Tag Archives: Nicholas Nassim Taleb

The Economic Calm

Lately there have been a lot of ‘weird’ posts on this blog – stuff about IQ, signaling, and intellectualism, and the like. If you go to the archives, back in 2011-2013, not once did I mention IQ (maybe one time in 2013 I think) and no mentions of SJW, Social Darwinism, or HBD either. It was pretty much strictly finance and politics related. So why am I venturing out to these other topics. Mainly it’s because since early 2014 we’ve been in an ‘autopilot’ economy, society, and stock market – or , in other words, there isn’t much going on, besides the usual manufactured hype. So I’m tying to expend the repertoire of posts and topics; otherwise, there would be much less to wrote about. Second, these issues are important – IQ and Social Darwinism – and they tie into finance and economics, and are worth exploring.

From 2007-2006 was the build-up to the crisis, with stories of mortgage-based hedge funds failing, economic weakness, and home prices falling.

From 2008-2009, there was the actual crisis, and then in 2009 bull market which still continues to this day.

In 2010, Europe began to falter, and there was the ‘flash crash’.

2011 was a tumultuous year, with the S&P debt downgrade, debt ceiling, and the economic debt crisis in Europe and possible dissolution of the Eurozone. Portugal, Ireland, Greece, Italy, Spain were all close to defaulting and needed to be bailed out.

2012 was less eventful. Europe began its austerity programs, and the US stock market and economy rebounded despite some weakness in the middle of the year.

In 2013 the S&P 500 rose a whopping 28%, shaking off the fiscal cliff, government shutdown, fed taper, and sequester. Home prices also surged, especially in California.

But not much has happened since then. The S&P 500 is flat since late 2014 and is only up 13% since early 2014. More importantly, the economy is still humming along, with neither deflation nor inflation. All prediction made between 2008-2016 of crisis, bear market, recession, hyperinflation, dollar collapse, or the fed being ‘boxed in’, all failed to come to fruition. The placidity the economy and financial markets has left commentators, myself included, without much to discuss.

Once you pull away the cobwebs of sensationalism, hype, and distractions, a clear picture emerges of what to do: ignore the doom and gloom and buy & hold stocks, which Is what I have done with success since 2011. Some say, ‘it’s different this time; the end is near’. Maybe, but maybe not. Odds are, going by hundreds of years of empirical evidence, it’s not.

As far back as the advent of agriculture, civilization and technology has progressed at an exponential rate, with some hiccups along the way, despite systemic risks. When crisis does occur, it tends to be brief. Of course, this does not prove that future crisis will always brief, but that’s the way it’s been for centuries.

Taleb and others shift the burden of proof unto others to ‘prove’ that there won’t be a crisis, an example of the fallacy of the argument from ignorance.

A common argument you’ll hear is that, ‘the models are wrong/policy makers are ignoring systemic risks’.

If the models are wrong, you can always bet against them, but as it turns out the expected return on such a strategy is negative, meaning that for every large win like in 1929 or 2008, there are enough losers that the expected value is still negative. There is a mathematical explanation for this: volatility skew, which means that anticipated volatility is, 90% of the time, higher than present. That means you are buying ‘high’, not ‘low’. Options are priced to account for jumps, resulting in a skew that makes put options expensive enough that long-term profit is not possible. Betting on crisis is sorta like buying insurance. However, if it weren’t profitable for the insurers, insurance companies would not exist. Policy writers are not going to let policy buyers take their money, or at least not for very long. If insurance companies notice that a certain neighborhood is susceptible to fires, they will raise premiums. Taleb creates a strawman argument that all options are priced with an underlying Gaussian distribution and that traders and statisticians are unaware of factors such as skew and jump processes, when neither of these are true.

Defending ‘Theory’ and Rationalism

Lib Nicholas Nassim Taleb takes another shot at Dawkins.

As for the passage itself, there’s room for both theory and empiricism, as I explain in an earlier article Falsifiability, String Theory, and Policy:

1. Algorithms save time, versus having to do everything individually. Whether it’s movies or video games, computer simulations have become so realistic as to be almost indistinguishable from reality. Although some problems such as turbulence remain unresolved, algorithms do a reasonably job of approximating reality. Why waste time with heuristics if an algorithm is 99% accurate and can be done instantly?

2. Scientists who create theoretical models understand the limitations of their models, and also have ways of measuring the plausibility of said models based on various preconditions without having to explicitly test their theories. Many physicals laws, for example, must obey conservation of energy, must have various invariance properties, and not ‘blow up’ under various limits and extremes and give reasonable answers otherwise. All of this can be verified mathematically without experiment. Once a model passes the ‘smell check’, tests can be run on it. However, as in the case of theoretical physics, constructing appropriate models is hard enough, let alone testing them.

3. Theory can proceed verification, not the other way around. General and special relativity were later verified with tests. Same for Maxwell’s equations, which predicted the speed of light, and later verified.

4. Scientists are aware that trajectory models cannot predict whether someone will throw a baseball or why he would want to throw it, yet Taleb assumes that scientists are unable to make this categorical distinction between a closed-system and an open one.

Liberals like Taleb want to promote ‘leveling’ – the belief (also shared by other pop psychology charlatans) that humans (especially smart ones) are irrational. ‘If smart people occasionally make mistakes, we can’t trust smart people to make decisions’ To the left, the ideal state of man is irrational, egalitarian, and primitive, not civilized.

Unless someone is clinically insane, everyone acts rationally in their own best-interests (homo economicus), but IQ determines outcomes, with smarter people having more fortuitous rationalizations. A stupid person may rationalize buying lottery tickets, for example, which it’s why it’s appropriately called the ‘stupid tax’. In the strictly mathematical sense, playing the lottery is irrational (due to the negative expected value for the participant), but less intelligent people rationalize playing it. These people act irrationally due to the availability of a priori knowledge (such as the odds of wining the lottery, which are available to the public), but other instances are not so obvious such as whether or not the stock market is in a bubble, in which case there is much more ambiguity. To settle this, in Defending Rational Markets, I argue there are two types of rationality: ‘real time’ rationality (based on what is happening now) and post-hoc/a posteriori rationalism (after the fact). For example, if someone observes that a stock has risen linearly from $40 to $60 in twenty minutes, would it not be so irrational for him to assume it will rise to $61 in the 21st minute? So he buys. But then the SEC halts trading of the stock and fraud is revealed. He loses everything. In retrospect he acted irrationally.

But if there’s ambiguity, doesn’t that invalidate certain models, particularly financial models? Not necessarily. The theory of Rational Expectations implies that even if everyone is uncertain, the aggregate of guesses will lead the ‘best’ answer, or in other words, the best guess for tomorrow it today’s forecast. For example, in predicting GDP growth, some economists will predict a number that is too high; others, too low. Since financial markets involve thousands of agents (stock brokers, hedge funds, day traders), the ‘committee’ is very big, meaning that it’s unlikely that everyone will be wrong. Regarding #1, financial models (such as Brownian Motion and jump diffusion) based on Rational Expectations do a reasonably good job approximating real-life financial markets. Even ‘fat tails’ and most ‘black swans’ can be accounted for if the models are sophistical enough. For the market to be irrational would imply that there is some sort of arbitrage. Option pricing formulas forbid arbitrage, and in real-life there is no arbitrage observed in option pricing, in agreement with the underlying theory.

Related:

Irrational Investors Don’t Exist
Defending the EMH

Four Years Later, Taleb Still Holding Grudge Against Pinker

Grumpy, anti-HBD liberal Nicholas Nassim Taleb is still holding a grudge against Steven Pinker and Richard Dawkins – four years later! – after getting his butt handed to him in the ‘IQ wars’.

I agree. No one should buy your books. Your books rehash what statisticians and traders already know, repackaging the obvious as something ‘new’. Anyone who has studied statistics or has traded options for longer than a year is aware of fat tails and the limitations of conventional option pricing models and the Gaussian distributions that underpin them. Second, mathematically, Taleb’s methods are neither viable nor profitable anymore. [1]

Same for those Gladwell books and other pop-psychology rubbish. This includes much of behavior finance, studies of human ‘irrationality’ under controlled conditions, and the like.

Of course, most science books that are written for the general public do a lot of rehashing, but the authors of said books typically don’t go around attacking scientists who are smarter and better-informed than they are. When they do, it typically backfires, as in the case of Stephen Jay Gould who erroneously accused the late Samuel Morton of data fabrication. It backfired, reveling Gould as the fabricator, and now Gould’s legacy has been damaged – at least in the eyes of other anthropologists.

And now the big lib takes a shot at The Donald:

Taleb should stick to Twitter debates against opponents who are too busy and respected to waste their time arguing with him, since he loses actual debates.

He’s also a crybaby and hypocrite, accusing the media of taking him out of context, while simultaneously seeking media attention to promote his books. He says he begs the media to go away, but he keeps arguing with everyone. In other words, he wants attention provided the conversation goes the way he wants. And when it doesn’t, he attacks his opponents and then deletes his tweets. Here is an example. This is hilarious. It’s funny because of how easily trolled he is, and how someone with a book titled Antifragile has such a delicate ego.

In spite of all his rantings, Taleb never actually formulates tenable solutions.

The problem with moralizing is that if the empirical data doesn’t agree, you’re just falling victim to your own confirmation bias; this is bad for yourself and your readers. Another problem is that it leaves little grey area, such as how much a firm should be punished for taking a bailout. Taleb has said on numerous occasions that bailed-out banks should forfeit bonuses and officers should be paid a ‘civil servant’ salary, but he never specifies for how long. What if a bailed-out bank only took a tiny bailout and has reformed? When would it shed its scarlet letter.

Taleb is one of those liberals like Peter Schiff and others who pretend to be on the ‘right’ yet advocate policy and hold opinions that communists and socialists would approve of. Let the banks fail and end the fed? Communists want that, too, because it would cause the economy and stock market to fall, and hence rich, productive people would lose a lot of money, creating more wealth equality even if society is worse-off as a result. Then the left can swoop in to ‘fix’ the problem that they themselves exacerbated, rebuilding society in their image. This is communism 101: crisis, revolution, rebuilding.

Contrary to popular belief, it’s communists who are anti-intellectual, not conservatives. Read any history book on the matter; in all communist regimes, intellectuals were persecuted.

Here is some more anti-intellectual liberalism by Taleb:

https://twitter.com/nntaleb/status/683442257610018816
https://twitter.com/nntaleb/status/688048036665290752
https://twitter.com/nntaleb/status/688082461763497984
https://twitter.com/nntaleb/status/688361352268787712
https://twitter.com/nntaleb/status/689126064296165376
https://twitter.com/nntaleb/status/689127906933641217

Just another example of turning high-IQ into a handicap, arguing that intellect must be in lieu of ethics or creativity. And yes, smart people make mistakes, but so do dull people, too. If a rocket blows up on the launchpad, do we fire the rocket scientists and replace them with ditch diggers?

Is it any surprise he’s close with Gladwell?

Pinker, who is a neo liberal, has spoken out many times against communism. Taleb? Never. Harris and Dawkins, as part of the ‘neo atheist movement’, care about the free dissemination of ideas, denouncing Islamism while feminists, who claim to care about human rights, remain silent on Islam, instead attacking men and Christians. Welfare liberals like Taleb want to impose their anti-intellectual provincialism on the world, in much the same way communists do. The left’s logic is, ‘if an intellectual makes a mistake, all intellectuals are wrong and narrow-minded’ or ‘intellectuals have no skin in the game, so they are wrong and should be ignored’ or ‘book smarts are better than street smarts’. (Good luck building a computer or curing a disease with ‘street smarts’) ‘Blame rich people’, ‘blame smart people’ are mantras of the left.

[1] The Taleb ‘barbell’ strategy only works when you have high interest rates, like before 2008, since you can use the compounded interest to finance losing out-of-money (OOM) put bets, and also because the market has a tendency to fall when rates are high (like 1987, 70′s, early 80′s, 1989, 1997, 1998, 2000, 2007). High interest rates also makes put options cheaper, in accordance to the Black Scholes option pricing formula. Thus, high interest rates may give the put buyer a positive expected value. But with rates still close to zero, this method doesn’t work. Then you have the constant stock buybacks, record high profits that keep growing, consumers that won’t quit consuming, and so on. A totally different macro landscape than before 2008 when such a strategy was viable.

In a paper, Taleb argues that selling OOM puts is a bad idea due to the volatility explosion, but this assumes that options are priced strictly under the Black Scholes framework and that options can be traded at infinitesimally small fractions of a penny. In reality, the volatility smile or skew makes these far OOM put options much more expensive than assumed by Taleb and the Black Scholes framework, thus substantially limiting potential profit. Also, there is a minimum ‘ask’ price for OOM puts, usually a couple cents. The huge multipliers given by Taleb are under the assumption you can buy OOM options for infinitesimally small fractions of a penny, which you obviously can’t.

Taleb Loses Debate, Blames His Opponent

Nassim Taleb Debated Larry Summers Last Week, And He Is NOT Happy With How Summers Behaved


derr risks..derr risks..derr didn’t know derr risk..derrr..derrr

ROFL cry me a river. Did the liberal Nicolas Nassim Taleb lose his temper once again, in addition to his debate with the redoubtable Larry Summers? Is that why he’s always mad, to compensate for being wrong all the time? lol His only retort is to call ‘bullshit’ when facts, tactfullness, and reason cannot suffice. As some may recall, a couple years ago he notably got his butt handed to him by the intellectually superior Steven Pinker.

“I was fighting with a bully,” Taleb said of Summers’ performance, later adding, “It’s very strange for a Harvard professor to act like a cheap politician.”

No, according to the audience you were losing. And rather than take it like a man, you are a petulant sore loser.

In the debate, he maintained that ‘too big to fail’ is still very much a reality, that bankers were never punished for their recklessness and as such will remain reckless.

Too big to fail policy was a resourding success, lib. By 2011, the treasury reported a profit. Six years later, and financial conditions couldn’t be better in terms of record reserves at major financial institutions, record high stock prices, record profits & earnings, etc. Bush, Paulson, Bernanke, and Geithner are the unsung heroes of this unending economic and stock market boom, all thanks to TARP. TARP indirectly created trillions of dollars in wealth through the 140%+ percent rally in stocks, the web 2.0 boom, the real estate boom, the economic boom, etc. Even Warren Buffet knows TARP was a success. Funny how such a successful program is so unpopular, compared to, say, social security which is projected to be insolvent in a few decades. Also, Taleb never answers how long banks shoud bear the consequences of recieving federal money, even after they have reformed.

From the intro page, we continue:

We believe in policy that creates wealth, which is why we support the federal reserve, quantitative easing, and limited crony capitalism yet oppose entitlement spending. We’re also rapacious capitalists, supporting individual freedom to create wealth under a free market. How do we reconcile support of bank bailouts and free market capitalism? Bank bailouts and defense spending, for example, represent an optimal allocation of wealth. Through the $750 billion TARP bailout, trillions of dollars were indirectly created through gains in stocks market, businesses expansion, and real estate. If the GOP is supposed to be a party of wealth creation, it behooves it to support policy that creates wealth, like the bailouts and quantitative easing. TARP ended the crisis and got things running smoothly again so that the healthier sectors of the economy, like retail and technology and would no longer sustain the collateral damage of the ailing financial sector. The irony is that TARP helped the free market thrive by quickly ending the crisis; just six months after its passage the market marked a bottom and hasn’t looked back since. QE further helped create an environment conductive for growth after traditional monetary policy measures had been used.

However the world isn’t perfect and like it or not governments intervene in crisis. They did in 2008 and will again in the future. We are lucky to have Larry otherwise things would be a lot worse.

quoted for truth

Funny how someone who wrote Antifragile could have such a fragile ego

Nicholas Nassim Taleb Wrong Again, Loses Temper

http://noahpinionblog.blogspot.com/2014/01/of-brains-and-balls-nassim-talebs-macro.html

What does Nicholas Nassim Taleb and Paul Krugman have in common? A tendency to make a lot of wrong predictions and not own up to them. Second, a tendency to sanctimoniously blame certain people like the 1%, bankers, high frequency traders, congress, Wall St., the fed, and economists for societies problems. But mostly bad predictions and lots of them.

The problem with moralizing is that if the empirical data doesn’t agree then you’re just falling victim to your own confirmation bias; this is bad for yourself and your readers. Another problem is that it leaves little grey area such as how much firm XYZ should be punished for taking a bailout. Taleb has said on numerous occasions that bailed-out banks should forfeit bonuses and officers should be paid a ‘civil servant’ salary, but he never specifies for how long. What if a bailed-out bank only took a tiny bailout and has reformed? When would it shed its scarlet letter.

If you’ve ever watched Taleb’s videos or read his books his investment strategy boils down to buying stuff that benefits from disorder (like options) versus stuff that contingent upon remaining stable (long equities, for example). Taleb’s approach is to take many small bests in the hope one of them will payoff so that the loss of any one trade is very small. The problem is there is no evidence this is actually a viable trading strategy. Events like 1987 crash will never happen again and can be relegated as anomalies that can be discarded for all practical purposes. If you continue to bleed small amounts of money in anticipation of another Black Monday you’ll go broke before it happen.
‘Skin in the game’ isn’t virtuous. It just means you lose a bunch of money and you’re still wrong. A least economists when they are wrong don’t lose lots of money.

That’s why we need to vote Republican, for pro-growth policy such as tax cuts, deregulation and defense spending. A republican super majority will mean no more brinkmanship over the debt ceiling nor shutdowns. Shutdowns have only occurred under democratic presidents and let’s not forget that the economy entered a recession on the Clinton surplus. Stocks will respond favorably to any clues of republicans winning control, so we recommend being long defense & technology sectors, oil, or the broad indexes. It will be interesting to see how the GSE’s (Fannie May FNMA and Freddie Mac) respond to a republican supermajority. We predict these stocks will surge up to 1000% because a republican controlled government would be more amenable to privatization. The left more than anyone else want the shareholders to lose all their money to ‘save tax payers’ even though these holders DO pay the same taxes as everyone else. The irony. Tax payers, by in large, have gotten over 2008. It’s not fair to make the shareholders collateral damage over the left’s longstanding war against the rich.