Monthly Archives: June 2010

Nassim Taleb, Hugh Hendry, Larry McDonald at GAIM 2010 Monaco | Market Melange

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Goes on to report a debate between Hugh Hendry and Michael Novogratz.

The program offered, as usual, stimulating and entertaining presentations and debates. The return of Nassim Taleb was not a black swan event.  He seems to have become bitterer in his crusade against Sharpe-ratio and model-wielding financial “pundits”: while last year he was campaigning for a world that is more robust to black swans, this year he’s fighting for a society that is “robust to bullshitters” (my Word spell checker suggests “bulls hitters”). When I suggested to him that models would be quite harmless and even useful  if the people who use them 1) understood them and 2) applied common sense, he replied that asking people to use common sense is like asking them to stop their heart beat. That seems to be a quite radical and not constructive stance. If people are so stupid, what’s the point in writing smart books?

Fearful of being included in the “no common sense” category, I’ve decided to become an admirer and a follower of Fat Tony, the “horizontally challenged” fictional character introduced by Taleb in Chapter 9 of the Black Swan. Fat Tony is a highly practical and commonsensical “successful nonnerd with a happy disposition” and the title to Taleb’s next book. Two chapters of Fat Tony can be previewed from Taleb’s website: see  Fat Tony 1 and Fat Tony 2.

Repetita juvant (repetition helps), the wise ancient Romans used to say, and there was a fair amount of repetition of old slogans in Taleb’s speech. However, for the benefit of the bearly awake and of the bulls hitters, here is another rehash. You’ve just boarded a plane headed to Rome, when the captain announces: “Hi folks, welcome to this flight to Rome. Just to let you know that we couldn’t get a map of the airways to Rome; we have a map of the airways to Berlin, but, hey, that’s all we have, so that’s what we’re going to use, and anyway, Rome and Berlin are pretty close to each other.” Naturally no passenger would accept to fly under those conditions … well, at least those with some common sense left in them, err … Anyway, says Taleb, why would anybody insist in using models that are known not to explain the reality at hand, just because those are the only models available?

Obvious observation, you might think, but ask yourself that question again next time you are confronted with standard deviations, Sharpe ratios, Value at Risk, or even cointegration, in a practical context. The repetition might indeed be helpful.

Print friendly – News from The China Post

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Had to mention this… predicting Black Swans!!!

Black Swan 1:

The Sovereign Debt Crisis

From Iceland and Dubai to more recently Greece and Hungary, news of countries defaulting on their sovereign debt obligations or being on the verge of bankruptcy has dominated the headlines in recent months, leading to bouts of volatility in global stock markets.

Even though different international organizations have jumped to the rescue, and Hungary’s debt crisis proved to be a false alarm, the frequent scares have punctured the myth that “countries can’t go bankrupt.” They have also revealed that the strategy of piling up new debt to service old debt to cope with the financial meltdown in late 2008 has created serious structural problems.

“The fundamental problem behind the financial crisis in 2008 was private debt. Now the threat to the global economy comes from sovereign debt,” says Wu Ho-Mou, a Taiwan native who is now the deputy director of Peking University’s National School of Development.

My bright idea: Nassim Taleb | Technology | The Observer

How much has your own biography taught you about uncertainty?

Not my recent biography, but my heritage. My family worshipped books, and we have done for six generations. Around 1800 my ancestor was a silk trader, who wanted all his progeny to be scholars. Even though my father was a doctor, we were taught to respect the lessons of history not science.

What does the past teach us about the current crisis?

The Romans, the Arabs, the Jews all had an edict against debt. If we had religion with a tacit prohibition of debt, we would probably not have had this problem. But science, or scientism, thinks it knows better.

Is there something in that silk trading heritage that you recognise in yourself?

Commerce in the Mediterranean has always been on a human scale. It is only when you move from an artisan‑style economy to a corporate-style economy that you develop fragilities. Corporations take the humanity out of trade – they take the happiness out and replace it with something that is ugly.

Should anything be too big to fail?

I just wrote a paper explaining why size necessarily brings fragility. You have family-owned businesses that have been around for 500 years. You cannot name a corporation that survives intact for even a few decades. We should not be concerned about wealth; we are rich enough, but we should be very concerned about robustness.