Black Swans And Complexity
Submitted by Jim Lewis
Nassim Taleb is wrong about the financial crisis and black swans.

The ongoing financial crisis is not the result of a perplexing phenomenon of complexity. It is the beginning of a train wreck we have seen for decades. We are not wandering into a surprise or horrified by the dark specter of a Black Swan rearing its long tailed head; this macro crisis appeared on the horizon long ago, easily calculated by any actuary armed with the knowledge that governments were not investing tax streams, but stealing them for current consumption.

via Jim Lewis: Nassim Taleb is wrong about the financial crisis and black swans « InvestmentWatch. HatTip to Dave Lull.

The Predictability of Unpredictability

1st Dec 2011; 18:00

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RSA Keynote

Nassim Nicholas Taleb is the brilliant and controversial author of The Black Swan, described in the Sunday Times as one of the twelve most influential books since World War 2. He came to wider public attention as one of the few prominent academics to correctly warn of catastrophe in the financial system ahead of the credit crunch.

Despite his skills as economist and aphorist, it is Taleb’s theory of knowledge which has made him required reading in 10 and 11 Downing Street. By emphasising the inherent uncertainty and complexity of reality he argues against top down planning and research arguing instead for small scale experimentation and observation. Cameron Conservatives quote Taleb in making the case against central state control and planning and in favour of localism and testing by doing.

Join renowned academic and author Nassim Nicholas Taleb as he discusses his groundbreaking ideas and their relevance to the current economic crisis, national policy making and other topics with Rohan Silva, senior policy advisor to the Prime Minister.

Chair: Matthew Taylor, chief executive, RSA.

via RSA – The Predictability of Unpredictability.

[Chapter on Political Volatility]

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The continuation of Seneca’s asymmetry: “Fragility is the new blue”. I need to find the person who wrote it to give proper credit.
http://www.fooledbyrandomness.com/fragility-blue.pdf

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via  The entire idea of… | Facebook.

End deposit insurance: a simple heuristic for a complex problem. Taleb of all people should appreciate that we need firms to have the freedom to pursue a variety of different organizational strategies to survive and flourish. If the problem is excessive risk-taking, and I think it may well be, deposit insurance pours fuel on the fire. Eliminate it for large financial institutions and the competition won’t be over which can make the biggest bets, but rather which can attract the most depositors by being as stodgy and risk-averse as possible. The bonus “problem” will solve itself.

Link to full story: End Deposit Insurance, Not Bonuses – By Reihan Salam – The Agenda – National Review Online.
HatTip to Dave Lull.

Going Back to the Partnership StructureTaleb suggests that investment banks go back to what they used to look like a few decades ago — where they were partnerships instead of publicly traded companies. This idea does have some attractive features, as the employees all share in the losses. But that also makes it somewhat unattractive for certain employees: if one trading group has a miserable year, then everybody suffers.Here’s the problem: investors love financial firms. Taleb oddly points to the recent failure of MF Global as an example of the dangers of excessive risk-taking. But that situation actually demonstrates exactly what should happen. A financial firm took big risks that went bad, and it failed. Its investors lost money. No investor was coerced to put money into MF Global. If they didn’t like risk taking, then they could have invested in a utility, a Dow component, or a U.S. Treasury. They knew what they were getting into and wanted a chance to reap the significant return that a company like MF Global offered.

[The article suggest to me that the author isn't familiar with NNT's various commentary on the banking situation. Certainly NNT doesn't suggest that curbing bonuses alone will fix anything, and he has been one of the loudest proponents of getting rid of banks that are 'too big to fail' since the crash began. See: Ten principles for a Black Swan-proof world Published: April 7 2009 20:02 JohnH.]

Full Article: No, Wall Street Bonuses Aren’t Destroying the Economy – Daniel Indiviglio – Business – The Atlantic.
Hat Tip to Dave Lull.

Concave and Convex.

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Link to Source

(My notes) The banks have made 2.2 trillion over the last 2 years. Salary plus bonuses.
It is a tax on citizens. Bailout scheme, since Reagan.
You need something to break the bank cartel. Federal Reserve policy is there to help the banks. Last year they had record bonuses.
The ONLY valuable information you can get from bank earnings is how much they pay themselves.
Which is why I like the model of a hedge fund because at least you see what’s there.
$1.58 Billion put aside for compensation and bonuses.
If we bail you out, you should not be paid a bonus.
In business, if you have the upside, you’ve got to keep the downside.
The banks are in the business of hiding risk. They make steady money, collect bonuses, and when the thing collapses, we pay the price.
Hammurabi’s Code

“So the statistics presented as the bell curve can at most work in one world. What polemic philosopher Nassim N. Taleb has called Mediocristan and Extremistan, the former domain is where statistics can be apply to physical measurements with miniscule margin of error like, say, astronomy, while the latter the bell curve breaks and shatters, the scientific tool cannot handle information data commonly acquire in social sciences. Too many stochastic variables, too many fat tails, and, furthermore, error rates, nonlinearties, dispersions: what Taleb named Fragile and the opposite his appellation Anti-Fragile; and improbable, consequential and explained by narrative, events, which cannot be predicted, I.e., Black Swans completely demolishes the statistical model; although they can be mitigated to a point by using robust heuristics as Mr. Taleb himself has suggested.”