"What Is The Moral of the Black Swan"
I’ve been glad to see a lot of people recommending Nassim Nicholas Taleb’s books in the wake of the current financial crisis, since The Black Swan and Fooled by Randomness constitute a huge proportion of the things I’ve ever read about finance and banking. Chris Dillow makes a provocative point about this:
Everyone seems to be hailing Nassim Nicholas Taleb as the man who saw the crisis coming. I have a problem with this. It’s not that what Taleb says about risk is wrong. Quite the opposite. It just strikes me as trivially true.
We’ve known for ages that returns are non-Gaussian, that extreme events are more common than a normal distribution predicts, and that risk can’t be quantified simply, if at all. The Black Swan, then, was just an entertaining if a little egocentric way of telling us what we already knew.
So, when I read in it (p43) that bankers “are not conservative at all; just phenomenally skilled at self-deception by burying the possibility of a large, devastating, loss under the rug” I thought: “But surely they’ve learnt from statistics and experience by now. Their risk management can’t be as terrible as Taleb claims. I know bosses are stupid, but they can‘t be this gibberingly, imbecilically, carpet-chewingly, moronically cretinous, can they?” I suspect most economists thought my way.
It looks like we were wrong and Taleb right.
But this isn’t because Taleb had any great insights into the nature of risk. It‘s because he thought banks‘ risk managers were idiots, whilst economists didn’t think so – not even me.
This is why I think Fooled by Randomness is probably more relevant than The Black Swan even though Swan is a bit more on-point. Randomness goes into some detail about how it is that a bunch of people who seem smart and accomplished, and are often hailed as smart and accomplished, might actually just be idiots who’ve been riding a wave of good luck.