Nassim Nicholas Taleb: the prophet of boom and doom
business.timesonline.co.uk
business.timesonline.co.uk
I think Taleb is taking the easy way out. Rather than doing the hard work of modeling fat-tailed probability distributions, or studying how people mismanage risk, or building new financial models with more realistic assumptions, he throws up his hands and says that the future cannot be modeled. To his credit, he did once run a hedge fund based on his principles (called Empirica), but it was forced to close. Whether this was due to a lack of rare events or to mismanagement, no one can really know.
Unfortunately, you are wrong and Taleb is right.
The future of a dynamical system such as market cannot be predicted any better than a weather can be predicted one month from now.
You could try to 'model' the temporal structure of the market (trying to find and describe its 'strange attractor'), but this is pointless because this market system has too many dimensions and your measurements of the system are too noisy and incomplete.
The best you can do is to run some 'local' predictor. Like simply build a black box model based on the system's past and predict tomorrow based on what you've seen in the past. This works quite well but only for the very short term horizon. And it is not the 'model' you are thinking about.
You should dispose of the traditional statistics altogether. It simply does not work in real life and all of the kludges developed to save it (like ARMA models etc) are pointless.
As far as his fund is concerned, I would think he has done right by stopping trading in times when his strategy did not work. His strategy was to buy out of money options. Well, we had almost ten years of falling volatility and he would bleed to death in such an environment. A log of smart traders also went out of the market (Soros etc), some are coming back now.
Taleb is not even such an innovative thinker. All of the stuff he is talking about has been an active field of scientific study, but he is valuable for being a popularizer of these ideas.
Mathematical finance is about a lot more than prediction, however. Risk management is even more important, since there are so many market participants who find themselves exposed to risks that they must hedge. Even your neighborhood mortgage banker is exposed to interest rate risk -- both the level of rates and the volatility of rates. Any multinational corporation is exposed to foreign exchange risk. An option trading desk will often find itself exposed to volatility and correlation risks. It would be foolish to leave these unhedged, and without some sort of a model you're forced to. The right way to approach this isn't to treat markets as some inscrutable thing, but to propose the best method you can and be aware of the risks you remain exposed to.
What I get after reading NNT's books is "being humble, prepare to be humiliated" I think it also the same like what PG said for startups, "get users feedback asap, and iterate it fast" An arrogant developer or hedge fund manager is just a disaster waiting to happen.
What passes for hedging and 'risk management' today in the financial industry is something different. You measure how one instrument has correlated with another instrument (or a basket) in the past build an offsetting portfolio based on these correlation matrices -- and voila!
But your assumptions that those correlations between assets will stay the same in the future (including volatility etc) are baseless. As you see, it is also predicting the future. And it is wrong.
Certainly, it's foolish to assume that you are ever perfectly hedged. In this example, several things could go wrong: e.g. credit default swap traders could have a different view of a company's creditworthiness than corporate bond traders, forcing you to pay exorbitant prices for protection on the bonds. But this is a smaller risk than holding the bonds outright.
In short: models can be helpful in risk management, as long as you are aware of the residual risks you are exposed to. Just don't allow them to make you complacent or overconfident.
But after subprime, he said he was interested in coming back to market because he thought it would have fun because the volatility of market may come back. Since he has "fuck off" money now, for him the fun is more important.
http://www.fooledbyrandomness.com/wsj-patterson.pdf
For what it's worth, the same article has him still in as of October last year with a new fund called Universa, doing basically the same thing.
If you've not read The Black Swan already, I would highly recommend it, it's a fascinating book.
All his point in fact is just "Instead of trying to predict future, how about let's just prepare for worst first?" So instead of computing probability of stock market index rising or falling in june 2009. The strategy is just "if all our current holdings dropped 75% in values? what is our protection against such happening". Instead of trying to bet on probablity, he just tries to hedge when black swan happens.
Two writers that I admire most lately are PG and Taleb. I feel amused when their writings sometime just create a storm because most readers feel so upset from what they write.
One most interesting part from this interview is about Taleb's fitness program. PG's "You weren't meant to have a boss" just popped out from my mind. It looks like both of them though walking down different paths in life have found the same reality that rest of the world seems unaware of or long forgotten.
His book is like conversation with an older, intelligent person who has the kind of wisdom you get from life experience. It's also very relevant to anyone working in a startup.
“Scientists don’t know what they are talking about when they talk about religion. Religion has nothing to do with belief, and I don’t believe it has any negative impact on people’s lives outside of intolerance. Why do I go to church? It’s like asking, why did you marry that woman? You make up reasons, but it’s probably just smell. I love the smell of candles. It’s an aesthetic thing.”