Nassim Nicholas Taleb
Nassim Nicholas Taleb (/ˈtɑːləb/;
alternatively Nessim or Nissim; born 1960) is
a Lebanese-American (of Antiochian Greek descent) essayist, scholar, mathematical
statistician, and former option trader and risk analyst, whose work concerns
problems of randomness, probability, and uncertainty. His 2007 book The
Black Swan has been described by The Sunday Times as one of the twelve most influential
books since World War II.
Taleb is the author of the Incerto,
a five volume philosophical essay on uncertainty published between 2001 and
2018 (of which the most known books are The Black Swan and Antifragile).
He has been a professor at several universities, serving as a Distinguished
Professor of Risk Engineering at the New York University Tandon School of
Engineering since September 2008. He has been co-editor-in-chief of the
academic journal Risk and Decision Analysis since September
2014. He has also been a practitioner of mathematical finance, a hedge fund manager,
and a derivatives trader, and is currently listed as a scientific adviser at Universa
Investments.
He criticized the risk management
methods used by the finance industry and warned about financial crises,
subsequently profiting from the late-2000s financial crisis. He advocates what he calls a "black swan
robust" society, meaning a society that can withstand difficult-to-predict
events. He proposes antifragility in systems,
that is, an ability to benefit and grow from a certain class of random events,
errors, and volatility as well as "convex tinkering" as a method of
scientific discovery, by which he means that decentralized experimentation
outperforms directed research.
Early Life and Family Background
Taleb was born in Amioun, Lebanon, to
Minerva Ghosn and Nagib Taleb, a physician/oncologist and a researcher in anthropology.
His parents were Greek Orthodox Lebanese,
holding French citizenship. His grandfather, Fouad Nicolas Ghosn, and his
great-grandfather, Nicolas Ghosn, were both deputy prime ministers in the 1940s
through the 1970s. His paternal grandfather Nassim Taleb was a supreme court
judge and his great-great-great-great grandfather, Ibrahim Taleb (Nabbout), was
a governor of Mount Lebanon in 1866. Taleb
attended a French school there, the Grand Lycée Franco-Libanais in Beirut. His family saw its political prominence and
wealth reduced by the Lebanese Civil War, which began in 1975.
Education
Taleb received his bachelor and master
of science degrees from the University of Paris. He holds an MBA from the Wharton
School at the University of Pennsylvania (1983), and a PhD in Management
Science from the University of Paris (Dauphine) (1998), under the direction of Hélyette
Geman. His dissertation focused on the
mathematics of derivatives pricing.
According to a profile in Le Monde,
Taleb claims to read in ten languages.
Finance view
Taleb has been a practitioner of mathematical
finance, a hedge fund manager, and a derivatives trader. He is a scientific adviser at Universa
Investments.
Taleb considers himself less a
businessman than an epistemologist of randomness, and says that he used trading to
attain independence and freedom from authority.
He was a pioneer of tail risk hedging (now sometimes called
"black swan protection"), which is intended to mitigate investors'
exposure to extreme market moves. His business model has been to safeguard
investors against crises while reaping rewards from rare events, and thus his
investment management career has included several jackpots followed by lengthy
dry spells.
He has also held the following
positions: managing director and proprietary trader at Credit Suisse UBS,
worldwide chief proprietary arbitrage derivatives trader for currencies, commodities
and non-dollar fixed income at 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 (now Deutsche
Bank), proprietary trader at BNP Paribas, independent option market maker on
the Chicago Mercantile Exchange and founder of Empirica Capital.
Taleb reportedly became financially
independent after the crash of 1987 and was successful during the Nasdaq dive
in 2000 as well as the financial crisis that began in 2007, a development which
he attributed to the mismatch between reality and statistical distributions
used in finance. Following this crisis, Taleb became an activist for what he
called a "black swan robust society". Since 2007 he has been a Principal/Senior
Scientific Adviser at Universa Investments in Miami, Florida, a fund which is
based on the "black swan" idea, owned and managed by former Empirica
partner Mark Spitznagel. Some of its separate funds made returns of 65% to 115%
in October 2008. In a 2007 Wall Street Journal article, Taleb claimed he
retired from trading in 2004, and became a full-time author. However, he describes the nature of his
involvement as "totally passive" from 2010 on.
Academic career
Taleb changed careers and became a
mathematical researcher, scholar and philosophical essayist in 2006, and has
held positions at NYU's Courant Institute of Mathematical Sciences, at University
of Massachusetts Amherst, at London Business School, and at Oxford University. He has been Distinguished Professor of Risk
Engineering at New York University Tandon School of Engineering, since 2008. He was Distinguished Research Scholar at the Said
Business School BT Center, University of Oxford (2009-2013).
He is co-Editor in Chief of the academic
journal, Risk and Decision Analysis (since September 2014), jointly
teaches regular courses with Paul Wilmott in London (19th time, March 2015), and
occasionally participates in teaching courses toward the Certificate in
Quantitative Finance. He is also
co-faculty at the New England Complex Systems Institute.
In late 2015, Nassim, along with Robert
J. Frey and Raphael Douady, formed the Real World Risk Institute to build the
principles and methodology for what we call real-world rigor, in decision
making and codify a clear-cut way to approach ... to provide executive
education courses and issue two certificates."
Writing career
Taleb's five volume philosophical essay
on uncertainty, titled the Incerto, covers the following
books: Fooled by Randomness (2001), The Black Swan (2007–2010), The
Bed of Procrustes (2010), Antifragile (2012),
and Skin in the Game (2018). It was originally published in
November 2016 including only the first four books. The fifth book was added in
August 2019.
His first non-technical book, Fooled by Randomness, about the
underestimation of the role of randomness in life, published in 2001, was selected
by Fortune as one of the smartest 75 books known.
His second non-technical book, The Black Swan,
about unpredictable events, was published in 2007, selling close to 3 million
copies (as of February 2011). It spent 36 weeks on the New York Times
Bestseller list, 17 as hardcover and 19 weeks as paperback, and was translated
into 31 languages. The book has been
credited with predicting the banking and economic crisis of 2008.
A book of aphorisms, The Bed of Procrustes: Philosophical and
Practical Aphorisms, was released in December 2010.
The fourth book of his Incerto series—Antifragile:
Things That Gain from Disorder—was published in November 2012.
The fifth book of his Incerto series—Skin in the Game: Hidden Asymmetries in Daily
Life—was published in February 2018.
Taleb's non-technical writing style has
been described as mixing a narrative, often semi-autobiographical style with
short philosophical tales and historical and scientific commentary. The sales
of Taleb's first two books garnered an advance of $4 million, for a follow-up
book on anti-fragility.
Ideas and Theories
Taleb's book The Bed of Procrustessummarizes
the central problem: "we humans, facing limits of knowledge, and things we
do not observe, the unseen and the unknown, resolve the tension by squeezing
life and the world into crisp commoditized ideas". Taleb disagrees with Platonic
(i.e., theoretical) approaches to reality to the extent that they lead people
to have the wrong map of reality, rather than no map at all. He opposes most economic and grand social science theorizing,
which in his view, suffers acutely from the problem of overuse of Plato's Theory
of Forms. Based on these and other constructions, he advocates for what he calls a
"black swan robust" society, meaning a society that can withstand
difficult-to-predict events.
He has also proposed that biological,
economic, and other systems exhibit an ability to benefit and grow from
volatility—including particular types of random errors and events—a
characteristic of these systems that he terms antifragility. Relatedly, he also believes that
universities are better at public relations and claiming credit than generating
knowledge. He argues that knowledge and technology are usually generated by
what he calls "stochastic tinkering" rather than by top-down directed
research, and has proposed option-like experimentation as a way to outperform
directed research as a method of scientific discovery, an approach he
terms convex tinkering.
Taleb has called for cancellation of the Nobel Prize in Economics,
saying that the damage from economic theories can be devastating. He opposes top-down knowledge as an academic
illusion. Together with Espen Gaarder
Haug, Taleb 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". Teacher and author Pablo Triana has explored this
topic with reference to Haug and Taleb, and says that perhaps Taleb is correct to
urge that banks be treated as utilities forbidden to take potentially lethal
risks, while hedge funds and other unregulated entities should be
able to do what they want.
Taleb's writings discuss the error of
comparing real-world randomness with the "structured randomness" in quantum
physics where probabilities are remarkably computable and games of chance like
casinos where probabilities are artificially built. Taleb calls this the "ludic fallacy".
His argument centers on the idea that predictive models are based on
Plato's Theory of Forms, gravitating towards mathematical purity
and failing to take some key ideas into account, such as: the impossibility of
possessing all relevant information, that small unknown variations in the data
can have a huge impact, and flawed theories/models that are based on empirical
data and that fail to consider events that have not taken place, but could have
taken place. Discussing the ludic fallacy in The Black Swan, he
writes, "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."
In the second edition of The
Black Swan, he posited that the foundations of quantitative economics are
faulty and highly self-referential. He states that statistics is fundamentally
incomplete as a field, as it cannot predict the risk of rare events, a problem
that is acute in proportion to the rarity of these events. With the
mathematician Raphael Douady, he called the problem statistical
undecidability (Douady and Taleb, 2010).
Taleb has described his main challenge
as mapping his ideas of "robustification" and "antifragility",
that is, how to live and act in a world we do not understand and build
robustness to black swan events. Taleb introduced the idea of the "fourth
quadrant" in the exposure domain. One
of its applications is in his definition of the most effective (that is, least
fragile) risk management approach: what he calls the "barbell strategy"
which is based on avoiding the middle in favor of linear combination of
extremes, across all domains from politics to economics to one's personal life.
These are deemed by Taleb to be more robust to estimation errors. For instance,
he suggests that investing money in 'medium risk' investments is pointless,
because risk is difficult, if not impossible to compute. His preferred strategy
is to be both hyper-conservative and hyper-aggressive at the same time. For
example, an investor might put 80 to 90% of their money in extremely safe
instruments, such as treasury bills, with the remainder going into highly risky
and diversified speculative bets. An alternative suggestion is to engage in
highly speculative bets with a limited downside.
Taleb asserts that by adopting these
strategies a portfolio can be "robust", that is, gain a positive
exposure to black swan events while limiting losses suffered by such random
events. Together with Donald Geman and Hélyette
Geman, he modeled the "maximum entropy barbell" which consists in
"to constrain only what can be constrained (in a robust manner) and to
maximize entropy elsewhere", based on an insight by E. T. Jaynes that
economic life increases in entropy under regulatory and other constraints. Taleb also applies a similar barbell-style
approach to health and exercise. Instead of doing steady and moderate exercise
daily, he suggests that it is better to do a low-effort exercise such as
walking slowly most of the time, while occasionally expending extreme effort.
He claims that the human body evolved to live in a random environment, with
various unexpected but intense efforts and much rest.
He appeared as a special guest on The
Ron Paul Liberty Report on May 19, 2017 and stated his support for a non-interventionist
foreign policy. Taleb subsequently
appeared with Ron Paul and Ralph Nader on their respective shows in support
of Skin in the Game, which was dedicated to both men.
Taleb wrote in Antifragile and in
scientific papers that if the statistical structure of habits in modern
society differ too greatly from the ancestral environment of humanity, the
analysis of consumption should focus less on composition and more on frequency.
In other words, studies that ignore the random nature of supply of nutrients
are invalid.
Taleb co-authored a paper with Yaneer
Bar-Yam and Joseph Norman called Systemic risk of pandemic via novel
pathogens – Coronavirus: A note. The paper, published on January 26, 2020, took the position
that the SARS-CoV-2 was not being taken seriously enough by policy makers and
medical professionals.
Praise and Criticism
In a 2008 article in The Times,
the journalist 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, saying "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."
Taleb was treated as a "rock star" at the World Economic Forum
annual meeting in Davos in 2009; at that event he had harsh words for bankers,
suggesting that bankers' recklessness will not be repeated "if you have
punishment".
Taleb contends that statisticians can be
pseudoscientists when it comes to risks of rare events and risks of blowups,
and mask their incompetence with complicated equations. This stance has attracted criticism: the American
Statistical Association devoted the August 2007 issue of The American
Statistician to The Black Swan. The magazine offered a mixture of
praise and criticism for Taleb's main points, with a focus on Taleb's writing
style and his representation of the statistical literature. Robert Lund, a
mathematics professor at Clemson University, writes that in Black Swan,
Taleb is "reckless at times and subject to grandiose overstatements; the
professional statistician will find the book ubiquitously naive." However, Lund acknowledges that "there
are many points where I agree with Taleb," and writes that "the book
is a must" for anyone "remotely interested in finance and/or
philosophical probability."
Aaron Brown, an author, quantitative
analyst, and finance professor at Yeshiva and Fordham Universities, said that
"the book reads as if Taleb has never heard of nonparametric methods, data
analysis, visualization tools or robust estimation." Nonetheless, he calls the book
"essential reading" and urges statisticians to overlook the insults
to get the "important philosophic and mathematical truths." Taleb
replied in the second edition of The Black Swan that "One
of the most common (but useless) comments I hear is that some solutions can
come from 'robust statistics.' I wonder how using these techniques can create
information where there is none". While
praising the book, Westfall and Hilbe in 2007 complained that Taleb's criticism
is "often unfounded and sometimes outrageous." Taleb, writes John Kay, "describes
writers and professionals as 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. But it is hugely enjoyable –
compelling but easy to dip into. Yet beneath his rage and mockery are serious
issues. The risk management models in use today exclude the very events against
which they claim to protect the businesses that employ them. These models
import a veneer of technical sophistication ... Quantitative analysts have
lulled corporate executives and regulators into an illusory sense of
security."
Berkeley statistician David Freedman said
that efforts by statisticians to refute Taleb's stance have been unconvincing.
Taleb and Nobel laureate Myron Scholes have
traded personal attacks, particularly after Taleb's paper with Espen Haug on
why nobody used the Black–Scholes–Merton formula. Taleb said that Scholes was
responsible for 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
claimed that Taleb does not cite previous literature, and for this reason Taleb
is not taken seriously in academia. Haug
and Taleb (2011) listed hundreds of research documents showing the
Black–Scholes formula was not Scholes' at all, and argued that the economics
establishment ignored literature by practitioners and mathematicians (such as Ed
Thorp), who had developed a more sophisticated version of the formula.
In an interview on Charlie Rose,
Taleb said that he saw that none of the criticism he received for The Black
Swan refuted his central point, which convinced him to protect his assets
and those of his clients.
In May 2009 interview for GQ magazine,
journalist Will Self authored an article in which Taleb said his hedge fund
"made $20 billion for our clients."
On June 30 that year, Reuters published emails showing that Taleb
explicitly corrected Self.
Taleb's aggressive and clearly directed
commentary against parts of the finance industry—e.g., stating at Davos in 2009
that he was
"happy" that Lehman Brothers collapsed—has led to reports
of personal attacks and possible threats.
2016 Commencement Address Statement
About Predictions
Taleb received an honorary doctorate
from the American University of Beirut in 2016 and gave a commencement address to
the graduating class in which, describing his life, he stated:
I hesitate to give advice because every
major single piece of advice I was given turned out to be wrong and I am glad I
didn't follow them. I was told to focus and I never did. I was told to never
procrastinate and I waited 20 years for The Black Swan and it
sold 3 million copies. I was told to avoid putting fictional characters in my
books and I did put in Nero Tulip and Fat Tony because I got bored otherwise. I
was told to not insult the New York Times and the Wall
Street Journal, the more I insulted them the nicer they were to me and
solicit op-eds. I was told to avoid lifting
weights for a back pain and became a weightlifter: never had a back problem
since. If I had to relive my life I would be even more stubborn and
uncompromising than I have been. One should never do anything without skin in the game. If you
give advice, you need to be exposed to losses from it.
See Also
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