Continuing...How has Taleb made his name?
Look at the above graph. The blue line represents a normal or Gaussian distribution, also known as the "bell curve." Events on the far right or ar left side of that line, where the blue is approaching zero along the X axis, are sometimes call hundred-year storms.
If we think of this in a finance/business context, the blue line may represent what a certain business thinks are its profits for the coming year. The tip of the bell represents the most likely result (a modest profit in line with that of most of its competitors, perhaps.) Toward the right end of the curve you get to ever higher but more unlikely profits, to the left you get losses, and then ever larger losses, though here too the fall-off in the line toward the zerobase of the X axis implies that certain disastrous results are very unlikely.
But what if probabilities in finance don't have a normal outcome distribution? If you draw a flattened curve with "fat tails" at both ends you have, voila, the red line. You'll have great, super-profitable years more often than the normal curve had led you to expect. Of course, you'll attribute that to your genius, not the distribution curve. You'll also have terrible years, hundred-year storms, a lot more often than once a century. Your perfect storm may come along every four years or so. You'll attribute it to whatever political party you dislike.
Taleb has built his career warning that the tails are in fact quite fat. So you need bigger boats to be ready for these storms.
Now we can see the connection to both Ricardian free-trade theory and Gould's views on evolution. Gould held that exogenous things happen. A comet makes impact on the earth and wipes out a lot of species, for example, creating new open ecological niches for a lot of other species, re-defining the course of evolution. THAT is a fat-tailed type of event.
Taleb recently posted one of the appendices of his forthcoming book online. You can read it here. He contends that Krugman shouldn't pontificate about why intellectuals "don't understand comparative advantage," because he doesn't really understand the concept himself. Krugman is "completely innocent of tail events and risk management," so it is sad that he "makes fun of other intellectuals such as S.J. Gould who undertsand tail events albeit intuiutively rather than analytically."
What does the mathematics of fat tails have to do with Ricardian trade theory? Ask yourself: what happens if climate changes? A climate change might make Portugal less hospitable to grapes than it had been, and England more so. Now, it might be better for England to develop a viniculture industry, and Portugal to develop textile manufaturing. But it may be very slow and costly for each to do so, because each has specialized in what it was best at given the preceding climate.
If you believe tails are fat, it is easier than it would be on a narrow-tail view to believe: that sometimes comets re-define the course of evolution; and that dramatic events may change what countries have a comparative advantage more quickly than they could easily adjust to. You may then believe that Darwin/Dawkins overstress the significance of natural selection as a mechanism, and that Ricardo/Krugman overstress the value of national economic specialization.
Some final thoughts on Krugman and Gould tomorrow.
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