I recently had the occasion to reread my review of The Black Swan, from April 2007.
It was fun reading my review (and also this pre-review; “nothing useful escapes from a blackbody,” indeed). It was like a greatest hits of all my pet ideas that I’ve never published.
Looking back, I realize that Taleb really was right about a lot of things. Now that the financial crisis has happened, we tend to forget that the experts who Taleb bashes were not always reasonable at all. Here’s what I wrote in my review, three and a half years ago:
On page 19, Taleb refers to the usual investment strategy (which I suppose I actually use myself) as “picking pennies in front of a steamroller.” That’s a cute phrase; did he come up with it? I’m also reminded of the famous Martingale betting system. Several years ago in a university library I came across a charming book by Maxim (of gun fame) where he went through chapter after chapter demolishing the Martingale system. (For those who don’t know, the Martingale system is to bet $1, then if you lose, bet $2, then if you lose, bet $4, etc. You’re then guaranteed to win exactly $1–or lose your entire fortune. A sort of lottery in reverse, but an eternally popular “system.”)
Throughout, Taleb talks about forecasters who aren’t so good at forecasting, picking pennies in front of steamrollers, etc. I imagine much of this can be explained by incentives. For example, those Long-Term Capital guys made tons of money, then when their system failed, I assume they didn’t actually go broke. They have an incentive to ignore those black swans, since others will pick up the tab when they fail (sort of like FEMA pays for those beachfront houses in Florida). It reminds me of the saying that I heard once (referring to Donald Trump, I believe) that what matters is not your net worth (assets minus liabilities), but the absolute value of your net worth. Being in debt for $10 million and thus being “too big to fail” is (almost) equivalent to having $10 million in the bank.
So, yeah, “too big to fail” is not a new concept. But as late as 2007, it was still a bit of an underground theory. People such as Taleb screamed about, but the authorities weren’t listening.
And then there are parts of the review that make me really uncomfortable. As noted in the above quote, I was using the much-derided “picking pennies in front of a steamroller” investment strategy myself–and I knew it! Here’s some more, again from 2007:
I’m only a statistician from 9 to 5
I try (and mostly succeed, I think) to have some unity in my professional life, developing theory that is relevant to my applied work. I have to admit, however, that after hours I’m like every other citizen. I trust my doctor and dentist completely, and I’ll invest my money wherever the conventional wisdom tells me to (just like the people whom Taleb disparages on page 290 of his book).
Not long after, there was a stock market crash and I lost half my money. OK, maybe it was only 40%. Still, what was I thinking–I read Taleb’s book and still didn’t get the point!
Actually, there was a day in 2007 or 2008 when I had the plan to shift my money to a safer place. I recall going on the computer to access my investment account but I couldn’t remember the password, was too busy to call and get it, and then forgot about it. A few weeks later the market crashed.
If only I’d followed through that day. Oooohhh, I’d be so smug right now. I’d be going around saying, yeah, I’m a statistician, I read Taleb’s book and I thought it through, blah blah blah. All in all, it was probably better for me to just lose the money and maintain a healthy humility about my investment expertise.
But the part of the review that I really want everyone to read is this:
On page 16, Taleb asks “why those who favor allowing the elimination of a fetus in the mother’s womb also oppose capital punishment” and “why those who accept abortion are supposed to be favorable to high taxation but against a strong military,” etc. First off, let me chide Taleb for deterministic thinking. From the General Social Survey cumulative file, here’s the crosstab of the responses to “Abortion if woman wants for any reason” and “Favor or oppose death penalty for murder”:
40% supported abortion for any reason. Of these, 76% supported the death penalty.
60% did not support abortion under all conditions. Of these, 74% supported the death penalty.
This was the cumulative file, and I’m sure things have changed in recent years, and maybe I even made some mistake in the tabulation, but, in any case, the relation between views on these two issues is far from deterministic!
Finally, a lot of people bash Taleb, partly for his idosyncratic writing style, but I have fond memories of both his books, for their own sake and because they inspired me to write down some of my pet ideas. Also, he deserves full credit for getting things right several years ago, back when the Larry Summerses of the world were still floating on air, buoyed by the heads-I-win, tails-you-lose system that kept the bubble inflated for so long.