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Posts Tagged ‘Black Swan’

Second Time Around

July 27, 2014 1 comment

Since his philosophical ideas are refreshingly new, counter-intuitive, and mind-boggingly deep, I decided to re-read all four of Nassim Taleb’s books. I just finished re-reading “Antifragile” and am now well into my second pass through “The Black Swan“.

As with all good books that resonate with me, I find that re-reading them brings new learning, excitement, and joy. It’s almost like I’m reading them for the first time.

The reason I’m magnetically drawn to Mr. Taleb’s work is because his mission is truly noble and humanitarian.  It is to make the world a better place by creating a system in which so-called elites (e.g. economists, politicians, academicians, Harvard-trained managers, high frequency traders) with no “skin in the game” cannot harm millions who follow their predictions/advice/policies without being harmed themselves. Requiring big-wigs to place some “skin in the game” (Mr. Expert, does the content f your portfolio align with your forecasts/advice?) precludes the alarming and increasingly asymmetric transfer of anti-fragility from regular Joe Schmoes like you and me to smug, self-serving elites.

Show SkinIn case you are new to the concept of antifragility, consider the figure below. A fragile system is one in which, as the magnitude of an external stressor is applied, the harm it experiences increases non-linearly. An antifragile system is the exact opposite. It is more than simply resilient or robust. It actually gains from volatility (up to a point, of course).

Convex Concave

Since you can’t know what’s going to happen in the next five minutes, let alone far into the future, you can’t guarantee your own personal antifragility. But you can take concrete action to reduce your fragility and minimize the risk of someone stealing whatever antifragility you do have. Eliminating debt decreases fragility. Adding redundancy (e.g. two kidneys, two lungs) and “having options” reduce fragility. Government bailouts transfer antifragility from taxpayers to executives and shareholders. Lack of term limits transfers antifragility from voters to politicians. Corporate mergers and buyouts transfer antifragility from employees to executives. Increasing size and centralization increases fragility. Lack of exercise increases fragility. Long periods of obsessively manufactured stability increase fragility. The ultimate fragilizer, and the one in which we can only accept, is…….. TIME.

Taleb Terminology

 

All Upside, No Downside, No Conscience

Check out these three financial portfolio performance graphs from Mr. Nassim Taleb:

FRA

A fragile portfolio is one which is prone to getting decimated by a rare, unpredictable, event (a.k.a. a Black Swan). A robust portfolio is one which is relatively immune to the effects of a devastating Black Swan. An antifragile portfolio is one which experiences spectacular gains from a Black Swan.

Mr. Taleb asserts that the world’s financial system has been (since the 80’s when we first started bailing out banks), and still is, fragile. As long as bankers know that we, the taxpaying public, will continue to shoulder the cost when they blowup because they are too big too fail, they will continue to exhibit incompetent, reckless, risky behavior backed by bogus PhD calculations. They get their perennial bonuses before each big bust for “doing well“, but aren’t forced to give them back when they lose more money in an instant from a Black Swan than all the profits they’ve ever made previously in the history of banking. It’s a no-brainer with all upside and no downside. What a life… if you don’t have a conscience.

So, how do you construct a anti-fragile portfolio? According to Mr. Taleb, you allocate 80% of your portfolio to “cash” and 20% to wildly speculative investments. It’s called the barbell strategy – weighted investments at both ends of the risk spectrum and nothing in the middle. In the worst case, you’ll lose the full 20%, but the sky is the limit if you’re right with your speculative investment choices. The challenges are:

  • To muster up the nerve to actually go against what the mindless “portfolio theory” trained herd says and reallocate your currently fragile portfolio,
  • Figure out exactly what Nassim means by “cash” (no, it’s not a savings account at Citibust or Bank Of Nightmerica),
  • Decide on which speculative financial instruments to invest in (gold/metals? commodities? real estate? “other”?) .

BD00 knows what these challenges are because, as an unsophisticated investor, he’s struggling to conquer them himself. WTF!

investment allocation

Hopping On The Anti-Fragile Bandwagon

February 13, 2014 3 comments

Since Martin Fowler works there, I thought ThoughtWorks Inc. must be great. However, after watching two of his fellow ThoughtWorkers give a talk titled “From Agility To Anti-Fragility“, I’m having second thoughts. The video was a relatively lame attempt to jam-fit Nassim Taleb’s authentic ideas on anti-fragility into the software development process. Expectedly, near the end of the talk the presenters introduced their “new” process for making your borg anti-fragile: “Continuous Delivery/Discovery/Design“. Lookie here, it even has a superscript in its title:

CD3

Having read Mr. Taleb’s four fascinating books, the one hour and twenty-six minute talk was essentially a synopsis of his latest book, “Anti-Fragile“. That was the good part. The ThoughtWorkers’ attempts to concoct techniques that supposedly add anti-fragility to the software development process introduced nothing new. They simply interlaced a few crummy slides with well-known agile practices (small teams, no specialists, short increments, co-located teams, etc) with the good slides explaining optionality, black/grey swans, convexity vs concavity, hormesis, and levels of randomness.

smug consultant

The Skeptical Empiricist

January 31, 2013 Leave a comment

Thanks to my friend at ThinkPurpose.com, I discovered a bona-fide “skeptical empiricist“:

As a skeptical empiricist I prefer the experiments of empirical psychology to the theories-based MRI scans of neurobiologists, even if the former appear less “scientific” to the public. – Nassim Taleb

In his refreshingly original and caustic book, “The Black Swan“, this former Wall St. quant convincingly trashes the ubiquitous Gaussian probability distribution because of its lack of scalability and utter failure to account for “Black Swans“. Mr. Taleb also disses those statisticians, Nobel prize-winning economists, and planners that make predictions based on the reductionist properties of the taken-for-granted Gaussian probability distribution.

According to Mr. Taleb, a Black Swan is an event with these three attributes: unpredictability, consequences, and retrospective explainability. A prime example of a Black Swan is the 9/11 terrorist attack. Note that the housing bubble was not a Black Swan – since many people predicted it was coming.

Throughout his tome, Nassim exhibits some profound insight and wisdom across a wide range of topics. Here are just some of the many snippets that resonated with me.

Humans will believe anything you say provided you do not exhibit the smallest shadow of diffidence; like animals, they can detect the smallest crack in your confidence before you express it. The trick is to be as smooth as possible in personal manners.

The problem with business people… is that if you act like a loser they will treat you as a loser—you set the yardstick yourself. There is no absolute measure of good or bad. It is not what you are telling people, it is how you are saying it.

Now contemplate epistemic humility. Think of someone heavily introspective, tortured by the awareness of his own ignorance. He lacks the courage of the idiot, yet has the rare guts to say “I don’t know.” He does not mind looking like a fool or, worse, an ignoramus. He hesitates, he will not commit, and he agonizes over the consequences of being wrong. He introspects, introspects, and introspects until he reaches physical and nervous exhaustion.

Forecasting by bureaucrats tends to be used for anxiety relief rather than for adequate policy making.

By removing the ten biggest one-day moves from the U.S. stock market over the past fifty years, we see a huge difference in returns—and yet conventional finance sees these one-day jumps as mere anomalies.

…it is contagion that determines the fate of a theory in social science, not its validity.

…there was a strange cohabitation of technical skills and absence of understanding that you find in idiot savants.

Missing a train is only painful if you run after it! Likewise, not matching the idea of success others expect from you is only painful if that’s what you are seeking.

The Achilles’ heel of capitalism is that if you make corporations compete, it is sometimes the one that is most exposed to the negative Black Swan that will appear to be the most fit for survival.

Black Swan

Nobel, Or Un-Noble ?

January 27, 2013 2 comments

From Nassim Taleb’s “The Black Swan“:

And now a brief history of the “Nobel” Prize in economics, which was established by the Bank of Sweden in honor of Alfred Nobel, who may be, according to his family who wants the prize abolished, now rolling in his grave with disgust. An activist family member calls the prize a public relations coup by economists aiming to put their field on a higher footing than it deserves. True, the prize has gone to some valuable thinkers, such as the empirical psychologist Daniel Kahneman and the thinking economist Friedrich Hayek. But the committee has gotten into the habit of handing out Nobel Prizes to those who “bring rigor” to the process with pseudoscience and phony mathematics. – Taleb, Nassim Nicholas. The Black Swan: Second Edition.

One example (out of several) that Mr. Taleb uses to back his disrespectful opinion of the vaunted Nobel prize in economics is the tale of prize winners Robert Merton, Jr., and Myron Scholes. Robert and Myron worked for Long Term Capital Management LP in the late 90’s. Of course, since they had a rigorously tight and academically peer reviewed modeling strategy, they were touted as geniuses and lots of people threw money at them in the hopes of making a killing in the financial markets. However, a combination of events lying outside of their impeccably rigorous, Gaussian-based, award-winning, often-copied, financial models caused the company to go ka-boom! Because of the massive 4.6 billion dollar loss (suffered in only 4 months) authored by these perceived Gods, the US Federal Reserve sensed that an LTCM bankruptcy could topple the entire financial system. Thus, the Fed orchestrated a huge bailout by a consortium of Wall St. and international banks.

The attempt by the guild of economics to elevate themselves to a level of respect higher than they deserve reminds me of this quote by Sam Culbert about the Gestapo, uh, I mean (in)Human(e) Resource departments in “Get Rid Of The Performance Appraisal” :

So in return for being the cheerleaders for management, the (HR) department that permits management abuse and cleans up after its mistakes, it gets a seat at the big boys’ table.

But so…. freakin’…. what! Every individual, group, and institution has an innate need to survive and thrive before the grim reaper comes a callin’ fer us down the road. It’s simply that the tactics and methods that we use to achieve our needs differ. Obviously, BD00 (and most likely you too) are “above” all the unfairness and inequity in the world. We’re fair and just and we deserve better. We’re not like the guild of economists or the Gestapo HR departments in corpocracies. Damn it, we’re better than “them“! The behaviors we exercise in order to survive and thrive are always noble; never un-noble (cough, cough).

Better Than You

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