Wednesday, October 15, 2008

Apocalypse Revealed

I'm not big on talking heads. I enjoyed Nassim Nicolas Taleb's books. I admit I didn't act on what I read. I'm guilty of not foreseeing the horrors we are now in. But...

I hate it when a guy who "got it right" suddenly is wined and dined and made the centre of attention after the fact. Who says he is right now? I don't know. I do appreciate that Taleb refuses to take the bait in the following and pontificate on "climate change", "civil liberties" and other "big issues". But I still find it a bit hard to swallow when he starts saying "you tend to think that the crisis is in the middle or towards the end, I think we may be in the very beginning". Argh!

When somebody becomes famous for one thing, that one thing becomes their whole life. Taleb has fallen into that trap. He is becoming a Cassandra.

The following video is a bit chopped up. Whoever submitted it to YouTube cut out everything but Taleb's comments so the larger discussion is lost...



The sad fact is that Taleb is currently one of history's "winners". Here are the facts presented on Bloomberg:
Investors advised by ``Black Swan'' author Nassim Taleb have gained 50 percent or more this year as his strategies for navigating big swings in share prices paid off amid the worst stock market in seven decades.

Universa Investments LP, the Santa Monica, California-based firm where Taleb is an adviser, has about $1 billion in accounts managed to hedge clients against big moves in financial markets. Returns for the year through Oct. 10 ranged as high as 110 percent, according to investor documents. The Standard & Poor's 500 Index lost 39 percent in the same period.

``I am very sad to be vindicated,'' Taleb said today in an interview in London. ``I don't care about the money. We're proud we protected our investors.''

Taleb's book argues that history is littered with high- impact rare events known in quantitative finance as ``fat tails.'' As the founder of New York-based Empirica LLC, a hedge- fund firm he ran for six years before closing it in 2004, Taleb built a strategy based on options trading to bullet-proof investors from market blowups while profiting from big rallies.

While I enjoy Teleb's insights, I have no intention of worshiping at his feet. I'm more a believer in Burton Malkiel in his book A Random Walk Down Wall Street:

Let's engage in a coin-tossing contest. Those who can consistently flip heads will be declared winners. The contest begins and 1000 contestants flip coins. Just as would be expected by chance, 500 of them flip heads and these winners are allowed to advance to the second stage of the contest and flip again. As might be expected, 250 flip heads. Operating under the laws of chance, there will be 125 winnder in the third round, 63 in the fourth, 31 in the fifth, 16 in the sixth, and 8 in the seventh.

By this time, crowds start to gether to witness the surprising ability of these expert coin-tossers. The winners are overwhelmed by adulation. They are celebreated as geniuses in the art of coin-tossing, their biographies are written, and people urgently seek their advice.

Taleb is now an "expert coin-tosser". I'm not denying that his insights are not good. But I put him in the camp of "experts" who are now sought for every word of wisdom. He now tells us that we are only at the start of a most horrendous economic downturn. This gives us shadenfreude. We love it!

But the reality -- as even Taleb states in the above video -- is that nobody knows the future. Not even Taleb. So when he pontificates on this being "only the beginning" he has just betrayed his own claim to wisdom!

By the way... if you want to hear some of Kenneth Rogoff's views, try this NPR broadcast. Or, go to Rogoff's website.

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