Nassim Taleb was a financial derivatives trader who made enough money in his 20's (born 1960) and checked out of the rat race to become a "philosopher." His book is a snarky but intellectual appraisal of the pseudo-knowledge employed in our financial markets and elsewhere. He argues that economics is a soft non-science that tries to legitimize itself with "statistical analysis" of risk using techniques such as the bell curve, standard deviation and other charlatanry, which only gives the field a veneer of validity.
He discusses the Black Swan, i.e. the unlikely event that always rears its head and has profound consequences. The unknowable unknown, the risk which cannot be assessed, is ignored by the managers of risk-- to the detriment of everyone. The book was written a few years ago and the lesson is prescient. Whether its 9-11, the Asian currency crisis of 1998, the Great Depression, the Influenza Epidemic, or the current mortgage solvency meltdown, the markets are always vulnerable to something unseen.
All of the successes in the world, whether it’s Bill Gates’ career or the discovery of penicillin, are reliant on a combination of skill and luck, but luck is always under-emphasized in the human brain. When fortunes are made, the human psyche is quick to take the credit, but when disaster strikes we blame some external phenomenon. Taleb does not call for paralysis in the face of such bias, only truth in assessing the risks and recognition of the lack of control we have. The world is a complicated, interconnected place and one hiccup-- whether man-made or natural-- can spell disaster. It's always the entity that was not anticipated that brings down the house.
Humans are vulnerable to several fallacies and biases that can have deleterious effects on our judgment. The narrative fallacy is the appeal of the story: we look for causation for events and this is often misleading. “The market crashed because x occurred this morning.” David Hume, the great Scottish philosopher outlined the problems with causation a couple centuries ago and we need to re-consider his premise now more than ever.
Another problem Taleb outlines is the Ludic fallacy, the idea that all of life resembles game theory with predictable structure and controllable randomness. In life, however, rules often do not apply and such structure, the idea of which is appealing, is absent.
Taleb discusses various biases to which humans attach themselves. The strongest is confirmation bias that is characterized by seeking “proofs” that our preconceived notions are true. We ignore or avoid information that contradicts our worldview. Coupled with narrative fallacy, confirmation bias can be deadly. While Taleb comes at these topics from a financial point of view, the philosophical constructs are applicable to any field, and I would argue that great understanding is at hand for most scientific fields.
The difference between Platonism--i.e., top-down theorizing ala the Ivory Tower-- versus Empiricism--i.e., experiential real-world knowledge-- is a particularly important part of Taleb’s thesis. We yearn to find science where this is none, whether it’s modern financial portfolio theory or alternative medicine; humans look for the comfort of proof that our preconceptions are valid. Often it’s not there.
The desire to create a narrative to explain history or current events leads to an overvaluation of these usually inaccurate facts. As a result, we overvalue the intellectual elite who proposes the narratives. The debacle of Long Term Capital Management, a group of Nobel Prize winning economists and “experts” who went bankrupt in the 1990’s, is an especially poignant example. The history of medicine is also rife with such false theoretical thinking, with examples of grand theories of bodily humours or gases which needed to be expelled or infused, often with horrific results. Only with the practice of empiric study— reasonable conclusions drawn from our collective experience-- can the truth be found if ever. But we must also know the limits of our empiric knowledge; some things just are not known.
The Black Swan is as important a book as any as we seek bedrock explanations for fast moving events in our globalized existence. Taleb’s points are interesting, his book excellent and my short discussion hardly does it justice.
No comments:
Post a Comment