by his little tinkertoy drawings.

    Kaku is another favorite.

    • Scott Locklin said, on July 23, 2009 at 11:32 pm

      Kaku seems to be well after my time -“never hoyd of the bum. ” Greene is the only popular string-a-ding I know of. I like what Dyson said about him, quoting Churchill, “I wish I knew as much about anything as that young man knows about everything.”

      • Alberto said, on January 4, 2011 at 7:54 pm

        Correction: That quote isn’t BY Churchill; it’s ABOUT Churchill. Prime Minister Herbert Asquith said it.

  31. David Harper said, on July 24, 2009 at 12:19 am

    I’ll admit: I don’t care if you are right or wrong about Taleb (and you are right…)

    It’s like watching intellectual MMA for me, I just like watching his twitching corpse on the canvas; i don’t think we’ve heard from him since this post, i’m just saying

    …you’ve Iron Sheik’d him…enough chit chat, get yourself into training for the next bozo, so many targets, so little time

    • Scott Locklin said, on July 24, 2009 at 7:26 pm

      I take requests.

  32. conglac2009 said, on July 24, 2009 at 9:31 am

    The FT piece makes more sense if you are familiar with Taleb’s other work. The main idea behind everything he writes is that we don’t know whether we are dealing with normally distributed data in real life. It’s an oversimplification, but he has a point that Black-Scholes and other staples of quantitative finance rely on Gaussian distributions.

    That’s the argument that needs to be thoroughly considered

    Michael Jackson

    • Scott Locklin said, on July 24, 2009 at 6:51 pm

      The thing is, people like me (a quant) make a living knowing for a fact that the world of finance simply ain’t Gaussian. As such, he’s about as useful as a public figure repeatedly stating that the Earth is round and goes around the Sun. Of course, most laypeople don’t even know what a Gaussian is, so they’re more impressed with Taleb telling them something they didn’t know about. Great way to sell books … as long as you don’t mind alienating people from your profession who think you’re a wanker.

      • Marcus said, on January 23, 2012 at 2:24 am

        knowing for a fact that the world of finance simply ain’t Gaussian.
        What’s quite shocking is that the classic finance and investment textbooks in finance, which can be found in university libraries, hardly mention this.

    • David Harper said, on July 24, 2009 at 9:47 pm

      @Michael,

      to Taleb’s credit, his main point isn’t that financial data are not Gaussian
      (he knows better than to setup that straw man)

      his essential Black-Swan point is that extreme uncertainties cannot be parameterized by any distribution, that we fool ourselves when we translate “uncertainty” into “risk” as characterized by any distribution. It’s a good point, it’s as old as the hills, but it’s a good point…the rest of black-swan expounds on the biases that comform us in parameterizing risk; e.g., Excel has cells for numbers, so the numbers must mean something

      David

    • Lawrence D. Loeb said, on July 25, 2009 at 5:50 am

      First, I’m both impressed and surprised that this item has led to so much commentary – and emotion.

      Second, in regard to conglac2009’s (Michael’s) comment, Taleb shouldn’t be requiring, or expecting, FT readers to read his prior books before reading an op-ed piece.

      Unfortunately, when you look at the op-ed piece closely, it is written in a fairly incoherent manner.

      WE may know what he is getting at, but the FT’s audience isn’t just quants (and while I’m good at finance theory, I wouldn’t normally qualify as a quant these days).

      The problem that Taleb is generally referring to in financial models (and those are the published models, not proprietary models) is that they use statistical concepts founded from physics.

      His point, and he is absolutely right, is that people’s behavior may be similar, when quantified, to the behavior of physical objects, but psychology (which does not influence inanimate objects) leads to markets behaving at significant variance from the physical world.

      The models we are taught in finance classes (CAPM, Black-Scholes, etc.) all are based on normal curve distributions. Most of the initial proprietary models that were developed were modifications of that, and, to the best of my knowledge, they are still pervasive. Those models are, therefore, flawed in that they will fail approximately 5% of the time (and fail in a massive way).

      I’m not sure if Taleb goes far enough in terms of “fat tails,” but if you’ve got models that work for you, that’s great. Personally, I’m intrigued by fractals – but I can’t see how they can be applied for prediction.

      Bottom line, the FT piece tried to cover too much ground in too little space and ended up as a mess. In my opinion anyway.

  33. [...] Nassim Taleb: clown of quantitative finance « Locklin on science – As such, Taleb is merely setting himself up as some sort of heretical alpha monkey of the quants for stating the obvious, the misleading, and occasionally the gratuitously wrong-headed and untrue. – LOL HERETICAL ALPHA MONKEY OF THE QUANTS [...]

  34. vimothy said, on July 24, 2009 at 3:33 pm

    Not to jump right onto this bandwagon or anything, but…

    I think that Taleb is extremely interesting. Well, maybe not Taleb himself, but the phenomenon of Taleb. Post the crisis, he’s such a great example of everything he criticised pre the crisis, one wonders whether anyone in the audience at his popular lectures ever reflects on this contradiction. Rare events: before the fact, hard to predict; after the fact, easy to explain. But how ingenious to be able to sell this insight whilst simultaneously declaring that one predicted a rare event, and explaining how?

    Taleb, the non-experts, expert non-expert. Or something. Too jokes, anyway.

    • Scott Locklin said, on July 24, 2009 at 6:57 pm

      To quote some Zucker brothers film or other, “Irony can get pretty ironic sometimes.”

      Guys like Taleb don’t sell information; they sell self esteem and smugness. He’s not really explaining anything; he’s making his audience feel smarter and better than those “evil and stupid” dopes who run the world. The crafty Greek knows exactly what he’s doing; he knows his audience very well. He could have written, “SWPL,” but instead he caters to ‘em.

      • Faust said, on December 1, 2009 at 5:51 am

        Taleb did not claim the banking crash to be a black swan (unpredictable). It was completely predictable and he has said as much. You probably overlooked that.

    • Marsnotheplanet said, on September 21, 2011 at 8:59 pm

      Yeah, and that would have meant to predict something a fortiori: you’re closing the loop, making the entire thing describable as a self-fulfilling profecy. And so on. And maybe thinking of Bateson is cause and effet of having read Bateson. And so on.

      Srry for the bad enGlish.
      Keep on arguin’ :)

    • Marcus said, on January 23, 2012 at 2:36 am

      Indeed. I think he should make it more clear what is speculative guess work and potential prediction, which, according to Taleb is not possible.
      What is interesting is that one can reject any prediction making (even one’s own) but still engage in speculative bets based on some speculative guesswork . So both are not mutually exclusive at all.
      This said in a finance round table two or three years ago in Russia, moderated by Marc Faber, he made a strong case, a bet, on precious metals (a cocktail of gold) and rampant inflation, means the sovereign bond yield would increase. So he was right on precious metals and wrong on the yield rise. Assuming asymmetric equal positions (say out of money options in both of them) he still would have made good money.

  35. Brendan said, on July 25, 2009 at 3:16 am

    You state,

    “people like me (a quant) make a living knowing for a fact that the world of finance simply ain’t Gaussian.”

    Reality is, the research and analytical finance market was and remains flush with quant analysis that fails to carry that important qualification. For that reason, Taleb was entirely right to call quants on that, irrespective of whether people think him a wanker or not.

    As for your suggestions that,

    i) Taleb is not an honest writer, and
    ii) nobody would read his work if her were honest,

    you’ve demonstrated no dishonesty on his part, and your own observations that he is a good writer and somewhat charming argue against that latter suggestion.

    So you aren’t even coherent or consistent in you arguments. Rather emblematic for a bog-standard quant, I suppose.

    I reiterate that its rather pathetic that you frame him as a trader with innate opposition to quants, without acknowledging you will also be innately opposed to him as a skeptic of the “knowledge” you generate.

    • Scott Locklin said, on July 25, 2009 at 3:32 am

      Like Taleb, you remain unable to name one of them models, or suggest a useful alternative. Stating that “models sometimes don’t work” is as useful as “sometimes boats sink.” Stating where they don’t work, why, and how to fix them is useful. Taleb is not useful, relevant or even much of anything beyond a third rate charlatan who impresses the rubes with big words.

      First, you tell me any successful writer is automatically a Speaker of Truth. Now “good writers” who are “somewhat charming” are also people who always tell the truth? What kind of idiot are you anyway?

      • Rich S said, on October 27, 2009 at 11:50 am

        He has gone some way to to stating why boats sink – thats what the book is about (black swans), also where (finance but also almost any aspect of human life, because of our human pre-dispositions) and how to fix them…well he has put forward some suggestions about this as well – reducing the size of banks so they can fail for example; a more macro model but nevertheless a model.

        It seems to me you’re having a go at the man by decrying his ideas. I suppose you have called him a wanker though so just leave his ideas out and you’ll be honest with yourself and us.

        rgds
        Rich

        • Scott Locklin said, on October 27, 2009 at 6:31 pm

          The problem with Taleb is that he thinks nobody else in the history of the world has ever noticed that boats sink. This isn’t hyperbole in the least. This is what the gasbag himself says, ” Alas, nobody has examined this problem in the history of thought”

          http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1490769

          I haven’t read any of his “concrete” suggestions, other than the FT article, and don’t think it’s worth anyone’s time to do so, as the man is completely full of shit.

          • Colin said, on March 19, 2010 at 11:43 pm

            “I haven’t read any of his “concrete” suggestions, other than the FT article”

            Wait, you haven’t at least read TBS? If this is the case, how can you claim any criticism of a work you haven’t read? How can you be so ready to call Taleb full of shit if you haven’t read the damn book?

            • Scott Locklin said, on March 19, 2010 at 11:58 pm

              I’ll stick with Aaron Brown’s review of that book, thank you very much. I read “Fooled by Randomness,” and refuse to trudge through more of this idiot’s turbid windbaggery.

              Between that and his crappy popular articles: I think the jury is in. If you have some concrete suggestions from his black chicken book you’d like to expose to my scorn, feel free to chime in.

          • travisllc said, on July 5, 2011 at 3:41 am

            If you read the first paragraph of the article, he states:

            I holdthat this is a severe and consequential statistical and
            epistemological problem as we cannot assess the
            degree of knowledge that allows us to gauge the
            severity of the estimation errors. Alas, nobody has
            examined this problem in the history of thought,

            He is referring to the fact that no one in the history of thought has studied the severity of the estimation errors. His point being, what is the error rate of your estimation of something?
            Bottom line, he is saying, don’t be a sucker in life and I would add, always try to put yourself in a win-win position.For example, one might take a low paying job in a new field in order to learn the new field. You win because you have a job and if you are to be fired, you now have experience in that new field (win-win).
            You call him a gasbag but nothing he says brings harm to anyone. Compare him to those financial experts on TV recommending ‘safe’ stocks. Try concentrating on the charlatans who might bring harm to people.

    • David Harper said, on July 25, 2009 at 5:52 pm

      I just have a simple question for Taleb’s defenders. I’d love to know where he has offered more than the following two ideas:

      1. returns aren’t normal
      2. you can’t parameterize the tail; e.g., the extreme tail is uncertain and cannot be characterized into risk by a model

      any help beyond these constraints? if not, the implication that “we should call the whole modelling thing off”doesn’t help

      David

      • Faust said, on December 1, 2009 at 5:55 am

        Please provide proof that the models work.

  36. Siddharth Sharma said, on July 25, 2009 at 5:53 pm

    I didn’t read Taleb carefully enough to know whether he was targeting only quants.

    I think the bigger issue is modelling of ‘economic and market’ policy, (viz leverage, unregulated OTC etc) isn’t sophisticated enough to have a clue as to how the models and practices (of which there may be as many types as participants) may blow the whole system up.

    To me, cutting edge quant finance practitioners will obviously take up the best approximation they can and try to hedge and mitigate tail risks. I call this ‘best effort’ quant modelling and practice.

    The tricky thing is that markets of model ‘absent’, model ‘best effort’, model ‘naive’ (gaussian e.g.) etc participants need safeguards to stop systemic collapses. A market as simple as the stock market has all these types of participants (Those who monitor returns closely and statistically, those who speculate, those who use naive models etc.)

    That is a bigger issue. And to my mind, it might be that the econ and finance academic literature is practically naive on modelling systemic risks to markets. Thats probably where true naivete is likely to be present i think(speculating, don’t know enough).

  37. Tom said, on July 27, 2009 at 4:16 am

    Banks should not be traders or insurers. As banks they should minimize risks to protect their depositors.

    The market crash was not a Black Swan. It was entirely predictable. The unknown was what event(s) would trigger it. Goldman Sachs bet on the downside. Many recognized the bubble and were playing it. When the music stopped, instead of one chair being removed, all the chairs were gone. That was the wrinkle few players could appreciate until it actually happened. All of the non-players – most with 401(K) , mutual funds, etc. were caught unawares. They had trusted as they had been taught.

    Taleb is a philosopher and a bit emotional at that. He is old school in that he prefers a posture for resilience, enough redundancy to be able to handle any catastrophe, not just financial ones. In that regard he values life over money. Odd.

    I don’t think he’s a prude. Go ahead. Take big risks. Just use your own money.

    In the dialogue “Reflection on a Crisis DLD09″ – http://www.youtube.com/watch?v=LjGl6bZF6zs Daniel Kahnemann talks about the value of bad maps. When we follow a map(model) and it doesn’t work, we can improve the map, or find or make a better map. Accurate maps are not easy to make.

    Alfred Korzybski provided the insight that: “the map is not the territory.”

    Would it be a big leap to say “the model is not the territory?”

    (I did find two instances of this phrase relating to Learning Organizations and another on a LiveJournal, I think in relation to a database)

    No doubt, economists and quants have worked to give better maps. Management and its lawyers can, of course, obscure risk. This they’ve done well. They can claim to have the best model/map to wealth and even buy audited results prove it.

    We live in a relative world where there are many efforts to manipulate our perception within the mental environment. Our culture and its education system give us an initial map/model. If we live where there’s some freedom of thought and have access to other perspectives, we can reject what we’ve been taught, try out other maps and even cobble our own world view.

    Taleb the philosopher observes that when it comes to the preservation and perpetuation of life, negative advice is more useful – the thou shalt nots.

    Should we take risks? We do everyday. All life is risk management.

    Next.

  38. Siddharth Sharma said, on July 27, 2009 at 7:20 am

    http://www.math.cmu.edu/users/shreve/ModelRisk.pdf

    Is that a fair assessment of the misuse of the Gaussian copula model?

  39. Bijan said, on July 27, 2009 at 3:49 pm

    Early in my career, I sat next to Nassim on the trading floor. Taleb was polarizing and even in a small place like US office of French back, he was viewed overwhelmingly as a clown. Nassim told the traders he was smarter than them because he was quantitative, the quants that he was smarter than them becauses he had traded BUT most often he was neigther: a philosopher. He stumbled at basic math and was confused in option theory, his forte. Foremost, Nassim was bitter. Bitter that he had not made money. Bitter that he was not senior and did not have a leadership role.

    His track record during his early hedge fund days are available at least to some. He consistently lost money and even post 9-11 was only up temporarily as he did not take gains and gave all of it and then some back.

    For the most part, TAleb criticizes everything but he never offers any solutions. His observations when they make sense are trivial, like tails are fat.

    While I agree with this article, Scott, Sharpe ratio is not proper risk adjusted measure of performance if you agree that returns are not normal. Strategies with high Sharpe ratios are carry strategies that have very ugly tails. No matter what the risk measure, Taleb has no edge.

  40. Paul Becke said, on August 6, 2009 at 10:32 am

    From your, “About Scott Lochlin” piece, at the top of the page, it seems clear that you’re really a bombastic Narcissus, just like your anti-hero, Taleb is to a lesser degree; lesser because he has the profound intellligence to back it up. You just fall between the cracks: neither an intellectual, nor a man of the people.

    Unfortunately, the timbre of your piece evokes the blind fury and hatred that the “luminaries” of the medical establishment, have historically evinced all too often, when someone began to threaten their status and self-esteem by undercutting it with a new paradigm.

    Taleb’s bombast reflects a certain lack of wisdom, a certain immaturity, but that can be part of the package, as a result of such individuals being so far ahead of the game for so long. Frustration. He’s clearly a larger-than-life character, rather like Oscar Schindler, who wasn’t really satisfied with the monumental tomb they were to erect for him in Israel, preferring that they build him a complete and doubtless enormous mausoleum. You buy the package – or not. As someone said, if he hadn’t been that way, he wouldn’t have done the things that he did.

    Alex K above, nailed it: “I think you can have a legitimate criticism of Taleb, that he is sometimes a little more hysterical than proper manners would require. But when the criticism he faces is as stupid as yours, his antics become quite understandable.”

    Economics is essentially the study of human greed and its effects. The technical, financial aspects, apart from statistics, are not really proper to it at all. They would be proper to economics in a less depraved culture, granted that nobody was foolish enough to confuse it with a sphere of science – which, I suspect, is what Taleb is ultimately driving at.

    • Scott Locklin said, on August 6, 2009 at 8:02 pm

      Gee, d’ya think so bub? Maybe I should go have some acupuncture done to harmonize my narcissism. Taleb as Schindler? How about Taleb as Jesus sufferin’ Christ?

    • David Harper said, on August 6, 2009 at 9:15 pm

      I don’t think the essential criticism is that Taleb is hysterical. (his hysteria may be a marketing tactic). I read the argument as: Taleb affirms quantitative nihilism. (I am not myself sure, I just read that as the argument. Like I said, I am here for the writing clinic…).

      Is he really saying “the models don’t work, throw them out…don’t even speak of them?” It matters whether you are a nihilist or not. A nihilist (since “all things are permissible” if god is dead) gives you no guidance on what to do next; as religious nihilism is a formula for depression, quantitative nihilism implies I should delete Excel and Mathematica because I work in social sciences instead of physical sciences. And, though it is funny as posted above, it is the case that a nihilist (being a relativist) can come to almost any conclusion (a warrant on a front porch).

      More prosaically, I work with Value at risk (VaR) and you nowadays encounter a contingent of folks who bristle at the mention of the phrase (“idiot! don’t you know Goldman experienced a 25 sigma event? VaR sucks” It makes no sense to refute VaR wholesale without an appreciation for the details). It matters which camp you find yourself: one camp, call them pragmatists, recognizing financial models routinely violate assumptions (and have occassionally added value) and that predicting future is nasty business, is interested in the very old fashioned tradition of improving the tools we’ve got at our disposal, because them’s the best we got until we make them better (models: the worst possible approach, except for all of the others). The other camp, nihilists, can show that god is dead; but that’s pure entertainment and they know it. They know we can’t actually do something with that, even if we agree with it.

      David Harper

  41. Paul Jorion said, on August 19, 2009 at 7:04 pm

    Your ignorant remarks on Feyerabend undermine your otherwise good points. Time to learn the virtue of prudence.

    • Scott Locklin said, on August 19, 2009 at 8:06 pm

      Lol, um, OK dude. How about learning the virtue of philosophers who aren’t completely full of shit?

      • Faust said, on December 1, 2009 at 6:07 am

        Aren’t all philosophers completely full of shit? Otherwise they’d do something useful.

  42. On Taleb | Inscitia said, on August 26, 2009 at 2:53 am

    [...] Scott Locklin on Nassim Nicholas Taleb. AKPC_IDS += "126,";Popularity: unranked [?] [...]

  43. Adam said, on September 30, 2009 at 4:38 pm

    “An incorrect map is worse than no map at all” — People will tend to drive the speed limit (or more) regardless of road conditions if it is posted. Models give a false sense of security. Long Term Capitol, and now many banks assumed took excessive risk and debt because their models said was ok. While common sense obviously said otherwise.

    • Scott Locklin said, on September 30, 2009 at 8:31 pm

      Incorrect maps are pretty damn useful, which is why people used maps for thousands of years before they were able to get everything just right.

      • Faust said, on December 1, 2009 at 6:09 am

        What if the incorrect map led you to a cliff?

  44. David Harper said, on September 30, 2009 at 9:19 pm

    LTCM’s models gave them one map of one potential future (i.e., the future that repeated the past, where yield converged and the pair trade was profitable). Unlike actual maps, financial models predict and there is no such thing as instantaneous verifiability (is the model accurate? only time will reveal)…do we throw the models out, or do we blame the pilots who chose to bet the ranch on one future scenario among many possible. at some point, you’ve got to get beyond “model or no model?” (because: yes, of course, model!) and into “model risk” (how shall we use these things)

  45. [...] The article he was replying to can be found here. [...]

  46. Anynomous said, on October 17, 2009 at 2:55 am

    Scott,

    You have tendered your future resignation, in no uncertain terms, by perpetuating allegations of substance what is, fundamentally, a benign misconduct on the part of Mr. Taleb. I do not concurrently joust and philander in accordance with my intellect and egotism, respectively; for, if you are fortunate enough to regard your ego as an imbecility, prior to being walloped by that intellect which constitutes true and natural substance, an indication of the fragility of your own mind reverentially reveals an unexpected relationship with capacity for genius. Perhaps I am an unlearned bloke, though I make no claims as to who has planted the mortal wound of truth on the charlatan’s forehead. Furthermore, knowing that this is the differentiating characteristic between the two of us, I may attempt beneficence, without your characteristic, albeit unrealized mental chagrin.

    There are men who sing, and men who dance. There are men who subsist on a repertoire of purely exogenous facts. But above all, there are men of a kind intellect. It is undoubtedly the hallmark of the Western World that the true Gentleman has been given hoist above the multitude of misnomers. By what force was he thus empowered? By what laws or natural periodicity has his effect been entrenched? However, of utmost importance, is this fact subject to your understanding? Mr Taleb, in his action, albeit with fair erudition in method, has disregarded the story of Methuselah. The individual of former referral has yet to read it. I do not make this reference to any particular implication of this fact; merely, a framework has been provided for your help in understanding the spirit of man, surely made difficult by the unabridged cognitive dissonance your experience has chosen to adopt.

    “How trivial!” (his method) “How trivial! (I am)”

    Does your meaningful thought engage in percolation against the bounds of that nonsense you are adroit in constructing? Your financial education, as it is apt to do, well provided evidence of the institutional component. If I were a Levantine, in your reply, what difference would ensue? I will not take it upon myself to divulge the role of institutions in society, nor the role of the systemic fallacies that plague modern economic theory, simply to have the explication categorized and incoherently decried by the same individuals who understand not the prompt of their advent. Does the gentleman, Scott, carry the owner of a fallacious belief to the stake for public display, only to comprehend the personal fallacy he portends?

    What is meaningful in this world is precious, uncommon, and requires a staunch guard for preservation. This elicits an understanding of the need for the continuous application of efforts amongst those who may steer our people nobly and not unjustly. There exists no notional construct, no external structure, but the active conception of man that is capable of its maintenance. Mr. Taleb, though unattributed by you, has made a valiant attempt; any business as to his fate, whether he is cast with the common lot, or is bid to the heights which he has conceived, shall not bear duty to your remonstrance. I fear the garb with which you are attired; not simply as a result of your criticism, but that you demonstrate an irreverent contradiction to all the tenets of what is the great stoical doctrine. Your proclaimed adoption of these financial arts over Physics and the Mathematical disciplines was a route I also travelled. Here, I do not stand to promulgate, or to reaffirm the contemporary notion that resounds against financiers. I will share the intimate fact that I am sanguine with respect to the abstract truth I have enmeshed myself over the years; though not to be forgotten, I cannot hide my past levity, as it has bred an equivalent understanding of how disproportionately important our ethical and habitual affairs truly are. To simply sway your resolve from a discipline which your nature craves has a dramatic effect on your teleological conception, and undoubtedly has the capacity to permanently disable the depth of any particular sentiment.

    Are the broken models, and those who had a roll in the acute perception of their formation, wholly responsible for what has happened? A positive affirmation contradicts not only the lessons learned from the philosophy of Maimonides and its progressive influence on Spinoza, but rejects the truth of the affair in an overt manner. How to interpret this fact, given that it was a necessity? It occurred, did it not? Yes, and Lehman was saluted prior to execution. It is at this point that the perspective of Mr. Taleb becomes ineffectual and your criticism more so. Why strain ones mind in pursuit of such justification, when it is strikingly obvious from personal experience I am witnessing an intellectual charade? The philosopher has indubitably irritated the Philistine! What meager import your mind has supplied in its defense.

    Nevertheless, were the arguments presented by Mr. Taleb to be patently incorrect, he gains on the grounds of adamantly rejecting leadership by Robert Rubin. I was at J. Aron during the 1980s, though I will not expand upon this point. There is honest work for men who wish to see our societies progress, and it will be done without spite or angst; certainly, not with any claim to arrogance.

    Regards,

    A.

    • Scott Locklin said, on October 17, 2009 at 3:16 am

      You’re either a postmodern philosopher or a paranoid schizophrenic; I can’t tell which. Anyway, thanks for reading my blog.

    • Aaron said, on April 8, 2010 at 11:02 pm

      Whos been at the recursive grammer button again?

    • Sobby Kalebwe said, on May 4, 2011 at 2:54 pm

      You are fair, and intelligently detached- evidence of long and hard skepticism, but with interest nonetheless.

  47. David Harper said, on October 26, 2009 at 9:49 pm

    Scott –

    FYI, Taleb has published a new defense of his, er, theories

    http://falkenblog.blogspot.com/2009/10/taleb-confronts-his-critics.html

    suit up…

    • Scott Locklin said, on October 26, 2009 at 11:36 pm

      I actually read the whole paper, and find it a laughable straw man attack, mostly. Anyway, he doesn’t address why he wrote an unreadable FT article which suggests selling banks warrants on the front porch.

      Taleb should really give up this quasi academic pipe smoking philosopher schtique and try to make money by adding value somewhere. I admit, it’s more fun to write stuff, but it’s far more satisfying to make something work.

  48. Just a regular consumer said, on November 8, 2009 at 7:47 am

    Just finished TBS. Loved it. Explains a lot. Just finished reading your article and all related posts. Not so interesting. There, you have it, I am a critic, just like you. Oh, and I happen to LOVE the idea that instead of foreclosing on homeowners, we work out a plan that allows them to stay in their homes. I’m guessing you are not facing that problem.

  49. WTF said, on November 12, 2009 at 7:27 pm

    I just came across this taleb interview made in february 2008, about taleb’s view on Simons. Taleb says verbatim answering the 4th question (about buffet):..The only two people I think who are not lucky; there is Soros and then there is the other gentleman from renaissance.Simons, he is not lucky. He is beyond. There is no exposure to uncertainty on his models.” the video is here : http://fora.tv/2008/02/04/Nassim_Nicholas_Taleb_A_Crazier_Future

    So what’s the deal here?

    • Scott Locklin said, on November 13, 2009 at 12:36 am

      Odd enough. I think he’s smeared Buffet and Charlie Munger as “lucky” before, though I may be confusing Taleb with Burton Malkiel here.

      I think Ed Thorp may be documented as having beat Simons. There are also RenTech spinoffs who do very well (as far as I know anyway).

  50. Faust said, on December 1, 2009 at 6:11 am

    I’m having a tough time deciding which is right on this, you or Taleb. Could you please tell me your net worth so I can compare it to his?

    • Scott Locklin said, on December 1, 2009 at 7:14 pm

      I’d be happy to do so, just as soon as Taleb releases his audited track record. While it’s just a big old guess, something tells me he’s destroyed more of other people’s money in the last 30 years than I have. If you’d bothered to read some of the comments here instead of subjecting the world to the fact that you drank the kool aide, you’d know that too.

  51. clinton said, on December 28, 2009 at 6:21 pm

    I think peopke should read Malcolm Gladwell’s accountof NT to get a well written perspective of his black swan approach. I also hope you are a Cezanne!

    • Scott Locklin said, on January 2, 2010 at 11:12 pm

      Link?
      Gladwell is kind of the eigenvector (or in his parlance “igon value”) of the problem with popular writing on statistical subjects. Basically he is so over awed by his own cleverness he forgets to know what he is talking about. Seriously: how can anyone take seriously a man who publishes the phrase “igon value” in the New Yorker?

  52. partix said, on February 9, 2010 at 6:42 pm

    Scott, you rock.
    Curious – have you ever met Taleb in person, i.e. spent any personal time in his presence and with his attention? I have. Sometimes it seems to me that, totally regardless of very likely absence of any valid points or content in his “ideas”, or of his undeserved media attention and/or financial success resulting from it, much, if not all, could be forgiven if he were just a tad less arrogant. Though T is extremely well read and has more than solid general education, his arrogance is a sign of underlying insecurity, a sort of a repellant, a barrier of defense against digging deeper into what he sells. As if he himself (I personally believe so) has doubts.

    On the other side, have real, trained, grad-level mathematicians commented much on T’s supposed math knowledge? He loves to sell himself as a “mathematical trader”, which I guess is not too much of a sin given that most of the members of the traders’ flock do not know or use any math. However, Taleb’s intimate knowledge of any graduate-level mathematics is zero. He is very intelligent, but he started learning high level math too late in his life. Dig a little bit about how he got his “PhD”. The good ol’ Helyette was his personal friend long before she was his “thesis adviser”, or better, “writer”. Anyone thought that part of the reason T barks so much at models and math in finance, is because that math is – hard!? Kinda sour grapes sindrome? He doesn’t really know any high level statistics. He doesn’t understand even some college-level principles of conditional probabilities (check some blatant high-school style errors in his FBR book when trashing lawyers’ profession as supposedly not understanding probabilities).

    • Scott Locklin said, on February 9, 2010 at 9:42 pm

      Never met the guy; I don’t go to seminars or hang around with celebritards, so there wouldn’t be much opportunity. Some of the commenters above have made similar observations about his mathematical acuity. I’m no great shakes at math either (I fail at most of those probability brain benders they use in interview questions), though I do remember FBR weirdness which bothered me when someone foisted that book on me. I’m also deeply suspicious of people who do all their work in Mathematica, which sucks, and is generally for people too lazy to pick up a pencil and do the damn algebra themselves.

      I’m sure his arrogance is annoying, though I won’t hold it against him, as mine bugs people as well. I mostly want him to stop saying dumb stuff, and get off the television and do something real. Sort of like Irene Aldridge.

    • jn khoury said, on June 2, 2011 at 9:12 am

      Partix
      Before you make claims like these involving libel about helyette geman why don’t you disclose your name? Why do you spread rumors that Prof Geman knew Taleb BEFORE the doctorate (“good friends”)?
      Also if you spent time in her company why don’t you identify yourself?
      Fake liar

  53. quadog said, on February 13, 2010 at 8:09 pm

    I was initially very curious about your post. Finding a substantive argument against Taleb’s thinking is actually quite difficult to track down. Imagine my disappointment when I discovered your post was mostly an ad hominem review of Taleb the man rather than an measured analysis of Taleb’s ideas.

    Reviewing your profile, it could be that your line of thinking is closer to Taleb’s than you would care to consider. There are similarities in your language regarding skepticism of self-appointed “experts” along with your penchants for slinging mud at those same “experts”. Regardless, I would at least encourage you to reexamine your comparisons between physics and economics. It’s apples to oranges really.

  54. Me said, on February 17, 2010 at 4:29 pm

    This is a joke. These examples are a joke. Unless one of u make more money than Taleb, please stop talking shit, and listen to him. u guys are like a bunch of boys in a grade school that don’t like justin timberlake, even though he makes more money with one concert than the entire school board has to spend in one year. So instead of aspiring to b like him, u just sit around and blog shit about him.

    But please, keep buying China Inc. more money for guys like Taleb once the markets come crashing down again.

  55. Michael said, on February 21, 2010 at 10:58 pm

    Scott, I think your comments below say enough about your useless arguments:

    “Taleb’s strat will only strike paydirt when the poop hits the prop. The poop doesn’t hit the prop very often, almost by definition, no matter what kind of fat tail your black duck has.”- Scott Locklin

    When I discuss the impact of the highly improbable (“black swans”), people make the automatic mistake of thinking that the message is that these “black swans” are necessarily more probable than assumed by conventional methods. They are mostly less probable. – NNT

    “That’s why you “didn’t understand” what he was saying: he never said it.” – Scott Locklin

    The government-sponsored institution Fanny Mae, when I look at their risks, seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup. – NNT 2007

    “There are far more successful and long lived funds, as I have already pointed out which trade the inverse of the Taleb “swan strategy” at very high Sharpe ratios.” – Scott Locklin

    LTCM had lots of small up months and a few large down months. This is not detected by the Sharpe ratio as it assumes a symmetry in the distribution of returns. – NNT

    • Scott Locklin said, on February 23, 2010 at 9:07 pm

      Funny, I’m pretty sure the Sharpe ratio does pretty well at noticing that Taleb’s fund is a massive pile of suck. Feel free to pick any other performance metric: yearly returns, cumulative returns, Sortino ratio, bias ratio; doesn’t matter: his fund still amounts to “Capital Assets Destruction Model.” Wheras betting against Taleb’s dumb strat is a good business, and tail risks can apparently be managed.

      As for his quote about Fanny Mae, it was, in fact wrong. He thought FM would go tits up because everyone had so much money they’d pay off their loans early, which is about as wrong as everyone else was.

  56. Aaron said, on April 8, 2010 at 10:17 pm

    Ahhh Taleb…
    You got to hand it to Taleb, he has a huge head for heights, but has he really got those “street smarts” he so oft speaks of? Its quite obvious that the success of Dynamic Hedging had an funny (ha) effect on him. Barking mad? Definately maybe.

    Give any hyper-intellectual neophyte a loved-up publisher and carte blanche to jot down his ideas on evolutionary psychology and evolutionary processes in general, and its always going to make for edgy reading. But throw into the mix a certain type of guy, tinkering away in his attic with a Monte Carlo sim!? and a huge chip on his shoulder… its bound to be a horrendous carve-up. And everyone knows that Fooled By Randomness served it’s purpose in that particularly popular department.

    That aside, sometimes I just think Talebs main book should really have been called Fooled By Contempt & Prejudice. Indeed, it seems they are the only things holding him together at times. The main thread and his most consistent idea, by the way remember, is that everyone is an idiot (tell me about it cupcakes) that must be saved from themselves by realising just how idiotic they are. I cant think, havent i heard that somewhere before, it sounds so familiar.
    But, like the eager back-testing techies, programming furiously to keep theyre daydreams alive, it looks like Taleb has masterfully set up his own un-retractable dreamscapes. Sometimes he seems so emmersed in delusional aggrandizement that he must have to wind down at the end of the day with powerful doses of LSD…just to tie up the loose ends. Comming up with potentially semi-disturbing scenarios, un-refining his covert experiments, then testing them under the rigor of randomness… Solving any equation! Cometh forth high priest Nassim of randomness, and wield thy mighty sword of Monte Carlo. Eh? am i missing a chapter?
    He manufactures “situations that depend on pure luck without the SHADOW of skills”, obviuosly reducing skills, for effect, to some kind of dark art, sent to corrupt the caotic potential of the almighty purity that is randomness. (Skills are a dirty word to Taleb, because he assumes he is the only man on earth allowed to have them, well, him and George). His experiments, its seems, also serve a dual purpose, ” to make pure-nobodies to laugh at” stripped of their ability, perfectly manageable; i have a disturbing vision of him siggering away like a spoilt little princess at all the nobody variables in his Monte Carlo sim.
    This almost sluttish infatuation with randomness baffels me. He slobbers around the boundaries of randomness like Dennis Hopper, spewing nonsense at the perimiter of Charlie Sheens Bamboo cage in Apocolypse Now. “Charlie listen baby, you’re pure maaaaan, when you get home safe and sound, and you ever come accross any serious money, never invest it with anyone that has a good track record, its totally meaningless and irrelevent maaaaan” now go bash Brando’s skull in like a good boy!…then come find me.
    In an absurd doth of the cap to his cosmic anthropomorphic passions, we have Lady Fortuna herself vs the big bad, thin lipped & pasty faced, humourless stoics. Howling. Tell me this, why would any accomplished, developed adult withhold the details of a terminal illness from his loved ones(if he should have loved ones), just to even up the score with a certain Lady Fortuna? And save me the victim BS. Please!! Sacrificing the wealth of humanity, the very milk of human kindness itself, for what exactly? So that he can charge around his attic, pumped full of chemotherapy drugs, blowing raspberries in the face of randomness? Ahaaa! Checkmate Lady Fortuna, i gottcha now, i gottcha by the t***! What a dreadful prat. Lets hope he never has to call “her” bluff.

    I hope everyone realises why he does not read critisism by the way…hes has to be taking the P.
    As Jerry Springer once said with an evolutionary bent,” a man’s prejudices are like his plumage, in a way. The manifestations of prejudice and contempt are irrelevant, no matter how complex, un-retractable, lofty or absurd. If he is an axe wielding boorish oik, they will always find their feet.” My own are clear cut in this case… Mr Taleb is currently off the leash.

    Aaron Smyth

  57. Les Baker said, on April 22, 2010 at 6:32 pm

    NNT is at again. He reports that Raphael Douady and he derived a result that “appears vastly more devastating in its implication than the Gödel problem.” How nice it must feel to compare oneself to Kurt Gödel.

    • Scott Locklin said, on April 30, 2010 at 2:52 pm

      I wonder if this gets NNT laid? I mean, I hope so. There is no other reason for such behavior.

  58. Vikram Krishnan said, on April 28, 2010 at 1:46 am

    You have made some valid points. Do you think that Taleb’s problems could have to do with this working methodology.
    1. Refusing to publish in peer-reviewed journals
    2. Refusing to use editors for his books
    3. Making ‘philosophical’ statements instead of cold verifiable predictions (something he claims economists don’t do)
    4. Never discusses his investment strategy.
    Basically he refuses any form of creative control. Surely that should drive most people off the cliff. Also he has taken to posting ‘aphorisms’ on Twitter. They are truly gawd-awful.

    • Scott Locklin said, on April 30, 2010 at 2:51 pm

      The ancient greeks thought hubris was the source of all tragedy.

      • Vikram Krishnan said, on May 11, 2010 at 5:45 am

        I still get irritated by the fact that he never offers any concrete proposals that can be subjected to analysis and empirical verification. then he has the temerity of accusing economists of getting predictions wrong. At least they stick it out and make predictions Aphorisms don’t cut the deal. Somebody ought to force his hand and make him make a set of predictions. His excuse always is ” I don’t believe in predictions”. But if you are in finance aren’t you by default always making predictions. Even his so-called strategy of keeping most assets in cash (yes that is his strategy) involves an unstated prediction that the risk of a blowup is greater than ur savings being devalued by inflation. Nobody ever questions him. Most financial journalists don’t want analysis; they want a sound bite and that is what Taleb provides. He has never presented an analysis with historical facts, data collection, modeling and comparative analysis. And to see the brainless idiots at CNBC fawn over him for being correct because he never makes a prediction and therefore is never wrong (Shit happens is not a theory) is sickening

  59. Nandu said, on May 6, 2010 at 2:14 pm

    To a layman like me, his books read like he was thinking aloud. I wrote so to him on facebook, and he almost bit my head off! He probably has a good idea or two, but he raves and rants incoherently.

    I think he is a one-idea wonder, whose books became famous by some vicissitude of fortune. There are plenty of books, far far better. Now, he will write 2-3 books more, milking the same theme, before fading away.

  60. Marc Luske said, on May 18, 2010 at 10:00 am

    Seems really pathetic to attack everyone in person with your ‘witty’ commentswho critizices you. You say its very obvious that using gausian models is wrong very often. Yes its obvious to you.
    It is not obvious to a lot of economists and a lot of people who make very big decisions all over the world. That is Taleb’s main point, and he does a very good job telling people that in a relatively clear way. You seem like a jealous 14 year old because you ‘knew they were wrong too’.

    I also like how a lot of the people attacking Taleb here, are making exactly the mistakes he describes in his books.

    • Scott Locklin said, on May 18, 2010 at 6:05 pm

      Fair enough: I’m kind of a jerk. My ex girlfriend agrees.

      It would be nice to think Taleb’s contribution to intellectual discourse is a net positive. I don’t agree, obviously.

  61. [...] quite hard to find on the internet criticism of Taleb’s theories, though I found one article here, also by someone who has not read The Black Swan, but who is primarily riffing off of a very [...]

  62. Peter said, on June 16, 2010 at 12:09 pm

    good to see an fairly anti-taleb post picking actual holes in what he says – as someone who is definitely pro-taleb (his books have changed my outlook on various aspects of life) i have often tried to find holes in his logic and never have been able to – I am not convinced this post changes that but definitely got me thinking and one of the few anti-taleb posts (well at least not fawningly positive) that doesnt really resort to playing the man instead of the ideas.

  63. [...] And, Bob, if you’re reading this: I’m looking for work. I got references. [...]

  64. Black Sun said, on August 26, 2010 at 5:35 pm

    I don’t see any valid arguments in this rather philosophical subjective barking and even Nassim directly challenges his opponents to respond to his sound scientific arguments instead to the free Black Swan narratives.

    Take e.g. his Oxford BT lecture or more narrative “Why We Never Used the Black-Scholes-Merton Option Formula” or further scientific literature which can be easily found on the blog “Fooled by randomness” and argue with objective facts why do you resist to accept the proven fragility of mean-variance approach and all related models based on the ideal Gaussian world, which never did work in the real world, simply because the future CAN’T be foreseen using ANY historical information.

    http://www.fooledbyrandomness.com/OxfordBTLecture.pdf

    Think over even for yourselves: the liquidity of markets is based on the opposite interests of the participants, and since they have the different expectations of the market development, there still is not any method to make a “safe” decision, because such a method would – if proven – dissolve the different expectations and dry out the market liquidity. Hence we can make only bets on what we individually think would be the future development and use some quantitative voodoo on historical data to make an impression of using some “method”. In the end, everything will be decided by the market psychology and not by any quantitative means or ends up as the Japanese market declining for 20 years after a phase of growth. Nothing in this world can grow for ever.

    Taleb actually proposes many methods for building up more robust markets and society, but the leveraged magicians from Wall Street who think they can forecast the future or debt-loaded consumers who prefer to be bailed out by states printing new money do not listen at all. Even if they listen and nod – they do not really care.

  65. jason said, on September 18, 2010 at 9:44 pm

    this Swap Taleb is talking about, was discussed much earlier by Martin Armstrong in his letters from the whole, i guess its a plegiarism

    • Scott Locklin said, on September 20, 2010 at 1:29 am

      I ended up reading about something like this in “Nerds on Wall Street.” Basically, the idea is to securitize the underwater piece of the house, to be paid when the house sells, if it goes above water again. Epic retardation, IMO; you’re just printing more money and hoping the price goes up. That didn’t work so well with the first round of securitization.

  66. James said, on September 24, 2010 at 12:53 am

    Scott,
    Is a bad map worse than no map? That depends if you are the one who takes the risks while using the map or if you insist that we all have to follow it. If you want to believe that you can predict the future with your little numbers on a screen go right ahead and have at her. Believe in the power of incantantions and divination too, for all I care.
    The trouble with the arrogant eggheads in the back is that they do not admit that at this stage of the game the world is far, far too complex for the models. The models are not ready for prime time, Scott. Keep them in the back till they work. Back, back, you ghouls. Applying them to economic policy might just drive us all of the cliff and of course that’ll be our fault right, the dirty grubby rubes you so obviously look down at through both nostrils. The ones who each get a vote (maybe an IQ test should be applied first, eh Scott?). You know. The people.
    By the way, I notice lots of Jewish inflections in your sweaty attempts at sounding arch (“schnozz” “drek”). Do you swop Jewish jokes and iron crosses with your friend Taki, the self-described anti-semite and Wermacht lover, while taking his money, the man who got banned from writing about Jews at the Speccie for spreadiing a “blood libel on the Jewish people.”
    Ass.

    • Scott Locklin said, on September 24, 2010 at 12:57 am

      The nice thing about having something approaching common sense is your detractors will all be insane. Stick that in your tuches and smoke it.

  67. [...] Nassim Taleb: clown of quantitative finance (via Locklin on science) Posted on January 24, 2011 by nassimtaleb One of my fundamental realizations in life is that popular media in the 20th and 21st century is no better at conveying information than the "yellow journalism" of the Robber Baron era. A corollary to this is that most popular science "experts" are clowns. I realized this almost immediately in physics, as I had the good fortune to meet a couple of the charlatans I admired as a youth. It would be incredibly solipsistic of me to assume that this wa … Read More [...]

  68. London Guy said, on January 27, 2011 at 10:52 am

    Just a bit of clarification: The Black-Scholes option-pricing formula calculates option prices based on standard deviation (which again is spewed out of the Gaussian curve, the financial applications of which NNT has vehemently and rightly criticized) of historical stock prices (which as every layman in his right mind knows have nothing to do with future stock prices). Turns out that Messrs Black & Scholes based their formula on the probability of this deviation. The whole exercise is fruitless and the “map” is as good as one drawn out of imagination. Nobel must be lighting dynamites in his grave.

    • Scott Locklin said, on January 27, 2011 at 6:33 pm

      Yes, and CAPM is based on the Gaussian also, as is most everything in first year quantitative finance. That doesn’t make these models useless any more than other statistical models based on Gaussians when we know the process ain’t normal. Hell, the entire concept of “statistical distribution” itself is kind of a lie: everyone knows financial processes are Markov.

  69. Morgan said, on March 25, 2011 at 5:37 pm

    Thank God somebody else out there sees that Taleb is as mad as a bag of bats.

    I read both his books, BS and FBR.

    My initial impression was positive, “I guess that makes sense, even if NT comes across as overbearing/arrogant”.

    Having learnt something about investing and reading about the history of capitalism, I now come to the conclusion that he is quite mad.

    Believing that the bailouts were ‘a bad idea’, and then suggesting that we nationalise all the banks so only hedge funds/investment companies can operate, is like chopping off your arm and then deciding to go the whole hog and shoot yourself in the head. It is just WTF?

    Fundamentally, when you get right down to it, he has no solutions to improving either general economic or stock market forecasting.

    What is more, his idea of black swans is not original, every experienced investor is aware that stock returns don’t follow a predictable distribution, that the end outcomes are extremely uncertain.

    His actual solution for banking for example, is to effectively to get rid of markets. No private banks offering loans, the state owns them all. That my friends, is Communism. No hyperbole, this is not a Red Scare. It IS Communism pure and simple, it ticks all the boxes.

    I find it utterly bizarre that he complains of systematic failure in the banking system and then proposes we put all our eggs in one basket, that of the State. Look at the Soviet Union’s collapse. That was a Black Swan event too, no? States can collapse too, it just takes longer and the results last generations instead of a handful of years.

    Eventually, you’ll find that other parts of the economy are subject to ‘Black Swans’, and the nationalisation will continue to all the other commanding heights of the economy. It might sound crazy now, but that’s logically where this type of thinking leads you.

    Unfortunately, he has become a ‘guru’, and it is possible that people will look to him for solutions. That is my main concern with him, some people I know are infatuated with his ideas, and they seem to be in majority. I would worry that he might be conjured up to perform his lysenko science on a real economy, in which case I don’t want to be a citizen of that country.

    • Scott Locklin said, on March 25, 2011 at 7:13 pm

      Maybe the whole doing away with markets thing is an offshoot of his experiments with Paleo living.

  70. fahad said, on April 7, 2011 at 8:10 am

    Taleb’s books/FT/Edge articles are closer to fiction. It’s just lame that you’re trying to present a picture of Taleb reading articles which are meant to be read by someone who has no idea of economics.
    .
    You might try and read some of his scientific papers if you’re interested in math. Some of his more theoretical and rigorous work is collaborated with legends like Benoit Mandelbrot and Kahneman. It might do you good to actually read his math/science papers and stop criticizing his fictional books/articles which are meant to be fictional.

    • Scott Locklin said, on April 7, 2011 at 8:16 am

      His papers suck too. I don’t care who he wrote them with.

  71. Igor Shutdafokov said, on April 12, 2011 at 9:15 pm

    To me this “black swan” theory is not without value.
    Basically he wrote it in the format that would make it an instant US bestseller, it takes some craft to do this, although probably less than it is credited for (not anything approaching genius level here)
    Paraboles are not unlike contemporary marketing jargon.
    And tricks.

  72. Martin said, on April 27, 2011 at 10:03 pm

    Mathematics doesn’t only involve beautiful formulas and equations. Logic is also part of Mathematics, and The Black Swan proves very nicely using deduction why the future can’t be predicted and where the limitations on our knowledge are.

    I suggest, that if you really want to oppose Taleb’s work you should do it in a Mathematical way, instead of using funny sounding words which seem to only aim at making him look as a weird person.

    Moreover, he is not alone in the field, there are many more scientist working on similar problems. Many of them are also economists who are not afraid to admit (in published books) how the neoclassical economics doesn’t fit reality.

    But I guess many people are not interested in reality, they just want pretty formulas to make other peoples lives miserable with.

    • Scott Locklin said, on April 27, 2011 at 11:44 pm

      Perhaps you’d care to point out the mathematics in that ridiculous article? Or perhaps you’re one of those people more interested in being disagreeable because I had the nerve to mock your eminently mockable hero?

      He is not alone in his field for certain: the world is filled with gasbags.

  73. Anton said, on May 30, 2011 at 7:57 pm

    So where does this claim that Talib work outside the referee system come from? What kind of BS is that? Just look at his resumee. He has papers all over in Physica, Complexity, Quantitative Finance, Foreign Affairs, HBR, TAS,… mostly in the past 2 yeers.
    Now looked up Scott Locklin. Locklin has no papers to speak of outside on non-cited proceedings of a conference from 1997.
    Please explain.
    Also please look at meaning of “substantive” argument.

    • Scott Locklin said, on May 31, 2011 at 1:08 am

      I can give you a definition of non-substantive: comparing publication lists of some obscure blog monkey who actually works for a living to those of a professional blowhard: that’s non-substantive. Thank you, try again.

      • Anton said, on May 31, 2011 at 11:02 am

        Explain to me why when a bitter blogger without academic status and publications atacks the work of someone backed by plenty of academic publication in peer-reviewed work in prestigeous journals I should trust what the blogger says, especially when it is all personal hate.
        why does Scott Locklin not present his anti-Talib views in a peer-reviewed setting with specialists studying the validity of idea? That would make you more credible.
        Would you trust science if published outside the journal system?

        • Scott Locklin said, on May 31, 2011 at 6:23 pm

          Scott Locklin can be peer reviewed right here on the internet, sparky. I don’t get paid to make fun of Taleb for a living: though it sounds like a fun job.

          When you learn how to spell your hero’s name, I’ll consider you “prestigeous” enough to give a shit what you think. Meanwhile; obviously every famous person lionized in the media and published in “peer reviewed” journals is always right.

          • Anton said, on June 1, 2011 at 3:56 pm

            my language is not english. You are xenophobe, don’t like people outside America.
            You are not credible academically and personaly.
            You are a problem for yourself.

  74. Peter said, on May 31, 2011 at 1:13 pm

    This is hardly a matter of trust, Anton. Scott has pointed you in the direction of the relevant academic literature as regards Taleb’s revival of the long-shot lure. And if you want to know what an expert in Extreme Value Theory thinks of Taleb, you can read this:

    http://ideas.repec.org/a/bes/amstat/v61y2007maugustp189-192.html

    But don’t trust me either. Just head down to the racetrack and see how long your money lasts when you bet on the most unexpected outcomes.

    Regards

  75. Anton said, on May 31, 2011 at 3:09 pm

    What are you smoking Peter? Who are you fooling?
    The paper was before the banking crisis. What did EVT do in the crisis? Banks went bust.
    Talib is not saying to go for tails only avoid tails risks so it is dishonest to talk racetrak.

    The problem w Scott Locklin is that he is ad homninem against Talib but does not want people to be ad hominem against him.

  76. Peter said, on May 31, 2011 at 6:14 pm

    Dear Anton,

    Thanks for your considered reply and clarifying “ad hominem” for the process. For your interest I am not smoking anything in part due to the landmark study by Doll and Hill some sixty years ago, but I may be fooling myself because they used several techniques we are warned against by Taleb (attacking the “inverse” modeling problem, use of correlations, etc).

    Now, kindly clarify for me why Black Swan struggling (a.k.a. the appropriation of Jensen’s Inequality) does not apply to the racetrack. There are any number of difficult to predict events which might upset the script, making less favored runners more likely to win.

    Kindly also clarify whether you wish to denigrate EVT, because that strikes me as a very strange thing for a student of Black Swan theory to do. I’m happy to beat you up for your contempt of theory (you know, for your own good) but hate to waste energy if I am mistaken.

    Sincerely

    Peter

  77. Michael Morris said, on July 28, 2011 at 8:42 pm

    I attended a lecture on option pricing by Nassim a decade ago. He was nothing short of brilliant. All schtick to oneside Nassim’s ideas will help to save the system not bury it – something that will no doubt irritate him.

    Michael M

  78. Jason Holloway said, on August 9, 2011 at 8:01 pm

    Dear Scott,

    I enjoy your blog. You are an entertaining writer. I do have a few things to say about this article though. You missed Nassim’s main point. Or, maybe you just decided not to address it and focus on the less relevant details of his argument?

    Nassim’s argument in the Black Swan is as follows: 1) Highly improbable, hard-to-predict events are more impactful to the human race than predictable events, and 2) Humans fool themselves into believing that the future is more predictable than it actually is.

    The financial industry just got bailed out, whether in the form of interest free loans or direct aid, to the tune of 16+ trillion dollars. This bailout was necessary because of an inability to account for risk. It doesn’t take a physicist to figure out that somebody, somewhere screwed up. I don’t think it was the cook, the plumber or the neighborhood barber.

  79. Avenyprofilen said, on September 8, 2011 at 7:54 pm

    “Taleb thinks all of quantitative finance is nonsense and we should do away with quants. I am guessing the former’s delusions had something to do with drinking the same Berkeley tapwater in the 1960s which made everyone else believe in crazy things, but Taleb was a trader, and it’s a common prejudice of traders to dislike quants for cutting into their P/L. ”

    Yeah sure. He just worked as a quant all life and is now co-managing a quant fund. Great research dude!

    • Scott Locklin said, on September 10, 2011 at 7:55 pm

      Taleb was a trader, dipshit.

  80. Avenyprofilen said, on September 11, 2011 at 1:23 pm

    And you are basing that statement on…. hahahaah! Please enlight us on your specific sources of how you know that and why Taleb is lying about his profession.

    • Scott Locklin said, on September 11, 2011 at 3:52 pm

      “He has held the following positions: managing director and proprietary trader at UBS; worldwide chief proprietary arbitrage derivatives trader for currencies, commodities and non-dollar fixed income at CS First Boston; chief currency derivatives trader for Banque Indosuez; managing director and worldwide head of financial option arbitrage at CIBC Wood Gundy; derivatives arbitrage trader at Bankers Trust, proprietary trader at BNP Paribas, as well as independent option market maker on the Chicago Mercantile Exchange; and founder of Empirica Capital, ”

      http://en.wikipedia.org/wiki/Nassim_Nicholas_Taleb#Finance_career

      Thank you, drive through.

  81. Avenyprofilen said, on September 11, 2011 at 4:47 pm

    Are you really out of your mind? Try googling longer than the first google hit and you’ll find out. Maybe I couple of the 100 youtube clips where he is talking about the fund or check its website were he is addressed as an consultant.

    Game, set and match!

    • Scott Locklin said, on September 11, 2011 at 8:50 pm

      Are you one of those people who craves attention, even if it requires shitting your own pants or something? Taleb is/was a trader, by his own admission, and according to freaking wikipedia and every other reference on the dimwit which exists in Christendom. He’s now a professional blowhard. Never a quant.

  82. Scottisaloser said, on September 19, 2011 at 2:32 pm

    What a pathetic mess of a post. It is merely composed of ad hominems and no real arguments followed by desperate cute comments which are also ad hominems w/o real arguments. Post your net worth please Scott.

  83. Shawn Harrington said, on September 20, 2011 at 4:29 am

    Ego trumps intelligence. Period. Taleb doesn’t state this explicitly, but it resonates through his work; your comments completely pick out the thyme leaves in a forest of sequoias. He embraces quantitative methods more than other statisticians, but argues for them outside the parameters of intuition. Buying the correct out of the money options in the next decade will be a roulette wheel with 4 choices.

  84. maximisation said, on March 7, 2012 at 6:23 pm

    You should be a part of a contest for one of the most useful sites online. I will highly recommend this blog!

  85. Peter Simmons said, on March 19, 2012 at 9:49 am

    ‘he didn’t foresee what happened any more than anyone else did’ – funnily enough, I did foresee it. I was pointing out for years the unsustainability of a constantly rising housing market that depended on first time buyers for its profits, and the greed which fed it. I was aware it was going to crash at some point since there had to come a time when first time buyers couldn’t afford an inflated house price no matter now things were manipulated, at which point it would fall over.
    I wasn’t surprised in the least. But then I’m not an economist, not involved in the money-making world, no wealth, no shares, don’t pay tax, live frugally and have no debts; I am an observer, some might say seer. Black Swans are not events that could not be anticipated, they are events that few anticipate but for some are clearly inevitable. What’s lacking is imagination and efficient brain functioning. Unfortunately, brain functioning appears to be affected by greed and avarice. Sorry if my language isn’t all market-related terms and quotes, but I’m an environmentalist, and none of you have even heard that express train coming down the track yet.

    Watch out boys, a bumpy ride coming for capitalism!

  86. r said, on April 7, 2012 at 3:03 am

    i’m not a mathematician so i can’t really get involved in this argument over models and which models are most effective. a lot of the vitriol that i see directed at taleb seems to be that people don’t like him as a person. i don’t think the arguments against him that people are making would change if they liked him better, but the emotional character of them would.

    taleb’s books introduced me to seneca and stoicism and a whole area of a psychological biases that i hadn’t really spent much time considering or thinking about beforehand or reading. other books cover these areas better. for stoicism, actually reading seneca’s letters or marcus aurelius’s meditations is better than reading taleb’s version of it. for psychological biases, actually reading daniel kahneman is better than reading taleb. it sounds like in the areas where you agree with taleb with finance or math, you think a person would gain better understanding elsewhere.

    i’m not sure if i would’ve found these other books if never read taleb so i’m happy i read the black swan and fooled by randomness because it got me on a path to finding ways to overcome my own psychological biases in decision-making and formulate a philosophy to help me deal with the inevitable vicissitudes of life. i’m going to read charlie munger’s book coming in soon. i’d like to form an interdisciplinary general framework that’s capable of dealing with any problem of decisionmaking and charlie seems to have done that from the descriptions i’ve read. i’ll have a lot more work to do filling in the substance of each discipline within that framework. maybe, if i develop a greater understanding of math, i’ll be able to understand how these alternatives to the normal distribution work both in theory and in practice that are mentioned in the comments.
    -r

    • Scott Locklin said, on April 7, 2012 at 3:39 am

      I’m sure the guy’s an agreeable dinner companion, and I’m sure one could get something out of his books, which mention all kinds of crazy things. I just don’t think he should be taken seriously as a commentator; mostly because he says crazy and misleading things.
      I’m glad you’re reading the classics, and you got your moneys worth from reading Taleb if you read more such things. FWIIW, I got my Seneca and Marcus Aurelius from reading about Romans. Epictetus ain’t bad either. Really, this is stuff we should all have been taught in High School and College in a sane society.

  87. fiberz said, on February 27, 2013 at 3:42 am

    I think his latest book Anti-Fragility is pretty good, it talks a lot about the arrogance of scientism.

    • Scott Locklin said, on February 27, 2013 at 5:13 am

      I have not read his latest book, but I have read his interviews in various places, and I am inclined to agree with you. Not only has he avoided saying something retarded, he’s making sense. Either a sign of the apocalypse, or perhaps a little shame has done the man some good.

    • Quant said, on February 27, 2013 at 12:53 pm

  88. Nikolaz said, on October 7, 2013 at 9:00 am

    Doesn’t the Sharpe ratio assume normally distributed returns?

  89. Maciano said, on December 15, 2013 at 11:12 am

    Good critique. I’m no quant, but I got the same impression, he more or less disses econometric models, yet doesn’t really replace it with anything. The Black/Scholes formula gives you some insight, not perfect insight, but better than nothing. His ideas on Black Swans & antifragility are interesting, but are also a bit in the ‘meh’-territory. So humans do not expect the unexpected & robustness is important, well, swell… I mean that’s not very profound — at all.

    I already caught him once on EconTalk dissing IQ tests for being nonsense. He also outed himself as a buffoonish curmudgeon on Twitter, seemingly having a lot of time dissing random nobody’s arguing with him.

    I’m glad you wrote this article. I already ignored Taleb’s musings, because I sorta figured him to be like Wittgenstein. So critical of normal truth-funding, that truth-funding becomes nearly impossible. It’s one thing to diss B/S, but then replace it with something better. Otherwise it’s just BS.


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