Nassim Nicholas Taleb: Thin-Skin In The Game

The Talebian One himself, Nassim Nicholas Taleb, whom I have written about at length on this blog, has a new book, “Skin in the Game”, which he has been promoting on Twitter. This is not a review of the book; rather, it’s a review of his broader ideas and character.

The problems with Taleb are as follows:

1. contradictory views (holds both elitist and populist views)
2. apparently oblivious about modern option pricing and markets; misconstruing the views of experts (his literary career is predicated on two falsehoods: that options are incorrectly priced and that traders, statisticians, and policy makers are oblivious to tail risk)
3. disproving ‘black swan’ theory requires trying to prove a negative
4. thin-skinned and short-tempered (on Twitter, anyone who doesn’t agree with him is a ‘BS artist’, a ‘journo’, a ‘charlatan’, or an ‘idiot’)
5. a dearth of viable/realistic solutions to financial regulation problems and risk

Why do I care? Because he goes around on Twitter bullying people, calling scientists and economists ‘frauds’ and ‘chalatans’, but cannot take criticism, whereas Dawkins, for example, has received much more criticism than Taleb, for far less, and takes it much better. Although Eric Falkenstein has written some much needed criticism (pretty funny review of Taleb’s AntiFragile) of Taleb regarding volatility and options, more is needed.

Taleb’s views are full of contradictions. For example, in “The Most Intolerant Wins: The Dominance of the Stubborn Minority” he writes:

The entire growth of society, whether economic or moral, comes from a small number of people. So we close this chapter with a remark about the role of skin in the game in the condition of society. Society doesn’t evolve by consensus, voting, majority, committees, verbose meeting, academic conferences, and polling; only a few people suffice to disproportionately move the needle. All one needs is an asymmetric rule somewhere. And asymmetry is present in about everything.

This is an elitist view, which I agree with, but it seems contradictory to his populist-inspired attacks on universities and academia, his support of Sanders, and his promotion of the ‘Fat Tony’ character (the ‘everyday man’) over the academic. It’s like he can’t make up his mind. He seems to be subscribing to the Daniel Kahneman view that everyone, including the smart and elite, are irrational and susceptible to simple cognitive biases (like the conjunction fallacy and anchoring), in effect promoting leveling – that ‘smart people’ are not so smart and rational, after all. This is also similar to the blank slate, which could explain why Taleb is so close to Gladwell and Kahneman but enemies with Pinker. (This feud dates back almost a decade, during the so-called IQ Wars.) As I explain, proponents of the ‘blank slate’ often believe that no one is intrinsically better than anyone else (leveling), and that it’s the role of the state to help create equal outcomes. Moral relativists tend to believe all humans are inherently irrational and corrupt, and that that is no preferred standard of morality or a ‘more rational’ group of people. Although Bryan Caplan argues that most people are too irrational, too ill-informed to vote, the distinction is that Taleb holds the reverse view, which is that the ‘elite’ are irrational and the ‘everyday man’ is more rational and exalted, a view compatible with left-liberalism and moral relativism.

If there are a small number of superior people (as Taleb indicates by the quoted passage), why not put them in power? Instead of making arguments for why smart people deserve more, he advocates populist views and policy that would cause harm to the most productive, most useful members of society. By doing away with centralized, interconnected systems, society would fall, and the smart, exceptional people that Taleb pretends to care about would find their talents misplaced. Society reverting to a post-apocalyptic, chaotic, disconnected, hunter-gatherer state would hurt the cognitive elite, since their priorities would likely be diverted to finding food and shelter, not making abstract discoveries.

Taleb attacks academia, failing to realize that academia (once you eliminate the ‘safe spaces’, ‘trigger warnings’ and other SJW-nonsense) is essential for sharing ideas. The equations Taleb uses were derived by academics cooperating with each other and sharing their ideas, with one idea built upon an earlier one. That’s why his attacks on ‘nerds’ doesn’t make sense: nerds derived all the math he uses in his papers, and without ‘nerds’ (or the ancient equivalent), humans would probably still be scribbling animal pictures in dimly-lit caves…

Although Taleb occasionally hints at holding ‘libertarian’ economic views, which is why he’s respected among ‘alt right’ circles, for the reason above and others, he seems socially liberal. Being a liberal is more than just identifying as a liberal – it’s mindset, a constellation of beliefs. It’s about attacking conservative figures. It’s about attacking ideas that are congruent to the ‘right’, including HBD, ‘order’, and ‘stability’.

Here is Taleb attacking Trump and the Ronald Reagan in the same tweet:

Instead of taking Taleb’s word for it, I decided to investigate further, reading actual books on the matter instead of tweets, and while Reagan was probably not as sharp as Nixon, he was competent enough for the job. Contrary to popular myth of being an amiable dunce, Reagan was an eloquent speaker, a quick study, and had strong command of the issues. He also wrote thousands of letters and was well-read on a wide variety of topics, from philosophy to history.

Also, how many Tweets by Taleb are there criticizing Obama’s personhood (not policy)? Zero. Although Taleb may criticize some of Obama’s policies (such as foreign policy), the attacks are never personal, unlike his attacks on republicans like Trump (who he calls ‘Donaldo’) or Reagan.

Furthermore, Taleb has never spoken out against SJWs, black lives matter, or false rape accusations.

Here is Taleb endorsing non-interventionism, although such views are not unique to him:

There is a famous story about George Washington during the drafting the Constitution. It was suggested that a clause be included to limit the size of standing armies, to which Washington quipped to the effect that there should also be a motion limiting the size of an invading army.

That’s the problem with non-interventionism – it only works when everyone adopts it, but like the size of an enemy army, it’s perilous to make such a generous assumption. Non-interventionism means allowing the enemy to build-up at their leisure until they are ready to mount a massive attack, rather than eliminating the enemy at the onset of potential trouble. Neutrality didn’t prevent Pearl Harbor from getting bombed, and the attack forced America to abandon non-interventionism and enter the war, although one can argue that American involvement in WW1 was an instigating factor.

In some cases, non-interventionism may not be an option or may lead to undesirable outcomes. Consider three countries, A,B, and C. A and B are trade partners. B and C are neutral. Then B does something, inadvertently perhaps, to provoke C into war. With B losing the war, the economy of A is endangered, so A must intervene on behalf of B.

But doesn’t interventionism conflict with Pinker’s thesis about the world becoming less violent? Not necessarily, because America’s military might and willingness to use it (big stick) to defend its interests may dissuade countries from engaging in war, knowing that the United Sates may intervene at great cost to the aggressor.

In showing his softness on terror, here is another tweet:

Yes, technically that is true, but sometimes Islamic terrorism is really just Islamic terrorism. Incompetence allows terrorist attacks to happen.

Even liberals such as Richard Dawkins and Sam Harris understand the threat posed by Islamic terror on free society, and understand that the more radical elements of Islam are a threat to free speech, the religious equivalent of SJWs. But Taleb is silent on the matter, refusing to denounce Islamic terror and mass Islamic immigration into Europe.

Here is Taleb attacking Hillary:

I don’t like Hillary either, but it’s obvious that by never attacking Sanders, Taleb is sympathetic to welfare liberalism. Sure enough, here is a tweet praising Sanders:

I fail to grasp how promoting a message of division and class warfare is ‘saintly’.

Taleb wants to believe that the complexities of science and theory should be reduced to a bunch of aphorisms and heuristics. Or that ‘skin in the game’ is more important than expert opinions, but as Scott notes:

I guess the thing I’m not sure about is – does personal experience/”skin in the game” reduce fully to factual propositions? Does a factory worker have an advantage over a journalist in understanding globalization just because he knows that being laid off is really bad, and that it’s harder to get a new job than a journalist thinks – two things we would expect any journalist worth their salt to already know about? Or is there some hard-to-communicate knowledge that’s neither factual nor just a cover for “the secret hard-to-communicate knowledge that I am selfish and want a system that benefits me rather than other people”?

A person who is unemployed may be able to provide a personal account to justify why the economy is bad, but his opinion may be skewed by his own negative predicament and thus not indicative of the economy as a whole. Rather than deferring to anecdotal evidence, it’s better to defer to the actual economic data itself, weighing the summation of the good against the bad. Yes, losing your job sucks, but it doesn’t mean the whole economy sucks. This is related to the fallacy of composition.

Taleb’s arguments are easy to debunk by anyone who has actually traded options, understands elementary statics and option trading, or anyone who has actually studied option pricing, and being that I have done all three, dismantling Taleb’s arguments is a breeze:

Taleb’s books, papers and lectures repackage knowledge that statisticians, traders, and economists are already well-aware of. Fat tails and concave/convex risk are not new concepts. Pretty much all he does is state what anyone with some background knowledge already knows: that, yes, all statistical models have limitations, selling options can entail a greater loss than buying them, a single ruin can undo all prior wins, and models may underestimate risk. Although there is is nothing wrong with repackaging – new ideas are hard to come by, and pretty much all popular science books regurgitate information that exerts already know – Taleb has made a career out of distorting and misconstruing experts and professionals, whether it’s about statistics, option trading, or risk management. Taleb insist traders and statisticians are are obvious to the concept of fat tails, convexity, and ‘tail risk’, when in fact they are aware of it, and long before he wrote his books and papers ‘discovering’ it.

If you read his Twitter, Taleb often posts links to various math equations as if the concepts are new or his own, when they are not. It would be like me transcribing calculus equations from a textbook onto my website, Twitter, and PDF files and then calling them my own. To those who don’t know calculus, I may look like a genius, but to those who know calculus, I’m just re-posting stuff that is already known.

Taleb claims to be an option trader, but some of his comments suggest ignorance of how modern option markets work, as well as ignorance or omission of post-Black Scholes option pricing literature. Taleb argues that options are incorrectly priced to account for black swans – but, actually, options are priced correctly to account for jump processes and skew, with the research on the matter (jump diffusion models) going back to the 70’s. There are very complicated option pricing models that account for jumps and variable volatility. A Google search reveals a handful of pricing models that generate ‘fat tails’ and ‘volatility smiles’.

Second, the EMH stipulates that options are priced correctly, and if they weren’t then traders could make abnormally high returns from the inefficiencies, which would then eliminate the inefficiencies. Active management has done very poorly in recent years, suggesting a market that is more efficient, not less. Option traders make money from selling overpriced options and by betting on market direction, but not from the options themselves being inefficient or the market pricing the options incorrectly.

In a paper, Taleb argues that selling OOM (out of money) 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.

Here is Taleb again talking out of both holes, dragging in the mud economist Justin Wolfers in the process:

Taleb fails to grasp that just because rare, unforeseen events occasionally yield option buyers extremely large profits, doesn’t mean the options are incorrectly priced or that option sellers are oblivious to risk. As I explained earlier, OOM (out of money) options have a skew or smile to account for the possibility of these rare events. This means that although option buyers can make large profits, the skew makes the expected value of these trades (over many years) still negative. This means that for every trader who strikes it rich with a black swan, many more will fail, and the ‘house’ will still come out ahead. No free lunch. Just like Taleb underestimates the intelligence of his critics and the intelligence of policy makers, Taleb vastly underestimates the intelligence of modern markets. Anyone who reads a Taleb book thinking it will give them an edge in today’s super-efficient market, is just a sucker.

If you can judge someone by the company they keep, Taleb prefers the company of pseudoscientists to actual scientists and economists, an indictment on his intellectual credibly, and is why scientists (rightfully) ignore Taleb’s tweets, dismissing them as rantings of an unhinged dilettante.

Taleb is incapable of debating at a high school level. For example, regarding Pinker’s “Better Angels of OUr Nature”, which argues that the world has become less violent, Taleb’s counters that we don’t know the ‘true’ variance of the distribution that underpins violence, meaning that Pinker is not accounting for possible black swans like nuclear war that may kill millions of people at once. Taleb uses this argument against all his critics, but the problem is, methodologically, such an argument is fallacious. Taleb is invoking the argumentum ad ignorantiam logical fallacy by forcing Pinker prove that there won’t be nuclear war or some black swan, and in the absence of such a proof Taleb must be right. Of course, such a proof is impossible. Whereas Pinker’s arguments involve empirical evidence of how the world is safer, Taleb waves it away by forcing Pinker to prove a negative: that nuclear war (or some other great crisis) won’t happen. (See Russell’s teapot)

Here’s a Facebook post by Taleb defending pseudoscience purveyor Malcom Gladwell:

Many people are harrassing Malcolm Gladwell. Assuming critics are right about the anectodal aspect of his work, many many social “scientists” are much worse, many are dangerously ignorant of the very notion of “evidence” and the validity of statistical claims. And if he who is clueless about statistical inference is clueless about science.

By ‘many people’ he means anyone with a brain? Anyone with at least a room temperature IQ, if they think hard enough, can see through Gladwell’s nonsense. It’s not surprising both authors, who have made fortunes repackaging unoriginal ideas and disseminating erroneous ones, gravitate to each other.

Although on Twitter Taleb constantly rails against journalists (he calls them ‘journos’), his BFF Gladwell is a journalist, albeit a very glorified one that is probably often mistaken by non-scientists for being a scientist.

On Twitter, Taleb regularly attacks real scientists – Richard Dawkins and Pinker – who are also critics of SJW-liberalism. I guess Taleb would rather side with the SJWs than side with scientists who are at war with them (the SJWs), in the battle for intellectual honesty and the free dissemination of ideas.

As other have noted, Taleb is thin-skinned as rice paper and will block anyone on Twitter who disagrees with him, as well as having a short temper. He’s also liable to insulting his intellectually superior opponents, with retorts like ‘bullshit’, rather than forming actual substantive counterarguments. He’ll even insult regular Twitter users who merely point out the holes in his arguments, which are often wide enough to drive a truck through.

Here’s a recent example of Taleb accusing Noah Smith, who despite being a liberal deserves praise for standing up to the Taleb bully, of being a ‘charlatan’ for writing a negative review of one of Taleb’s books, as well as calling someone else an ‘imbecile’ and an ‘idiot’ for disagreeing:

For some who wrote a book titled ‘Antifragile’, Taleb sure has a fragile ego.

It’s funny how Taleb accuses Noah of using strawmen arguments when Taleb himself can’t formulate a cogent refutation, apparently conflating car theft, which is a crime, with a negative book review, which is protected speech under the First Amendment…

He also doesn’t offer any good solutions to regulatory problems in his rants against ‘too big to fail’ and ‘systemic risk’, and like Bernie Sanders and Elizabeth Warren, he blames bankers and Wall St. but ignores the role of the irresponsible homeowner. In response to the problem of black swans, he say to make systems ‘anti fragile’, but this is not a solution; it’s a buzzword. In a perfect world there would be no systemic risks, but such a world cannot exist if economic activity is not to be disrupted significantly. Just saying ‘break up the banks and make everything smaller’ is not only unfeasible, but it may backfire. Smaller banks and and less centralization didn’t prevent the Great Depression or the many smaller crisis of the 1800’s and early 1900’s. In fact, central banking was created to prevent bank runs, which plagued the economy for much of the 18th, 19th and some of the early 20th century. From the early 1800’s up until 1920, I counted eight financial panics in the US, compared to just two (Great Depression and 2008) in the past 100 years, so one can argue that centralization has made the US financial system more stable, not less so. The savings and loan scandal was very small relatively speaking to the overall economy, so it’s excluded. Although there were recessions in the 70’s, 80’s, 90’s, and 2000’s, the financial system itself was not at risk but rather these recessions were attributable to economic cycles.

It’s unreasonable to blame policy makers and banks for failing to anticipate black swans, because by Taleb’s own definition they are random and unpredictable. Imagine a bus is hit by meteorite, killing everyone but the driver. Is the driver culpable for not foreseeing the impact? Rather than losing sleep over black swans or trying to be psychic, a more practical approach is to have systems in place to contain crisis as soon as it arises, along with reform to help prevent future crisis. The 2008 bank bailout (TARP), although maligned by almost everyone, was a success, sequestering the weakest parts of the economy (banking, housing) so the healthier parts (payment processing, technology, web 2.0, retail) could thrive. Eight years later, TARP has surpassed even the wildest of expectations, with lending standards much more stringent and bank reserves fatter than ever, and by early 2011 the treasury reported a profit.

Part 2: Taleb’s CV