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Nassim Taleb: A Crazier Future
Now you can pretend you have read Fooled By Randomness and The Black Swan (on the other hand if you want to pretend you can use the word Heteroscedasticity in a sentence you will need to wait for RIEF's next apologetic letter explaining how minimizing portfolio drawdown is so much more important than actually generating P&L)
(make sure you watch the full program).
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Okay okay I'm coming clean
My real name is actually Mandelbrot. And I'm starting a hedge fund.
http://en.wikipedia.org/wiki/Bifurcation_fractal
I sure hope we're not just saying we sold it, and hiding the unsold treasuries at the back of the drawer,stock market blog
good articles; good articles 4 slow news day ..http://www..
hat tip: finance news & finance opinions
Another individual that doesn't trade in stocks.
I like his view that a turkey thinks for its whole life that humans are completely interested in its well being - until Thanksgiving when they hit a black swan moment. He compared that to today when people look at the past to predict the future, when as they say in the fine print disclosures, past performance is no guarantee of future results. It's true, we're somewhat limited by our own experience and that's why we are doomed to repeat history if we don't learn from it. He spoke of some quant tool that said our recent "black swan" events were one in 10,000 years but then said the individual didn't look like he was 10,000 years old.
Know your history - like Cheeky - or wake up some day on Thanksgiving realizing you are the turkey.
It is actually a paraphrased parable by Bertrand Russell.
The Problem of Inductive Knowledge
“Turkey Incurs a Revision of Belief”
Consider a turkey that is hatched…
And fed every day…
Every single feeding will firm up the bird’s belief that it is the general rule of life to be fed every day…
By friendly members of the human race “looking out for its best interests”…
If we graphed the turkey’s weight and number of days, it would look like this… [chart 1]
On the Wednesday before Thanksgiving, something unexpected will happen to the turkey… [chart 2]
It will incur a revision of belief…
The history of a process over a 999 days tells you nothing about what is to happen next.
Consider that the turkey’s experience may have, rather than no value, a negative value. It learned from observation, as we are all advised to do. Its confidence increased as the number of friendly feedings grew, and it felt increasingly safe even though the slaughter was more and more imminent. Consider that the feeling of safety reached its maximum when the risk was the highest!
What do we do when what we have learned from the past turns out to be at best irrelevant or false, at worst viciously misleading?
That is the story which also resonates with me... I apply it when I am getting just a little too comfortable.
not only that; the longer time it passes in which only one or two events happen, but system is designed so that 3 event must happen; and if the third does not happen in lets say 99 days; it is 98% probable that it will happen on the 100th day. Some call it an anomaly, a black swan etc; but when you look at it; its nothing anomalistic, or out of the ordinary, just probability expressed in action for the system to behave like it should. Now that is easy predictable when you have a system with only 2, 3, 4, 5 predictable outcomes; but when you have a system with unknown numerable outcomes; mathematics stops working there; and you can only guesstimate the outcome.
+9
I get your point, but the mechanics you describe are a little lacking.
If you have 3 equally likely events (A,B,C), and you have seen only A & B for the first 99 days, then you *still* only have a 33% chance of C happening on the 100th day. It is just that over the past 99 days you experienced an event that occurs with a (0.66^99) probability-- comes out to (1-in-2.9e17 odds).
But how do you *know* that (A,B,C) are each equally likely? This comes into some good Classical vs. Bayesian Statistics philosophy.
- OR (maybe I misunderstood your example) -
If you know that (A,B) happen all the time, but (C) tends to happen once every 100 days (without dependence on when the last (C) happened), then:
There is *not* a 98% chance it will happen on the 100th day. This is a Poisson distribution, so the probability of C_day:100 is: 1 - Pr(C=0, 100day)/Pr(C=0,99day) which is about 1%.
The problem with probabilities is that they can only tell us about time-spans that we have experienced. For instance, the chance of having 0 (C) occurrences (using Poisson, again) for 130 days would be: exp(-1.3) = 27%. Even going 300days would be a 5% occurrence (a 1:20 odds event).
Seen another way: If you see a long string of 0's coming out of a truly random number generator, you might be led to believe that the generator was not really random, when in fact, you are only witnessing a rare event.
The main problem I have with all this "black swan" talk is that most probability models require certain terms to be independent. However, in our highly-integrated society (globe, ...), not many things are really independent.
-EE (my account got deleted for some reason?)
I prefer we drop the black swan and go with something in nature that is more violent and uses applied mathematics - nobody thought they existed - rogue waves.
we used to call that a paradigm shift until it became a marketing buzzword
The Normal Distribution is the enemey of all mankind.
Only an Anon could post such a clueless statement. Behold the quincunx, and get a grip man.
http://www.jcu.edu/math/isep/Quincunx/Quincunx.html
http://www.cabinetmagazine.org/issues/34/burnett.php
Taleb is most notable for what he's missing, namely the opposite of the "Black Swan". He's got the attention of the world's pessimists with the outlier on the left hand side of the curve, when the outlier on the right is just as likely (but God forbid we should be optimisitic about things).
“I know of scarcely anything so apt to impress the imagination as the wonderful form of cosmic order expressed by the ‘Law of Frequency of Error’. The law would have been personified by the Greeks and deified, if they had known of it. It reigns with serenity and in complete self-effacement, amidst the wildest confusion. The huger the mob, and the greater the apparent anarchy, the more perfect is its sway.” – Sir Francis Galton, 1889
i heard he likes to put on bruce willis' old tennis shoes when things aren't going well.stock market blog
good articles; good articles 4 slow news day ..http://www..
hat tip: finance news & finance opinions
I don't undertand why anybody compares the recent events to a one only life time event. It was only 10 years ago that the same bubble exploded with roughly the same numbers in the equity market. The next implosion will be (if at all we take off from here to high altitude)worse. And the time horizon will be shorter. So instead of 8 years time lag,it might be 5 years. You might ask why:the reason has nothing to do with blackswan(those are unknown)rather it is greed. Greed is having an inflationary trade(it is not the amount of money,rather the numbers of a ceo has to be better than the bonus of b ceo). And it is going on with complacency from society. Hence the shorter time horizon.
This was posted on Y-Combinator's "Hacker News" earlier today, and I very much agree with the author's points:
Conclusion after some good analysis:
"The Black Swan may popularize the concept of low probability events, what were called 'peso problems' (see Rietz 1988), and that would be a good thing. But ultimately, the bumper sticker "shit happens" is kind of funny, kind of true, but hardly profound."
http://falkenblog.blogspot.com/2009/03/review-of-talebs-black-swan.html
Thanks Tyler! Great lecture :)
Never take advice from someone wearing a suit and tie...Love this guy...
During the CNBC interview I noticed he wasn't wearing any socks! Cool... maybe too cool?
Europeans don't wear socks in the Summer when going casual.
You say: 'I did not think it would happen.’ Do you think there is anything that will not happen, when you know that it is possible to happen, when you see that it has already happened ... ? - Seneca
What is this guys reward for "predicting" the greatest fiscal disaster for a couple of generations? Few more book sales and few interviews...would you rather be him or the credit trader who milked it for a decade...
I'd rather be me. I know that I don't know and am quite prepared to learn from a multitude of mis-takes while expending a great deal of time in thinking risk-reduction, or self-preservation.
I don't envy the credit trader, and I too predict that the "unpredictable" will irregularly occur since as Marshall McLuhan thoughtfully noted, “We look at the present through a rear view mirror; we walk backwards into the future”.
Who here has not noted when reporting an auto accident, that the most common origin of the other party, "(it) came from out of nowhere!"
Be ready and not ballistic.
Nice post and great analogy ToNYC, which brings up an interesting point. I conducted an in-depth analysis of auto accidents and the retrospective analysis revealed what we already knew - the epicenter of most auto accidents is carelessness, hence the "came out of nowhere" excuse. A mean of +/- 40,000 annual auto deaths in the U.S. (multiply that by 4 to 5 times to get the number of permanent partial or total disabilities due to serious injuries), tells us that despite what we know looking back has not translated into a whole lot of wisdom looking forward. For example, SSDI benefits paid to the auto-injury-related permanently disabled will become a much greater burden on the SS system within a decade, tough I imagine it will be seen as an "unintended consequence" by the policymakers in the future and we'll all pay for another ill in society.
What is the best I can do? Be a careful driver to reduce my risks, as well as realize there are a lot of idiots who have DL's out there (especially here in CT) in order to reduce the risk of "unintended consequences" because they exist.
Brilliant analysis/conclusion Chumly, thanks and to ToNYC too.
In the end, as Nietzsche noted:
“spielt einer mit uns” — someone plays with us.
pardon, duplicate (button for edit/ removal?)
The hardest currency is posthumous fame and reputation.
He will be rewarded in this nomismatic system.
All these hyper-rich guys (gates,soros etc) are willing to spend everything on getting some reputation credit points.
For Nicola will be much more easy.
Gents, what does a black swan look like?
Deflation: updated charts-
http://economicedge.blogspot.com/2009/08/more-overwhelming-deflationary-...
Ahhh.. More green shoots!
A decline in investment, incomes, receipts = set up for parabolic growth in inventory restocking.. The next great bubble.. If one were disposed to believe the MSM and government hacks of all sorts that is.
Dust bowl finance here we come!
Heteroscedasticity is for chumps. Homoscedasticity is where all the sweet regressions hang out.
I'd rather be Taleb, Sagittario. An intelligent man with ethics and realism, rather than a flash in the pan credit trading crook.
Even the one with the pigs has occured lately: A 'swine flue' event has occured.
pigs fly, swine flue...?
Taleb has a great mind and it was a pleasure to experience it through reading his books. I did feel that Fooled by Randomness was the better book and Black Swan was a bit of a rehash.
He says he made 80% of all the trading profits he ever made in October 1987 by making bets that an outlier event would happen at some point at a higher probability than the market priced in. That has been his central trading insight and he's been proved correct several times now.
He claims in the books to not really care about making money, and he does seem to be someone who is far more interested in ideas, but as always, treat a lack of interest in money with skepticism.
Whether he has any greater or wider insights than that unlikely events are underpriced in the options market, I don't know and would hesitate to take all his opinions as gospel
If his was really interested in money...he would would preaching green shoots and working for GS...;-)
He is now the Lone Ranger!!
Sooo-- what exactly could the turkey do about it?....
I believe Taleb would say that, although there may be nothing the turkey can do about it, that one should be aware of potential unknown outcomes and be skeptical of anything that seems as if it is a certainty. Skeptical empiricism.
I would rather be turkey feed for 999 days than starve to death before that.
Taleb knows his stuffstock market blog
good articles; good articles 4 slow news day ..http://www..
hat tip: finance news & finance opinions
I pretend to have read Dynamic Hedging.
Taleb is boring.
"I'm sooo smart!"
What is his fucking point?
Humans are imperfect, often emotional/irrational impulsive animals?
Wow, that's original.
How about life existing at all for a black swan event?
On a floating piece of rock in space.
What exactly does this mofo contribute to humanity/knowledge?
How about this "there's no business like show business which is no business at all"
Cheers.