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October 13, 2008

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Justin Rietz

The wizards at LTCM, MBS investors, and those who thought housing prices would always go up would have benefited from reading Taleb's book, too.

However, Taleb hasn't come up with anything drastically new - any statistician worth his salt would know that the realm of human dealings does not follow a normal distribution. However, it seems you can ignore that fact and still get a nobel prize.

Tucker

Why hasn't CNN/MSNBC/CNBC/Bloomberg put Taleb on constantly? The only legitimate reason I can think of is that he might be as pompous in person as his writing style.

Seymour

The book is not as profound as it is being blown up. At its core most of its arguments are covered under elementarty EVT (extreme value theory).

Matt

I've seen him speak in person. He writes more pompously than he speaks. Anyway, yeah, I really liked the book as well.

Bob

I just attended his lecture at LSE. He's brilliant.

Commenterlein

Taleb is a crank with a talent for marketing. I haven't seen anything in this book that was original, and in the few cases where he tried to be, he was just objectively wrong.

A few years ago I assigned this paper http://papers.ssrn.com/sol3/papers.cfm?abstract_id=720581 to an advanced MBA class in Derivatives. More than three quarters of the students were able to spot the mistake in his argument, which is a pretty embarrassing one. Hint: Look at the discount rates on the put and the call.

Chandan

I want to read Rodrik's reaction to Williamson's piece: http://www.growthcommissionblog.org/blogs/john-williamson

pete

Laughter in middle of stock market madness. Details below:


http://marketwarnings.blogspot.com/2008/10/laughter-in-middle-of-stock-market.html

Stefan

Talib makes extremely valuable points on the quality of institutions that we need to cope with the NEXT crisis, not the LAST one. I hope that many in the policy area read the book.

Raul Abreu

I also like his previous book: fooled by randomness

Barkley Rosser

Commenterlein is on the money. The Black Swan is a great read, showing a wide knowledge of many things and many interesting examples and arguments. However, when one gets down to the actual technicalities, it is not so impressive. He rants against the use of Gaussian distributions, but actual financial practitioners have not used Gaussian based formuli for derivatives or much else for a long time. The ubiquity of fat tails (kurtosis) is widely known, even if it is not discussed in most of the graduate textbooks and their models.

He knows this and hence his long discussion of "grey swans," which are the fat tails known to exist in the power law distributions that most financial asset returns exhibit. What he is looking for are those really extreme events that fit something long known, radical Keynesian/Knightian uncertainty that does not fit any distribution.

So, although that idea is now 87 years old, he plays a dirty game with his readers, touting a "barbell" strategy of buying long puts on major crashes while holding most of one's assets in very safe short-term ones. Unfortunately, it turns out that in recent years this has been a losing strategy, too many people have been trying to do it. The people making money in that mug's game are those selling such assets (and, hack, cough, Taleb owns an investment firm, so is not a neutral party here).

BTW, he is notorious for threatening to sue people who go against him too vigorously and too publicly. I have no respect for such conduct, none, zip, nada, period. This is John Lott conduct, beneath contempt.

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Martin Watzinger

Dear Mr Rosser,

you are right, no one uses the Gaussian anymore (more Variance Gamma nowadays), but at least in my finance classes you were told to omit the big crashes from the data when you calibrate the model. The reason: Including 1987 delivered "unrealistic" prices.......

Barkley Rosser

I was at a conference recently where I was a commenter, and the author of the paper had questionably removed "outliers" from the data. It was not about financial markets, but I cited the issue of leaving out outliers from financial data, which can be some of the most important data points. Same goes in other areas.

The only reason for getting rid of outliers is if one has reason to believe that they represent actually incorrect data, which is sometimes the case. Then they should go. But leaving out Oct. 19, 1987 from a financial model or estimation, is ridiculous.

Pani Pani

Mr. Rosser et al,

I don't believe Taleb ever claims originality for any of the ideas presented in the Black Swan. It is curious that one commenter suggested that extreme value theory addresses the shortcomings of financial economics pointed to by Taleb. Perhaps those that criticize the book should (re-)read it more carefully. The underlying philosophy is to be empirical and skeptical, to be careful of theory that builds upon theory (like a pyramid scheme) that presents an illusion of real understanding. People don't often see "no knowledge" as being useful and actionable. That is one of the most important insights from the book.

assman

I don't like Taleb's book. It is correct that it has no original insights. I would also say that he hasn't really provided any real understanding of anything.

If you really want to understand this mess I would read Devil Take the Hindmost, Irrational Exuberance, Hayek and ABCT, Richard Feynman's Personal observations on
the reliability of the Shuttle and Ponzi Nation by Edward Chancellor. This will give you a number of important perspectives on this financial crisis.

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