January 14, 2008
Nick Taleb's 'The Black Swan' Rules
Just in via Pablo Triana's article in today's Financial Times, the news that my friend* Nassim Nicholas Taleb ended 2007 as Amazon.com's bestselling author in the non-fiction book category with his mega-hit, "The Black Swan."
You could look it up — or just glance at the graphic above if you don't have the time, being the busy and important person you are.
Full disclosure: I received the galleys of "The Black Swan" months in advance of publication but even with that heads-up still wasn't smart enough to figure out how to apply Nick's insights and actually make money in the market.
I guess that's why he's rich and retired and writing bestsellers while I'm still passing gas and producing this virtual rag.
But I digress.
Here's the Financial Times story.
- Beware of the 'black swan' effect
Nassim Taleb's bestseller has had a salutary effect on investors' awareness of risk
The veteran options trader (and indefatigable sceptic intellectual) Nassim Taleb has ended 2007 as the top bestselling author in the non-fiction book category, according to Amazon.com. Mr Taleb’s "The Black Swan" crowns his outrageously successful transition from market player to popular muser.
As is well known, the book deals with unexpected, rare events that have a profound effect when they eventually take place. Mr Taleb’s main assertion is that we tend to misunderstand such events, and stubbornly assign small (even negligible) probabilities to them. In real life, “black swans” happen much more often than generally assumed. This is particularly true in the world of finance, where events that are assigned probabilities of one in 1m years make a semi-regular appearance every half-decade or so.
Mr Taleb’s musings have not been too well received within finance theory circles. He strikes at the very foundations of financial economics, hitting out at modern portfolio theory, the Black-Scholes option pricing model and financial econometrics — three essential building blocks of academic thought (and all Nobel-endowed constructs). In Mr Taleb’s view, financial theory is not only essentially useless but also quite dangerous, as it provides a faulty guide and forces people to take actions that may result in enhanced, not reduced, market turmoil.
But bothered as the most dogmatic of academics surely are, perhaps it is the practitioners who are most discomfited by Mr Taleb’s message. This may seem an odd assertion. After all, Mr Taleb has been one of them, and a prominent one at that. Bluntly stated, Mr Taleb’s ruminations threaten to disrupt a traditional, cherished resource at the disposal of bankers and market punters. Post-Taleb, it could become more difficult to use the “unforeseeable once-in-a-lifetime rare event” excuse for blow-up losses, just as it could become less feasible to peddle products that are heavily (negatively) exposed to the “black swan”.
Financial dealers make a lot of money by selling and arranging sophisticated devices that can deliver nice returns for end-users as long as markets don’t turn awry. Collateralised debt obligations (CDOs) are the most recent example. For these dealers it is essential that the probability of the nasty scenario remains downplayed. After all, not many customers (not even the most reckless) would enter into a transaction where they face large odds of suffering a bloodbath. So, while (honest) bankers would tend to warn of the potential risks, it certainly helps if no one loudly proclaims that the chances of those risks materialising are far greater than negligible. By doing just that from his highly visible Black Swan parapet, Mr Taleb could be damaging many a salesman’s prospects.
The same logic would apply to hedge funds. Many of these high-profile players enjoy nothing more than taking positions that bet on the negative black swan (the crash, the meltdown, the defaults) not taking place. For instance, many punters seem to have traditionally been avid option-sellers, a great way to generate tasty returns (in real-income form, to boot), but of course also a window to a potential devastating blow-up. Here it is again crucial to downplay the possibility of disaster.
The black swan must be presented and marketed as undeniably unlikely, perhaps by relentlessly asserting that markets behave normally (fund managers could present tons of academic “scientific backing” in this regard). These days, however, such presentations become less convincing, courtesy of Mr Taleb’s incessant contrarian rooftop chatting. Equally likely to lose credibility becomes the traditional “unpredictable freaky rarity” excuse when faced with outlandish setbacks. So it turns out that Mr Taleb not only has achieved worldwide notoriety and fortune by transforming himself into a crack intellectual, but may also influence the way market participants interact with each other. This could be a good thing.
By acting as “probabilistic cop” Mr Taleb could force professionals to be more honest with others and, crucially, with themselves. This applies particularly to customers and investors. The subprime mortgage crisis has allowed us to witness disgruntled members of those two factions claim their ignorance of the risks of the stuff they took exposure to, in a scenario reminiscent of past debacles. After Taleb, this could change.
When a book that unremittingly states nasty “unexpected” high impact surprises happen quite often becomes a bestseller, it becomes much harder not to take a close look at the rarities lurking in the fat tails of the distribution, and to accept and condone claims of naive ignorance after the fact.
Hey, I'm not crying just 'cause I can't apply Nick's theories to finance.
They're equally — if not more — applicable to the rest of the great world and everyday life.
Read the book — it'll be the best $16.17 you ever spent.
If you find this not to be the case, well, not to worry.
As always, the bookofjoe guarantee applies, to wit: simply notify me of your dissatisfaction and I will refund every red cent you paid.
That goes double if you checked it out of the library.
an excerpt from Nick's website.
Subtle advance notice of a new Apple laptop?
Read the above (just in 22 minutes ago) and decide for yourself.
But it's hard to believe WaterField Designs could ship a new custom case for it 72 hours after it's announced by Steve Jobs tomorrow at Macworld unless Apple had already sent the specs to make them in advance.
How do you spell "WiMax?"
The origin of 'nerd' — Episode 2: Bob of RPI strikes back
His comment on yesterday morning's Episode 1 arrived last evening at 9:20 p.m. and appears above.
Me, I tend to agree with Bob's contention that "Seuss's use is nonsensical and not related to our definition of a 'nerd.'"
Okay, Economist, the ball's in your court (after I send them this post).
And while we're on the subject of Seuss's neoligisms, the origin of the word "blog" in another of his works — blogs meaning "the world's sweetest frogs" — would appear likewise to be coinage of a nonsense word unrelated to our concept of what a blog is.
'Those cars with light damage will be repaired at the Elizabeth Receiving Facility and sold through BMW's dealer network as new cars'
The news above is not going to be very well received by BMW nation.
Just in from Elux Troxl, the following report:
Ferry incident with new US-bound BMW M3s
The Courage tipped today at the port in Jersey City causing major damage to over 300 BMWs — not including 70+ BMWs that were total losses.
A majority of the destroyed vehicles were M3s (mostly in dark blue) with a variety of 3ers and 1ers smashed up as well. A small number of the cars destroyed had German Tourist plates on them. Those European delivery customers will NOT be getting their cars back.
If you were expecting your M3 or e90/92 in the next month, you're going to be in for a sad surprise.
Those cars that were a total loss will be crushed. I asked a BMW rep who stated that they will not be auctioned as there is a liability for letting those cars on the road. The shipping company's insurance is footing the bill. I do not know how they will handle those cars that are already owned by the European Delivery customers.
Those cars with light damage will be repaired at the Elizabeth Receiving Facility and sold through BMW's dealer network as new cars.
Pictures of the incident's aftermath accompanying the M5 message board post appear above and below.
As Steve commented on the M5 board, "I guess now if I order a 4-door M3 I definitely want one with a build date after January 14, 2008."
Prediction: Within 24 hours BMW will recant and issue a notice that no such thing as stated in the headline up top was ever considered, and that the damaged cars will be scrapped as well.
ScientificMatch.com — 'The only introduction service that creates matches with actual physical chemistry'
From the website:
- The Science of Love
Our patent-pending technology uses your DNA to find others with a natural body fragrance you'll love, with whom you'd have healthier children, a more satisfying sex life, and more.*
Our personal-values-analysis provides a deep spiritual bond, to complete your path to truly amazing relationships.
*This statement is based on peer-reviewed, independent studies published in distinguished scientific journals.
Please read more here.
I can see how that could happen.
Read the article in the latest issue (January 12, 2007 print edition) of The Economist for more; it follows.
- How to find a mate — The scent of a woman (and a man)
A new kind of dating agency relies on matching people by their body odour
One of life's little mysteries is why particular people fancy each other—or, rather, why they do not when on paper they ought to. One answer is that human consciousness, and thus human thought, is dominated by vision. Beauty is said to be in the eye of the beholder, regardless of the other senses. However, as the multi-billion-dollar perfume industry attests, beauty is in the nose of the beholder, too.
ScientificMatch.com, a Boston-based internet-dating site launched in December, was created to turn this insight into money. Its founder, an engineer (and self-confessed serial dater) called Eric Holzle is drawing on an observation made over a decade ago by Claus Wedekind, a researcher at the University of Bern, in Switzerland.
In his original study Dr Wedekind recruited female volunteers to sniff men's three-day-old T-shirts and rate them for attractiveness. He then analysed the men's and women's DNA, looking in particular at the genes that build a part of the immune system known as the major histocompatability complex (MHC). Dr Wedekind knew, from studies on mice, that besides fending off infection, the MHC has a role in sexual attractiveness. It changes odours in ways the mice can detect (with mice, the odours are in the urine), and that detection is translated into preferences for particular mates. What is true for mice is often true for men, so he had a punt on the idea that the MHC might affect the smell of human sweat, as well.
It did. Women preferred T-shirts from men whose MHC was most different from their own. What was more, women with similar MHCs favoured the use of similar commercial perfumes. This suggests that the role of such perfumes may be to flag up the underlying body scent rather than mask it, as a more traditional view of the aesthetics of body odour might suggest.
That makes evolutionary sense. The children of couples with a wide range of MHC genes, and thus of immune responses, will be better protected from disease. As the previous article suggests, that could be particularly important in a collaborative, group-living species such as humanity. Moreover, comparing MHCs could be a proxy for comparing kinship, and thus help to prevent inbreeding.
The promise of an MHC-based match is not only that your partner's old laundry will smell better but all sorts of other benefits too. The biological compatibility created by complementary immune systems apparently promises better orgasms, a lower likelihood of cuckoldry, more happiness and so on. Nor are heterosexuals the only ones who can benefit. Gay men and women respond as strongly to MHC-derived smells as straight people do—though, as might be expected, their response is to the smell of people of the same sex, rather than the opposite one.
Indeed, the only people for whom MHC matching might not be expected to work are women on the Pill. Chemical contraception, which mimics pregnancy, messes up the system because of an intriguing twist. When women are pregnant, they prefer the smell of MHCs that are similar to their own. This means they are happier in the company of their relatives, which may, as the previous article also suggests, bring evolutionary benefits of its own.
ScientificMatch.com does not rely entirely on the MHC. Besides sending off a swab taken from the inside of their cheek and a cheque for $1,995, hopeful singles have to answer the usual questionnaire about income, background and details such as whether they would prefer a skiing holiday to one spent sketching. They are not, however, asked whether they wear their T-shirts for three days on the trot.
Sure hope the mailman isn't in a bad mood and carrying a pin....
From the website:
- Personalized SENDaBALL
Not only does this bright ball arrive personalized and hand-lettered with the name of the recipient, a special message or your name — but it shows up in the recipient's mailbox unwrapped.
Wish someone happy birthday, congratulations, or just an extra-sunny day.
For personalization: Please specify name or message up to 20 characters.
Choose from yellow, red, blue, pink or green.
'Dead Man's Cell Phone' — Best play title of the year
Written by Sarah Ruhl, the New York premiere is on February 8, 2008 at Playwrights Horizons Theater.
'No Dumping!' Dog Yard Sign
Who posted this?
From the website:
- No Dumping! Dog Yard Sign
Protect your peonies — or have fun trying.
This rugged cast iron lawn sign is modeled after antique garden ornaments — with a wickedly funny twist.
12¾"H x 10"W.