Understanding Taleb

By Felix Salmon
June 1, 2009

Nassim Taleb is all over the news today, for a couple of reasons, both of which seem to have caused quite a lot of misunderstanding. So after talking to him this morning, it’s worth clearing a few things up.

Firstly, the new fund being launched with his imprimatur, the Black Swan Protection Protocol-Inflation, is not really a bet on hyperinflation, as the WSJ would have it. Rather, Taleb describes it as a bet that the error rate in global fiscal and monetary policy is being systematically underestimated. “Forecasting errors can compound either way”, he says, and if you have an incompetent pilot flying a plane, then inevitably there’s going to be some kind of crash, whether it flies into a mountain or into the sea.

Essentially, the fund is going long volatility in macroeconomic variables, on the pretty reasonable grounds that policymakers are likely to get things wrong, one way or another. Or, as Baruch condenses it, “when you shake the ketchup bottle, none’ll come; then the lot’ll”.

Then there’s the mini-brouhaha over a GQ article on Taleb by novelist and professional provocateur Will Self. This is British GQ, mind — it doesn’t go through the kind of fact-checking process that the US edition does. And Will Self, for all his erudition, is no finance geek; he prefers purple prose like this.

The streets surrounding the Taleb household were piled high with swept-up leaves the colour of money. Taleb picked me up from the station driving a boat-like Lexus with cream upholstery. “It’s eight years old!” he expostulated as he yawed this way and that through the sleepy sun-dappled Saturday streets, one hand clutching a BlackBerry against the steering wheel. He was keen to stress that he himself only retained a percentage of the half-billion dollars the Black Swan hedge fund he set up condensed from the toxic red cloud.

At one point in the article, Taleb is quoted talking about his hedge fund, and how “we made $20 billion for our clients”. Did he actually say this? He says that he didn’t, and that in fact he told Will Self in as many words that he was being misquoted and that the numbers were wrong. I believe Nassim on this, as someone who has talked to him quite a lot: he simply doesn’t give journalists performance numbers for his hedge funds. He doesn’t do that for people like me, who would understand what he was talking about; he certainly wouldn’t do it for someone like Will Self. If the $20 billion number ever did come up, says Taleb, it was probably as a very vague ballpark figure for the total notional amount associated with the options bought by his fund.

So Tracy Alloway is right: this episode might make GQ look bad, but it doesn’t really say anything about Taleb. And indeed the whole controversy seems to have been blown up as a result of a missive from Janet Tavakoli, where she says, quite rightly, that “any claim of enormous gains for any strategy—including a black swan fund— should be explained and balanced with caveats”. This is true, but it rather misses the point of the GQ profile, which is all about Taleb the man and which only incidentally touches on his investment returns.

Taleb is, as ever, annoyed that people are looking at things like GQ errors rather than at his bigger philosophical points — and of course now I’m doing much the same thing, although I am planning to write something big on risk which will touch on many of his ideas.

One of Nassim’s peculiar strengths is the way in which he refuses to get bogged down in details. If you ask him a specific question, you’re likely to get a very generalized answer. That can be frustrating, until you get used to it, and it explains a lot of the talking-past-each-other nature of the gripes he has with people like Tavakoli or Bookstaber or Merton. They tend to try to reduce things to something tractable; his whole point is that doing so misses the big picture. What he wants is a debate about his ideas; what he gets is a debate about his returns. But that’s probably inevitable in a world where facts are king — even when those facts can obscure more than they reveal.

13 comments

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Just read Tavakoli’s take. Her description of how Taleb’s strategy works (by way of caveat) is right on the mark.

“The streets surrounding the Taleb household were piled high with swept-up leaves the colour of money.”

Note to Americans: he’s not talking about American money.

Posted by Jon H | Report as abusive

Thanks for the post.

Though I think that most who try to point minute almost useless details, over his ideas will take anything from this.

It may take years, even generations for people to fully appreciate his ideas. And see the problem with post Enlightenment style ‘rationality’ in an inherently complex world.

Posted by randomlobster | Report as abusive

re: “It may take years, even generations for people to fully appreciate his ideas.”

There is nothing new about Taleb’s ideas. You can easily trace them back to Benoit Mandelbrot’s 1963 paper about the behavior of cotton markets. And Taleb’s 2005 review of Mandelbrot’s book “The (Mis)Behavior of Markets” provides more of Taleb’s perspective on these matters. The reference follows.

Mandelbrot Makes Sense: A Book Review Essay
by Nicholas Taleb

A discussion of Benoit Mandelbrot’s “The (Mis)Behavior of Markets” by Nassim Nicholas Taleb (Wilmott Magazine, 2005)

http://www.fooledbyrandomness.com/mandel brotandhudson.pdf

Posted by Steve | Report as abusive

If Taleb never said $20 billion, then why did his clarification *on his web site* say it was a mere typo? There’s a big difference between “not saying it” and a typo. Here’s what the curmudgeon thinks: He said it, boastfully. Then it got printed and he realized he said something he shouldn’t have. To cover his a$$, he came up with some excuse to make it sound as if GQ got it wrong.

On the other hand, I used to get quoted in Barron’s all the time back in the 1990s in the options column. Half the time they got the story completely wrong. I would say something like volatility was low, so we want to situate ourselves for a rise in volatility. They would write, “Don Fishback expects volatility to be low.” Must be those layers of fact checkers in the U.S.

I guess we’ll find out if there is a retraction, clarification, correction. Should be interesting.

“There is nothing new about Taleb’s ideas.”

I have read both (Mis)Behavior of Markets and Fractal Geometry of Nature. In fact, some of Taleb’s idea can be traced back to those of Sextus Empiricus and Pyrrhonism (knowledge without cause). What he points out, among other things is the problem with using any kind of theoretical mathematical model for decision making, beyond studying their descriptive properties (and not predictive).

On a more general note: almost all modern thinkers try to understand our world (be it finance or ecology) and make decisions based on their understanding. This is where Taleb differs. He is trying to make a framework for decision making under uncertainty and ignorance. And that is what I meant when I said ‘his ideas’.

Posted by randomlobster | Report as abusive

Nice piece —

BTW, Nassim is the keynote speaker at our conference tomorrow in NYC — you are invited

http://secure.pnmi.com/bigpicture/

If you think that’s purple prose you’ve been reading too many blogs and not enough books.

Posted by S | Report as abusive

“There is nothing new about Taleb’s ideas.”

What is that comment supposed to tell us? Taleb himself says so in his book where he traces the intellectual history of his ideas. What he did was bring together ideas from different fields to show how uncertainty and randomness is more relevant today, and how our mistaken belief in forecasting is making us more vulnerable.

Moreover, Steve confuses existence of ideas with appreciation of the same. Taleb does a good job of showing how the intellectual tradition that he is part of has been largely ignored. And while his book has made an impact, it will still take some time before economics departments reduce their fixation on hypercharged mathematics.

Posted by Staufer | Report as abusive

Taleb is becoming something of a bore. Ya, Mr Taleb, we get it: you can’t predict the unpredictable, you can only claim to have predicted it and make up stories in support of that after the fact. Except when you predicted that whole financial crisis thing not so long ago.

Posted by vimothy | Report as abusive

Urrgh — just read the story: “visionary predictor”… puh-lease

Posted by vimothy | Report as abusive

I much prefer talking in generalities to specifics. I much prefer to get future data when making bets on the present. Yes, less math! Fewer facts! Let us congratulate ourselves for our erudite observations and overlooked intellectual tradition. Oh yes, and Mandelbrot is underhyped! He has been ignored for reasons other than the value of his ideas. Down with the Econ. Nobel! Down with anyone applying math that I don’t understand!

Posted by orwell | Report as abusive

Spot on Orwell. Taleb is a joke and his attempts to dodge questions, logic and “specifics” are beyond the pale.

Example:

Probability was created with the wrong type of intelligence. Intelligence, “in the sense of IQ tests and SAT scores” is not, we learn from Taleb, “as natural & ancestrally fit as wit”. By not natural, the philosopher explains, “I mean not Black-Swan robust, skills we call intelligence because of a certain construction, but that are not needed ecologically”. The modern day thinker is referring to mating probabilities and poses an important question for humorless nerds without dates. “Is ‘intelligence’ without wit & verbal brilliance really intelligence?” If not, it stands to reason, we should be using ecologically valid criteria to “define true intelligence” and more importantly, to discern “relevant subjects”. One might conclude for example that “painting, wit, music are more NATURAL than abstract mathematics”.

How much of this nonsense does Taleb need to spurt before journalists peg him for what he is? Lift your game Felix.

http://www.quantapology.com

Posted by AQuant | Report as abusive