Tag Archives: Nassim Taleb’s Notebook

The Macrobullshit problem

158 The Macrobullshit problem, r=g, and why a degree in economics is very harmful analytically

I started my professional life as a foreign exchange option trader. Thirty years ago economists believed that “purchasing power parity” determined the “long term” currency rate between countries. And economists who became traders (plus traders stupid enough to listen to economists) kept blowing up by selling the “expensive” currency and buying the “cheap” one. And, if anything, the opposite held in reality: currencies that were expensive kept getting more expensive. So it became known that the fastest road to bankruptcy in foreign exchange was an economics degree. We would walk out of the trading floor anyone using the word “equilibrium”, and ban them from ever coming back. More analytically, saying “the long term” without attaching a period to it (six months, six years, six hundred years, etc.) is meaningless. The duration is more relevant than the idea that currencies “converge”.

In the Piketty case, the argument that the rate of growth and that of the return on capital need to be equal, that is r=g, “in the long term” is very similar. Except that in addition, Piketty mistook an equality of parameters for an equality of integrals and forgot to make them both stochastic, which would skew the return on capital by adding a small probability of ruin “Black Swan” style that would annihilate capital in the long run. r>g is a necessity most of the time, doesn’t mean r= E[r] outside crises. The other problem is that r and g depend on one another, and r drops when K is high.

Which bring me once again to silver rule (skin-in-the-game) problem and why ONE SHOULD NOT READ PRACTICAL STUFF ON ECONOMICS BY NONDECISIONMAKERS. Don’t be like the trader who is stupid enough to listen to economists. Every person who has skin in the game knows sort of what is bullshit and what is not, since our capacities to rationalize —and those of bureaucrats and economists —are way too narrow for the complexity of the world we face, with its complex interactions. And survival is a stamp of statistical validity, while rationalization and narratives are the road to the cemetery.

via Opacity.

156 The Pikettistas’ Reasoning Error

Reminded by a tweet that NNT frequently updates his notebook page.

A wealth tax meaning to punish the wealth generator is absurd: since the payoff is severely clipped on the upside, it would be a lunacy to be a risk taker with small probability bets, with wins of 20 (after tax) rather than 100, then disburse all savings progressively in wealth tax. The optimal strategy is to go become an academic or a French-style civil servant, the anti-wealth generators. To see the cross-sectional problem temporally: Compare someone with lumpy payoffs say an entrepreneur who makes $4.5 million every 20 years to a professor like Krugman who earns the same total over the period ($225K in taxpayer-funded income). The entrepreneur over the VERY SAME income ends up paying 75% in taxes, plus wealth tax on the rest while the rent-seeking tenured academic who doesn’t contribute to wealth formation pays, say 30%.)

The problem with economists is that they are not (with very few exceptions) familiar with fat tails and make general statements that violate the true probabilistic payoff. In Mediocristan changes over time are the result of the collective contributions of the center, the middle. In Extremistan these changes come from the tails. Sorry, if you don’t like it but that is purely mathematical

via Opacity.