Nassim Nicholas Taleb predicted the 2008 crisis

19 Jul

https://en.m.wikipedia.org/wiki/Nassim_Taleb
 (1998)Doctoral advisorHélyette GemanKnown forApplied epistemology, Antifragility,Black swan theoryInfluencesFriedrich HayekKarl PopperHenri PoincaréMichel de MontaigneBenoit MandelbrotFrédéric BastiatSeneca the YoungerFrancis BaconInfluencedDaniel KahnemanWebsite
fooledbyrandomness.com

Nassim Nicholas Taleb (Arabic: نسيم نيقولا نجيب طالب‎, alternatively Nessim or Nissim,born 1960) is a Lebanese-American essayist, scholar, statistician, and risk analyst,[1] whose work focuses on problems of randomness,probability, and uncertainty. His 2007 bookThe Black Swan was described in a review by the Sunday Times as one of the twelve most influential books since World War II.[2]

Taleb is a bestselling author,[3][4][5] has been a professor at several universities, serving as Distinguished Professor of Risk Engineering at the New York University Polytechnic School of Engineering since September 2008, and as co-Editor in Chief of the academic journal, Risk and Decision Analysis since September 2014. He has also been a practitioner of mathematical finance, a hedge fund manager, a derivatives trader, and is currently a scientific adviser at Universa Investments.

He criticized the risk management methods used by the finance industry and warned about financial crises, subsequently profiting from the late-2000s financial crisis.[6][7] He advocates what he calls a “black swan robust” society, meaning a society that can withstand difficult-to-predict events.[8] He proposes antifragility in systems, that is, an ability to benefit and grow from a certain class of random events, errors, and volatility[9][10] as well as “convex tinkering” as a method of scientific discovery, by which he means that decentralized experimentation outperforms directed research.[11][12]

Early life and family backgroundEdit

Taleb in his student days

Taleb was born in AmiounLebanon to Minerva Ghosn and Najib Taleb, a physician and oncologist and a researcher inanthropology. His parents were Greek Orthodox Lebanese with French citizenship, and he attended a French school there, theGrand Lycée Franco-Libanais.[13][14] His family saw its political prominence and wealth reduced by the Lebanese Civil War, which began in 1975. During the war, Taleb studied for several years in the basement of his family’s home.[15]

Both sides of his family were prominent in the Lebanese Greek Orthodox Christian community. On his mother’s side, his grandfather, Fouad Nicolas Ghosn, and his great-grandfather, Nicolas Ghosn, were both deputy prime ministers. His paternal grandfather was a supreme court judge; his great-great-great-great grandfather, Ibrahim Taleb, was a governor of the Ottoman semi-autonomous Mount Lebanon Governorate in 1861.[16] Taleb has described himself as Greek Orthodox Christian.[17] The Taleb family Palazzo, built in 1860 by Florentine architects for his great-great-great-great grandfather, still stands in Amioun.[18]

EducationEdit

Taleb received his bachelor and master of science degrees from the University of Paris.[19] He holds an MBA from the Wharton School at the University of Pennsylvania(1983),[13] and a PhD in Management Sciencefrom the University of Paris (Dauphine)(1998),[20] under the direction of Hélyette Geman,[20] with Nicole El KarouiDilip Madan, Patrice Poncet, and Marco Avellaneda as committee members.[21] His dissertation focused on the mathematics of derivatives pricing. [20][21]

polyglot, Taleb has a literary fluency in English, French, and classical Arabic; a conversational fluency in Italian and Spanish; and can read classical texts in Greek, Latin,Aramaic, and ancient Hebrew, as well as in the Canaanite script.[22][23]

CareerEdit

Finance careerEdit

Taleb has been a practitioner ofmathematical finance,[24][subscription] a hedge fund manager,[8][25][26] a derivativestrader,[13][27][28] and is currently a scientific adviser at Universa Investments. In 2011, he worked on a paper with the International Monetary Fund.[29][30]

Taleb considers himself less a businessman than an epistemologist of randomness, and says that he used trading to attain independence and freedom from authority.[31]Taleb was a pioneer of tail risk hedging (now sometimes called “black swan protection”),[32]which is intended to mitigate investors’ exposure to extreme market moves. His business model has been to safeguard investors against crises while reaping rewards from rare events, and thus his investment management career has included several jackpots followed by lengthy dry spells.[13]

He has also held the following positions:[33][34][35] Managing director and proprietary trader at Credit Suisse UBS, Worldwide chief proprietary arbitrage derivatives trader for currencies,commodities and non-dollar fixed income atFirst Boston, Chief currency derivatives trader for Banque Indosuez, Managing director and worldwide head of financial option arbitrageat CIBC Wood Gundy, Derivatives arbitrage trader at Bankers Trust (now Deutsche Bank), Proprietary trader at BNP Paribas, Independent option market maker on theChicago Mercantile Exchange and founder ofEmpirica Capital.

In 2004, Taleb retired from trading and became a full-time author.[36][contradiction] Since 2007 Taleb has been a Principal/Senior Scientific Adviser at Universa Investments in Santa Monica, California, a tail protection firm owned and managed by former Empirica partner Mark Spitznagel. However, Taleb describes the nature of his involvement as ‘totally passive’ from 2010 on.[37]

Taleb reportedly became financially independent after the crash of 1987[13] and was successful during the Nasdaq dive in 2000[38] as well as the financial crisis that began in 2007,[39] a development which he attributed to the mismatch between statistical distributions used in finance and reality.Universa is a fund which is based on the “black swan” idea and to which Taleb is a principal adviser. Some of the separate funds managed by Universa made returns of 65% to 115% in October 2008.[6][40] Following the economic crisis that started in 2008, Taleb has become an activist for what he called a “black swan robust society”[41][42] and as of July 2011, Taleb was writing a paper with theInternational Monetary Fund on identifying and mitigating tail risks in financial markets.[29]

Academic careerEdit

Taleb changed careers and became a mathematical researcher, scholar and philosophical essayist in 2006,[33] and has held positions at NYU’s Courant Institute of Mathematical Sciences, at University of Massachusetts Amherst [39], at London Business School [40], and at Oxford University. He has been Distinguished Professor of Risk Engineering at New York University Polytechnic School of Engineering, since 2008.[33][43][44]He was Distinguished Research Scholar at the Said Business School BT Center, University of Oxford (2009-2013).[citation needed][33]

Taleb is co-Editor in Chief of the academic journal, Risk and Decision Analysis (since September 2014),[45] jointly teaches regular courses with Paul Wilmott in London (19th time, March 2015),[46] and occasionally participates in teaching courses toward theCertificate in Quantitative Finance.[47] He is also co-faculty at the New England Complex Systems Institute.[48]

Writing careerEdit

Taleb’s four volume philosophical essay on uncertainty, titled the Incerto covers the following books: Antifragile (2012), The Black Swan (2007–2010), Fooled by Randomness (2001) and The Bed of Procrustes (2010).

Taleb’s first non-technical book, Fooled by Randomness, about the underestimation of the role of randomness in life, around the same time as the September 11 attacks, was selected by Fortune as one of the smartest 75 books known.[49]

His second non-technical book, The Black Swan, about unpredictable events, was published in 2007, selling close to 3 million copies (as of February 2011). It spent 36 weeks on the New York Times Bestseller list,[50] 17 as hardcover and 19 weeks as paperback, [13][51] and was translated into 31 languages.[13] The Black Swan has been credited with predicting the banking and economic crisis of 2008.[52][53]

In 2007, in The Black Swan, Taleb warned about the coming crisis:

Globalization creates interlocking fragility, while reducing volatility and giving the appearance of stability. In other words it creates devastating Black Swans. We have never lived before under the threat of a global collapse. Financial Institutions have been merging into a smaller number of very large banks. Almost all banks are interrelated. So the financial ecology is swelling into gigantic, incestuous, bureaucratic banks – when one fails, they all fall. The increased concentration among banks seems to have the effect of making financial crisis less likely, but when they happen they are more global in scale and hit us very hard. We have moved from a diversified ecology of small banks, with varied lending policies, to a more homogeneous framework of firms that all resemble one another. True, we now have fewer failures, but when they occur …. I shiver at the thought.[54]:TBD[page needed]

The government-sponsored institution Fannie Mae, when I look at its risks, seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup. But not to worry: their large staff of scientists deem these events “unlikely”.[54]:TBD[page needed]

He warned of pseudostability in Syria:

Dictatorships that do not appear volatile, like, say, Syria or Saudi Arabia, face a larger risk of chaos than, say, Italy, as the latter has been in a state of continual political turmoil since the second war.[54]:205

A book of aphorisms, The Bed of Procrustes: Philosophical and Practical Aphorisms, was released in December 2010.

The final book of his Incerto series—Antifragile: Things That Gain from Disorder—was published in November 2012 by Random House in the United States and Penguin in the United Kingdom.[55] In the introduction of the book, Taleb describes it as follows: “Some things benefit from shocks; they thrive and grow when exposed to volatility, randomness, disorder, and stressors and love adventure, risk, and uncertainty. Yet, in spite of the ubiquity of the phenomenon, there is no word for the exact opposite of fragile. Let us call it antifragile. Antifragility is beyond resilience or robustness. The resilient resists shocks and stays the same; the antifragile gets better.”[55]:3 (A mathematical parallel version of the Incerto Quadrilogy is freely available on Taleb’s website.[56])

Taleb’s non-technical writing style has been described as mixing a narrative, often semi-autobiographical style with short philosophical tales and historical and scientific commentary. The sales of Taleb’s first two books garnered an advance of $4 million for a follow-up book on anti-fragility.[13]

In summer 2013 Taleb stated that his intention was “to complete a multi-volume mathematical expression of the ideas of the more philosophical works, with rigorous derivations and proofs. Volume one is complete.”[57]

Philosophical influences and ideasEdit

InfluencesEdit

Taleb’s acknowledged influences for his philosophical and intellectual positions include Friedrich Hayek,[citation needed] Karl Popper,[13] Henri Poincaré,[citation needed] Michel de Montaigne,[citation needed] Benoit Mandelbrot,[citation needed] Frédéric Bastiat,[citation needed] Seneca the Younger,[54]:TBD and Francis Bacon[54]:101 The following ideas have been acknowledged to have influenced Daniel Kahneman.[58]

Ideas and theoriesEdit

Taleb’s book The Bed of Procrustessummarizes the central problem: “we humans, facing limits of knowledge, and things we do not observe, the unseen and the unknown, resolve the tension by squeezing life and the world into crisp commoditized ideas”. Taleb disagrees with Platonic (i.e., theoretical) approaches to reality to the extent that they lead people to have the wrong map of reality rather than no map at all.[28] He opposes most economic and grand social science theorizing, which in his view suffer acutely from the problem of overuse of Plato’s Theory of Forms. Based on these and other constructions, he advocates for what he calls a “black swan robust” society, meaning a society that can withstand difficult-to-predict events.[8]

He has also proposed that biological, economic, and other systems exhibit an ability to benefit and grow from volatility—including particular type of random errors and events—a characteristic of these systems that he terms antifragility.[59][60] Relatedly, he also believes that universities are better at public relations and claiming credit than generating knowledge. He argues that knowledge and technology are usually generated by what he calls “stochastic tinkering” rather than by top-down directed research,[61][62]:182 and has proposed option-like experimentation as a way to outperform directed research as a method of scientific discovery, an approach he terms convex tinkering.[55]:181ff, 213ff, 236ff

Taleb has called for cancellation of the Nobel Memorial Prize in Economics, saying that the damage from economic theories can be devastating.[63][64] He opposes top-down knowledge as an academic illusion and believes that price formation obeys anorganic process.[65] Together with Espen Gaarder Haug, Taleb asserts that option pricing is determined in a “heuristic way” by operators, not by a model, and that models are “lecturing birds on how to fly”.[65] Pablo Triana has explored this topic with reference to Haug and Taleb,[66] and says that perhaps Taleb is correct to urge that banks be treated as utilities forbidden to take potentially lethal risks, while hedge funds and other unregulated entities should be able to do what they want.[67]

Taleb’s writings discuss the error of comparing real-world randomness with the “structured randomness” in quantum physicswhere probabilities are remarkably computable and games of chance like casinos where probabilities are artificially built.[68] Taleb calls this the “Ludic fallacy“. His argument centers on the idea that predictive models are based on Plato’s Theory of Forms, gravitating towards mathematical purity and failing to take some key ideas into account, such as: the impossibility of possessing all relevant information, that small unknown variations in the data can have a huge impact, and flawed theories/models that are based on empirical data and that fail to consider events that have not taken place but could have taken place. Discussing the Ludic fallacy in The Black Swan, he writes, “The dark side of the moon is harder to see; beaming light on it costs energy. In the same way, beaming light on the unseen is costly in both computational and mental effort.”

In the second edition of The Black Swan, he posited that the foundations of quantitative economics are faulty and highly self-referential. He states that statistics is fundamentally incomplete as a field as it cannot predict the risk of rare events, a problem that is acute in proportion to the rarity of these events. With the mathematician Raphael Douady, he called the problem statistical undecidability (Douady and Taleb, 2010).

Taleb sees his main challenge as mapping his ideas of “robustification” and “anti-fragility“, that is, how to live and act in a world we do not understand and build robustness to black swan events. Taleb introduced the idea of the “fourth quadrant” in the exposure domain.[69] One of its applications is in his definition of the most effective (that is, least fragile) risk management approach: what he calls the ‘barbell’ strategy which is based on avoiding the middle in favor of linear combination of extremes, across all domains from politics to economics to one’s personal life. These are deemed by Taleb to be more robust to estimation errors. For instance, he suggests that investing money in ‘medium risk’ investments is pointless because risk is difficult if not impossible to compute. His preferred strategy is to be both hyper-conservative and hyper-aggressive at the same time. For example, an investor might put 80 to 90% of their money in extremely safe instruments, such as treasury bills, with the remainder going into highly risky and diversified speculative bets. An alternative suggestion is to engage in highly speculative bets with a limited downside. He asserts that by adopting these strategies a portfolio can be “robust”, that is, gain a positive exposure to black swan events while limiting losses suffered by such random events.[70] Taleb also applies a similar barbell-style approach to health and exercise. Instead of doing steady and moderate exercise daily, he suggests that it is better to do a low-effort exercise such as walking slowly most of the time, while occasionally expending extreme effort. He avers that the human body evolved to live in a random environment, with various unexpected but intense efforts and much rest.[citation needed]

Praise and criticismEdit

In a 2008 article in The Times, the journalistBryan Appleyard described Taleb as “now the hottest thinker in the world”.[27] The NobelLaureate Daniel Kahneman proposed the inclusion of Taleb’s name among the world’s top intellectuals, saying “Taleb has changed the way many people think about uncertainty, particularly in the financial markets. His book,The Black Swan, is an original and audacious analysis of the ways in which humans try to make sense of unexpected events.”[71] Taleb was treated as a “rock star” at the World Economic Forum annual meeting in Davos in 2009; at that event he had harsh words for bankers.[clarification needed][72][73]

Taleb contends that statisticians can bepseudoscientists when it comes to risks of rare events and risks of blowups, and mask their incompetence with complicated equations.[74] This stance has attracted criticism: the American Statistical Association devoted the August 2007 issue ofThe American Statistician to The Black Swan. The magazine offered a mixture of praise and criticism for Taleb’s main points, with a focus on Taleb’s writing style and his representation of the statistical literature. Robert Lund, a mathematics professor at Clemson University, writes that in Black Swan, Taleb is “reckless at times and subject to grandiose overstatements; the professional statistician will find the book ubiquitously naive.”[75]

Aaron Brown, an author, quant and finance professor at Yeshiva and FordhamUniversities, said that “the book reads as if Taleb has never heard of nonparametric methodsdata analysis, visualization tools orrobust estimation.”[76] Nonetheless, he calls the book “essential reading” and urges statisticians to overlook the insults to get the “important philosophic and mathematical truths.” Taleb replied in the second edition ofThe Black Swan that “One of the most common (but useless) comments I hear is that some solutions can come from ‘robust statistics.’ I wonder how using these techniques can create information where there is none”.[77] While praising the book, Westfall and Hilbe in 2007 complained that Taleb’s criticism is “often unfounded and sometimes outrageous.”[78] Taleb, writesJohn Kay, “describes writers and professionals as knaves or fools, mostly fools. His writing is full of irrelevances, asides and colloquialisms, reading like the conversation of a raconteur rather than a tightly argued thesis. But it is hugely enjoyable – compelling but easy to dip into. Yet beneath his rage and mockery are serious issues. The risk management models in use today exclude the very events against which they claim to protect the businesses that employ them. These models import a veneer of technical sophistication… Quantitative analysts have lulled corporate executives and regulators into an illusory sense of security.”[79][subscription] Taleb felt that academics showed “bad faith” by criticizing a literary book that claimed to be a literary book and by ignoring the empirical evidenceprovided in his appendix and more technical works.[citation needed]

The late Berkeley statistician David Freedmansaid that efforts by statisticians to refute Taleb’s stance have been unconvincing.[80]Taleb wrote in the second edition of The Black Swan that he had a session in 2008 with statisticians in which the hostility changed:

I found out that telling researchers “This is where your methods work very well” is vastly better than telling them “This is what you guys don’t know.” So when I presented to what was until then the most hostile crowd in the world, members of the American Statistical Association, a map of the four quadrants, and told them: your knowledge works beautifully in these three quadrants, but beware of the fourth one, as this is where the Black Swans breed, I received instant approval, support, offers of permanent friendship, refreshments (Diet Coke), invitations to come present at their sessions, even hugs(…) They tried to convince me that statisticians were not responsible for these aberrations, which come from people in the social sciences who apply statistical methods without understanding them.[54]:TBD[page needed]

Taleb and Nobel laureate Myron Scholes have traded personal attacks, particularly after Taleb’s paper with Espen Haug on why nobody used the Black–Scholes–Merton formula. Taleb said that Scholes was responsible for the financial crises of 2008, and suggested that “this guy should be in a retirement home doing Sudoku. His funds have blown up twice. He shouldn’t be allowed in Washington to lecture anyone on risk.”[42]Scholes retorted that Taleb simply “popularises ideas and is making money selling books”. Scholes claimed that Taleb does not cite previous literature, and for this reason Taleb is not taken seriously in academia.[81] Haug and Taleb (2011) listed hundreds of research documents showing the Black–Scholes formula was not Scholes’ at all, and argued that the economics establishment ignored literature by practitioners and mathematicians (such asEd Thorp), who had developed a more sophisticated version of the formula.[citation needed]

Citing his academic works on the same topics covered in The Black Swan, Taleb said that “Academics should comment on data there, not make technical comments on a literarybook”.[citation needed] He has said that no direct published criticism has been directed at his ideas, but rather at his person and style. He wrote, “you never win an argument until they attack your person.”[citation needed] In an interview on Charlie Rose, Taleb said that he was pleased that none of the criticism he received for The Black Swan had any substance, as it was either unintelligent, ad hominem, or style over substance, which convinced him to “go for the jugular” with a huge financial bet on the breakdown of statistical methods in finance.[82][full citation needed]

Taleb’s aggressive and clearly directed commentary against parts of the finance industry—e.g., stating at Davos in 2009 that he was “happy” that Lehman Brotherscollapsed—has led to reports of personal attacks and possible threats.[83][subscription]

Personal lifeEdit

Though a non-smoker, Taleb suffered from throat cancer in the mid-1990s, which he overcame. He has stated that his major hobby is “teasing people who take themselves and the quality of their knowledge too seriously and those who don’t have the guts to sometimes say: ‘I don’t know …'”.[citation needed] Some reporters have commented that information about his personal life is difficult to extract, though Taleb appears to enjoy being in the limelight.[84] Others find him more talkative:Malcolm Gladwell, in What the Dog Saw, wrote: “We would have lunches that would last for hours. The delight I took in his company was offset only by the dread I felt at the prospect of transcribing all those hours of tapes.”[85]According to a 2008 interview in the Financial Times, Taleb lives in New York with his wife and two children.[86]

Taleb stays in touch using his official Facebook page, but reminds readers not to write in it about finance and what he has termed topics that are similarly depraved.[citation needed] The Penguin book cover of Antifragile states that Taleb “refuses all awards and honours as they debase knowledge by turning it into competitive sport.”[55]

Books by Taleb

Honors

See also

References

External links

Read in another language

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