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Standard deviation tells you how volatile measurements are not what mean deviation is. Those are both very real life things just not the same thing."

While I am not a Taleb fan (he had his own black swan and became exactly the reviled expert his own books warn us about), your hostility in this case seems out of place.

The root of his seemingly casual contemplation is that standard deviation is simply misnamed. That this misnaming causes a cognitive dissonance that confuses even knowledgeable practitioners to mentally conflate it with the mean deviation. Which -- as someone in the financial industry -- I can absolutely confirm. It seems like such a minor thing, but the name has tremendous influence on how we parse these things, and the shortcuts we take in understanding things.

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Well, I read his article as "let's abandon standard deviation and use average mean deviation instead". I think that's what he claims. It's not: "some people are sometimes confused by the concept and in some places mean deviation would serve better, for example here and here". It has way more aggressive tone and way wider assertions about people misusing standard deviation. Remarks about "real life" doesn't help either, especially if you don't provide even one example where standard deviation is commonly used but mean absolute deviation would serve better.

>> Which -- as someone in the financial industry -- I can absolutely confirm.

This is what he is doing: he takes common sentiment often and makes into war. "Abandon standard deviation", "the confusion started", "PhD's are confused" It's easy to like him and nod in agreement while omitting that he took it way too far, proposed things way too radical and again: didn't give one single example of stuff not working because of it.

What is Taleb's own black swan?

Correctly predicting the 2008 collapse

After being assigned to a currency desk, he was sitting on a lot of Eurodollar options when black Monday happened in October, 1987.

http://en.wikipedia.org/wiki/Black_Monday_(1987)

That unpredicted event made him and his organization loads of money, and made him a sudden seer of markets. Which is humorous because his book Fooled By Randomness is primarily a bit of a bitter tirade about how we declare people savants because they happened to be in the right place at the right time.

Since then he gets the classic seer type treatment, for instance the other post notes that he "predicted" the financial collapse of 2008 (weird that someone would register just to post that). Yet almost everyone predicted 2008. No, seriously, the house bubble and crisis, and the probable impact on the market, was absolutely common knowledge by the time Taleb made his pronouncements, and was the endless material of virtually every financial discussion. There was absolutely nothing of worth predicted in that, but that's what you get when you got lucky once.

He did make a lot of money in 2008 as well. That is completely aside from the fact that his points would be valid regardless of how successful his individual investments have been.

I am not sure what would convince you otherwise though, since it seems like you have made up your mind already. Please loosen up on the snark.

There is no snark in my post: I am outright calling Taleb a false prophet who is guilty of exactly the things he criticizes in Fooled by Randomness.

And yes, I've seen a lot of claims of various other successes of Taleb, with a lack of any actual citations or proof at all: His own fund folded after yielding mediocre returns, and then he started consulting for a fund that seems to demonstrate a tremendous amount of bluster, with some curious and cringe-inducing ways of reporting returns, the narrative reading like the story of a gambler, telling you with great pride about the 35:1 payout on their roulette bets, skipping over the 0:37 payout on all their other bets.

I've worked with a large number of hedge funds, many of whom made a lot of money in 2008. You haven't heard a word from them because they have no need to do PR or to pitch the one bet they made right. I become suspicious of any who does.

And the danger of Taleb's lucky bet was that he is listened to as an expert, at least by some. Virtually everything he had to say about government intervention after the financial crash has been proven fundamentally wrong -- actual reality demonstrated that. Thankfully a lot of people didn't listen to him.

I think that you may be missing the point of Fooled by Randomness. The point is knowing whether your success came from luck, skill, or both. It also shined a light on people who took high-probability, "sure bets" (selling out-of-the-money options) that paid off most of the time but would eventually bankrupt them if the stock price jumped.

Quite contrary, the point of the book is that it is very difficult to differentiate between skill and luck when random odds influence events.

For instance if you asked 1000 people to guess coin flips, on average one half will be wrong on each flip. So on the first flip you'd drop to 500, then 250, then 125, then 65, then 32, then 16, then 8, then 4, then 2, then you'd -- in a perfectly ideal scenario -- have one person left. A person that remarkably, "against all odds", guessed 10 coin flips in a row right! Surely they must be some sort of magician or seer, right? Yet their probability of guessing the next coin flip is no better than the people eliminated in the first round.

But that is exactly what we do with things like exceptional events: We find the person who was right about a set of events, among a collection of people guessing almost everything, and assume they've cracked the code. Even outside of financial situations (like being a guy who happened to have a portfolio that did great during an extreme black swan on October 19th, 1987, even if that same portfolio generally did terribly), just look at what happened with 9/11: Of all of the millions of scenarios that people concocted for fiction or just postulating, anyone who talked about a plane hitting the WTC suddenly became prophetic.

It's actually a pretty good book, as an aside.

The key question is how you determine the difference between skill and luck. Is that difference statistically significant and is their a different set of inputs that lead to this output?

For instance, Taleb's example of fund managers that beat the market for five years in a row. You start with a cohort of 10,000 and a 50% chance of beating the market each year. There will be a group of 300 or so fund managers that consistently beat the market 5 years in a row. This does not differentiate the lucky from the skillful. 1) Analyzing other cohorts that had higher success rates and 2) their investment strategies and decisions would be necessary to make the determination.

Well, a broken clock is right twice a day. Someone who always calls for a market correction will eventually be right. The real question is how will the investment strategy fair over decades or longer.

We may have different takeaways from the book. My takeaway was that one should invest in becoming skilled (learn strategies that work in the long run) rather than seeking or worshiping those who may just be lucky.

...weird that someone would register just to post that...

The implication is obvious. 'gggggggggggggg is either an employee of yours, or is in some other situation such that she doesn't want to get on your shit list. Nevertheless, the truth must come out! Hence, anonymity.

After reading your two above comments, I'm not sure what your point is. You've listed a bunch of facts about Taleb that he talks about. Just because people mis-attribute his success or butcher his ideas when applying them to him is not his fault.

Actually, Taleb has explicitly stated that the 2008 financial crisis was not a Black Swan nor does he claim to be able to predict any of them.

In fact, most of Taleb's ideas are about how to not rely on predictions of events that are unpredictable - so faulting him for predicting or not predicting this and that means one does not really understands what Taleb is talking about.

Yes, his Black Swan stuff is a completely separate issue from whether he has or hasn't predicted anything.

Fascinating, but how is that at all relevant? I didn't call 2008 a black swan, I called Black Monday in 1987 a "Black Swan", using Taleb's own descriptor for it. So what is the issue?

A different discussion concerns the fact that Taleb's possible luck in 1987 makes him a prescient seer for things like the financial crisis. But he isn't, and a tremendous number of things he has said have simply been wrong (most notably, and importantly, everything he said about government intervention. He was 100% wrong in every way).

People ask why people get the heckles up about Taleb, and it isn't actually about Taleb at all. It's about the, for lack of a better phrase, Taleb "fan boys". Bizarre that such a thing exists, but people like having their prophet.

Your post was in reply to someone asking about Taleb's Black Swans so I assumed you were talking about 2008 in reference to that.

Almost everyone predicted it yet almost nobody was ready when it came, and I still remember the panic and cries about "this is the end of western civilization" and "we have to abandon capitalism now because it failed completely". Maybe "almost everyone" was not as everyone as it seems.

>>> There was absolutely nothing of worth predicted in that,

I think it was quite worthy for those who was on the right side of the market. From what it looks like, though, a lot of people were on the wrong side. So presenting it as "everybody knew" is a bit misleading, it seems.

The housing and subprime issues were the fodder for every economic fear monger, rightly, for literally years (and honestly if you think otherwise, you have absolutely no knowledge of the financial markets). So why then didn't everyone just pull out of the market? Well, eventually they did, and that was what caused the crash. But preceding it was effectively a game of chicken where people still want to make money trading papers, and if they think they can buy something today that they can sell for more tomorrow, even if they think the next day it might be worthless, many will do that. In the same way that the world is pretty certain we're going to run out of oil...so we use more of it than ever. We'll deal with it running out when that actually happens.

There was zero specificity in Taleb's proclamations. It was just the vague "there are a lot of debts and an inflated housing market that is bound for a correction and is immensely interest rate dependent". Yeah, that's great, but is the same thing everyone else was saying.

GM went bankrupt during the financial crunch. This may blow your mind but the bankruptcy of GM was predestined for years -- their debts kept growing larger while their profits stayed static or shrank.

Everyone knew it was coming, it was only a question of when and what would precipitate it. Yet, people still traded in GM. Exactly the same concept -- people don't trade on what they think will happen tomorrow or next year, they trade on what they think other people think will happen tomorrow or next year.

So there is no misleading, and honestly only "rubes" fall for the "I predicted this" bit.

>>> were the fodder for every economic fear monger, rightly, for literally years

You realize "everyone" and "every economic fear monger" are very distinct groups? Before the crisis struck, those fear mongers were generally thought of as curiosities or cranks, not visionaries. It wasn't that long ago, too early yet to rewrite history.

Moreover, theories like these: http://www.wired.com/wired/archive/7.09/zeros.html http://bullnotbull.com/archive/predictions-2007.html http://useconomy.about.com/b/2007/01/03/2007-forecast-for-th... http://knowledge.wpcarey.asu.edu/article.cfm?articleid=1344 or even this one: http://www.amazon.com/gp/product/0385514344

were pretty popular. At the last one, we've got excellent review from top people at Federal Reserve and Fannie Mae.

>>> There was zero specificity in Taleb's proclamations.

Huge surprise from a guy who talks about principally unpredictable events as the basis of his philosophy. You expect him to talk about black swans and then say "the market would go down X points at day Y"?

>>> In the same way that the world is pretty certain we're going to run out of oil.

Are you sure? http://cnsnews.com/news/article/gao-recoverable-oil-colorado...

I understand that he made a lot of money in 2008 from betting on 'Black Swans'.

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