Will somebody with some influence in the real world please read Nassim Nicholas Taleb’s book best seller “The Black Swan.” And act on it. If no one does, then we will continue to be plagued by financial meltdowns and deep offshore well disasters for which we are unprepared.
Taleb, son of a Lebanese family prominent since the Ottoman Empire and a native of Amioun, Lebanon, is a New York University professor of Mathematics. He describes his life’s work this way: ”I am interested in a systematic program of how to live in a world we don’t understand very well — in other words, whil e most human throught (particularly since the enlightenment) has focused us on how to turn knowledge into decisions, I focus on how to turn lack of information, lack of understanding, and lack of ‘knowledge’ into decisions — how not to be a ‘turkey’.”
Taleb asserts that our current tools of assessing risk are not only inadequte, but often flat-out wrong. We don’t properly acknowledge the impact of “highly improbable” events on our lives and, as a result, we get blind-sided. These unusual, yet more frequent than we understand, events are symbolized by the “Black Swan,” — a swan Europeans didn’t know existed until seen in Australia.
As our markets slide from the latest “Black Swan” visit, consider this little factoid, and comment, supplied by Taleb. “In the last 50 years, the ten most extreme days in the financial markets represent half the returns. Ten days in fifty years. Meanwhile, we are mired in chitchat.”
Basically, Taleb maintains that the best way to approach risk assessment is to watch what actually occurs in the real world, and then work from there. This “bottom-up,” empirical approach results in more accurate tools of risk assessment. It doesn’t eliminate “Black Swan” events, it just makes us better able to prepare for them–even profit from them.
Right now financial market movers and shakers, from economists to bank presidents and politicians, are making decisions based on theories that are “top down” ones designed in sterile classrooms. These theories are elegant, and mathematically impressive, Taleb acknowledges. Their authors are undeniably bright and well educated and some are Nobel prize winners. They are also incredibly wrong. In a world that is very risky and often unknowable, failure to prepare for what we don’t know, and aren’t likely to know, is an inexcusable mistake.
Taleb’s credentials go beyond his academic training. He’s a no-nonsense mathematician who has worked on Wall Street. Unlike most on Wall Street, or anywhere else for that matter, Taleb is also a philosopher who has devoted much of his adult life studying a wide range of knowledge. He already has one non-fiction best seller “Fooled by Randomness,” to his credit and his literary skills are highly developed.
But math is his surgical instrument. And he explains it in a way that is understandable even to the math-challenged. That the concepts he presents are not incorporated into modern portfolio theory is a tragedy. Why these ideas are not being widely used is unfortunate human nature, something Taleb spends time acknowledging and explaining. Humans are not all that independent, even the brightest among us. We all need confirmation. We see what we need to see to confirm our points of view.
Interestingly, Taleb found like-minded thinkers not on Wall Street but in Washington at the Department of Defense. When it comes to the security business, keeping a wary eye towards what is not known is a given. DoD calls it the “unknown, unknown.”
Unknown or not, Taleb’s approach is practical and practicable. Given our current straights, it’s time we started keeping a much better eye on the “Black Swan.”