Finance is a scam - Taleb

Interviewed by Time… " But amid all this, your company is doing quite well. The only important thing about it is that I protected my clients. I offer a protection package and it does work, but I don’t want to be associated with trading too much. I believe finance is largely a scam, and I don’t want to be associated with that profession. You’ve done very well at it for a number of years? I know, I know — today I probably have the best track record in existence, because today, comparatively, all these other people have disappeared. So do you feel vindicated by this current crisis? I feel angry. Very, very angry. I described the way it happened, I described the mistakes, and I see all these people explaining it backwards. Let me make another metaphor: you have a hundred people playing Russian roulette, and one of them killed themselves, and… ",8599,1853531,00.html

Totally agree with Taleb. With all my heart.

“If I give you a number, you’re going to take more risk. Regardless of the confidence you have in the number. It’s psychological. If I ask you to write down the last 4 digits of your social security number, and then take you out to lunch and ask you how many dentists there are in Manhattan, there’s going to be a high correlation between those two numbers.” Why does he say “if i take you out to lunch”? Is this something to warm up to the reader? Sometimes authors who don’t say much have a way of saying things that helps them gather a following among the laymen. Just seems like a strange thing to add in the middle of his discourse…

I think the idea is that things like that will influence you even if some time (and possibly gas) has passed.

Finally read the article. Although his books annoy me, I *liked* his interview. I really got annoyed when running across (often quantitative) people talking about how this or that exotic derivative was truly awesome, when mostly it was the mathematics required to value it that was awesome. But the deeper the math you do, the more assumptions you have to make (usually) to get the thing to be solvable, and that introduces so much complexity. So I admired the talent required to do the work, but I seldom trusted the result. So many products seemed so complex to me - heck, just buying a stock, it’s sometimes hard to figure out explicitly what risks you’re actually taking. It gets worse with vanilla options, and even worse with exotics. Or you open a hedge fund that sells naked OTM puts in a raging bull market. You know how that story always ends. The fund always blows up (b/c they’re naked), but they raked in a bunch of profits over the years that they still get to keep even after losing most or all of their client’s money. It’s a positive expectation game for the managers, and negative for the clients, but the client somehow can’t see it coming because they’ve posted great risk adjusted returns for a few years (and the downside risk didn’t manifest itself in historical data). Seems we have found a great risk diversification technique… bundle a bunch of mortgages together, sell at a nice yield, collect a transaction fee, and then let the taxpayer insure them. The taxpayer is the ultimate diversifier. I know there are a bunch of different arguments mixed in there, but for the first time I can remember in a while, I really liked Taleb’s interview here.

My question on the whole Taleb strategy is this: So he buys deep OTM puts, and the rest he puts in essentially treasuries. When an event like this happens he comes out a rockstar. When the 2003-2007 happens he misses out on everything. Can we find a balance somewhere? I mean the protection his strategy offers is great, but in more mild markets you dont really gain anything. Therefore is it really an applicable strategy for an “investor”? Also his “finance is a scam” is a bold statement for someone who traded for many years and now advises a HF…

bchad, I just started reading Fooled by Randomness (about 40 pages), but so far, I’m enjoying it as it points out to something I have always argued, that people ignore the role of luck and the power of random events around us. I’m not sure what the rest of the book will say, though.

it will say the same thing about 50 more times.

I propose a moratorium on Taleb discussions. The guy is a troll.

Joey, you met the guy, and you know what he talks about in terms of stats, risk, and all. How’s he viewed by his peers? I’m just learning about him as I’m going through this book, but was he “known” before this book? Was he a leader in his field? I’m not sure what his field is!!! Is he a philosopher? A mathmetician? A statistics prof? A financial trader?

He’s a mathematician/risk guy whose intellect is highly regarded.

I met him a couple of months ago. I would say that he is highly regarded for his thinking, and highly disdained for his attitude/ego/social skills. I believe he was an options trader for quite some time before penning his books, wikipedia him or something to find more. I personally don’t like the guy, you can add that to Wikipedia for me.

JoeyDVivre Wrote: ------------------------------------------------------- > I propose a moratorium on Taleb discussions. The > guy is a troll. troll?.why is that. because he is obnoxious or his ideas dont have much merit?. i can live with the obnoxious part.

Dreary, I haven’t read it all the way through, but my sense is that Fooled by Randomness is much better than The Black Swan. Both are kind of repetitive, but FBR has more mini-insights along the way than TBS. I think he has a good intellect and kind of an obnoxious personality. He says he’s fed up with how arrogant academics are, and then proceeds to be just as arrogant himself. Taleb’s strategy is sensible except for one thing. The basic strategy is capital preservation and then making money on the fact that options fail to price in extreme events accurately because they are not really predictable and human subjective methods to account for that tend to underestimate their real probabilities because of behavioral biases and the urge to undercut competition. So he hangs out with the risk free rate and collects a grand slam every once in a while. The problem is when Treasuries take a slam and all go to zero or 50% or whatever. But wait, they’re treasuries… they’re supposed to protect capital. Well, the collapse of treasuries is one of these events that is known as - and there’s now a name for this - “a black swan event.” The only problem is that it’s not truly a black swan event because it’s actually more thinkable these days, and true black swan events are supposed to be unthinkable until they happen.

Dsylexic Wrote: ------------------------------------------------------- > JoeyDVivre Wrote: > -------------------------------------------------- > ----- > > I propose a moratorium on Taleb discussions. > The > > guy is a troll. > > troll?.why is that. because he is obnoxious or his > ideas dont have much merit?. i can live with the > obnoxious part. And Dsylexic’s description fits quite a few distinguished posters on this forum.

Talib Kweli wrote a book?