Thursday, 9 April 2009

Taleb - 3/10 (and that is being generous)

Let's score Nassim Taleb's latest set of ex cathedra pronouncements:
1. What is fragile should break early while it is still small. Nothing should ever become too big to fail.
Fair point. Score one.
2. No socialisation of losses and privatisation of gains.
Exactly. Otherwise moral hazard is enormous and banking is profitable with little risk. Score one.
3. People who were driving a school bus blindfolded (and crashed it) should never be given a new bus.
No. Firstly nearly everyone who knows enough to be helpful was driving (or at least helping to navigate) the bus. And secondly most people even if they did not like the driving, weren't in a position to do anything about it. We cannot afford to get rid of all of our experts, even if they have been wrong in the past. Score zero.
4. Do not let someone making an “incentive” bonus manage a nuclear plant – or your financial risks.
It depends on the bonus. One year bonuses with no clawback based on mark to market profits clearly provide bad incentives. But multiyear bonuses with clawbacks based on realised gains may provide a good incentive. Score half.
5. Counter-balance complexity with simplicity. Complexity from globalisation and highly networked economic life needs to be countered by simplicity in financial products.
No. Balance complexity with appropriate technology. Complex products can be appropriate, simple products can be inappropriate. It depends. Score zero.
6. Do not give children sticks of dynamite, even if they come with a warning . Complex derivatives need to be banned because nobody understands them and few are rational enough to know it.
No. It is enough to ensure that risk takers genuinely bear the consequences of their actions and that there is sufficient capital in the system for the risks being taken. If you ban dynamite, tunneling gets much more expensive. You just want to be sure it is civil engineers not terrorists who have the dynamite. Score zero.
7. Only Ponzi schemes should depend on confidence.
Nonsense. No one knows what a financial system that is not confidence sensitive might be like. That is an unsolved problem in finance. Score zero (with the judge contemplating taking away a mark for idiocy).
8. Do not give an addict more drugs if he has withdrawal pains. Using leverage to cure the problems of too much leverage is not homeopathy, it is denial.
It depends. Allowing firms to increase leverage is insane, and no regulator I know is permitting that (unless you could accounting games which result in over-stating capital). But governments can and should increase their borrowing at times like these. Score half.
9. Citizens should not depend on financial assets or fallible “expert” advice for their retirement. Economic life should be definancialised. We should learn not to use markets as storehouses of value: they do not harbour the certainties that normal citizens require.
So what, prey, do you suggest people use to save for retirement? Given I know of no asset whatsoever that does not fluctuate in value, this is a real question. Score zero.
10. Make an omelette with the broken eggs. Finally, this crisis cannot be fixed with makeshift repairs, no more than a boat with a rotten hull can be fixed with ad-hoc patches. We need to rebuild the hull with new (stronger) materials; we will have to remake the system before it does so itself. Let us move voluntarily into Capitalism 2.0 by helping what needs to be broken break on its own, converting debt into equity, marginalising the economics and business school establishments, shutting down the “Nobel” in economics, banning leveraged buyouts, putting bankers where they belong, clawing back the bonuses of those who got us here, and teaching people to navigate a world with fewer certainties.
The sheer cliche density of that paragraph alone deserve a minus five.

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Blogger huntse said...

Its surprising how many people are taken in by his line of bullshit. I even know some intelligent, financially literate people who are taken in by the mix of obviousness, shouting, cliche and drivel that he comes out with.

Oh, and a black swan is not rare. A Siberian white tiger is rare. A black swan is something that people thought was impossible (not rare, impossible) but it was later discovered to be neither rare nor impossible. Well, sheesh. Why on earth anyone would read (let alone write) a book about something so prosaic is beyond me.

The "amazing" insight of his about black swans is of course neither rare nor novel. It is a known problem (the difference between mathematical proof by induction inductive reasoning in the natural sciences). Only Taleb could turn it into an explanation for all of history and a successful career as a shouty financial pundit.

6:38 am  
Blogger David Murphy said...

Thank you. I particularly like your remarks about rareness.

7:12 am  
Blogger Charles Butler said...

One of the benefits of just allowing everyone who is going to go broke to do so is that guys like him would suddenly become superfluous and take up their rightful place in the soup lines.

Farseeing is a growth industry in a dense fog.

9:18 am  
Blogger Vaudt Varken said...

Finally somebody who speaks up against this one metaphor guy. The blindness of his simplicity has been annoying me for a long time.
Keep up the good work.

6:40 pm  

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