Saturday, April 18, 2009

Note to Nassim Taleb: You Can't Kill Off Black Swans

Finally self-styled investment prophet Nassim Taleb is hearing some criticism from various corners. He recently wrote an opinion piece for the Financial Times entitled Ten Principles for a Black Swan-Proof World.

A few folks responded, including Felix Salmon, Connor Clarke and, most notably Charles Davi, who laments The Unbearable Lightness of Nassim Taleb.

While we enjoyed Taleb's original book, Fooled by Randomness, in which he discussed the illusion of causality and aptly invoked "black swans," did he really need to put out another book to expound on those black swans? Of course, by the time the second book became an option, black swans had become fashionable in the world of finance, so why not ring the register one more time?

One doesn't need to read Taleb's Ten Principles for a Black-Swan Proof World to wonder how in the world one can black-swan proof anything by following a list. After all, black swans are not literally little black animals swimming on lakes.

They are unpredictable, out-of-the-ordinary events, or what the former defense secretary might call "unknown unknowns." To have the father of the black swan theory essentially say that we can do away with black swans by following a recipe flies in the face of everything he has asserted about black swans. His recipe destroys the credibility of his entire previous train of thought.

(Not) to pile on, we observe that Taleb the investment manager appeared to be advocating losing a bit of money in your investments in normal times, presumably by buying out-of-the-money put options and the like. Then the "black swan" would come and you would make a killing -- or certainly enough to retire to a tropical island and to never be seen on the talk show circuit again.

Unfortunately, there have been a few sightings of Taleb the investment manager here, here, here, here, here, here and here (no, those are not tropical islands). If he is not tanning in the Caribbean following the biggest black swan since the Great Depression, then what kind of black swan will it take? Or are we simply dealing with another author whose 15 minutes of fame have been stretched a bit too far?

Article from Seeking

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