Short works

Books : reviews

Nassim Nicholas Taleb.
Fooled by Randomness.
Texere. 2001

rating : 2.5 : great stuff
review : 13 August 2002

Taleb has one main thesis: in a competition that exhibits a large degree of randomness, where there are many competitors, and we see only the winners ("survivorship bias"), then those winners survived more by luck than skill, and are no more likely to continue winning than anyone else.

Put baldly like that, it's an obvious conclusion. (There are party tricks, and successful confidence tricks, based on this very fact.) And Taleb claims this is the case with most stock market traders, that past performance really is absolutely no guide whatsoever to future performance. However, because we all seem to have a built in bias to credit our successes to skill rather than good luck, and our failures to bad luck rather than inadequacy, these merely lucky traders have fooled themselves, and others, into thinking they are skillful traders.

There's an added wrinkle. Taleb is himself a trader. Not one of the highly successful high fliers who make millions, then burn up spectacularly, losing billions. But successful in a steady, reasoned way. He knows the difference between probability (say, the market is more likely to go up than down) and expectation (but if it goes down, it will go way down), and knows to bet on the latter. Also he knows that any mind, even his own, can be fooled by randomness, so he has fascinating little tricks he plays on himself to minimise the problem.

This is no plain, dry account of a bald statistical result. This is told in Taleb's own eccentric, highly individual voice. And all the better reading for that.

Nassim Nicholas Taleb.
The Black Swan: the impact of the highly improbable.
Penguin. 2007

rating : 2 : great stuff
review : 16 October 2008

This is a highly entertaining and informative rant against those who try to plan and predict by denying the possibility of improbable high-consequence events. Taleb's main thesis is that it is impossible to be absolutely sure that something like "all swans are white" is true (no matter how many white swans you have seen), but devastatingly easy to be absolutely sure that it is false (exhibit just a single black swan). In particular, the fact that financial markets and other risk takers haven't had problems in the past doesn't prove that their risk strategy is sound, but a single financial collapse can demonstrate its frailties. Moreover, even to have a statistical degree of confidence in such statements we need a lot more evidence than we think we do, especially when the probability distributions have "fat tails", rather than Gaussian exponential decays. And even worse are the "unknown unknowns", those "black swans" of the title, the events from left field that we never even considered in our risk calculations, which take us completely by surprise -- but which are much more common than we might like to think.

He backs up his argument with data, anecdotes, and illustrative fictional tales, all in a very persuasive manner. He has a compelling little example of the difference between Gaussian and fat tailed probabilities: as you get older, your expected date of death draws nearer (life expectancies are Gaussian), but as a project becomes more and more overrun, its expected completion date gets even further away (a property of "fat tailed" power law distributions).

I like his emphasis that most people concentrate too much on what they know, rather than learning more about what they don't know -- that is, seeking confirmatory rather than refuting evidence for their theories and models. Part of the reason I like this is personal: he starts off with a tale of a library:

p1. a private library is not an ego-boosting appendage but a research tool. Read books are far less valuable than unread ones. The library should contain as much of what you do not know as your financial means, mortgage rates, and the currently tight real-estate market allow you to put there. You will accumulate more knowledge and more books as you grow older, and the growing number of unread books on the shelves will look at you menacingly. Indeed, the more you know, the larger the rows of unread books.

This makes me feel so much better about my own unread library. Nevertheless, they are still looking at me menacingly.

He also claims that history only occurs in retrospect -- it is so much easier to explain the past, when we can pick and choose the evidence, than to predict the future, when we have no idea what is important and what isn't. Events just don't make the kind of historical sense that we impose on them. He exhorts us to read people's diaries, rather than their post hoc histories, to see this. Taleb himself claims not to make specific predictions, because by their very nature his kind of Black Swans are unpredictable. However, the following words, written in 2006, published in 2007, are eerily prescient as we today sit surrounded by global financial meltdown...

pp225-6. Financial institutions have been merging into a smaller number of very large banks. Almost all banks are now interrelated. ... when one falls, they all fall.* The increased concentration among banks seems to have the effect of making financial crisis less likely, but when they happen they are more global in scale and hit us very hard. We have moved from a diversified ecology of small banks, with varied lending policies, to a more homogeneous framework of firms that all resemble one another. True, we now have fewer failures, but when they occur . . . I shiver at the thought.
     ... The electricity blackout experienced in the northeastern United States during August 2003, with its consequential mayhem, is a perfect example of what could take place if one of the big banks went under today.

* ... the government-sponsored institution Fanny Mae, when I look at their risks, seems to be sitting on a barrel of dynamite ...

Taleb has been promulgating his brand of market economics for some time now. He disapproves mightily of the theoretical economists who base their models on patently false assumptions, who win Nobel Prizes for them, and who lose billions of dollars when they apply them in the real world. Clearly, he has experienced some hostility in return, but this doesn't faze him:

p280. An ad hominem attack against an intellectual, not against an idea, is highly flattering. It indicates that the person does not have anything intelligent to say about your message.

This is a marvellous book, a fun read, and a sobering read. If his assertions about how wrong the markets theorists are, and how long this has been known to be the case (and he is not alone in this opinion), then the current situation of global financial meltdown is at best due to criminal incompetence.

Nassim Nicholas Taleb.
The Bed of Procrustes: philosophical and practical aphorisms.
Penguin. 2010

rating : 4 : passes the time
review : 16 July 2011

This slim book of Taleb's aphorisms covers a wide range of subjects. Some made me laugh, some made me scowl, some made me think, and some made me think "huh"?

And he really doesn't like academics.

There is a "postface" (as opposed to a preface), explaining the point of aphorisms. Although this is deliberately at the end, personally I would have found it more useful at the beginning.

Nassim Nicholas Taleb.
Penguin. 2012