Taleb - the new sage of Wall Street | | Hacker News Reader

Taleb - the new sage of Wall Street |

guardian.co.uk

16 pointsnickb29 comments

The banking system, betting against black swans...

I'm so sick of this guy and his gimmicks. Here--I'll sell you some zebra stampede insurance. Now you're covered against that black swan. It could happen, yes? But by definition, a random event can't be predicted, so why bother planning against it?

But this wasn't a "black swan". There was nothing strange about what happened, and many, many people predicted it and explained their predictions. Yet, the media is giving credit to some charlatan who provides nothing but magical thinking:

where he believes no one can predict black swan events, he's eager to cite instances where he alone has done so.

agreed, there was no black swan here. this was a simple debt implosion

Taleb isn't saying that this event can't be explained ("simple debt implosion"), or that no one predicted it. He's saying that the markets as a whole didn't take into account what ended up happening.

This crisis is built upon the fact that people thought they could predict mortgage repayment rates, and they didn't expect a major decline in housing prices. Huge parts of the world economy took these bets. The unexpected happened. Hence the black swan.

In some respect, what Taleb is saying is obvious - markets aren't predictable, and it is unwise to place bets that will kill you if your predictions are wrong. Too bad more people didn't do this.

I generally agree with you (I find Taleb's writing to be incoherent and his arguments overwrought), but I think his point is still relevant: if you make your wealth through financial tricks that work moderately well 99.99% of the time, but fail catastrophically .01% of the time, you've got to plan on failing in a catastrophic way. For whatever reason, most Wall St. guys don't seem to think that way.

Point being, you don't need to predict the improbable event; you just need to be aware that it's eventually going to happen, and plan appropriately.

plan appropriately

Sure. Did you know that on the big stock market drop a couple weeks back, only one company in the s&p 500 went up?

http://www.usnews.com/blogs/new-money/2008/9/30/campbells-so...

if you have no confidence in your banking system and no confidence in the financial markets, the only thing you can have confidence in is the ability to build a bunker

That is the only way to provide against the vast bulk of "black swans". A bunker with plenty of canned goods. And that fact got priced into the market instantly. Even if it amounted to a sort of joke...

You're being extremely cynical.

The point is not that you (probably) lost money in last week's market; the point is that you didn't go bust. The guys that Taleb is talking about put it all on the line, discounted the possibility that this sort of thing could happen, and now they're dead.

Like I said: I don't like Taleb's writing, but I don't think the message is particularly bad.

>But by definition, a random event can't be predicted, so why bother planning against it?

Bang on! This is the typical talk of people who either don't understand what Taleb is talking about or are so adamant that they simply don't care flexing some of their brain muscles. It is analogous to saying that jumping off the cliff, there is a finite probability (however small) that one won't be killed, so why bother not jumping?

I hope you get the point now.

I am sure you did not understand Taleb at all. Actually I think it is possibly his mistake that he believes common people without n iota of statistics or mathematics can understand it. Let me explain, almost all of the equations that the Bankers used are based on a bell curve for a distributed event funtion. Now its called a bell curve because the be represents the average and assumes that an event of infini value would have zero chance to happen. That is ok general continuous function because that is a theorical contruct; but in a distributed function and which by definition cannot have zero occurance (because it is distributed) and event with infinite value can occur atleast once. The whole base of mathematics, therefore which is being used by the Banks is flawed and should be removed.If you udnerstand this thing, I would say Taleb is to Banking what Einstein was to Physics. He is asking you to change the foundation. Do you understand it? I doubt you do.

Taleb doesn't claim that black swans are strange; kind of the opposite, in fact. His claims is that its stupid to pretend that black swans don't exist simply because they haven't been seen before.

I don't see what the gimmick is in this line of thought, can you explain a bit more?

Ah, hindsight. I doubt that many people actually predicted exactly what and when it would happen. Just saying "mortgage-based securities will fall" or "the market will go down in 2007/2008" doesn't count. Of course, I don't doubt that some people predicted it in the sense that they took trading positions against the market. But there are always people shorting the market.

Have you actually read any of his books? His style might be a little unusual, but I've never seen any "magical thinking" there.

I am not nearly a good enough statistician to give a good critique of Talib's theories.

But I do recall a great article that was very informative and for the life of me, I can not find it.

Does anyone here know what I'm talking about, or did I just dream of an excellent Taleb counter point?

You're not dreaming. I remember that it was an article about how to allocate your portfolio according to the risk inherent in the various investment options. It appeared here on hacker news, and yes, it put the lie to a lot of Taleb's claims about risk and investing.

I am not nearly a good enough statistician to give a good critique of Talib's theories.

Neither is he. (rimshot)

I'd love to see this article. Anyone know what it is?

Yes, thank you, that's the article I am talking about.

And it had the name of a mathematical theorem for investing, I think a girl's name.

I am a self professed big fan of Taleb and his writings so would be really interesting to read counter points to his philosophy. Know the link to the article?

Be sure to read this as well:

The Fourth Quadrant: A Map Of The Limits Of Statistics (9/15/08):

http://edge.org/3rd_culture/taleb08/taleb08_index.html

Taleb is to Roubini as Klein is to Chomsky.

This black swan stuff is like that Web 2.0 - everyone can have his own definition.

i'll explain this market for you all so you can understand it

DEBT UNWINDING

the world has flooded itself in debt, far more than any economic expansion or confidence can handle. there is always an inflection point where confidence in debt unravels. this is why even the govt can't stop the debt unwinding.

until a significant de-leveraging takes hold, all markets will stay in the toilet

for de-leveraging to take place, assets need to be repriced

we are now in a period i will call

THE GREAT REPRICING

all assets will be repriced. you see stocks reprice quickly now because they are the most liquid asset. bonds are next. houses will continue to fall. in the end, houses will fall by a minimum of 50%. i say this as a homeOWNER, i have already made peace with the fact that my home (in desirable bay area) will fall by 50%. in some places they have already fallen 50%

this is the exact experience of the japanese in the 90s. even 0% interest rates could not induce more consumption and debt. it took them TEN YEARS to work it off

I agree with you - there is really no need to be talking about black swan events, it's simple math. Over the last few years people (especially in the US) have been borrowing like crazy based on the value of their homes. These were inflated because of banks being willing to loan to people that really couldn't afford it, thus driving up the price. A simple but vicious circle that ends the day someone yells "the emperor has no clothes on". And that time is now.

If you look through all the bank-yadayada and think for yourself it's both very simple and inevitable. And the only thing that will fix it is bringing prices and spending back to their natural level, which is well below what it is today.

Well, it all seems so simple and inevitable now, but we have the benefit of hindsight. A year ago trillion dollar losses, nearly trillion dollar bailouts, and general financial collapse was not so obvious.

How about 8 years ago?

http://www.city-journal.org/html/10_1_the_trillion_dollar.ht...

I think you misunderstand what a "black swan" event is. It isn't necessarily an amazingly rare or complicated thing; actually, kind of the opposite. It's an event that is thought to be rare based only on the flawed reasoning that it hasn't been seen yet - the danger of a black swan comes from people betting so heavily on that perceived rarity.

No, this scenario has been seen often before and should be well understood by anyone who knows their history. Or have any common sense.

Taleb's book deals (among other subjects) with the reasons why, in the real world, nearly all of us - regardless of common sense and knowledge of history - continue to be surprised with such events.

A complete lockup of the global financial system has been seen often before? Come on.

As for whether or not the scenario should be well understood by anyone who has common sense: yes, that's the point. People were blinded by their faulty statistical models, and stopped acting in a sensible way.

Everybody knew that 'debt unwinding" was coming. What nobody could predict, and everybody was betting against, was when.

You are spot on. All these manifestations are the by-products of deleveraging

It's happening everywhere. Housing, equity, bond, commodities etc.

The term "There's always a bull market somewhere" is no longer relevant at this period of time.

Of note is that in Japan, houses fell by 90%, and office space fell by 99%.

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