Taleb is Riding the Black Swan!

The Times Online has a terrific article about Nicholas Taleb’s reaction to the market crash.  Taleb is the author of The Black Swan, a very fun read about his theories of unpredictable events.  (It’s interesting that the ideas in the book come across as much more attractive than their author, who presents himself as unconscionably arrogant for someone whose strongest arguments are about the limitations of human knowledge!)

I found several things enchanting about the article. First, it’s amazing to an American that a professional athlete in Britain writes and thinks like Ed Smith does.  Our athletes mostly get in fights with their bodyguards in bars; they certainly don’t write with insight about major economic events.  Second, there are a number of wonderful quotes that strike at the heart of Taleb’s arguments.  We’ll go through those individually.

So is Taleb really against expertise, or is he simply pitting his own against that of the experts? He got this call right. The fall was forecast-able and he forecast it. It was not really a black swan.

This problem grabbed my attention while reading the book.  Taleb keeps attacking the ability of “experts” to know what they’re doing, all the while arguing that he himself knows exactly what he’s doing, because of his analysis of the limits of knowledge … but how can he — or we — know that he knows what he’s doing?  What evidence can be trusted, given the limits of all evidence to predict the future.  Taleb comes back to this point when he says:

But Taleb’s victory today is a pyrrhic one. “I wake up every morning at 2am, scared. I have made money on my bet that the financial world will go under. But now, if the banks go under, I can’t cash my money. If I follow my logic all the way through, I get scared.”

This point is the critical one for his reader: how far ought we to follow the chain of logic in predicting that astonishing disasters will occur with (unpredictable) regularity?  Ultimately some of the disasters will be ones we can’t recover from.  What about those?  It’s impressive that Taleb made lots of money by betting the economy would crash, but how does one short sell an ecological disaster, for instance?

A phoney meritocracy of people who got massively lucky and think they did it all themselves is a recipe for social disaster.

[later]

There is surely, for Taleb, an uncomfortable irony. Much of his present notability is due to his having made one devastatingly accurate prediction. Had he got his forecasts for the fall of banking wrong, the error would only have strengthened his general theory of black swans. But it would have undermined his popular reputation, which has never been higher. Now that really is luck. I leave him hoping that it may prove contagious.

Lovely writing about lovelier thinking.  Taleb is powerfully convincing about the limitations of human knowledge to predict outside of their sphere of understanding.  However, his theories aren’t powerful ones, like, say, chaos theory, that give us rich meta-theories from which to predict the overall structure of likely events.  Instead, they just tell us that very, very bad things are going to happen, and that their happening is completely unpredictable.  Fascinating ideas … but what should we do about them?

John