Nassim Nicholas Taleb

Nassim Nicholas Taleb
Born	1960 (age 63–64) Amioun, Lebanon
Alma mater	Wharton School at the University of Pennsylvania (MBA), University of Paris Dauphine (Ph.D.)
Known for	Applied epistemology, philosophy of statistics, bestselling books, warnings before crisis, anti-Platonism
Scientific career
Fields	Scholar, essayist, epistemologist, statistician, risk engineer and trader
Institutions	Polytechnic Institute of New York University, Oxford University
Doctoral advisor	Hélyette Geman

Nassim Nicholas Taleb (Arabic: نسيم نيقولا نجيب طالب, born 1960, alternatively Nessim or Nissim) had three distinct careers (literary, scientific, and business) built around what he calls "epistemic limitations" (probability, uncertainty and the fragility of human knowledge): 1) bestselling literary essayist, 2) university professor in risk engineering (Distinguished Professor level), scholar, epistemologist, philosopher of science (probability and statistics), and 3) senior Wall Street trader, hedge fund manager, and practitioner of mathematical finance.. Though a specialist in financial derivatives, Taleb has been critical of the finance industry and has been credited with making predictions regarding financial crises and making a fortune out of the 2008 crisis.>Patterson, Scott (2008-11-03). "October Pain Was 'Black Swan' Gain - WSJ.com". Online.wsj.com. Retrieved 2009-10-14.</ref> He held senior trading and financial mathematics positions at a number of New York City's Wall Street firms before starting a second career as a scholar in the epistemology of chance, and as an activist and a promoter of what he calls a "Black Swan robust" society. He is also a promoter of aggressive "stochastic tinkering" as a means of scientific discovery.

Taleb is a bestselling author with 2.7 million copies sold in 31 languages. His idiosyncratic writing style mixes narrative fiction (often semi-autobiographical) and short philosophical tales with historical and scientific commentary.

Taleb's best-known book, The Black Swan, has been described by The Times as one of the 12 most influential books of the past 60 years. Among the people Taleb has influenced are the writer Malcolm Gladwell and the British Tory leader David Cameron, who uses his black swan robustness idea as "intellectual ballast" for his program.

Biography

Taleb originates from Amioun, Lebanon. His political Greek Orthodox Levantine family saw its prominence and wealth reduced by the Lebanese Civil War which began in 1975. He is the son of Dr. Najib Taleb, an oncologist and researcher in anthropology, and Minerva Ghosn. Both sides of his family were politically prominent in the Lebanese Greek Orthodox community: on his mother's side, his grandfather and his great-grandfather were both deputy prime ministers of Lebanon; on his father's side, his grandfather was a supreme court judge and, in 1861, his great-great-great-great grandfather was a governor of the Ottoman semi-autonomous province of Mount Lebanon.

Taleb received his bachelors and masters in science from the University of Paris and holds an MBA from the Wharton School at the University of Pennsylvania, and a PhD in Management Science (thesis on the mathematics of derivatives pricing) from the University of Paris (Dauphine) under the direction of Hélyette Geman.

Taleb, a polyglot, has a literary fluency in English, French, and classical Arabic, a conversational fluency in Italian and Spanish, and reads classical texts in Greek, Latin, Aramaic, and ancient Hebrew, as well as the Canaanite script.

Finance career

Taleb considers himself far less a businessman than an epistemologist of randomness who used trading to attain his independence and freedom from authority, as he writes in his book, Fooled by Randomness, which became a cult book on Wall Street after it was first published in 2001. It was translated into 23 languages.

As a trader, Taleb has said he took a skeptical and anti-mathematical approach to risk and uncertainty and had a severe distrust of models and statisticians and a contempt for finance academics, especially economists. He has held the following positions: Managing director and proprietary trader at UBS. Worldwide chief proprietary arbitrage derivatives trader for currencies, commodities and non-dollar fixed income at CS-First Boston. Chief currency derivatives trader for Banque Indosuez. Managing Director and worldwide head of financial option arbitrage at CIBC-Wood Gundy. Derivatives arbitrage trader at Bankers Trust, proprietary trader at BNP Paribas, as well as independent option market maker on the Chicago Mercantile Exchange. Founder of Empirica LLC after which Taleb retired from trading and became a full-time author and scholar in 2004. Taleb is currently Principal/Senior Scientific Adviser at Universa Investments, the Santa Monica, California, fund owned and managed by former Empirica partner Mark Spitznagel.

Writing and research career

Taleb became a full time researcher in 2004, as a university professor and writer. He is currently Distinguished Professor of Risk Engineering at Polytechnic Institute of New York University, and Distinguished Research Scholar, Said Business School, Oxford University . He was Visiting Professor at London Business School and the Dean’s Professor in the Sciences of Uncertainty at the Isenberg School of Management at the University of Massachusetts Amherst, Adjunct Professor of Mathematics at the Courant Institute of New York University, and affiliated faculty member at the Wharton Business School Financial Institutions Center.

In 2008-2009, he ranked fifth, in terms of the number of downloaded papers, on the Social Science Research Network (SSRN). His second nontechnical book, The Black Swan sold (according to Slate), as of March 2009, close to 1.5 million copies. It also spent 17 weeks on the New York Times Bestseller list and was translated into 31 languages."The Black Swan" has been credited with predicting both its own success (through the fate of his character Yevgenia Krasnova) and the banking and economic crisis of 2008. The sales of Taleb's first two books garnered an advance of $4 million for a follow-up, tentatively titled "Tinkering."

Epistemology and theories of randomness

Taleb's epistemology is focused on what he calls "opacity" (i.e., epistemic constraints) and relates loosely to traditions of skeptical empiricism, but:

1. Unlike other skeptics, his skepticism is focused on one single class of events; it only directed to the fundamental incomputability of the probability of consequential rare events from empirical observations ("Black Swans"), though he accepts that scientific knowledge can deal with the regular ones. Taleb advocates gullibility for things that make us human without adverse consequences, matters in "Mediocristan".
2. Taleb's empiricism implies resisting generalization from data and limiting the derivation of general rules from particular observations as one can be missing hidden properties. Thus he believes that scientists, economists, historians, policy makers, businessmen, and financiers are victims of an illusion of pattern. They overestimate the value of rational explanations of past data, and underestimate the prevalence of unexplainable randomness in those data.
3. Taleb advocates the construction of a society around the concept of "Black Swan Robustness", by lessening the effects of interdependence associated with the low predictability of a complex system, particularly with a certain class of events he calls "extremistan".

Taleb put a psychological, mathematical, and (mostly) practical framework around the philosophical problems in a long lineage of skeptical philosophers, including Socrates, Sextus Empiricus, Al-Ghazali, Pierre Bayle, Montaigne, David Hume and Karl Popper in believing that we know much less than we think we do, and that the past should not be used naively to predict the future. Furthermore, as a practitioner he creates a decision-making framework of "how to act under incomplete understanding, imperfect information". Taleb believes that most people ignore consequential rare events that he calls "Black Swans" because we are more comfortable seeing the world as something structured, ordinary, and comprehensible. Taleb calls this blindness "the Platonic fallacy" and argues that it leads to three distortions:

1. Narrative fallacy: creating a story post-hoc so that an event will seem to have an identifiable cause,
2. Ludic fallacy: believing that the unstructured randomness found in life resembles the structured randomness found in games. Taleb faults random walk models and other inspirations of modern probability theory for this inadequacy,
3. Statistical regress fallacy: believing that the structure of probability can be delivered from a set of data.

He also believes that people are subject to the triplet of opacity, through which history is distilled even as current events are incomprehensible. The triplet of opacity consists of

1. an illusion of understanding of current events,
2. a retrospective distortion of historical events,
3. an overestimation of factual information, combined with an overvalue of the intellectual elite.

Taleb, an anti-Platonist, believes that universities are better at public relations and claiming credit than generating knowledge. Knowledge and technology are generated by what he calls "stochastic tinkering", rarely by top-down directed research.

Taleb stands against grand theories in social science. He supports experiments and fact collecting, but opposes the idea of directing our thinking into general Platonic theories that are not supported by hard data. His work is supported both by qualitative argument and by rigorous technical and quantitative analysis.

Consistent with his anti-Platonism, Taleb doesn't like to see his ideas called "theories". As he stands against general theories and top-down concepts, he never mentions theory in conjunction with the Black Swan. The phrase "Black Swan theory" is, to him, a contradiction in terms, and he urges his readers not to "Platonify" the Black Swan. Rather, Taleb in his 2007 book The Black Swan calls this an "anti-theory" or the "Black Swan idea".

He opposes the academic aura around economic theories, which in his view suffer acutely from the problem of Platonicity. In an article titled "The pseudo-science hurting markets", Taleb called for the cancellation of the Nobel Memorial Prize in Economics, saying that the damage from economic theories can be devastating.

Ludic fallacy

Taleb's exposition of the Ludic fallacy in The Black Swan

We love the tangible, the confirmation, the palpable, the real, the visible, the concrete, the known, the seen, the vivid, the visual, the social, the embedded, the emotional laden, the salient, the stereotypical, the moving, the theatrical, the romanced, the cosmetic, the official, the scholarly-sounding verbiage (b******t), the pompous Gaussian economist, the mathematicized crap, the pomp, the Academie Française, Harvard Business School, the Nobel Prize, dark business suits with white shirts and Ferragamo ties, the moving discourse, and the lurid. Most of all we favor the narrated.

Alas, we are not manufactured, in our current edition of the human race, to understand abstract matters — we need context. Randomness and uncertainty are abstractions. We respect what has happened, ignoring what could have happened. In other words, we are naturally shallow and superficial — and we do not know it. This is not a psychological problem; it comes from the main property of information. The dark side of the moon is harder to see; beaming light on it costs energy. In the same way, beaming light on the unseen is costly in both computational and mental effort.

Warning of the global banking crisis

In 2007, in The Black Swan

Globalization creates interlocking fragility, while reducing volatility and giving the appearance of stability. In other words it creates devastating Black Swans. We have never lived before under the threat of a global collapse. Financial Institutions have been merging into a smaller number of very large banks. Almost all banks are interrelated. So the financial ecology is swelling into gigantic, incestuous, bureaucratic banks – when one fails, they all fall. The increased concentration among banks seems to have the effect of making financial crisis less likely, but when they happen they are more global in scale and hit us very hard. We have moved from a diversified ecology of small banks, with varied lending policies, to a more homogeneous framework of firms that all resemble one another. True, we now have fewer failures, but when they occur ....I shiver at the thought.

The government-sponsored institution Fannie Mae, when I look at its risks, seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup. But not to worry: their large staff of scientists deem these events "unlikely".

Success during the 2007-2008 financial crisis

Taleb appeared to be vindicated against statisticians in 2008, as he reportedly made a multi-million dollar fortune during the financial crisis of 2007–2008, a crisis which he attributed to the failure of statistical methods in finance. Universa, a fund which is based on the "Black Swan" idea and to whom Taleb is a principal adviser, made returns of 65% to 115% in October 2008 in its approximately $2 billion “Black Swan Protection Protocol.”

Taleb's financial success coupled with his earlier predictions have seen him catapulted to prominence. He has appeared on numerous magazine covers and television shows to discuss his views Taleb started being treated as a "rock star" in Davos 2009 in which he had harsh words for bankers.

In an article in The Times, Bryan Appleyard described Taleb as "now the hottest thinker in the world". The Nobel Laureate Daniel Kahneman proposed the inclusion of Taleb's name among the world's top intellectuals, citing "Taleb has changed the way many people think about uncertainty, particularly in the financial markets. His book, The Black Swan, is an original and audacious analysis of the ways in which humans try to make sense of unexpected events."

In the wake of the economic crisis that started in 2008, Taleb became an activist for a "Black Swan robust society".

Living in a world we do not understand

Recently, Taleb sees his main challenge in mapping how to live and act in a world we do not understand, and how to come to grips with randomness and the unknown—which includes his idea of Black Swan Events, concerning unexpected rare events.

Approach to models linked to Austrian School

In his criticism of models, Taleb has taken a point of view in line with the Austrian School of economic thought. He opposes top-down knowledge as an academic illusion and believes that price formation obeys an organic process. His paper with Espen Gaarder Haug asserts that option pricing is determined in a "heuristic way" by operators, not by a model, and that models are "lecturing birds on how to fly", except that in the case of options, the birds might listen. In the book "Lecturing Birds on Flying: Can Mathematical Theories Destroy the Financial Markets?" Wiley Publishing (2009), Pablo Triana explores this topic with references to Haug and Taleb and critiques of the Black-Scholes-Merton model.

Taleb's Ten Principles for a Black Swan Robust World

1. What is fragile should break early while it is still small. Nothing should ever become too big to fail.

2. No socialisation of losses and privatisation of gains.

3. People who were driving a school bus blindfolded (and crashed it) should never be given a new bus.

4. Do not let someone making an “incentive” bonus manage a nuclear plant – or your financial risks.

5. Counter-balance complexity with simplicity.

6. Do not give children sticks of dynamite, even if they come with a warning.

7. Only Ponzi schemes should depend on confidence. Governments should never need to “restore confidence”.

8. Do not give an addict more drugs if he has withdrawal pains.

9. Citizens should not depend on financial assets or fallible “expert” advice for their retirement.

10. Make an omelette with the broken eggs.

Criticism

Taleb's aggressive attitude against the finance industry has led to a plethora of personal attacks including a smear campaign and death threats from former employees of Lehman Brothers . His contention that statisticians can be pseudoscientists when it comes to financial risks and risks of blowups, masking their incompetence with complicated equations, has attracted criticism from some statisticians.

According to Taleb, so far no direct published criticism has been directed at his ideas, rather at his person and style. The American Statistical Association devoted the August 2007 issue of The American Statistician to The Black Swan, in which statisticians offered a mixture of praise and criticism for Taleb's main points, mostly focused on Taleb's writing style and Taleb's representation of the statistical literature. Robert Lund writes that Taleb in Black Swan is "reckless at times and subject to grandiose overstatements; the professional statistician will find the book ubiquitously naive." Aaron Brown opines that "the book reads as if Taleb has never heard of nonparametric methods, data analysis, visualization tools or robust estimation," although he also calls the book "essential reading" and urges statisticians to overlook the insults to get the "important philosophic and mathematical truths." Westfall and Hilbe (2007), while praising the book, complain that Taleb's criticism is "often-unfounded and sometimes outrageous." Taleb's contentious style draws comments such as, "with few exceptions, the writers and professionals [Taleb] describes are knaves or fools, mostly fools. His writing is full of irrelevances, asides and colloquialisms, reading like the conversation of a raconteur rather than a tightly argued thesis.". Taleb reacted by blaming the academics for "bad faith" by targeting a literary book that claimed to be a literary book and ignoring the empirical evidence provided in his appendix and more technical works

The late Berkeley statistician David Freedman said that efforts by statisticians to refute Taleb's point that rare events with major consequences are poorly dealt with by conventional statistics had been unconvincing.

In an interview on Charlie Rose, Taleb said that he was pleased that none of the criticism he received for The Black Swan had any substance as it was either unintelligent or ad hominem/style over substance, which convinced him to "go for the jugular" with a huge financial bet on the breakdown of statistical methods in finance.

Taleb and nobel laureate Myron Scholes have traded personal attacks. Taleb said that Scholes is responsible to the financial crises of 2008, and suggested that "This guy should be in a retirement home doing Sudoku, His funds have blown up twice. He shouldn't be allowed in Washington to lecture anyone on risk" Scholes retorted that Taleb simply "popularises ideas and is making money selling books". Scholes also claimed that Taleb does not cite previous literature, and for this reason Taleb is not taken seriously in academia. Listing his academic works on the topics in "The Black Swan" Taleb said that "Academics should comment on data there not make technical comments on a literary [emphasis] book"

Bibliography

Literary Books

• Taleb, Nassim Nicholas (2001/2005). Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets. New York: Random House. ISBN 0-8129-7521-9. {{cite book}}: Check date values in: |year= (help)CS1 maint: year (link)
• Taleb, Nassim Nicholas (2005). Le Hasard Sauvage. Paris: Les Belles Lettres. ISBN 2-251-44297-9. The French edition of Fooled by Randomness with revisions and changes to the English version.
• Taleb, Nassim Nicholas (2007). The Black Swan: The Impact of the Highly Improbable. New York: Random House. ISBN 978-1-4000-6351-2.

Scholarly and technical publications

• Taleb, Nassim Nicholas (1997). Dynamic Hedging: Managing Vanilla and Exotic Options. New York: John Wiley & Sons. ISBN 0-471-15280-3.
• Taleb, N. N. (2004) Bleed or Blowup: What Does Empirical Psychology Tell Us About the Preference For Negative Skewness? , Journal of Behavioral Finance, 5
• Taleb, N. N. (2004) “These Extreme Exceptions of Commodity Derivatives.” in Helyette German, Commodities and Commodity Derivatives. New York: Wiley.
• Taleb, N. N. (2004) “Roots of Unfairness.” Literary Research/Recherche littéraire. 21(41-42): 241-254.
• Taleb, N. N. (2004) “On Skewness in Investment Choices.” Greenwich Rountable Quarterly 2.
• Taleb, N. N. (2004) "I problemi epistemologici del risk management " in: Daniele Pace (a cura di) "Economia del rischio. Antologia di scritti su rischio e decisione economica", Giuffrè, Milano
• Taleb, N. N. (2005) "Fat Tails, Asymmetric Knowledge, and Decision making: Essay in Honor of Benoit Mandelbrot's 80th Birthday." Technical paper series, Willmott (March): 56-59.
• Derman, E. and Taleb, N.N. (2005) The Illusion of Dynamic Replication, Quantitative Finance, vol. 5, 4
• Taleb, N. N. (2006) "Homo Ludens and homo Economicus." Foreword to Aaron Brown's The Poker Face of Wall Street. New York: Wiley.
• Goldstein, D.G. and Taleb, N.N. (2007) We Don't Quite Know What We Are Talking About When We Talk About Volatility, Journal of Portfolio Management, Summer 2007.
• Taleb, N.N. (2007) "Black Swan and Domains of Statistics", The American Statistician, August 2007, Vol. 61, No. 3
• Taleb N.N.and Pilpel, A. (2007)Epistemology and Risk Management, "Risk and Regulation", 13, Summer 2007
• Taleb, N. N. (2008) Infinite Variance and the Problems of Practice, Complexity, 14(2).
• Taleb, N.N. (in Press), Errors, Robustness, and the Fourth Quadrant, International Journal of Forecasting (forthcoming)
• Haug, E.G. and Taleb, N.N. (2008) Why We Have Never Used the Black-Scholes-Merton Option Pricing Formula, Wilmott
• Taleb, N.N., Golstein, D.G., and Spitznagel, M.,2009, "The Six Mistakes Executives Make in Risk Management", Harvard Business Review , October
• Pilpel, A. and Taleb, N.N., 2009 (in Press), “Beliefs, Decisions, and Probability” , in (eds. T. O' Connor & C. Sandis) A Companion to the Philosophy of Action (Wiley-Blackwell).
• Taleb, N., and Tapiero, C.Too Big to Fail and the Fallacy of Large Institutions (forthcoming)
• Makridakis, S., & Taleb, N., 2009, "Decision making and planning under low levels of predictability", International Journal of Forecasting (in press)
• Mandelbrot, B. and Taleb, N.N. (in Press). Random Jump, not Random Walk. In Francis Diebold and Richard Herring (Eds.), The Known, the Unknown, and the Unknowable, Princeton University Press
• Taleb, N.N., 2010 Common Errors in the Interpretation of the Ideas of The Black Swan and Associated Papers,Critical Review, Vol 21, No 4
• Taleb, N., and Tapiero, C.The Risk Externalities of Too Big to Fail (forthcoming)

Other essays

• Taleb, N. N. (2005) Edge article: The Opiates of the Middle Class
• Taleb, N. N. (2006) "On Forecasting." In John Brokman, ed., In What We Believe But Cannot Prove: Today's Leading Thinkers on Science and the Age of Certainty. New York: Harper Perennial.
• Taleb, N.N. (2008) Edge article: Real Life is Not a Casino, forthcoming in In John Brokman, ed., Edge Question 2008. New York:Harper Perennial. The article explains Taleb's position on global warming and why we need to be green regardless of models.
• Taleb, N.N. (2009) Edge article: The Idea of Iatrogenic Science, forthcoming in In John Brokman, ed., Edge Question 2009. New York: Harper Perennial.

Collaborations

• Taleb is collaborating with Benoit Mandelbrot on a general theory of risk management.
• Taleb also works with Daniel Goldstein on a project to test empirically people's intuitions about ecological and high impact uncertainty.

Honors

• Inducted into the Derivatives Hall of Fame in February 2001.
• Selected for the Power 30 in Business by SmartMoney in October 2007.
• 2007 getAbstract International Book Award.
• 2008 Frost & Sullivan Visionary of the Year Award.
• 2008 Prospect Magazine Long list for Public Intellectual of the Year .
• 2009 Member of the Business Guru "Thinkers 50" most influential business thinkers .

Quotations

• "My major hobby is teasing people who take themselves and the quality of their knowledge too seriously and those who don’t have the guts to sometimes say: 'I don’t know...."

See also

• Taleb distribution
• Applications of randomness
• List of American philosophers

External links

• Nassim Taleb's home page
• Nassim Nicholas Taleb on X
• Taleb on Black Swans Podcast interview with Nassim Taleb at EconTalk
• Econtalk presenting Taleb's Austrian economics point of view about the crisis.
• Radio interview on Philosophy Talk
• finance blog
• FrankVoisin.com – Summary and Review of Fooled By Randomness
• Nassim Nicholas Taleb: the prophet of boom and doom – Profile from The Sunday Times by Bryan Appleyard