money jungle

Taleb: “anything in finance that has equations is suspicious”

Posted in nassim-nicholas-taleb, nnt by moneyjungle on December 10, 2008

The latest McKinsey Quarterly has another interview with Nassim Nicholas Taleb, with some great quotes concerning the dangers of modern finance:

“The Quarterly: You question many of the underpinnings of modern financial theory. If you were the dean of a business school, how would you overhaul the curriculum?

Nassim Nicholas Taleb: I would tell people to learn more accounting, more computer science, more business history, more financial history. And I would ban portfolio theory immediately. It’s what caused the problems. Frankly, anything in finance that has equations is suspicious. I would also ban the use of statistics because unless you know statistics very, very well, it’s a dangerous, double-edged sword. And I would ban linear regression. All these things don’t work.”

Nassim Nicholas Taleb: “Markets are Stupid”

Posted in macro, nassim-nicholas-taleb, nnt, predictions by moneyjungle on December 6, 2008

“In a complex environment that is dominated by black swans and rare events, markets are not very good”

Wide-ranging Charlie Rose interview covers Taleb’s black swan theory, the roots of the current crisis, the future of banks as utilities, and a chilling view on the deflation and deleveraging to come in the market.

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Blowing Up — The Postscript

Posted in nassim-nicholas-taleb, niederhoffer, nnt by moneyjungle on October 14, 2007

Like many people, Nicholas Nassim Taleb first came to my attention via Malcom Gladwell’s 2002 New Yorker profile, “Blowing Up“. The article, written shortly after the release of Fooled By Randomness, illustrated Taleb’s contrarian investing strategy by way of contrast to Victor Niederhoffer’s:

“Niederhoffer, like Buffett and Soros, was a brilliant man. He had a Ph.D. in economics from the University of Chicago. He had pioneered the idea that through close mathematical analysis of patterns in the market an investor could identify profitable anomalies. But who was to say that he wasn’t one of those lucky nine? And who was to say that in the eleventh year Niederhoffer would be one of the unlucky ones, who suddenly lost it all, who suddenly, as they say on Wall Street, “blew up”?”

And, as Gladwell goes on to write, their disagreement was more than conceptual:

The distinction between these two sides is the divide that emerged between Taleb and Niederhoffer all those years ago in Connecticut. Niederhoffer’s hero is the nineteenth-century scientist Francis Galton. Niederhoffer called his eldest daughter Galt, and there is a full-length portrait of Galton in his library. Galton was a statistician and a social scientist (and a geneticist and a meteorologist), and if he was your hero you believed that by marshalling empirical evidence, by aggregating data points, you could learn whatever it was you needed to know. Taleb’s hero, on the other hand, is Karl Popper, who said that you could not know with any certainty that a proposition was true; you could only know that it was not true. Taleb makes much of what he learned from Niederhoffer, but Niederhoffer insists that his example was wasted on Taleb. “In one of his cases, Rumpole of the Bailey talked about being tried by the bishop who doesn’t believe in God,” Niederhoffer says. “Nassim is the empiricist who doesn’t believe in empiricism.” What is it that you claim to learn from experience, if you believe that experience cannot be trusted? Today, Niederhoffer makes a lot of his money selling options, and more often than not the person who he sells those options to is Nassim Taleb. If one of them is up a dollar one day, in other words, that dollar is likely to have come from the other. The teacher and pupil have become predator and prey.

Well, it is almost five years later, and Niederhoffer is back in the New Yorker, this time in a piece by John Cassidy. The results are not good:

On Tuesday, July 24th, the Dow fell two hundred and twenty-six points. Two days later, it dropped three hundred and eleven points. Commentators on CNBC were making ominous pronouncements. I sent Niederhoffer an e-mail, saying that I hoped he had been well positioned for the market’s correction. He replied in three words: “I was not.” On Friday, July 27th, the Dow fell another two hundred points, closing four per cent down for the week. The markets were still volatile a week later, when Niederhoffer came into Manhattan for his monthly libertarian meeting. After it ended, we went across the street to a restaurant, where he ordered a cappuccino. He looked pale and haggard, and years older. For several minutes, we sat in silence. Then, in a low voice, he said, “Things have changed totally since we last spoke. The situation is fundamentally different. It is critical.” Kenner and Aubrey joined us, but Niederhoffer hardly seemed to notice them. “We are fighting for survival night and day,” he said when I pressed him for details. “I was caught wrong-footed in the market turbulence. I’m not as smart as I thought I was.”

Told you so

Posted in nassim-nicholas-taleb, nnt by moneyjungle on August 16, 2007

Nassim Nicholas Taleb weighs in on the current market conditions