Nassim Taleb is refreshing because he writes on social phenomena in a way at a great distance from the usual platitudes of right and left, and that leaves him agreeing with one or the other in ways that seem fortuitous. I just finished reading SKIN IN THE GAME (2018). The essential idea of the book is that one shouldn't take advice from anyone who doesn't stand to lose if the advice is wrong. Don't buy stock in Apple on the basis of a case made to you by someone who has no Apple in his own portfolio. This is connected in Taleb's mind with the idea of "fat tails," extraordinary events that aren't at all as extraordinary as they "should" be under Bell-curve or Gaussian probability theory. A bell curve maps one dimension, which can be for example the earnings of Apple next year. The highest point is the most likely outcome. Some absurdly high number for Apple's earning would be the "tail" figure on one head, and bankruptcy-forcing ...
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Throwback Thursday. Let's look today at the way in which underestimating the nature and extent of a loss can be disastrous, even if one is right about the binary question of an asset’s direction. As Nassim Taleb has put it, “In 2007 the Wall Street firm Morgan Stanley decided to ‘hedge’ against a real estate ‘collapse’, before the market in real estate started declining. The problem is that they didn’t realize that ‘collapse’ could take many values.” It didn’t work out well for them. Morgan Stanley’s hedges would have worked in the face of a modest decline, but in the event MS lost $10 billion in the face of the one they got. Taleb also offers some good news for risk managers: machine learning is on the right track. There are “various machine learning functions that produce exhaustive non-linearities,” that is, that do control for the fat tails. They do this through “cross-entropy.” Cross-entropy is a concept taken from the field of information t...
I've discussed both Taleb and Pinker in this blog at various times, but I've never brought the two of them together. Yet reality has brought them together for me. One of Pinker's books for a broad popular audience is called THE BETTER ANGELS OF OUR NATURE (2011). It argues that the world is making progress toward peace. Violence still occurs, but it becomes less common century after century, peaceful methods of the resolution of differences advancing. An example: it is almost possible to imagine France and Germany on opposite sides of a war in the next fifty years or so. Yet not TOO long ago as meta-historians reckon time they were on opposite sides of three different wars within about 3/4s of a century. What has happened? See Pinker's title for his answer -- the better angels of our nature are slowly prevailing and giving us a better world. Taleb has been sharply critical of this book. With the help of statistican Pasquale Cirillo, Taleb wrote a couple of es...
Steven Pinker has attracted a fair amount of attention with a new book, Enlightenment Now, in which he argues that technology is good because it has made so many lives better, science is good because it allows for technology, science came to us from the Enlightenment, and thus the Enlightenment was good and requires revival. It seems like a jejune thesis. Whether it makes for a worthwhile book I wil have to leave up to those who actually read the book to judge. What interests me is that the book seems to have created a number of quite spirited responses. That is generally a good thing. Without Edmund Burke, the best known writings of Paine and Wollstonecraft would never have come about. If you can't give Burke a 'hurrah' for anything else you can spare one for that. Pinker seems to have earned THAT sort of hurrah at the least. As to those reviews, I'll quote just one. John Gray writing in the New Statesman says that the book is "a rationalist sermon deli...