Black Swan author Nassim Nicholas Taleb divides the world into three

Ex-Wall Street derivatives trader turned author and academic talks about living “antifragile” in a fragile world

“Before we had economists, the world was functioning very well,” Nassim Nicholas Taleb tells a packed auditorium at the London School of Economics. His declaration draws laughter and loud applause. This is quintessential Taleb – unafraid to take his battle against economists, academics and bankers to one of their elite breeding grounds.

Taleb is accustomed to conflict and controversy; in fact, he claims it makes him stronger.  An ex-Wall Street derivatives trader turned author and academic, Taleb is a professor of risk engineering at New York University’s Polytechnic Institute, a scholar at Oxford, and a popular draw on the international lecture circuit.  His books and theories provoke strong reactions from critics and acolytes alike. Nobel Laureate Daniel Kahneman is a fan and called him “one of the world’s top intellectuals.” According to the latest Social Science Research Network statistics, Taleb’s academic papers are among the most downloaded, earning him god-like status from students and envy from researchers and academics.

He published his first book, Fooled by Randomness, in 2001. Fortune Magazine declared it one of the 75 smartest books of all time.  But it was his second book, The Black Swan, which brought Taleb attention on a global scale. The book was a bestseller, selling three million copies.  His “black swan” is not a Hollywood story about a deranged ballerina, but Taleb’s damning indictment of Wall Street bankers and economists who exaggerated their ability to predict risk. The author warned about the devastating consequences of catastrophic and unpredictable market swings; events he called “black swans.” Forbes magazine gave him the moniker “The Oracle of Doom,” but his prophecies were ignored until 2007.  He has been credited with predicting the financial meltdown—for Taleb, a personal vindication that he was right all along.

Sipping a café latte and nibbling on cheese croquettes in the private lounge at the Aldwych Hotel in London, Taleb laments that some of his critics misinterpreted the meaning of black swan events. “The guy flying a plane into the (World Trade) towers: for him, it was not a ‘black swan’ event; for us, it was a ‘black swan.’ It is observer dependent.  Also, The Black Swan is about the inability to compute small probabilities.”

The Lebanese-born Taleb is charming, sometimes profane and displays a seemingly endless reservoir of philosophical knowledge. The 52-year-old self-described “international flâneur” employs a kinetic speaking pattern, widely leaping from subject to subject, almost daring you to keep up. Dressed casually in his trademark turtleneck and blazer, he says he enjoys poking at journalists and reviewers on this book tour.  “I make sure no reviewer is able to skim the book.  The chapter titles should not connect to what is inside.”

Antifragile

His new book, for which he received a $4 million advance, is called Antifragile.  It is already #7 on the New York Times bestseller list, and is earning equal praise and harsh reviews. Cambridge political scientist David Runciman in The Guardian calls it a “big baggy, sprawling mess” while The Economist declares it  “an ambitious and thought-provoking read.”

And what about those chapter titles?  Chapter 3 is called “The Cat and the Washing Machine.” Chapter 5: “Fat Tony and the Fragilistas.”  So, yes, skimming is not an option.

But what’s the book about? It’s part philosophy, part theories of political economy with a smattering of Taleb’s rules for living “antifragile” in a fragile world.

Antifragile divides the world into three categories: antifragile, robust and fragile. Taleb says, “If I asked you what the opposite of fragile is, you would say, robust.  That is wrong.” The author suggests antifragile means something that grows stronger under pressure. Antifragility welcomes stresses and adapts and thrives during black swans. On the other hand, something that is fragile avoids disorder and is susceptible to destruction during unpredictable shocks.  If something is robust, it can absorb shocks but it remains unchanged. According to Antifragile, bureaucrats are fragile while entrepreneurs are antifragile; politicians are fragile, a truck driver is robust and an artist is antifragile; debt is fragile, equity is robust and venture capital is antifragile.

As for where Canada rates on his antifragile scale, Taleb says Canada is not antifragile but robust. “Canada is more robust than the United States because you have natural resources and less debt and you are more decentralized because of the Quebec problem.”

The book also argues against minor interventions, unless under emergency circumstances. Taleb suggests governments and central banks should not attempt to smooth out minor booms and busts in the markets through monetary and fiscal mechanisms. He claims these minor interventions produce markets that are more fragile and unable to withstand the forces of black swans when they occur.  “Intervention to increase happiness is bad.  But to decrease unhappiness is good.”

He is highly critical of Western central banks and their use of quantitative easing. “It’s not addressing the real problem. You are saddling the system with debt, transferring private debt into public debt, and the next generation and retirees are paying the price.”

And he doesn’t credit Canadian government intervention for inoculating Canada from some of the more devastating effects of the financial crisis. “Canada survived because you had lower levels of debt in the system. What happened is you have commodities, and when there is hyperinflation, you guys go through the moon. I own Canadian dollars as a hedge against inflation. Canada is like Russia without the Russians.”

In this Penguin interview, Taleb discusses his new book:

http://www.youtube.com/watch?v=1NXaafTpVjM

The Central Bankers

Taleb has little to say about Mark Carney’s recent appointment to the top spot at the Bank of England.  “I don’t really know who Mark Carney is, but I could tell you in five minutes, if I read his works, if he is dangerous or not.”

He does, however, have praise for the current governor of the Bank of England. “There is something about Mervyn King. You can read him and he is transparent.” This uncharacteristic praise of a central banker may stem from the fact that, in a recent speech, King borrowed Taleb’s concept of antifragility and the harm micro-interventions cause. King “used my thesis,” says Taleb.

King is not the only powerful figure enamored with Taleb’s theories. Some claim Taleb is British Prime Minister David Cameron’s intellectual guru. Taleb told the BBC earlier this year, “I like going to 10 Downing and seeing the most powerful person in his T-shirt and jeans.” Taleb says he is advising members of Cameron’s inner circle. “I give advice to them on the fragilizing effects of debt. I’m talking to the Cameron administration about putting skin in the game rules for bankers. If you force bankers to have skin in the game, it is better than regulation.”

Taleb: The Wall Street Trader

Taleb speaks from experience. He was educated in the U.S. and Europe, earning an M.B.A. and a Ph.D. Taleb began his career in the ’80s as a trader and a quantitative analyst for firms like UBS, Credit Suisse and CIBC Wood Gundy in New York. He eventually started his own investment firm, buying options. But unlike many over-exuberant Wall Street players who clung to the belief that disastrous market swings were ancient history, Taleb’s investment dogma was grounded in the theory that black swans exist. He and his investing tactics were profiled in Malcolm Gladwell’s 2002 New Yorker essay “Blowing Up: How Nassim Taleb turned the inevitability of disaster into an investment strategy.”

He has choice words for the world he once inhabited. “Banking is largely a fraud, a scam to take money away from taxpayers.” He tugs at his trademark mock turtleneck and becomes visibly angry when discussing his previous profession. “Bankers have not paid the price. We are paying the price and we continue to pay the price. And they keep making bonuses.” His solution returns to the concept of having skin in the game. Taleb believes governments should claw back bonuses and break the backs of the bankers.

Canadian economist Don Drummond agrees that bankers have not changed their behaviour: “I am amazed at the audacity of the American bankers and how quickly they returned to their bonuses.” Jeffery Miron, a Harvard economist and libertarian, suggests that many did become overconfident and have not been sufficiently humbled. But he does not place the blame solely at the feet of bankers and economists. “People wanted more than they could reasonably afford, so simply blaming Wall Street and economists is incomplete.” He argues government policy and human nature are also responsible. Miron says Taleb is not the only one who was warning about the dangerous amount of leverage in the system. “If you are always Dr. Doom, one day you will be right.”

Taleb, for his part, casts himself in the role of proverbial fox in the hen house; undermining and delegitimizing the notion that economists and other policy-makers have the ability to anticipate economic swings.

Oliver Hart, a Keynesian economist at Harvard University, says the most troubling aspect of the current economic crisis is the level of disagreement that still exists among economists. “Seventy years after the Great Depression, and we still haven’t resolved the battle between monetarists and Keynesians. There is no consensus and how to fix this.”

How does Taleb think we should fix this? He doesn’t want to throw the entire field of study out the window, so budding economists should not switch disciplines quite yet. Rather, he prescribes, “discarding the entire discipline of modern finance and portfolio theory.”

Taleb vs. Pinker

The Lebanese-born academic is not afraid to tear down the ivory towers, in which he himself resides. But he also displays an incredible sense of loyalty. After the 2002 New Yorker profile, of which Taleb complained that Gladwell “made me seem gloomy and I’m not gloomy,” the two writers became friends. In 2009, Gladwell told a C-SPAN interviewer that he feels an intellectual kinship with Taleb.

So, when the renowned Canadian-born Harvard psychologist Steven Pinker penned a critical review in The New York Times of fellow Canadian Malcolm Gladwell’s novel, What the Dog Saw, Taleb rushed to Gladwell’s defense. “I got furious. I feel loyalty for someone who does something nice for you, when you are nobody.” Taleb wrote a scathing critique of Pinker’s research in The Better Angels of Our Nature: Why Violence has Declined. In his critique, titled “The Pinker problem,” Taleb claims Pinker’s book is riddled with errors in sampling and doesn’t “recognize the difference between rigorous empiricism and anecdotal statements.” Pinker responded with his own paper in which he writes, “Taleb shows no signs of having read Better Angels.”

Academics, Bankers and Economists

Taleb faces his own critics in the academic world, and there are many. David Aldous, a mathematician and statistician at Berkeley, describes Taleb as  “a cheerful egomaniac” who ignores the impact of slowly accumulating changes. “The predictable things, we don’t have to worry about,” says Aldous.

Egomaniac or not, his research does have traction in some influential circles. In addition to his access to the Cameron administration, he recently published a paper for the IMF on measuring tail risks and fragility.

Taleb claims he has no desire to enter politics, nor would he accept any government position. “Did you read my paper on heuristic risk for the IMF? I think I am vastly more impactful doing that and showing the technique.”

Although not interested in politics, Taleb is not apolitical. It is, however, difficult to pin down where he sits on the political spectrum. “I am the reverse of a libertarian. I am a close to Ralph Nader, who is a personal friend.”

He says he votes for Nader each time he runs for president, and didn’t vote for either Mitt Romney or Barack Obama. “They are fossil systems.” In the same breath, he proclaims, “I like Ron Paul, except for some of his stances, and I don’t agree we should eliminate the Fed.”

Taleb’s Prescription

He strongly argues no company should ever be allowed to get too big to fail, where taxpayers could be hijacked. Taleb’s perfect society is a decentralized government with city states, akin to Switzerland. “Harm should be local, and projects should be broken up into small ones, in some domains. And break up big companies that are too big to fail.”

His views cause Keynesians and monetarists alike to shudder. Taleb suggests, “There is a class of people in economics who are very good but the establishment is rotten. Financial economists hate me because I come from the field of derivatives. I do practical applied mathematics. Asking academics about that is like asking nuns about sexual positions.”

But Taleb does see some hope in the future, that perhaps a new generation of economists will not accept the current economic orthodoxy. “After the LSE lecture, the number of students came up to me and said, ‘My professor is a fraud.’ What should I do?” Taleb’s advice? Don’t just skim his book, read it.

 




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Black Swan author Nassim Nicholas Taleb divides the world into three

  1. Fascinating!

    This will be my Christmas read.

    I live and breath VALUE and earn my living every day based on these principals.

    Sustainability, Risk, and of course the Ownership and Management are key elements I use to determine value; very similar to Mr. Taleb’s “fragile”, “antifragile”, and “robust”.

    I produce Value Statements for businesses which I consider to be more accurate than the standard “business valuation” that depend upon “comparable’s” – which generally don’t exist and “tax accounting” which is suspect; to reach an academic number that has no logic or common sense to it. The Business Valuations accepted by courts seem to me to be based upon the premise that the academic procedures used to produce them is too big to fail. I suspect standard valuations would earn the grade of “fragile” in Mr. Taleb’s school of thought. Perhaps this is why I get so much work from partnerships who want to know the “real world value” of their business.

  2. Taleb is a totally overrated author.

  3. Good article. Liked the effort put into gathering those links e.g. the Pinker and Aldous reviews. When I read Fooled by Randomness, I had the disquieting sense of reading a little bit of truth mixed in with a fair amount of malarkey. It’s possible to be plausible, coherent and erudite but wrong. Black Swans themselves only have the qualities of “rarity, extreme impact, and retrospective (though not prospective) predictability” (copying from Aldous who copied from the book) for those who haven’t bothered to take 10 seconds to look their description up on Wikipedia. Of course, an author does have the artistic license to adopt a catchy name for other purposes. But that is perhaps a telling feature of Taleb’s writing – too much artistic license to get splashy headlines and not enough nuanced cautious language.

  4. Think about why this author liked the most powerful politician being in jeans? Reduced the gap of hierarchy. So why did he like that? Says a great deal about his character. Give me Pinker, any day over this emotional person.

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