Russ Roberts

Taleb on Black Swans, Fragility, and Mistakes

EconTalk Episode with Nassim Taleb
Hosted by Russ Roberts
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Nassim Taleb, author of The Black Swan and Fooled by Randomness, talks with EconTalk host Russ Roberts about his latest thoughts on robustness, fragility, debt, insurance, uncertainty, exercise, moral hazard, knowledge, and the challenges of fame and fortune.

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0:36Intro. [Recording date: April 26, 2010.] Between last visit and present conversation, it has been the "most interesting period of my life." Topic: new essay, epilogue to The Black Swan, in Europe will be a standalone book; post-mortem of sorts on events of the last two years. Crisis of 2008 was uninteresting to you--puts you in a small group. Most think it is landmark, negative. Learned more from stock market crash of 1987 than anything else. Outlier then, world more robust at the time, "it was still a much more significant event than the last crisis." We've had a lot more shocks in history, except it happens that memory is short, for reasons related to education. Professors don't have the incentive to focus on the techne; they focus on the epistome. They don't focus on the "know how"--they focus on the "know what." History is an accumulation of small stories and tricks you can't compress into an equation. This crisis taught me nothing except as a simple test case: built the argument, but we've known about fragility. The new essay is called "On Robustness and Fragility"--we've known the topic since the Babylonians. Slightly long time. Debt fragilizes systems. We've known since the Babylonians; forgotten; the Romans had to relearn it, waging wars to satisfy debt obligations. Entire package of things you don't do and have negative advice, categorical; because heuristics. Anyone who has a grandmother knows about the ills of debt--makes you fragile, makes you a slave, debt is not healthy for an economic system. You need to have the opposite, redundance, to make your life more stable. Any grandmother would have taught you that from experiences of crisis of 1929. Yet we had Modigliani-Miller, optimization in economics, post-Samuelson era. optimizing economics, take a very reduced class of things and they optimize, makes you more fragile under perturbations. Can't teach robustness because it is too complex for them; can teach you simple tricks, really fragilized. Simple tricks: have debt to optimize, seems to be optimal. In Shakespeare's Hamlet, also: Polonius's advice to Laertes: "Neither a borrower nor a lender be." Going back to Septuagint. Mediterranean religions had either an explicit or implicit ban on debt. Jewish religion did away with the ban later on. Made it easier. Under Judaism, interest to a fellow Jew was frowned on. There were ways put in place to get around that, but the prohibition initially certainly discouraged borrowing and lending. Others had the same, copied, continuation of the Jewish religion. The Arabs had the same ban on that. When you lend to someone, it had to be humiliating for the person, an acceptance of defeat by not letting him pay interest. So the person, not being able to pay interest, is forced to accept a failing somewhere. Very surprised that all these economic textbooks, all these studies and behavioral finance, and behavioral biases, nobody gave a thought to the idea that overconfidence translates 1-1 into accumulation of debt. Someone who knows the future won't necessarily borrow. What's the point? I know I'm going to make an 8% return, and if I underestimate my error rate I will know with certainty I'm going to make an 8% return, so if I borrow at 5% I can leverage up the wazoo. Plus, salary going up. Permanent income hypothesis, Milton Friedman. Same for government. Vastly more optimal than diluting your returns. French government has had deficit now for 39 years. Won't stop any time soon. No government intends to have a permanent deficit, but they keep having deficits, and also inflation. The projections are usually marred with over-confidence. They have all these economists who produce forecasts, like the IMF. Greece has at least a 13% debt to GDP; they forecast 3%. Forecasting maps one0-to-one with debt. The more you have forecasting, the more you are going to have debt. The Congressional Budget Office (CBO) projected that in 2016, Social Security revenue from the payroll tax would for the first time be less than the money going out the door to retirees. Unfortunately, that occurred this year. They were only off by 6 years. This was a surprise to them. Went to D.C. for a lecture in 2006; told them they should get another job. I want to live in a society where human error doesn't penalize the multitude. This is my mission for the rest of my life: figure out how to build a society in which people can make mistakes that are inconsequential. Want to encourage small mistakes, a discovery; an option. At the same time, large mistakes are crippling.
9:34Explained in essay we have two things going on: the problem of forecasting has increased dramatically over the past 25 years because random variables became a lot more fat-tailed thanks to the Internet. Why? Complexification: when you have interdependence, you no longer reach the Central Limit. When I start buying a certain movie in NY in response to people buying that moving in Spain, I am no longer independent. Variables become a lot more fat-tailed--prone to extreme events. We've had that arising since the Internet. Third part of The Black Swan--we are moving into an environment, the randomness becoming freer of natural constraints. Fat tails, except for Gray Swans. We've had that complexification of the world arising continuously, while at the same time having more fragility, through either optimization or more government role, but mostly debt. The rise of debt has been monstrous. That makes forecasting difficult. Talk a little more about the reaction you get when you tell people not to forecast. Some would say, "Better to have some map than no map"; you point out that's not true at all. In Atlanta, flying to NY; announcement that pilot is flying to NY but can't find a map of NY; going to use the map of the Chicago airport. You would get off the plane and cancel your flight. Against portfolio theory, so give us something else. There is nothing else. Small probabilities are not measurable empirically. People got offended. Built four quadrants: map of where your errors are not consequential and where conventional statistics and forecasting work. If you tell people that this is where your techniques work; and this little corner where they don't work--people are going to be very friendly. You tell them how smart they are. Instead of telling people it's 30% fat, you tell them it's 70% fat-free. Reframing the problem. The fourth quadrant--cannot afford to use the wrong map because it could crash the plane. All the mistakes we've had from forecasting come from the fourth quadrant. In the fourth quadrant, you need something else: Robustness. I want to live in a more robust society; the first thing I've got to do is get rid of extra problems because they make the society more fragile. Recently in Korea, gentleman from the IMF; on a panel, sitting next to an economist who likes deficits--deficits necessary because we need to get out of the crisis. Don't know history. We're going to bail out Greece, and then we'll get bailed out by Mars. Gentleman from the IMF stood up and gave a 2-3 minute forecast for 2010-2014. Anyone in the room listening to the forecast without asking what his forecasts for 2008-2009 were in 2001-2007 needs to go up again. Want a society where a gentleman like him can be as incompetent as he wants without it harming innocent people.
15:24Know we have a deep belief that, okay, so I didn't do a good job in 2003 predicting 2008, but now I have more data. The whole essence of the econometric priesthood is the idea that the bigger the sample, the more reliable the forecast. Flaw: we don't have any more data because the process that created the additional data is different from before. It's an illusion that we have more data. The natural answer should be that what we have is more fat tails, because the process that generates the new data is causing more unreliability because of the fat tails. Not against forecasting; just make sure you don't have small errors that are destroying the whole thing. Glimpse of what things we can forecast: Tomorrow, looking out the window, see a cloud. Can forecast the rain. Rain forecasting is not in the complex domain. Up to a point. Up to one or two days, mechanical. See a truck rolling down a hill, know where it's going to head. Not really forecasting--it's projection, extrapolation, very simple. Climate, completely different matter because of nonlinearities. Very good at knowing June, July, and August will be warmer than November, December, and January. Almost always right. Clouds from satellites. A company can forecast its inventory in the very short term. As you go out, the error becomes monstrous. Explained in The Black Swan with billiard ball. Forecasting ten years down the road has an error rate several billion times the error rate for a five-day forecast. No company tries to project its inventory 25 years from now because they know it's a waste of time. The question is whether it's a waste of time six months from now. What's worth forecasting and what isn't; what do you need to insulate yourself from? Point in the essay, and underlying point in the book--you need some redundancy. Since you know your errors are going to grow over time, and since you know that your ability to predict the future is imperfect, you want to create some redundancy. Some sort of backstop other than the taxpayer to take care of the future. Government deficits. I have personal redundancy--I spend less than I earn; I have a big buffer, probably not enough, maybe huge in other people's eyes. Government should shoot for positive net revenues--a surplus--so they don't get too big a deficit. All this is good, but biggest mystery is that it's obvious. How can people still listen to the Number 2 man from the IMF talking about his forecast in the future when he never got anything right in the past?
20:41Find it strange that in the aftermath of the crisis, the demand for my services has never been higher; true of the economics profession in general. Some would argue it's better to have a map of Chicago, better than no map at all, even if you are going to fly to New York. If you want to figure out what's going on in the economy, better to ask an economist than electrician--but that's not necessarily true. People use astrologers all the time and it's not hurting anyone. Alternative medicine, lowers your anxiety. Just want to build a society in which forecasts are not taken seriously. Example: you need an option, insurance--two lungs, two kidneys. Economists: you need one central kidney and people would borrow it--that would be more efficient. Only family-owned companies really survive in the long run. Look at Mother Nature. Redundancies; no debt. Debt is the opposite of redundancy. I have $100 in capital; I hide $80, barbell strategy in The Black Swan; banker would borrow $3000 and take a huge amount of risk.
22:50Appeal of the debt issue. You talk about the role of leverage, debt--seductive but leaves you vulnerable to collapse. That's the Kahneman view; but Vernon Smith, co-winner of the Nobel Prize that year has an alternative view. He accepts everything in the behavioral economics world, or much of it; people make mistakes, they misestimates, but markets punish people for making those mistakes. We've stopped punishing people; stopped the feedback loops that would encourage people to learn from the dangers of debt. Is it just human nature or is it also some public policy errors? Don't think that human biases are harmful in the natural environment. They exist. Governments provide a non-natural environment. Not many do-overs in nature. Evolution doesn't give people a second chance. Survived this crisis, have higher tax bill; those who lost money in this crisis have a bigger tax break. Obama, Cash for Clunkers program, give $3000 to those who buy a car; those who don't buy a car pay for it. Large corporation eventually dictate to the states what they way. "I have 300,000 employees!" The last thing I want to hear is someone trying to hijack the state because they hire so many people. That's an argument against giving you money--you've misused the resources that you were entrusted with. Now it's time to let someone else hire those 300,000 people, who could use them more effectively. Big guy enters into collusion with the state automatically, at least in America. The worst thing we've had here is that moral hazard--people started attacking my point that small probabilities, people take a lot of risk by small probabilities, by saying the market knows how to price them. But the market does not know how to price them and there is a huge amount of moral hazard. A company making $200 million blows up and the hair dresser pays for it subsequently. The model showed no risk. The state has been tampering with the functioning of the system. If the state wasn't there, large companies would self-destroy. The ones that would survive would be the small, robust units. Or the large ones would be more cautious because they've learned something. Disproportionately more fragile to unseen shocks. Example: French company, Société Générale, rogue trader with $50 million dollars hidden in the drawer; had to liquidate that one right away. Costs a lot more per unit to liquidate $50 million dollars than $500 dollars. When you concentrate companies, squeezes are more costly to the company. Dinosaurs had to go first--more efficient to be large but unseen shocks are going to hit you harder. Large companies, large states are disproportionately more fragile. Want the nation to destroy the car companies early on so that I don't have to pay for more bonuses; same with banks. Should have been destroyed in 1982-1983, survived with help of the government. We don't live in a natural environment where these biases are harmless; the biases get compounded under the state. Société Générale: they were the Number 1 creditor of AIG. When the government bailed out AIG in September of 2008--the Number 2 creditor was Goldman Sachs; they were owed $14 billion by AIG;--Société Générale was owed more than $14 billion. But we insured! They insured with an insurer not capable of carrying out its obligations--rated Triple-A--but the government kept their promises anyway.
29:56The banking system; regulation is what got us here. Regulators encouraged banks to take hidden risks, less visible risk. Banks have a vested interest in growing and in going bankrupt. Vested interest to create debt instruments. If you just let the banks destroy themselves--why should your grandchildren pay the price through deficits when one adult lent to another adult--then things will get definancialized automatically. The role of financial institutions will be reduced organically, not through some measures that are going to make lawyers rich. Lawyers' business comes from regulation. A year and a half after the crisis started, we are worse off because all the ills are compounded. Larger financial institutions; larger state roles; more deficits; more susceptibility to forecasting; more dependence on economists who never got anything right in the past. Fear hyperinflation. All these people think they understand monetary policy. Quote from paper: "I tried to explain the problems... Government should not be given toys they do not understand." Fear that we are going to have a deflation and the remedy is going to be worse.
32:39One of simple but deep ideas in the essay is that true/false is not what matters. What we care about is the expected outcome. It's easy to say we are going to get inflation. A little is not so bad--not good, but not so bad. A hyperinflation can destroy society. Too many of our models are about the probability of x or y, but it's the consequences of x or y that matter. Did four things: tried to channel ideas into four disciplines. Econometrics, statistics, fourth-quadrant approach; second, distinction between know what and know how, Polanyi, Hayek, people we don't hear about, from Wittgenstein to Burke to Oakshott; third, robustness; fourth, epistemology. True-false doesn't count in your daily life except in maybe the first quadrant. No decisions are based on true/false. People say "Do you have evidence of that?" Do you have evidence that the gentleman is a terrorist? No. So why are you searching him? Small probability, but the consequences of his being a terrorist are humongous. Like looking at the world in 2 dimensions, 2-D, when the world has 3 dimensions. A lot of logic that has been studied in both mathematics and philosophy is so incomplete as to be unusable. Russ: Where I'm sympathetic to behavior economics, behavioral finance--we don't seem to be very good at that 3-dimensional thing. Our brains really struggle to deal with the third dimension and the consequences. Taleb: We're not that bad. Dread risk: we are wired for some classes of risk avoidance; overestimate the odds because you see something on television. We have a mechanism to take account, but we don't live in the right habitat for that. Goes haywire, makes us overestimate some events at the expense of others. People are afraid of sharks in San Diego. Dread risk has served us well. Paranoia has a survival advantage. Is that why we find economists so appealing--someone has a model, someone has a theory? When you are sick you like to use a doctor. For a long time, seeing a doctor was not a good thing--increased your chance of death. Hospitalization was very bad for you, quadrupled the chance of death. Next book, Tinkering, studying that problem. In medicine, always better to do something rather than do nothing. We have had that bias for acts of commission, not acts of omission. Very hard for people to say we don't know what works so we'll just do nothing. Unless you frame it by saying this is how Mother Nature does things automatically. Broke nose recently, running on rocks; ice it. Mother Nature doesn't ice things, wants nose to swell for a reason. Looked at it and there is absolutely no evidence that icing is good for you. Good for the ice makers. Statisticians: well, you have n of 1. The n of nature is the largest n you can get. Need to live close to the natural state. That's the thinking of Burke, Polanyi; Hayek to a lesser extent. Not a conservative--a conservationist. Want to follow Mother Nature in the fourth quadrant, want a state that doesn't blow up.
40:40Medicine. Human body is a complex system, akin to an economy; prone to unintended consequences when we intervene and meddle; complementarities and nonlinearities--yet we've gotten better in healing the human body. It's better now to go to a hospital than to not go. Not suggesting we should let Mother Nature take its course if you get cancer or rip open an artery--Mother Nature is going to let you die. We don't live in a natural habitat. What Mother Nature is good at correcting is helping us live in spite of civilization. Technology makes us live longer but punishes us by making us sicker. We've been eating things very unnatural to us. Aristotle. We've never understood the human body; but we have had some breakthroughs in making people live longer through drop in the crime rate. Russ: Better nutrition in childhood. Taleb: Nutrition was actually better before agriculture. Penicillin. Harm done by the healer, like bleeding--bad track record of medicine. People tell you to eat three meals a day; no animal eats to work out. You hunt to eat. Empirically people are healthier when they go through periods of starvation. Chapter in The Black Swan about distributions in nature--just like the economies that let companies go bust, which robustifies the others; should not never eliminate stressors. We have had a reduction in stressors; very risky. We are weaker than our ancestors. Antibiotics. Look at the distribution of energy to expenditure for a hunter-gatherer. Starve; active while starving. Get their food in a feast or famine way; not steady, not a bell curve. You kill a large animal, big inflow of protein; then nothing at all for a while. Spent three to four years reading on states of nature for health or other things. Humans use their own rationalism to make laws. For example, that you get healthier jogging--but you don't get healthier jogging because it is on smooth surfaces. Art De Vany podcast was greeted with a lot of skepticism by the listening audience. You've been trying to implement some of these ideas for yourself. How's it going? Between the first conversation and this one, about 25 pounds of adipose tissue. Smaller excess weight. More fitness. Brain works better. Started walking about 20 hours a week. Strolling, not power walk. Needs to be effortless. Wrote in 2-3 weeks 100 pages. Stressing self now and then. Sprint once in a while, but no jogging. Run on rocks--black swan, can break your nose. Makes you aware. Try to avoid smooth surfaces, gyms. Art De Vany uses a gym. Unnatural to lift weights unless you have an emotional drive to do so. Lift heavy weights; keep them over my head; seen some literature on it; don't use machines. Wife's version: You should sprint with a dead deer on your shoulders, or at least carry it home. Don't have the emotional trigger when you go to a gym. Lack that. Olympic weightlifting. Seen significant difference. Hope it's not confirmation bias. Back to Mother Nature. Footnote: using an n that's monstrous. Human knowledge is too limited. Know what, know how: Mother Nature know how; humans try to know what. Doesn't work very well in nonlinear domains. We've exhausted the linear domains. Of course government can put a man on the moon; but we know nothing about volcanoes. They do what they can, not what they need to.
49:43Next book, Tinkering: what about tinkering are you thinking about? Looking at convexity; part of the robustness. All the same idea. Confessed before starting the conversation--rare confession from a public intellectual--said you had only one idea. Shouldn't say that, even privately! Takes maybe 30, 40, 50 years to get even one idea. Mandelbrot was in his 60s or 70s when he figured out what his idea was, reverse smoothness. Write about the same thing, but each time it is a different application. The black swan is not the central idea. The central idea is convexity. Convexity is when you lose a penny to make a dollar; when being wrong doesn't cost you as much as being right. Jensen's inequality: an average of expectations is not the expectation of the average. In lay terms: convexity is knowing where the lack of knowledge is going to lead you. In other words, an option is a convex instrument. Russ: Teasing you about having only one idea. Part of economics I love dearly is how simple ideas can be very deep. Think you understand something, ten years pass; realize you didn't really understand it. Takes a lifetime. Taleb: First book was on dynamic hedging; technical; for a long time nobody could understand it. Financial model, want to know if you are missing a variable, what impact that has on the forecast. If Black-Scholes option formula misses a stochastic variable, what will it do? Some options, small probabilities, gain in price. Came from convexity. Now looking at the application of convexity. Relationship to Ed Leamer's work: "Let's Take the Con Out of Econometrics." Essential idea: When we see a published paper and there are 27 variables on the left and one on the right-hand side, we don't know how many permutations the author went through to get that final specification. There could be variables missing; could be variables in there that don't belong; could be variables on which we don't have data, which is a whole separate problem. What Leamer recommends is looking at the range and sensitivity of the coefficients when we look at all the variations. Looking at second-order effects; know something's got to be missing. When I buy an option--did that for 20 years of my life--discovering now how to formulate it. Reasoning: if I'm wrong on the model, the cost is close to zero. If I'm right, I have a second-order effect. I have an option on being wrong on the models. Someone tells you an event has zero probability. If he's not certain, you already have a paradox. If it has a zero probability, or if he's estimating zero probability, it means he is estimating around zero. Necessarily, all kind of uncertainty he has would raise it from zero, because the probability cannot be negative. That's convexity. Close to zero, practically zero. Generalize: whenever some people estimate something--sales of a company for 25 years--if you stochasticize that number you are going to see the value of the company may rise dramatically. Second-order effect: higher than zero in expectations. Reasoning about 25 years ago; center of book 20 years ago. Know the model is not perfect; when a pilot is flying a plane, you know what it is going to do to you--not going to be good. Concave, reverse of convex. Errors in pricing an option usually help you.
57:43Where will it take you next? Black swan model. Hyperinflation trader. Know there is some error, but will pick up monstrously, in a disproportionate way, if there is hyperinflation. Evolution works because it's a free option; it's convex. Mother Nature knows it cannot produce a perfect baby; goes through a lot of trial and error. Often the mother doesn't if know, if there was a spontaneous abortion. Growth of knowledge. Libertarians. Government funding of research has led nowhere; we had the data. Book, trying to find places where government funding of knowledge has helped. Do the opposite. It's not science-technology-business; it's business-technology-science. How much do we spend on the war on cancer for how much we gain, versus how much we spend versus the gains from the outside. Pretty black and white? Confirmatory thing: universities are much better at public relations. Not saying business-technology-science is 100%. Myth is that basic research won't be done by individuals; have to have government sponsorship. Silly argument. Industrial revolution by businessmen. Medicine is obvious; heuristic science, not top down. During industrial revolution, Germany was top down and was copying England. Always have to read the opposite; attacks of black swan idea. Same concept as Fooled by Randomness--people underestimate the amount of luck--people overestimate the amount of skills. Convex luck: trial and error, costs very little; exploiting the option of nature. We are a lot better at doing outside the box than thinking outside the box. The appeal and the seductiveness of experts is also the appeal of design rather than trial and error. Politically there is a deep appeal to plans and top-down design rather than trial and error. We are humans; if you want to have a shaman, just have to make sure it is not increasing black swan risks, not in a position to be fragilized from it. Backwards, to American Medical Association; look at the food pyramid today and listen to my talk ten years from now. We know from De Vany and from the data--they want you to eat carbs and they don't want you to eat saturated fat; but a lot of the diseases that they say come from fats come from carbs. Making us sicker and charging us for their services. Multicollinearity--some things go together and make it hard to figure out which one is responsible; can make a mistake and think it's the wrong one. Controlled experiments.
1:04:29Fame and fortune that have come your way: talk in essay about being threatened to be surrounded by phonies. Became allergic to politicians. Have not been corrupted so far; remind me if you see it. Makes me feel that I have a mission and I should continue saying things the way they are. Walked out on people. Delegation to the White House; looked around and walked out because of other people there. Trying to not be corrupted. Nothing is permanent--except what you think is temporary.

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COMMENTS (60 to date)
Nick writes:

Taleb is always great, any chance we can get a Taleb podcast where he takes user submitted topics (similar to the Munger one recently)


Also can you post a link or info to the book on the industrial revolution he references?

Thanks

Sam Lundstrom writes:

I echo your sentiments Nick...I've listened to the previous Taleb interviews multiple times. He's my favorite Econtalk guest by far. An interview with him based on user submitted topics would make for a great podcast.

JasonW writes:

I would like to learn more about his investment ideas. Something that I can do in my financial life to become more robust. I know he has mentioned something like 85% bonds or T-bills to 15% stocks. But with his ideas that hyperinflation is a near certainty, how would that possibly work?
As for the rest of his talk, he sounds absolutely nuts: "avoid flat surfaces"? But you know what? I love it. And somehow, I think he's crazy enough to be right.

Nick writes:

@JasonW

No he said 15-20% in risky investments. Obviously betting on hyperinflation is a big risk, because the chances seem very low. I'm not sure what exactly would appreciate in a scenario of hyperinflation (I assume he means hyperinflation of the US dollar) but my guess is 20% would cover your loss of 80% in bonds.

Also several shoe companies have recently released sneakers which are based on the principle of creating an uneven surface, I don't know how sound of a principle this is for exercise (maybe just a fad) but hes certainly not alone this line of thinking.

Ben Atlas writes:

That was "Modigliani-Miller"
http://en.wikipedia.org/wiki/Modigliani-Miller_theorem

not "Yanni Millier [sp?]" as in the transcript

[Thanks, Ben! I've fixed it now.--Econlib Ed.]

Lee Kelly writes:

Why should equity-financing be so superior to debt-financing? Someone who is absolutely certain about the future (and wrong about it) will squander resources however they happen to finance their business.

Tanya writes:

I don't understand the comment that government sponsored research doesn't accomplish anything. Especially because afterwards he goes on saying that trial and error is what produces results. Where better than get trial and error than in an University that is not required to show immediate monetary results for an area of research?

He mentions the LHC, would that research into early stages of the Universe ever be possible without government support? Many things in place that inspired the industrial revolution were done by University Research! The period of Enlightement was brought by academics and they always vied for public funds to sponsor their research. That period is a necessary condition to later incite the Industrial Revolution that followed.

I do agree that the process is not always linear. In science you hardly get the exact result you were looking for, but Universities encourage at least the searching for answers (the trial and error) rather than the complacency he's advocating.

Signed,
angry NSF sponsored physicist ;-)

BoscoH writes:

I know Taleb likes to move on to new things to think about, but I feel like he owes us something after pointing out the folly of those who can't admit what/that they don't know. He's made these people very easy to identify. All you have to do is ask them how they know and watch them flounder for a sensible explanation. But he hasn't really told us what makes them tick. I'd like an explanation that's not "I'm better than them because I know it's OK to admit when I don't/can't know".

Ray Gardner writes:

Excellent interview.

Years ago I was a lowly advisor with Morgan Stanley, and since I was not a finance major, I was somewhat surprised at the cult of "analysis" that I was exposed to in my training.

I would get in these long, drawn out debates with Morgan Stanley big wigs from Asia about their cock-eyed ideas on "social capitalism" and all I really had to do was ask "why" or "how." (They had no way of telling how low of peon I was so they had to answer my questions since I'm might be heading up a large book for all they knew.)

Primitive diet/fitness:
I agree with Taleb partially. There is nothing unnatural about a bench press in and of itself, but a behind the neck military press is totally foreign to your body. Having lots of experience in the gym and as an athlete in general, I now keep a very irregular schedule. Fast paced basketball one night, body weight exercises another, short jogs broken up with sprints on another, and every once in awhile some weight training using only the most basic movements; bench press, squat, etc.

I like the single idea portion. There's one line of thought in my own meditations like the trunk of a tree. Whenever it seems there's a new line, it turns out to be a branch connected to the trunk.

Ryan Vann writes:

"No he said 15-20% in risky investments. Obviously betting on hyperinflation is a big risk, because the chances seem very low."

Seems like he was talking about TIPS to me, in which case the worse that can happen is huge deflation in CPI. If that happens, he isn't necessarily losing real wealth. It's often difficult to get a bearing on where Mr. Taleb is goign exactly. He is a cryptic guy at times. In other words, probability being low doesn't mean something is necessarily risky; you have to consider the value of the potential loss.

Nick writes:

@Ryan Vann

In hyperinflation scenario the taxes on the TIPS bonds would be a killer. You have to pay cap gains on the tax from the adjustment every year even if its not matured.

Jonathan writes:

I am sure Taleb must know about Hayek/Mises etc.
Debt is not the problem in and of itself, it is the fractional reserve banking system. A dollar lent ought to be from a dollar saved. When you borrow a dollar it ought to represent that someone somewhere else forewent using that dollar so that you have the ability to use resources that arent currently being used elsewhere. When you have a monetary system that encourages an expansion of credit not backed by savings it gives the illusion of greater savings than actually exist, in real terms. This encourages lower savings, increased consumption, increased production of all manner of goods, both in length of structure of production and breadth.
I don't understand Taleb's over intellectualising of the core problem unless he doesn't grasp the above and/or he doesn't want to accept the conclusions of any student of Mises. Namely that once you have grasped his theory you realise there is no role for an economist or chief tinkerer... you just need to stand back and at most, become an evangelist for encouraging social cooperation bounded by enforcement of natural law, period.
Any money is enough money. At core it seems this is a presumption an Austrian accepts but others simply don't realise they presuppose is incorrect.

Dorian Taylor writes:

In a Wired interview a number of years ago, Alan Kay said:

I think the frontier has to do with human learning. Knowledge is not completely relative. There are a hundred or so powerful ideas that basically mean the difference between life and death, and I think one of our major jobs should always be to be true and get as many people enfranchised into them as possible.

That's stuck with me, and it's interesting in that context that Taleb admits to only having one of them.

Richard Sprague writes:

@Tanya It's generally not possible for the government to sponsor so much research without getting SOMETHING for their money, so I think Taleb's point is not that you get ZERO return, but that the returns are much lower than they'd be if the money were spent elsewhere.

Also, note that government-sponsored research tends to crowd out private research from places like Microsoft/etc that spend TONS on pure R&D. Maybe one reason your physics is NSF-sponsored is that private firms don't want to compete with all that taxpayer cash.

Trent Whitney writes:

Excellent interview, and one that I'll have to listen to again...soon.

Taleb's criticism of forecasters/predictors was spot on, and it applies to areas outside of economics, finance, and weather, too. Every year, Mel Kiper, Jr., is treated as a deity by ESPN concerning the NFL Draft because he's their draft guru...their master prognosticator. But nobody ever goes back to check and see how accurate he was. I actually got my hands on his NFL Draft preview (the premium one that people pay for) from the Peyton Manning draft...back far enough so you can judge Kiper's predictions...and he was mediocre at best.

And Taleb's points on debt and hyperinflation reminded me of your last interview with Milton Friedman, in which he said he feared that one day, our government might decide they could fix the debt problems of Social Security, Medicare, etc., simply by firing up the printing press. Like some other postings, I would have liked to have known more specifically how Taleb is investing to combat hyperinflation (e.g. precious metals, foreign currencies, real estate, etc.)...but perhaps that's something he wouldn't want to give away for free on a podcast.

floccina writes:

Wonderful provocative pod cast. Thank you.

On the fragility of the financial system:

I have this idea that the Federal Reserve and US treasury has a monopoly on money and so the system is fragile. Also in a monopoly it is difficult to set price.

I think that the monetary system is not robust because it did not evolve or at least its evolution was stopped when central banks were created. From your (econtalk) Free Banking Pod Cats with George Selgin I got the idea that free banking was evolving toward a system where money was backed in nothing but assets of the bank. The evidence is that they had gotten to the point where they held 30 capital but only 2 percent gold. The money was backed in bank capital not gold to dump the gold backing all together would be only a crisis plus one innovation away. IMO such a system would be robust.

Having said all that I do not think that we could ever convince the median voter to allow free banking and allowing the monetary system to evolve so I am open to the post Keynesian idea that government should in a recession just spend money without selling bonds and tax the money back in response to inflation.

Now on Nasim's ideas about nutrition and exercise I think that he should just say we do not know.

We know we need some small amount of exercise (like walking), we know that we need a minimum of some vitamins, minerals and amino acids. We know nothing beyond that!

Matthew writes:

OK, first I have to say that I never thought that I'd hear De Vany and Taleb mentioned in the same sentence. Without admitting it, this occurrence has slightly confused my lofty opinion of NNT. But this is, I have to trust, remediable.

That out of the way, this is the second ET podcast where techniques of interval training were mentioned (albeit, both times the term was not mentioned directly). There is nothing new or novel about the concept of interval training.

But that's not really important when discussing a NNT interview. RR, thank you for arranging this conversation.

Floccina writes:

My comments did not make it through perhaps because they were to long so I put them in my blog here:

http://un-thought.blogspot.com/2010/05/comments-on-econtalk-podcast-on.html

[As you can see, your comment is posted now. It was held only because it happened to hit a bunch of words that are flagged by our spam filter. Sorry for the temporary inconvenience.--Econlib Ed.]

Mariusz writes:

It is most of the time enjoyable to listen to those podcasts but what I heard here borders on tragi- comic. Two overweight guys recommend periodic starvation (feast - famine) as a way of living. How many times have you applied that to your kids? Or your-self - did not hear Taleb mentioning this a a way to stress himself on his way to better mental performance.

And then THE MARKET is supposed to solve everything - to price things right, to punish people - and it will, has, is doing it for everybody - neoclassicals, Austrians, Taleb - have not had enough market which if it was working would not allow the crisis, or would punish transgressors, and elevate Hayek to a deity. Can someone tell me where is this market working (real world examples please) and who of its prophets have given up a tenure to expose himself to it? And by the way - isnt' this a forecast as well?

Nassim why do you shy away from meeting big wigs, the President, Robert Rubin, CNBC etc. - why not run for office, test your ideas at the market place of politics - otherwise it will not last much longer as you so rightly feel.

Ray Gardner writes:

Matt:
Taleb eludes to his preference for the primitive/natural approach to diet and exercise in the Black Swan.
The adherence to some variation of a paleo diet seems to be rather common among libertarians and like minded people (myself included).

Tanya writes:

@Richard
Thanks for addressing my comment. I think it's a very slippery slope characterizing research's value. We don't know what gives returns and I usually find that industry only spends money on things that they think fattens their wallet. Many accidental discoveries would not have been made.

I do believe that you need industry to spread the fire, but you need somebody that is not expecting any returns like the government to spark the fire. We need people doing research even if right now we don't know what it's good for or what the return is, as it will cause many accidental discoveries. Companies will not invest in this kind of research. Strangely enough people are willing to spend some small portion of their taxes on it (think of public opinion of NASA, for example).

Seth writes:

Great podcast. Thanks to Taleb and Russ!

Re: diet/exercise - Russ thanks for pointing out the obvious to Taleb that running over uneven surfaces resulted in a broken nose.

I lost 18% of my body weight by simply changing how I ate, by taking in a few more grams of fat, a few less carbs, eating more often and not overeating. Though I jog, so I may be training the chaos out of heartbeat.

Trent Whitney - Good catch on Kiper. I too noticed long ago that sports "experts" weren't better at predicting outcomes than I [not a sports expert]. Though, they sound much smarter rationalizing their forecasts than I do. I think that's the part that keeps them employed. If they were better pickers, they wouldn't need to trade on their verbal skills, they could just take up residence in Vegas and clean out the sports books.

BoscoH - "What makes them tick?" Great question. Don't you know? They've been told all their lives that they are very smart people. Their self esteem depends on them being viewed as an expert. Being viewed as an expert and "figuring out complex" things is the only thing that has worked for them. It's hard for them to come to grips with the reality that they aren't much different than an astrologer or palm reader.

Keith writes:

Very enjoyable podcast. Laugh out loud funny at times, as I imagined Taleb lifting heavy objects and running on rough surfaces.

Does anyone know the source of Taleb's advocacy of running on rough surfaces? I get the idea of 'primitive' exercise, but is there a school of thought that specifically advocates this?

Nick writes:

@Keith

I took rough to mean "uneven"

Keith writes:

@Nick.

I was imagining rough/uneven as in very rocky areas. Unless he just meant grass rather than concrete?

Nick writes:

@Keith

Yes I think so, as far as the science, several shoe makers (rebok, sketchers) have created shoes based on the principle of walking on an uneven surface, and the MBT shoes which are similar have been around even longer. The inventors purportedly studied african bushmen who train for long runs without shoes. They determined that the lack of balance caused more muscles to be engaged to stabilize the persons stride and resulted in better posture and less injuries, or something like that. I'm afraid I dont know the specifics. Certainly buying uneven shoes sounds safer than Taleb's experiences.

DM writes:

What a fun podcast!
I don’t post often, but this time I just could not resist.
Lending (and charging a market interest) is bad?????
How is it different from selling a product or a commodity for a profit?
As someone pointed out earlier, the problem arises when a lender lands money they don’t have.
Mother Nature’s intend???? What is that, and who is there to interpret this intent to us? Thank you, Mr. Prophet.
How about just a cause and effect in a random and very specific environment with no underlying point? Narrative bias, anyone?

Nature did not intend to ice a booboo…That’s just too bad (and why again did Mr. Taleb went to see a doctor in the first place?). What is next? No polio or tuberculosis vaccinations? How about no fire, back to the caves, and then back to the ocean where we came from?
Seems to me Mr. Taleb is looking at the medicine as a some kind of evil invention by an angry wizard rather then a result of an “evolutionary demand” from fellow hunters and gathers.
I seriously doubt that a primitive hunter and a gather, Mr. Taleb is looking up to, would pass up on an ice pack, or a cortisone shot in a time of need in order to increase his economic output from the hunt (or just to avoid an untimely death by starvation).
I must be missing a ton here.


Loved the rest (with some disagreements, of course)!

DM

Worik writes:

Tanya

You are correct. Taleb is wrong. In actual fact there are very few fundamental discoveries that have been made by the private sector. It is the state sector that takes the risks and breaks new ground.

Taleb's work on long tails is very good. pity he is such an abrasive so and so, and he feels the need to express opinions about stuff he knows very little about, such as medicine - and Greece.

His comments on Greece are way way off the mark. The idea that states should never run deficits is a bit doctrinal. Greece has many many problems. It has too much debt (probably) but its bigger problem is massive, systemic and seemingly unshakable corruption. There is only a fraction of the tax paid that needs to be paid.

Interesting podcast - interesting guy, just wish he would stick to what he knows. A genius he may be, a polymath he is not!

peace
W

skepthinker writes:

I think this interview was both interesting and insanely infuriating. Talebs points concerning medicine and health seem to be largely just an example of the naturalistic fallacy. I am surprised that this was not challenged more. To this point, as I learned in my undergrad Evo. Bio. class, evolution selects the better of the choices available at the time, not the best of all choices over time. Evo. is a one way street with a 1 to 1 progression over time. as such, sickle cell root genetic traits are not beneficial now that we can control malaria, even though evolution selected for it.

Yes, there is no specific direct evidence (as there is no direct study) that ice on a nasal bone fracture is beneficial, but we have a lot of studies and evidence of the benefits of reducing inflammation and edema for nasal bone fractures in terms of pain and outcome, and there is a lot very old studies showing that cold compressions can reduce inflammation and edema. The natural way (do nothing) in such case has a higher complication rate (infection, blocking of airways, etc.) and rate of ending up with a crooked nose.
And yes, we do know a lot about the body (I use it every day and it is very accurate in terms of prediction ability though not perfect) and what the body does naturally is not always good (think head trauma and encephalitis (inflammation of the brain)).
I love the economics and discussions there on, but I do know that the reality and the evidence doesn't fit with Talebs arm chair philosophy. By just letting him rant on with his assertions without substantial challenges seems to promote them.

Anyway, sorry for my own rant. Love the program and have been listening to it for years, and will continue to do so. I look forward to everyone elses' input.

skepthinker writes:

@Worik

I agree completely, though I don't know too much about the Greek situation.

Jeff G writes:

Great podcast. At around 1:04, Russ talked about science, nutrition and economics having the same issue. Agreed. If there are too many variables and too many unknowns, results become meaningless or worse, misleading. If you don't follow the scientific method, it is not science.

Liked the destructive nature of markets commentary. A poorly run telegraph beats a super efficient pony express every time. Not a pleasant experience for the pony express employees, but a change that will occur despite their best efforts.

Jeff G writes:

Fundamental discoveries made by the private sector:

transistor, laser - Bell Labs

With only an hour to talk, going down the list would distract from the conversation. There may be books on this that go into more detail.

Tom Vest writes:

Another great/entertaining podcast, although Taleb seems to have vastly over-extended his original and extremely valuable insights about black swans, so much so that his original pragmatic bent is now receding in the distance as he speeds on along on a path toward absolute skepticism/nihilism.

I wonder where Taleb would draw the line between legitimate/adaptive and illegitimate/maladaptive banking practices... for example, which of the following would be prudent, and which are properly regarded as heavy-handed and doomed to failure:

1. Private "free banks" establish a private clearing house association (CHA) to economize on joint costs and help mitigate potentially crippling, systemic information problems.

2. CHA members use the aggregate currency-flow information collected in the course of normal clearing operations to modulate their relations with other member banks (and to favor member banks over nonmember institutions), e.g., shorting those that are generating excessive, potentially unsustainable banknote volumes.

3. Charter CHA members establish eligibility rules for themselves and aspiring future CHA members, rules which compel subsequent members to employ practices that sustain that indirect information exchange, and/or alternately that "tread on their inviolate rights to privacy and commercial freedom."

4. CHA-employed auditors monitor member compliance with information sharing rules, and CHAs reject and/or eject those who refuse to maintain the level of transparency necessary for other banks to judge their soundness.

At what point in that sequences does sensible private coordination morph into pointless and heavy-handed "regulation"? If (1) passes the "know-how" test, shouldn't the rest -- and if all do, then why in principle would a competent, independent, regulatory institution populated by experience-tested domain experts fail the test?

I'm not suggesting that that's what actually existed in the US in the run-up to the current debacle, but I'd like to know whether Taleb's recommendations are truly rooted in pragmatic or alternately theoretical/philosophical objections...

TV

John Strong writes:

Interesting that Nassim believes that large companies are more vulnerable to shocks. Hmmmm. As an owner of a small software consultancy, my view is that big companies enjoy a buffer against demand volatility that we small fries do not enjoy.

Large companies, by virtue of their size, can limit entry to their markets in a significant way: they have an infrastructure that allows them to confer the benefits of both stability and economies of scale on their customers. They commoditize their services and products.

There's a welfare benefit to this, so I'm not complaining. On the contrary, I think it is part of the magic of capitalism. But it surprises me to hear Nassim allege that bigness makes you more vulnerable to demand volatility. Seems to me it makes you less vulnerable.

Mark M. writes:

Like the De Vany podcast, I'm again a bit annoyed by this flat out dismissal of running as a valuable form of exercise. It is widely understood that to improve times at any distance (which is presumably what runners aim to do - get better) some level of speedwork is required.

To hold "jogging" out there as a one size fits all non-diversified type of workout is a straw man. Take anyone who has done even one month of consistent running (w/ proper technique to avoid injury), and I'm quite sure most people will say
1) they can run faster at the end of one month, and are on occasion tempted to push themselves hard on days they are "feeling good" (something that is only possible once you clear the hurdle of "omg, i'm running and this is horrible", which comes w/ time) and
2) they generally feel healthier and have improved mood.

To illustrate the wide level of variation in running, check out Hal Higdon's website for training schedules for various races (from my experience, most runners are typically training for one type of race or another): http://www.halhigdon.com/ (I'm not at all affiliated with Higdon, but his training schedules are very widely read.) Also, consider the popularity of fartleks (http://en.wikipedia.org/wiki/Fartlek) and "indian running" (http://thehighschoolrunner.com/2007/08/indian-runs.html). The importance of variation is nothing new to runners.

Also, I would like to hear De Vany and Taleb specifically address the practice of persistence hunting, where early humans allegedly used their ability to sweat to keep cool while running long distances to exhaust animals that lacked this ability:
http://en.wikipedia.org/wiki/Persistence_hunting
http://www.nytimes.com/2009/10/27/health/27well.html

Having been around the sport for awhile and having heard people on one hand extol its virtues and on the other criticize it and having seen many arguments in between, I put De Vany and Taleb squarely in the category of people who don't have the guts to run. Conversely I would be hard pressed to think of a sport enjoyed by so many (soccer, tennis, swimming, cycling, golfing, etc.) for which I could muster the level of disdain these guys have for running.

I love your podcasts Russ, but I wish you would be more willing to grill your guests when they stray outside of their specialty. For example, one line of questioning might be: "Running certainly seems to be an emergent phenomenon. Marathon running has grown from 25k finishers in 1976 to 425k in 2008 (http://www.runningusa.org/node/16414), a CAGR of 9.3%. My presumption is that participation in shorter races like 5k's and 8k's are growing even more rapidly. Why do you think humans are adopting this allegedly self-destructive behavior at such a high rate?"

shawn writes:

@john strong

I think that the point behind taleb's point on the dangers of bigness is the inevitable progression from bigness to political favor-seeking (aka, rent-seeking). *That* becomes the part that will trip them up, along with an increasing reliance on complicated systems of risk management and capital reserve leveraging, while small firms rely more on "grandma's" notions of simply saving.

So, the big firms can invest in these "experts" that tell them how to manage their capital, and that "opportunity" ends up being their undoing.

russ Bankson writes:

very interesting podcast. Nassim often says things in a way that offers a new and deep insight into familiar ideas and indeed long standing aphorisms. Many of his thoughts deserve much more nuanced exploration.

On the notion of the limitations of "experts', it is important to consider the traditional definition
ex·pert n
1.somebody with a great deal of knowledge about, or skill, training, or experience in, a particular field

Encarta® World English Dictionary

What method can be used to determine whether someone fulfills this definition? It is often done by reference and consensus from other 'experts'. It is ultimately an opinion or judgment not something easily measurable.

You can ask how do they know? or why do they believe that? Their answers will give you insight into their self awareness of their limitations. Knowing what you don't know is an essential element of expertise. Often it is the questions and doubts that a person expresses rather than their answers that is key to identifying an 'expert',

Thomas Stanley writes:

Environmentalists have not yet managed to convince the public (and certainly not the libertarian public) that biodiversity decline is an important problem. It seems to me that Taleb's stance on robustness, risk, and incomplete knowledge fits very closely with things that some environmentalists have been saying for a while. The next time that Taleb's in the studio, please ask him to comment on biodiversity.

I have no evidence for this, but I think Taleb is completely misinterpreting the origins of religious debt codes. The point was to limit the abuse of one person by their wealthier peers, not to eliminate systematic risk. Of course, a free market advocate probably wouldn't agree to be bound by everything in the Torah, but that's ok. I suspect Taleb is simply conjuring up ancient texts as to justify his theories. He wouldn't be the first to do so.

Mr. Whitney,
I believe that Taleb did mention that precious metals (I think he said "gold") made up a portion of his investments in a previous podcast.

jason bush writes:

[Comment removed pending confirmation of email address and for rudeness. Email the webmaster@econlib.org to request restoring your comment privileges. A valid email address is required to post comments on EconLog.--Econlib Ed.]

Justin P writes:

@ Russ "What method can be used to determine whether someone fulfills this definition?"

I think it's subjective. I think that most people assume if someone has a MA or PHD then they are an expert, regardless of any actual experience they might have.

For example, most people consider the Krugman and expert in politics because he has a PHD and Nobel, even though they are both in Econ...I consider Krugs to be a hack...subjective.

Christian Pugaczewski writes:

Russ,

Once again, another brilliantly done interview. Nasim Taleb is a very smart man but you were careful enough to catch him several times falling victim to cognitive biases that he often rails against, such as hubris and confirmation bias.

Nasim's greatest failing (if you can even call it that) is his reliance on analogy. Recall his analogy of using a map of Chicago when flying to NYC. Perhaps forecasts are more like a map of the world from 1850's. Certainly not as good as GPS but much better than a map from the 1450's. Analogy is a useless device that can be easily manipulated to tell the story that matches your world view.

That said, thank you very much for this episode of Econtalk. It was a great pleasure to here my two favorite economists/philosophers discuss the world in which we live.

Thanks,

Eric Vanhove writes:

I really enjoy listening to Taleb talk about economics and even philosophy, but must admit I'm a little taken aback when hearing his opinions on mother nature and fitness. Yes, I'm sure the hunter gatherers lived a "much better" life... all that uncertainty about the next meal, dying at what we would now consider a very early age, diseases that are today easily cured that would have killed most back then. It sounds to me that Taleb wants, as Murray Rothbard wrote about environmentalists in his essay on the Exxon Valdez incident, to "get back to pristine 'nature,' with its chronic starvation, rampant disease, and short, ugly, brutish life span."

Well, he does have wonderful "convex" ideas about economics.

Mike Russell writes:

Those interested in what NNT calls robustness might be interested in the work being done in social-ecological resilience. Check out the resilience alliance or Panarchy for more details. I find SER to be a deeply Haykeian framework for dealing with environmental issues; their ideas are far different from the command-and-control assumptions held by some greens.

Jeff G writes:

Chronic starvation is different than fasting.
Curing a disease is different than a broken nose.

How has all of our knowledge of nutrition and finance helped us? We have a heavier society losing our homes at a record rate. Seems like looking at areas from a historical perspective may do some good.

Chaos can be added to our lives without a short, ugly, brutish life span. We might even enjoy it.

EPZEN writes:

Wow!!! No question that government spending to save the economy was a waste. Why should I pay for someone's clunker? Furthermore, why should I pay for fire fighters? After all, if someone's house burns down, why should I pay for their mistake in hiring a bad electrician.

Bank regulation is right up there with building codes and building inspectors. If a electrician causes a few houses to burn down then the free market will eventually cause his business to fail. Not my problem if someone doesn't know how to find a good electrician. Same goes for bank regulation.

Yes and amen to the return to our natural state. We all need to get rid of all light bulbs. Only sunlight is good for the eyes. Running water that isn't from a stream is also bad for you. Get rid of all indoor plumbing!!! Too much reliance on toilets is why there are so many knee replacements in this world. After all, we were meant to squat not sit when using the bathroom. By using toilets we end up with weak knees.

Yes and pay attention to history because there were no such thing as down turns in the economy when we all lived in a free market with no regulation. In fact we should just get rid of money and go back to a barter system.

Salt water economists and modern medicine have it all wrong. It is just free market and the natural state all they way!!!

Tjalco P. van der Meij writes:

Mr. Taleb says somewhere.
Quote:
They have all these economists who produce forecasts, like the IMF. Greece has at least a 13% debt to GDP; they forecast 3%.
Unquote.
I do not think this a good example. The Greek government was not forecasting, but deliberately lying and cheating to mislead the ECB.

Lee O'Neill writes:

I was interested in the discussion of government sponsorship of research. I like the idea that the conventional wisdom of government sponsored research leading to business success is backwards and that the process starts with business demand. However, I think there's a step missing.

The business first model implies a customer - supplier relationship, with the business being the customer and this makes sense. Business has a demand and technology supplier, technology has a demand and science becomes a supplier, etc. But business' customer, or the Customer, is missing. Business does not act in vacuum developing its demands for no particular reason. It does so because it needs to supply the demands of Customers. This process is really driven by Customers, who are taxpayers thus creating an endless loop.

Regina Blaszczyk has a very interesting take on a Customer driven process in Imagining Consumers (Johns Hopkins, 2001). She explores several case studies from the 18th to 20th centuries to examine the processes businesses use to try and figure out what Customer demand is and then respond to it.

Ray Gardner writes:

Tjalco P. van der Meij:
I think Taleb would contend that there is precious little difference between economic/financial forecasting and lying. Seriously.

Saffa writes:

57:43. "Fooled by Randomness--people UNDERestimate the amount of luck--people overestimate the amount of skills". Not overestimate amount of luck as currently shown in script. Thanks.

[Thanks, Saffa. I've fixed it in the Highlights above.--Econlib Ed.]

Bryan MacKinnon writes:


This is a typical Taleb interview where he diminishes the validity of his main point by making broad-sweeping statements such as that Government sponsored research "has led nowhere; we had the data."

John Humphrey writes:

Thanks again Russ, your trio of Taleb interviews are, I think, his best.
About the closest I've heard NNT come to actually defining his (hedge for hyperinflation) investment formula was at the Moscow Forum in February 2010. Audio: http://www.blackswanreport.com/media/NassimTaleb-Moscow-February2010-trades.mp3

I'm not sophisticated enough of a trader to figure out how to apply this strategy at the small, IRA investment account, level. But perhaps one of your readers is and could point me to a site or blog post how-to.

It's not even so much about the money, as it is about not wanting to be the turkey, especially when you see the butcher coming.

BTW Taleb goes into detail about his latest health discoveries in a chapter from the upcoming Black Swan 2nd edition. He made the chapter available as a pdf download from his site some weeks ago. (Direct pdf download link)
http://www.fooledbyrandomness.com/whyIwalk.pdf

Jared writes:

Great podcast! As a 'layperson' in economics, I have a hard time understanding the relationship between what Taleb talked about on the show, and what happened last Thursday in the markets. The Wall Street Journal kindly adds to my confusion ("Did a big bet help trigger 'Black Swan' stock swoon?" May 10, 2010).

I suspect a random coincidence, but it would be helpful to listeners like me if you could return to the subject of market 'failure' once again in response to recent events.

Is there a separate edition of "On Robustness and Fragility" available online or in print form? I love Taleb, but I'm not about to buy another copy of his book if I can just get the article I want.

Thanks for this podcast!

James writes:

I think Taleb is too pessimistic, and it is hard to tell when his theories actually apply in the real world.

A country that takes a lot of risks, optimizes, and runs a deficient will almost certainly outperform an identical country that maintains a surplus and plays it safe (robust). The booms in the risky country will outweigh the crashes. The black swan is not going to come along and swallow the whole country. Taleb talks about the wisdom of mother nature, well in a Darwinian scenario the risk-taking country is more likely to take the other by force.

The idea that debt is always bad seems crazy. Is he saying it is better to pay rent until you are 40 and have saved enough to buy a house with cash?

Large companies are more fragile than small companies? Does anyone really believe that?

He is in favor of experimentation and tinkering, yet against publicly-financed research? Most people use that same argument to support public funding for science...Companies only do certain types of research. Relying on business to generate new technology and science would narrow the range. Public funding of science is a form of diversification. If tinkering is good, then how can the billions of man-hours of tinkering going on at universities every year not be a good thing?

I think he is right that business drives technology which drives science, but without public funding there would be very little science. Technology does not automatically cause people to devote years of their life to studying something and publishing papers...

And on the natural lifestyle choices, the problem with all these kind of arguments is that a healthy "natural" lifestyle is not worth the cost. If I have to spend 20 hours a week running on rocks, I am already throwing away over 1/7th of my waking life. The benefits would have to be tremendous to be worth that high a cost, and if they were that large, then they would be obvious and everyone would already be running on rocks instead of watching TV and eating McDonalds.

James writes:

Jeff,

I just had to comment on this quote...

"How has all of our knowledge of nutrition and finance helped us? We have a heavier society losing our homes at a record rate. Seems like looking at areas from a historical perspective may do some good."

A heavier society losing our homes....

Well, first of all, we enjoy being heavy. Second, the boom gave us a lot more homes to begin with. Our knowledge of finance makes it easier to borrow money than ever before. Knowledge of nutrition helped Micheal Phelps win tons of gold medals. If people want to be healthy, like he does, then we have the knowledge to do it. That doesn't mean people want to be thin. Why is that so hard to understand? Knowledge does not necessarily imply action. Would you really want to live in a world where people are forced to eat "healthy" and make their mortgage payments on time?

Tim Wright writes:

I enjoyed the Podcast. Taleb's ideas are very thought provoking.

I just wonder where all these studies that he quotes about health etc come from? Universities paid for from government grants? When he says there is a large N so we can trust nature, large N from what? I believe that Quine (a philosopher of science) stated that N is never big enough to be 100% sure of anything. There are always multiple theories that can match collected data.

Tim

Glen writes:

Taleb made a fleeting comment about government regulation having led to the creation of financial derivatives. Does anybody know what he's talking about?

JCE writes:

what a dissapointment! i had been looking forward to hearing taleb again on econtalk but this time he provided no insights whatsoever

he has now taken his theory to the absurd conclusion that 'mother nature knows best', and that we shouldn't onterfere with anything. in fact we were better off as hunter-gatherers (we got more excersice, and our diet was better), medicine doesnt't work, it´s better to NOT treat diseases and injuries, so as to not interfere with mother nature.... o yeah, and excersise isn't healthy.

what a joke!

Woodah writes:

The great thing about this interview is that as it went on Mr. Taleb sounded crazier and crazier, culminating in his quasi-social-darwinian nonsense about how bad modern medicine is. Most folks who advocate a "natural lifestyle" in accordance with "evolutionary forces" either have no idea what they're talking about, or seek to exempt themselves from their new brutal utopia. If Mr. Taleb contracted prostate cancer -- and I hope he does not -- I'm sure he would seek aggressive and targeted chemotherapy rather than allowing nature to destroy him as he claims to believe it should. But that's just one example. The whole neo-luddite philosophy falls apart for everyone who's not willing to live like Gandhi. (Who was also anti-medicine, btw. Read Hind Swaraj.)

Anyway, ridding the world of debt and lending is a bad idea. I think Spain experienced it after the Jews were expelled in 1492. The wealth from the New World kept stuff going for a while, but the economy was stagnant without lenders.

Karl writes:

He is definitely correct: he has one idea. The problem with Taleb is that couches this idea in "science-y" language and is pretty shaky on things like statistics (and keeps saying "you see?" and "right" like his mis-interpretations of the literature are self-evident).

He also tosses off comments like - you agree there are things with zero probability and then goes on to show that since you don't know everything about the topic that of course the probability must be something other than zero and of course positive. So far so good, but ask a physicist: is there something that has zero probability? Taleb keeps assuming statements that he tosses off as accepted by everyone, when in fact they are not and certainly not by anyone who has more than a cursory understanding of the field (which makes it easier to knock them down, I guess). Other examples: starvation is good for you (yes, rats live longer, but are you telling me that those living 50,000 years ago were healthier than we are?? How do you know?), medicine is only good at healing those things that technology and society causes in us (so there was no cancer 50k years ago? How does he know this???) etc. etc.

I agree, you should understand that there is error in everything you do and try to figure out how that error can propagate through to possible outcomes. But he extrapolates this into a grand theory with a certainty that is totally unwarranted. Walk 20 hrs/ week because mother nature tells us that that's the "right" thing to do? Well, maybe right for 10,000 BC, but extrapolating that to 'absolutely better' is totally unwarrented and there is no data (as he is fond of saying) to support that. And of course he lost weight. That was probably 20 hrs more than he was doing before.

Summary: reasonable idea applied broadly to mis-interpreted data.

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