Nassim Taleb (Black Swan) open letter to David Cameron • Hacker News Board

Re: Nassim Taleb (Black Swan) open letter to David Cameron

#21

Post by TriinT » Tue, Aug 18, 2009, 5:50 AM UTC

jamesbritt wrote: post #18

TriinT wrote: post #9

Earlier quoted context omitted.

"Taleb's position (and argument in this paper) is that we need to recognize instances where we don't know the answer instead of making decisions based on assumptions that we do." Have you ever worked at an investment bank? I suspect you have not. Wall Street does not run on the scientific method. It runs on greed, fear and politics. The ones who check the assumptions and know the limits of their models don't have the…

"You can't steal ideas from probability theory and statistics that have been known for centuries, rename it, wrap it nicely and call it a new, original idea." Do you have any references to work centuries old that describes what Taleb calls 'Black Swans'?

No need for references. Probability was started by a bunch of bored french aristocrats who wanted to understand risk and uncertainty. Read what they wrote. They're the original thinkers.

Last but not least: in the late 1990s, Lehman Brothers had a trading desk dedicated solely to extremely unlikely events. That was before the so-called "black swan" theory came along. They made money only once. On 9/11.

Taleb's good ideas are not original, and his original ideas are no good.

Re: Nassim Taleb (Black Swan) open letter to David Cameron

#22

Post by mynameishere » Tue, Aug 18, 2009, 5:52 AM UTC

neilk wrote: post #17

mynameishere wrote: post #13

Earlier quoted context omitted.

You can't discount the apocalypse. You just can't. And this pan-phobic concept "black swan" is just various degrees of unknowable apocalypses that we are supposed to account for based upon their very unaccountableness. I don't buy it. Read the tea leaves first, then tell me about swan feathers. The housing bubble was BLATANT . No black swans involved. I remember talking about it with friends in 2005. No big deal, rea…

Many people knew there was a housing bubble, but few predicted it would have such wide-reaching effects. Did you?

I had all my money in the foreign markets, and got out in late 2007 when it spiked down,

http://finance.yahoo.com/q/bc?s=VEIEX&t=5y

...I wouldn't have made any connection to US housing and foreign equities, but I was looking at both, and I knew both were bubbly. I've since lost money on a few stupid trades, so it's not like I'm an expert or anything. But the fundamentals are usually clear to all. Right now, the macros on S&P PEs, long-term treasuries, and high-yield,

http://finance.yahoo.com/q/bc?s=JNK&t=2y

...are clear, and they all scream "avoid". And that's the extent of my trading strategy right now.

Re: Nassim Taleb (Black Swan) open letter to David Cameron

#23

Post by neilk » Tue, Aug 18, 2009, 5:57 AM UTC

BrentRitterbeck wrote: post #16

neilk wrote: post #14

Earlier quoted context omitted.

I think Taleb's main complaint is that Obama has not changed the incentives for Wall Streeters to put the economy at risk. Instead, we've had a big and apparently permanent transfer of risk from private to public, exacerbating the situation. A Goldman Sachs executive just boasted that their business methods hadn't changed at all from before the crash. Think about that for a second.

I hear this from people all the time. From a financial viewpoint, the markets exist to transfer capital from those that have it to those that need it. In addition to that, the markets exist to transfer risk from one party to another. People outside of finance need to realize that companies like Goldman, when they are speculating, serve a legitimate purpose. They provide a mass of liquidity that otherwise wouldn't be…

Your slippery slope looks pretty flat to me. Some regulation does not mean locking down the entire market. And anyway, Taleb is proposing complete liberation for speculators; the only thing is they can't do it and expect bailouts, and they can't get some quasi-official stamp that says "AAA", please invest widows' and orphans' money here.

From a financial viewpoint, the markets exist to transfer capital from those that have it to those that need it.

No, that's what communism was supposed to do. Under capitalism, we use the market to allocate capital efficiently, to its most productive use. Perverse incentives, like excessive bonuses or government bailouts without penalties, interfere with the efficient allocation of capital.

Re: Nassim Taleb (Black Swan) open letter to David Cameron

#24

Post by lutorm » Tue, Aug 18, 2009, 5:59 AM UTC

BrentRitterbeck wrote: post #16

neilk wrote: post #14

Earlier quoted context omitted.

I think Taleb's main complaint is that Obama has not changed the incentives for Wall Streeters to put the economy at risk. Instead, we've had a big and apparently permanent transfer of risk from private to public, exacerbating the situation. A Goldman Sachs executive just boasted that their business methods hadn't changed at all from before the crash. Think about that for a second.

I hear this from people all the time. From a financial viewpoint, the markets exist to transfer capital from those that have it to those that need it. In addition to that, the markets exist to transfer risk from one party to another. People outside of finance need to realize that companies like Goldman, when they are speculating, serve a legitimate purpose. They provide a mass of liquidity that otherwise wouldn't be…

Yet markets worked before mortgage-backed securities were invented. Have you read Talib's books? He's not arguing against taking risks, he's arguing that we shouldn't take risks that might bankrupt us, based on some high-falutin' economic model that says that the payoff is slightly larger than the risk, because the calculation is likely to be wrong. And he's arguing that because we can never understand these single events (the Black Swans) we must absolutely never put all our eggs in one basket. Resiliency is more important than efficiency, because in the long run the efficiency is an illusion brought on by imperfect understanding.

Re: Nassim Taleb (Black Swan) open letter to David Cameron

#25

Post by sh1mmer » Tue, Aug 18, 2009, 6:04 AM UTC

Having not read his book, was I the only person annoyed that he used the phrase "black swan" a dozen times in the first paragraph without qualifying it?

He could have been saying "You and your party may be the only hope we have for a resilient society insulated from negative oranges and in which everyone has the opportunity to benefit from positive oranges." for all the difference it makes to me.

Re: Nassim Taleb (Black Swan) open letter to David Cameron

#26

Post by rdouble » Tue, Aug 18, 2009, 6:05 AM UTC

TriinT wrote: post #21

jamesbritt wrote: post #18

Earlier quoted context omitted.

"You can't steal ideas from probability theory and statistics that have been known for centuries, rename it, wrap it nicely and call it a new, original idea." Do you have any references to work centuries old that describes what Taleb calls 'Black Swans'?

No need for references. Probability was started by a bunch of bored french aristocrats who wanted to understand risk and uncertainty. Read what they wrote. They're the original thinkers. Last but not least: in the late 1990s, Lehman Brothers had a trading desk dedicated solely to extremely unlikely events. That was before the so-called "black swan" theory came along. They made money only once. On 9/11. Taleb's good i…

To be fair, the work of Pascal and the Chevalier de Mere does not give much insight on how a water leak may turn into a mudslide. Whatever you may think of Taleb, his work is more of a popularization of catastrophe theory than it is basic probability. He even says as much in his writings.

Re: Nassim Taleb (Black Swan) open letter to David Cameron

#27

Post by BrentRitterbeck » Tue, Aug 18, 2009, 6:06 AM UTC

neilk wrote: post #23

BrentRitterbeck wrote: post #16

Earlier quoted context omitted.

I hear this from people all the time. From a financial viewpoint, the markets exist to transfer capital from those that have it to those that need it. In addition to that, the markets exist to transfer risk from one party to another. People outside of finance need to realize that companies like Goldman, when they are speculating, serve a legitimate purpose. They provide a mass of liquidity that otherwise wouldn't be…

Your slippery slope looks pretty flat to me. Some regulation does not mean locking down the entire market. And anyway, Taleb is proposing complete liberation for speculators; the only thing is they can't do it and expect bailouts, and they can't get some quasi-official stamp that says "AAA", please invest widows' and orphans' money here. From a financial viewpoint, the markets exist to transfer capital from those tha…

Your twist on the poor being the group that "needs" the money is a clever little play on words, but you, and everyone else here, knows exactly what I meant. Companies need money. Investors have money.

As for some god-given right to bank accounts, I never said any such thing. It's not my fault, nor Wall Street's fault, that people aren't better prepared to understand finance. It's a dog eat dog world. If you want to keep hold of your money, learn how to invest for yourself, place it with a broker and accept that even they may lose money, or hide it in your bed. Those are your options.

Under capitalism, we use the market to allocate capital efficiently, to its most productive use.

You are not distilling finance enough. Your definition is a first-year economics definition. That's a definition from an idealized world. In the real world, companies exchange shares for cash. They invest that cash into the business to create value. Other instruments have their own purposes, but it's all about taking either money or risk and transferring it from one party to another based on needs.

Re: Nassim Taleb (Black Swan) open letter to David Cameron

#28

Post by BrentRitterbeck » Tue, Aug 18, 2009, 6:09 AM UTC

lutorm wrote: post #24

BrentRitterbeck wrote: post #16

Earlier quoted context omitted.

I hear this from people all the time. From a financial viewpoint, the markets exist to transfer capital from those that have it to those that need it. In addition to that, the markets exist to transfer risk from one party to another. People outside of finance need to realize that companies like Goldman, when they are speculating, serve a legitimate purpose. They provide a mass of liquidity that otherwise wouldn't be…

Yet markets worked before mortgage-backed securities were invented. Have you read Talib's books? He's not arguing against taking risks, he's arguing that we shouldn't take risks that might bankrupt us, based on some high-falutin' economic model that says that the payoff is slightly larger than the risk, because the calculation is likely to be wrong. And he's arguing that because we can never understand these single e…

Yes, I have read Taleb's books and numerous academic articles by him. My comment was not about Taleb. It was a direct response to the parent of my comment.

Re: Nassim Taleb (Black Swan) open letter to David Cameron

#29

Post by nazgulnarsil » Tue, Aug 18, 2009, 6:16 AM UTC

frossie wrote: post #20

mynameishere wrote: post #13

Earlier quoted context omitted.

You can't discount the apocalypse. You just can't. And this pan-phobic concept "black swan" is just various degrees of unknowable apocalypses that we are supposed to account for based upon their very unaccountableness. I don't buy it. Read the tea leaves first, then tell me about swan feathers. The housing bubble was BLATANT . No black swans involved. I remember talking about it with friends in 2005. No big deal, rea…

"The housing bubble was BLATANT. No black swans involved." Yes, but what was not blatant was that the housing bubble popping would kill Lehman Brothers, cause runs on banks and almost bring down the whole world economy. Taleb's point is that you can't go around behaving like any system is, to borrow a phrase "too big to fail" - or rather too cleverly thought out/regulated to fail. To some extent this is simple engine…

the problem isn't that people were too dumb/greedy to notice. it's that they weren't punished for not noticing it. you'd be amazed what a little incentive does to people's willingness to self educate.

Re: Nassim Taleb (Black Swan) open letter to David Cameron

#30

Post by lutorm » Tue, Aug 18, 2009, 6:23 AM UTC

mynameishere wrote: post #13

oakmac wrote: post #7

Earlier quoted context omitted.

Black Swan theory isn't about denying science; it's about recognizing the limits of science. Taleb's position (and argument in this paper) is that we need to recognize instances where we don't know the answer instead of making decisions based on assumptions that we do.

You can't discount the apocalypse. You just can't. And this pan-phobic concept "black swan" is just various degrees of unknowable apocalypses that we are supposed to account for based upon their very unaccountableness. I don't buy it. Read the tea leaves first, then tell me about swan feathers. The housing bubble was BLATANT . No black swans involved. I remember talking about it with friends in 2005. No big deal, rea…

If it really was that blatant, why did it happen? Doesn't the fact that it burst by definition mean that most people did not recognize it?

But Taleb makes a different point: Discounting the apocalypse is exactly what he's arguing against, because this is essentially what LTCM et al were doing with their models. They calculated probabilities to make sure that the estimated payoff was greater than the estimated loss, but they got the distributions wrong. What you should try to do is make sure that the apocalypse can't happen, that you aren't exposed so that one outlier will take you down. Because due to the nature of the system (there is only a sample of one of the world economy) you simply can't gather data that can pin down the wings of the distributions to the precision you need.

According to the models used at the time, the Black Monday 1987 was something like a 30-sigma event. If the distributions truly were gaussian, such an event should never happen in the history of the Universe. So you have a choice between thinking that we just had an incredibly bad luck, or the model is wrong. I'd go with the latter.