Excellent Taleb Critique

Wednesday, June 17, 2009

Excerpted from "Swan Song" by Mark Gimein, http://www.thebigmoney.com
...the failures of the Niederhoffers and AIGs do not translate to a validation of Taleb-style catastrophism because these two approaches turn out to be linked. They are mirror images. In noncatastrophic times, the Niederhoffers and AIGs make money consistently and quietly and then end up losing it conspicuously and painfully. The Talebs make money rarely, amaze everyone because they do it when everybody else is getting killed—and so make it easy to forget about years of steady losses. Over the long run, the anti-catastrophists often do fairly well (if they don't get too greedy and make bets that cost them all their money in even a small market drop). But it is the catastrophists, a la Taleb, who look smarter. If you're always planning for crisis, you look like a genius when it does come.

Arguing against Taleb is a little embarrassing; who among us wants to side with the plodders when for the price of a paperback you can join the elect? But the experience of the markets here is important because it shows that neither consistently discounting the chance of unforeseen risks, as AIG did with such gusto, nor betting day after day on unforeseen catastrophes is a reliable way to make money.

In his books Taleb presents a wealth of examples of how prone we are to discount the unexpected and unlikely, but what is notably missing from The Black Swan are examples of just how likely we are to overestimate the chances of unlikely events when they are presented to us under a spotlight. Taleb is, of course, right that we fail to anticipate what we are not looking for. But we also overanticipate when we are looking too hard for the outliers. Lottery players overvalue their chances of winning $10 million, and horse bettors put too much money on 100-1 long shots. People who watch the local news too avidly believe there is a child kidnapper around every corner, and followers of Taleb assume that every time they pass a dark alley, catastrophe is about to pop out with a bloody knife.


Post a Comment