Nassim Nicholas Taleb - The Black Swan: The Impact of the Highly Improbable

Nassim Nicholas Taleb has devoted his life to immersing himself in problems of luck randomness human error probability and the philosophy of knowledge although born in Lebanon and with a rich family history in that country in a 2008 London Times article he was described as not believing in national character those are the reporter's words but to be comfortable with a regional identity my body and soul are Mediterranean he was quoted as saying mr. professor talev who has his bachelor's and master's in science from the unit pardon me from the University of Paris and MBA from the Wharton School and a PhD in management science from the University of Paris also has had three successful careers thus far as a man of letters as a businessman trader and risk manager and as a university professor he is currently distinguished professor of risk engineering at New York University's Polytechnic Institute a distinguished research scholar at Oxford in a principal and senior scientific advisor at universe' Investments his books fooled by randomness and the Black Swan have been published in 31 languages he's widely recognized as the foremost thinker on probability and uncertainty please welcome Nassim Nicholas Taleb and the idea of robustness can be best illustrated with this example how many of you own a what do you call these ugly things sold by Amazon or you can download the electronic Ken doll how many of you own a Kindle ok alright so and how many of you have read used the book something commonly known as a book or bite at a bookstore like the bookstore okay so a lot of you have read books have seen birth touch the book okay now make a comparison if you spilled coffee on your Kindle you know what happens no or if you don't have electricity or if your whatever there's technical problem now what kind of technical problems and you have was a book okay I have my parents had under collection a book by plotters comedies by plotters that my father bought for something like five dollars in in Moscow and he was visiting 50 years ago anyway the book was 500 years old it looked no different from regular book I don't know how many of you are old enough to have encountered to disc the floppy disk drive okay alright so I have stuff written on floppy disk drive not long ago 10 years ago I can't retrieve it can't read them I'm glad I can't read them because I'm sure before it's appointed by the literary quality of what I wrote to music but so you understand the difference between the two worlds one seemingly is not efficient a book is heavy it's so passe alright the other is hip it's technology and that's what so the the problem was technology that it's seemingly optimizes things but it does cause some fragility and my idea is anything that becomes complex becomes a lot more fragile to black swans to these events name you know Black Swan after some exception mentioned by juvenile and my Black Swan is different because I'm not talking about birds I'm talking about events was some sets some characteristics so this in a nutshell is what I've been thinking about then I realized that anything fragile eventually break and anything robust would survive and I looked at nature and discovers that nature has some parameters no two big animals are too big the elephant is the biggest why because as elephants anything because an elephant would have to pay up for water per liter a lot more you see an elephant pace pace up if there's a shortage of water would you pay up a lot more than a mouse per liter you agree so seemingly a larger organization would be a lot more efficient but in fact becomes a lot more fragile so the biologists understand why you know they have some theories why you can't be bigger than elephant is I mean the the problem is sensitivity to random events random events may squeeze you a lot more when you're larger organism so mother nature understands that rather well and build things in a certain way humans think they're smart they build things in a bad way and these things break I mean how many corporations have survives last hundred years 50 years 25 years 10 years so you realize that there's a high mortality in the species called businesses and a much higher mortality than in species the biological species so based on that I realized that we have to work on I'm tired of the idea of the black swan so we have to work on on something called robustness and in there's no edition of the Black Swan I made a tableau of where is it that we're fragile to black swans I call that the fourth quadrant and how we can protect ourselves by becoming more robust and the fourth quadrant you can either exit the fourth quadrant or if your energy needs to be robust so I can talk about these things the the this idea of fragility or robustness came to me as you know I'm not a Gladwell or a right journalist who takes a topic and milks it and then moves on it's like serial monogamist to another topic right I have I have only one topic uncertainty via but I continues I continue so the transition between my books is seamless okay so I'm transiting and - how to live in the world we don't understand so I added that stop on fragility and robustness as a transition between the Black Swan and and then the next idea then I realized that you know that Stubb was rich enough as a document it could be a book on its own in Europe and most countries were added to the Black Swan we published a separate book so that idea came to me before you know I finished the Black Swan I don't know how many of you remember or were old enough to remember the 2003 problem we had in New York City when we had a sorry blackout you remember the blackout okay I've seen pictures of Grand Central but I don't go to the movies anymore for reasons and I what I remember it reminds me I've seen a train station and Doctor Zhivago people sleeping on the floor you don't know if they're dead you walk over bodies you know in Grand Central New York that's two thousand three two thousand or two thousand three grand sense of 2003 New York City so vulnerable to a technological glitch and and became an obsession for me and I remember you know my mind and you can I can wash my hands because they had that fancy technology no more faucets it's so much passe and it works beautifully you know you you you wave in front of it sometimes it doesn't work of course but here you couldn't wash your hands you couldn't get water because they were 100% reliant on technology so I understood that notion of fragility was and I knew that the idea of Black Swan has to be coupled with what systems are more fragile to blast one and others so I continued my idea with that stub and I'm continuing now and here I have my efforts I continue now part time putting efforts on Twitter and because it's a good discipline to write ideas in hundred forty characters now trying to go 200 characters and maybe I'll get to ten characters maybe one day so so this is my speech alright I think I'm done it was a long minute and now we can move to Q&A and don't worry I always I sometimes don't listen to questions so answers will be decorrelated I can continue my speech all right so don't worry to end but you won't notice this one thing I learned during my book tour of 2007 when the Black Swan became a best-seller I realized that when a journalist asked you a question and you listen to it you feel obligated and usually they're dumb questions about journalists you you have to answer like CNBC journalists you have to answer alright if you listen to it the best things I daydream when they ask me the question I look at their face I vaguely have an idea what they're talking about and I answer randomly and it works beautifully nobody noticed these are the viewers I did that last week with CNBC the perfect don't listen to other talking about except very vaguely so I realized that when people are focusing on your answers the question doesn't matter much and and better have the illusion of having driven the conversation rather than me it's a lot more fun so I'd rather go to that format where you ask me questions and we have time till this rolls out of here and and we can I can answer as a plus I have some effort isms if you don't have enough answers and maybe some efforts move to just you know impress you guys with by literary orientation okay so let's start with Q&A okay who's asking me but I was accused of it's too cute to say that Black Swan author had a hand in the destruction of markets the flash crash and protect the structure no worse in civilization a lot of things and I was sipping wine like I was in Saudi Arabia and got to Dubai and I've developed an obsession for Lebanese wine and someone provided me with Lebanese why now sipping Lebanese wine in Dubai and I couldn't care less about what's happening in markets of course we you get phone calls if you are in a market if you are involved with a hedge fund and that's the hedge fund is a baby of my old hedge fund it's not real hedge fund it's a firm that just buys out of money options because I have this idea that the only way you can understand the world is you have something at risk plus life is very boring if when you wake up in the morning you don't have a screen to go to all right so to look at what happens all right so and so it's good to be involved in something but I I don't have enough interest in details of transactions so I'm completely immune from from burdens of details of transaction I have no idea what they traded but I know that we're in a business of buying puts almost every day okay just like you're instructing business so you have trucks you know on a road every day all right now if one of your trucks is on a bridge the last truck on the bridge before the bridge collapses you're definitely only The Wall Street Journal would be interested in investigating why that truck was there okay so that's what happened with the flash crash we were one of the last buyers of puts before the market collapsed so but we do that for a living okay so you don't look at the buyers at puss you look at the structure of the market capable of collapsing under the weight of selling which means that the market is fragile that's that's the idea so did I answer your question or no all right so sorry that that my metaphor is when you have when the bridge collapses you the first phone call should be to the engineer and you know of course angry phone call you don't call the last the owner of the last truck that was honest okay that was my that's my idea so plus so I the not a plus but it's very nice to portray me as a professor Moriarty okay extremely enigmatic you know living in a pneumatic life hiding in places and having a hand and the destruction of things it's very nice the trigger of like someone's it's a Black Swan author caused Black Swan is it but unfortunately reality isn't as romantic at that all right vastly more boring is a good point but I disagree with the notion of tipping point he's saying that volcano appeared to be like a tipping point I don't believe in that notion of tipping point it's very good in bookstores it's but it's not to me it's an exposed idea because ahead of time you never know what's the tipping point you know in history books like saying sorry it was a tipping point for the first war okay so that thing is sort of buff butterfly in India concept there are a lot more butterflies than events so you're not gonna you know study every butterfly ahead of time and to me Sciences perspective not retrospective because we have hindsight biases but I agree with you the as some as an illustration it's just like my story of the New York having someone wants most to wash his hands in New York in August 2003 when you have a blackout and realizes how vulnerable we are to technology we just realize how vulnerable we are with that with that volcano in Iceland but whether there are many more problems particularly one coming from Iceland so let me illustrate an end that edition of the Black Swan my idea of what has happened over the past twenty five years and why were a lot more I would say lot less fit and the governments and universities are a lot less fit to understand what's going on than they were 25 years ago the world has gained in complexity while incompetence has arisen a lot more so let me goes with that points very quickly and why I have one of my tweets all right but I call them aphorisms because I mean I I put things on Twitter I have no idea what people put there except when they send me messages so I'm not into the culture of the place so one of them is every 10 year there's something called Moore's Law every year computational power doubles so my my my my effort is amaz every 10 years collective wisdom degrades by half you know I okay let me start 25 years ago they invented something called the internet agree and we started to have experiencing a rise in complexity from the internet the planet started getting smaller the best insight on the results of that came to me from gentleman Nathan Myhrvold who explained who gave me what I was discussing it with him and then he sent me that paper who got me into this notion of something called area square law some name like that and it tells you the following you have a lot more species per square meter in islands that you do in continents so in other words the diversity decreases as your space becomes larger and that's an effect of what I discussed in the first Black Swan the first additional Black Swan as the result of globalization is you start having more clustering in other words think about the scenery not in terms of species but in terms of languages now you have a lot more people on a planet who speak the same language badly of course but English as like I used to call Citibank English but I don't verified too much by sticking in the name of Citibank by the time they were not bust so the whole planet speaks bad English you see the whole planet reads Harry Potter whereas 100 years ago we had more diversity okay and you had local poets and local languages and now the whole you know a planet studies fraud called portfolio theory or stuff like that so here you have this clustering that has increased thanks to the Internet the good you know if you're lucky and you have a winner-take-all effect and you're in California and you your name is Sergey Brin or something then you have a company that dominates the world all right and anyone would have dominated the world it's not them but if you write a best-seller and experience that although in a modest way that now everybody talks to me about black history you know everybody reads back swans I see them airports and crazy places all right I saw it because it sells a lot more overseas by the way than here per capita strangely so you can sell you can have a planetary phenomena like the Harry Potter read by every trial on you know almost every child on the planet sources some obscenely large number so we had the rise of that complexity exacerbated by globalization and the internet now things run very smoothly under these conditions except when there was an accident bad things can happen at the same time we had a rise of leverage now just talking about financial leverage financial leverage is only five times where was in 1980 which is very dangerous but operational leverage people have no slackin systems people are over optimized companies are very large so it means more fragile to contingencies and you get squeezed let me discuss two things let me discuss first the notion of operational leverage or operational optimization what I call optimization I was in Istanbul as I was riding the Black Swan and I walked into the room and I wanted to download the hate mail I usually get because the only interesting thing you know love letters and stuff are boring so you know but hate mail there's some diversity there so I want to download my hate mail at a time so I go in and plug my thing it doesn't work I call up a receptionist okay with technicians all right oh you're in room 13:05 yes yeah I know yeah no should be working okay the guy had an Indian accent before I hung up I told him do you a lot of Indians in Istanbul I can understand why they imported Indians all right he said no no I'm not in Istanbul all right so everybody's in Bangalore which is a lot cheaper probably except if you have a problem in Bangalore all right and you don't know the consequences of the things you know percolating through a system okay that's a complex system so that's operational that's optimization it means you don't have redundancies you go for the thing but now let me talk about financial in the financial sense say I have $100 capital and and I have a view of the future that I'm gonna you know I'm gonna be able to earn 8% returned from my great idea I'm gonna have some special light things that people can eat before the house flub and after the house well some kind of crazy thing I'm gonna earn 8% return okay with a high degree of certainty attached to my forecast I have two options I borrow against you know at 5% okay therefore I borrow 5% or an 8% I'm leveraged myself crazy or if I'm skeptical I can just not borrow but I'm gonna have a smaller project so if I'm you know if I'm successful I'm gonna make a little bit of money not a lot what would you know someone what would we do when you borrow it means that the the borrowing maps one to one with confidence you have about the future okay but it's a lot more efficient to borrow anybody who went to business school learned by borrowing okay so that kind of is more lot more optimal but if you're right if you're wrong it's a lot worse so of course people are gonna be encouraged to borrow what the same thing can be translated into the way you operate with your inventory and all that okay if you had no glitter everything is right if you have a glitch well you know you have a shortage you have to pay up for something and you get hosed so the the problem of course is that we had a rise of that coupled with the rise of complexity of course what can happen the volcano is nothing is what happened in 2007 things started unraveling and of course the thing needs to collapse but that's part 1 part 2 of the story is that nobody in Washington seems to know that's the problem nobody seems to understand the cause of the problem is the rise of complexity degradation of predictability hence you have to have a sustenance system a lot more robust so in my paper and my edition I also ok let me tell you one thing when I came up with a Black Swan a lot of academics thought I was an idiot alright because it was on rigorous and sold a lot of books when you sell a lot of books you automatically it correlates to being an idiot so I then I started publishing things that I had been writing for 20 years in journals refereed journals and they started to shut up okay they stopped addressing it I started addressing things on limits of computation probabilities things on on stuff like that but among the things are published is one thing on size Y size causes nonlinearities okay the same thing can be extended to specialization anybody who learns about specialization doesn't understand anything about risk because specialization causes you to be lot more fragile you know you had this theory I don't know how many of you went to economics school how many of you studied that ugly thing alright so he studied by Ricardo that it's more efficient to comparative advantage for one country to produce Klaus the other wine alright which is great but that model if you perturb ate in other words say they're gonna have a fatwa against wine alright in America you know that would have new president and president have a fatwa against wine what happens to your specialization or at the optimum malady of the specialization alright so it makes you less robust to changes in environment and and mother nature is vastly smaller than then you know economists visibly and then biologists just like the economy smarter than economists so organically things develop in a way to be robust they face stressors and they become robust and we humans have been messing up this thing with utopias was a physical utopia or economic utopias or anything else just like economically we go bail companies we make him less robust I make society less robust physically we take antibiotics so therefore going to be less robust to the next epidemic okay with fried realizing ourselves we have air conditioning all the time so it's fragile Rises your system because you can experience thermal vibrations which for which remained and and stuff like that so my concern is how to increase robustness in society and what these models we study at school due to that robustness and in fact almost everything in economics makes you more fragile whether the tools you study in statistics because everything is based on a bell curve but I'm not going to go through that I was tired of the concept this or the other ones now next the thing that is shocking to me is and that's my new work part of my new work isn't so much whether something is right or wrong is the fact that how come something can be deemed as wrong by individuals can be and and considered as true by could the collective okay if you take a cab driver a cab driver knows that you can forecast okay that you have to have a buffer but if you collectively put people together they started leaving a stock market or kind of lunacies okay and and all kind of stuff this is what shocks me about it though so Fat Tony has a saying it's easier to scan people with billions and scammin with thousands and lot easier to fool the multitude than full a single person and we know from social epistemology from contagions from something called informational Cascades that this is entirely true so you have here you've had over the past 30 years a clustering of opinion in academia and it ever since dominated but it's like almost the same economist and who's wrong by the way so and you supply them with the truth it's like your statistical method don't work in the tails hence robustness you can't compute these risks because I'm uncomputable you supply them with the fact that you can't forecast don't let people be suckers by relying on a forecast area supplying with all these facts and guess what you get nothing but this is one known in medicine and medicine it bears the name translational GAAP like it took 200 years for doctors to shed to stop killing patients because if you have pneumonia and you multiply your chance of death by 4 if your blood you know you know and bleeding was a standard procedure they bled you first and then it started conversation that was and no doctor wants to do and I think that other doctors didn't do but and they knew they would killing patients individually you see but that was the profession it's the same thing in economics same thing and forecasting the IMF never got anything right the last time I had the nervous nervous I had a angriff it was number 2 of the IMF some schmuck called dr. Kato I'm on a record here so so now anything I say about public affairs in private is public that's my my ethic professor mr. Kato was in Korea presenting the poor Korean 2,500 people in Rome was the forecast by the IMF for 2010 11 12 13 and 14 okay and and my my rage came from the fact that mr. Kato showing your forecasts for 2007 and 8 and 9 made in two thousand one two three four five six have you done that you'd realize that that's totally unreliable but guess what he's made two forecasts that's their business he's not going to stop the crisis is not going to be you know it was safe what's the crisis alright just like what's the deaths of a million patients right to stop them from their methods that's the problem of stickiness it's called institutional stickiness Mother Nature doesn't do that that this way mother nature kills it doesn't have tenure so it acts by destroying not by teaching or preaching all right so and and what I want when I did my model of a perfect society it would be something in which people like that would be destroyed naturally organically now so institutions keep things around okay so the end the problem is of course I had these poor twenty five hundred suckers taking notes on his forecasts okay thinking they're real and now we are suckers because we have Obama with his office of management and budget have you heard of that okay all right how much the forecast does someone work for him here okay how much does a forecast deficit for next ten years how much that's our forecast the forecast it will start with five and seven trillion okay ten charlie take the these guys the same environment in Washington was forecasting oil prices 25 years down the road at $25 a barrel in January 2004 and then had to double the forecast six months later 425 and didn't tell anybody look we cannot got a forecast in oil prices all right the same people who asked him what the forecast was for a deficit made in 2007 okay it's a small little change in Assumption say higher interest rate and renewing the debt you can make that number go to 40 50 60 trillion people don't realize that okay so my idea of a society I have a and I put it in any addition to the Black Swan is I have a perfect society that'll be robust you have to have no debt less debt than we did in 1980 you can't function because of environment less forecasts of all now how many individuals follow that policy alright by having cash in a bank you should for every person I'm sure shoots for a positive balances and others for surplus and you end up sometime with a deficit because of our foreseen circumstances okay now why the does it sorry I have to be does the government shoot for deficit okay that's I don't understand okay the other thing that that that is shocking here is the irresponsibility of making future generations pay for your mistakes future generations are paying for your mistakes whether you were polluting today polluted but we don't understand the climate by the way so people pollute and then later on some schmuck is going to come up with a model say oh yeah this product is bad it's ex-ante we should know that mother that that mother nature knows a lot more than climate experts okay and just like the human body knows a lot more than doctors and the economy I mean organically knows more than than economists provided you leave it in its own habitat so we have a we have a severe expert problem and my platform is for society in which these experts can be frauds all they want because they are I mean there are seen no difference between mr.kato and you're paying you know his salary whether you're from Tanzania or Lambeth or Mongolia or US you pay this is international civil service so you pay I don't know maybe two dollars because it's very rich it looks rich or two cents for you go to a salary all right okay so you're paying the salary of someone destroying the planet you get the idea so we have but there's no difference between them and astrologers so how can experts so this is my real concern is how can you have pseudo experts less so long thought about it I said well you know what you cannot stop people from being charlatans what you can't stop just like you can't stop markets from having collective you for years whatever they want what you can do easy its build a system in which people can make all the mistakes they want without endangering others and it's so simple that blueprint is so simple collapse at that not too big to fail no government saving Citibank okay no stop-loss for Goldman Sachs on part of you guys if they lose money who were stuck with the bill if they make money then they're arrogant and stuff like that it has it has ten points for a Black Swan robust society and it's in a book so I'm bored with this let's move on to more interesting questions right he that's a very good question is there gentlemen in Boston and never had the privilege of meeting but who had the best understanding of this Orlov is he here or not here okay sorry Dimitri Orloff he he you know considers the the robustness of social breakdown he didn't doesn't phrase it this way but I realized he did great work too late you know I don't have mention of his work in my book but it has covered it too late but Orlov explains the following the u.s. is built around suburbia okay your friends are usually friends on Facebook Russia had turmoil but Russia your friends live in the same building and and three people have three generations and even to have an activity that males and females like to do literally in private they can find the privacy be it so they do it and stairways or stuff like that so to tell you how there are two things that helped Russia an extremely bad housing policy which means people have been stuck knowing each other for three generations all right so you help each other at times of trouble there's a library thinks you know it's not strangers and the second thing is what all law says that one caller is in Russia it because Stalin tried to optimize agriculture and failed and you know he had to kill a lot of millions of farmers that was his war I mean from the kulaks that was a war of State against farmers so every it's so inefficient that around every city you have all kinds of products there to support the city in America we pay nine calories of fuel for every calorie consumed is to optimize so break down or more vulnerable than Russia for example the places that are less optimal okay the perfect place would be Syria they don't even know there was a crisis they have know that nobody would lend them you see so so and and they have good food and nice mountains and stuff so you have to imagine what would happen yes III think is to me I saw the war in Lebanon and so how you can hit chaos rather quickly but in Lebanon the breakdown of social orders was slowed down by this familiarity whose faces you see every day so you had that tribal help so nobody really have a few people starved and during the war whereas here your friends on Facebook I'm gonna have the emotional drive to go support you you know it's just drop you or something or stop checking their mail you see a chap checking their other things so it's a different structure suburbia is not good so there may be in case we're driven to break down social order I think that some countries are more robust than others so if you have Russian ancestry I would suggest you know you know where to go I'm gonna lie back Lebanon alright so simple because they've had problems before and some places are more robust than others now second second thing is they're high risk of break down social order let me tell you what people don't seem to understand I was in Athens just by complete coincidence a year and a half ago not this time you don't have to go on to start writing and they were writing and reminds me of my childhood I was arrested at the age of 15 throwing the slab of stone at the policeman okay and I was rioting but it looks like I mean I found the cause later either wanted to write it was so exciting to write with your friends okay and and and of course I was arrested and caused some problems with my family because for a lot of reasons so had to be punished more than others because my grandfather was Minister of the Interior who sent the troops okay so it's simple so when his grandson was arrested you can't really have to spend more time in jail all right and stuff so it was it was great but it was exhilarating to riot okay so when I was in Athens the year and half ago I saw these people riot things that kids were writing for to write and it was so exhilarating just like May 68 just like California in 1968 but made 1968 in France was prime thing right where there would go burnt cars or whatever you have this utopian drive from within to just riot okay and and you feel alive and it's so wonderful and it was arrested ecstatic to be arrested because my friends will no say I became a local hero you know as you know I I was 1516 and and then suddenly you can get the date that 20 year old can get because you were arrested so this to me tells us where we're having okay with generations have been deprived of any heroism hero you know spirit suddenly rediscovering it so now we saw again what happened in Greece but there's something more vicious the only way we can pull out of the problem two years ago nobody identified the problem had one solution collapsed that okay of course I was saying it but I'm tired of the all told you so all right so let's move on but nobody says you know nobody saw it then two years ago the now they're seeing what it needs to be done belt tightening because it looks like people read some things got Cannes Cannes was smart but they're usually kings in our Foster's because they don't quite understand that the whole notion doesn't work on the high uncertainty so whatever equation you're using my I'm trained to perserve eight stuff okay so if you perturb it Keynesian policies under Eocene blows up okay but visibly you're borrowing money you don't have now everybody's more money that they don't have okay now the ten trillion who are you gonna borrow for other Chinese the Chinese have two trillion okay two trillion all right hurry good but now they're borrowing from you from people putting the money in Treasury bills but these people are dying right or running out of money so we have a problem with with what needs to be done what needs to be done of course you're gonna ask me to tighten their belt but look what's gonna happen take Greece they're gonna riot and everywhere in Europe they're gonna riot because the kids are gonna say why should I pay the price for mistakes made by those bankers so they're gonna go burn I don't know if you own a Rolls Royce I wouldn't own one okay you try to have a non descript car if you can that's what I suggest you say and things like that so I I suggest that to lay low okay have gold in your basement and stuff like that and go to Siberia if you have friends over there something like that but I mean the you can have easily I hopefully we won't have that problem but if we have social breakdown today the world is more fragile so that volcano is nothing is peanuts what what can happen in the internet we don't understand the Internet Pakistan shut down YouTube one day YouTube worldwide went down we don't quite understand what these all these interaction what can happen in one place or the other so I'm Greece is a small thing it's 2% of two and a half percent of the European Union which is nothing but so I can expect here to have social disorder sympathy is so simple the use would say look we're paying the price for bankers it's outrageous and then go after hopefully beat up Larry Summers I don't know I didn't say it right but beat up Bob Rubin Bob Rubin I mean sorry or something like that it's stuff that kids like to do and from there it may be generous now what's the Society is robust to that it's a society that very quickly recognizes all right and start furnishing and as always the Obama instead of favoring Goldman Sachs guys and stuff like that you go in and start punishing to show that he means business and immediately start tightening right the belts by saying we adults adopt some idiot land to another idiot there's no reason why I should transfer socialize those losses those who made the mistake should pay but they're too scared of the consequences themselves the only person who seems to be aware of the problem today is David Cameron any okay yes we have a question in the back well I mean I don't know I mean sure there is but I I go rule I'm not my specialty is not robustness it just um came to it okay my specialty is the inverse of robustness but I came up with seven or eight methods not meet that seven or eight messes and I'll give you four for portfolio robustness and I can generalize okay you start playing with the parameters okay take value at risk or a method like that you start playing with the parameters and C or the the just by perturbing the parameters how much the output changes and that gives you an indicator how robust you are to value at risk and this is how I came up to with my barbel strategy because if you perturb eight if you have 75% cash and vernier Estelle's is the probably the probabilistically assess risk of losing more than 15% no method will make you will show you will show any difference so that's ultimate robot robustness and this is what I mean perturbation of parameters and also change of glass that change of class of distribution it's in tail fat tail and stuff like that but there's a general theory top-down I don't know I don't know I don't know there can be one of not spending time on this and spending time at identifying fragility now how to identify fragility to me is all linked to small probabilities what I did is I did something called four quadrants okay my specialty is tails of distribution is rare event and the role of rare event that's my lifetime specialty I had no other specialty and a little bit of biography I was a trader in 1987 with some schmuck MBA which doesn't teach you anything and I saw no I discovered in 1985 some that the tail events could matter in 1987 I decided to become a scholar of tail events okay so I had to go spend half the time in psychology wise people don't get the and the other half in the empiricism of tale events okay and let me tell you what that my discovery reframing my black swan is that there's some domain in which tail events play a larger role than others type 2 type 1 domains and the second thing there's some exposures that are larger to tail events than others okay so you don't have to answer acquire the the first the previous question so here for example I'm gonna give you an idea okay if I'm operating on a patient okay either I kill him or I don't kill him I'm a doctor okay but it's not like I'm gonna kill him ten times you come in once so the outcome is very binary it's and it doesn't it's not impacted by tail events on the other hand an epidemic can be impacted by tail events and epidemic can kill a hundred people or a billion people or maybe six billion people you see so a war can kill a lot of people in a bet with a friend of $1.00 okay regardless of the distribution is limited to its incident doesn't as insensitive to fat tails so had my three quadrants decisions that are sensitive to fat tail decisions are not sensitive to fat tails and then up top I had distribution that have fat tails distributions that don't have fat tails sorry to get technical with this and then there's fourth quadrant if exposure to fat tails and distribution that have fat tail and in my ideas get the out of there all right however you can that was the point all right so sorry for is it you have to clip alright okay so we're not allowed to curse on TV is it live or not live it's not live okay so no that's what they telling me every time I go to the studio right the yeah so get out of there okay so simple so how do you get out of there my friend Terry here runs a portfolio he just goes into cash caches and sensitive to probability distribution it doesn't vary because you know rarest cash all right I'm from Lebanon so my numerator is gold alright so whatever I haven't gold is insensitive to distribution and stuff like that now can you hedge everything that way no I cannot have the risk of epidemics I can why I can't hedge the risk of epidemics I can't unless you stop airplanes from flying okay because if airplanes transport people with venereal diseases and other stuff like that it's very inconvenient things so you can't you know you cannot so epidemics travel now much faster than it did before and of course the they're fatter tailed them before because the whole planet now is connected stuff so that my ideas have to get out of the fourth quadrant and Finance is simple very very simple in economic life is very simple to get out of force water okay no too big to fail no big impact and the metaphor I say is look at mother nature the elephant if I shot an elephant no impact on ecosystem if you shoot goldman sachs god forbid okay someone shot goldman sachs it'll be a big impact on the ecosystem you see so goldman sachs is too big hedge funds are okay because if you saw the hedge fund no impact on ecosystem that's sort of like parameters in finance is very simple outside finance I don't know all right I I had a few speculative ideas now do we need to measure what's parameters I don't know but there's a trick I used in the past about sensitivity to parametric or distributional changes that gives you some idea yeah okay she's asking about public policy preventing too big to fail let me tell you what we'd like to do the governments are the ones who why the government regulation is not the penisy because regulation tends to make Goldman Sachs rich the rudest Raiders I mean my colleague Richard because regulation all right you find some expensive lawyer and you go around and of course it makes lawyers rich so the the I bet some regulation can work I'm not against but don't think it's a panacea regulations what God was here we had regulations are regulating like models they say oh the firm's have a bank and use this model to measure tail events that was plain I knew that I spent 12 years in the flaming and of course they were kept using it called via risk and of course they blow up and they still use it today by the way and regulations a lot of people say oh you can own triple a paper so you had some trader put them in giving garbage and find ways to call it triple a so okay and here you're asking me your question is if government can stop too big to fail you don't have to you all you have to do is remove the advantage given to the big guy or stop favoring the big guy in 1982 had you let Citibank go bust we won't have Lehman Brothers today you should let him die and go to the funeral okay that's the way to do it okay we bailed out Detroit I don't know if you remember Chrysler we bailed them out start bailing them out and they keep getting bigger we've been bailing that's just the idea of bailing out a company and of course when we bailed out in 1982 the earliest marks guess what they said it's so unamerican we'll never do it again when you someone say we'll never do it again it's a confirmation that the guarantee that they will do it again right like someone's saying never again did one of my aphorisms you're guaranteed repetition alright so and of course if you bailout someone he knows it's just like a kid you know you let him off then they know they can push the envelope a little more so just not bailing out is already good good enough but let me tell you and other things I've been talking to the current administration about why is it that hairdressers for example and massage professionals and small grocery store owners okay are never bailed out okay but this system is very robust they have a huge disadvantage to the big guy I was at the public library with arguing was not Ferguson from Harvard and there was that poor lady the chairperson of PepsiCo and and she didn't know what she was getting into okay sitting between the two of us her argument she used sue made a mistake she's in argument I employees we have a thousand people so therefore she should have a say you see how dangerous it is these people and Ferguson of course who knows his history immediately picked up on the fact that that was in marx and engels okay whether you're libertarian or a communist you know you're gonna have collusion between state and large companies and that's Europe okay collusion and large companies are like just an integral part of the state okay and of course the state appears to be smaller but they have all these satellites around them okay so I looked and we looked at her and then of course we you know we realize this company deserves to go bust because they're hijacking the state employees 300,000 people okay whereas individually grocery store owners hairdressers prostitutes massage professionals all these poor people okay they're not bailed out okay so you see the the restaurant owners okay so you get the idea of what your state should do the state should stop giving advantage to the big and a big identity of cephalus roy don't give someone a monopoly but at the same time don't bail out anyone and look what will happen because companies if you look at history of companies they love to self destroy themselves by getting my elephant you just let them the minute so let's that's all you have to do are we done great thank you thanks a lot for this you

Channel: GBH Forum Network

Views: 152,399

Keywords: Nassim Nicholas Taleb (Writer), Black Swan, history, 9/11, Google, risk, psychology, economics

Id: 3e6UKCJt-g8

Length: 51min 33sec (3093 seconds)

Published: Tue Sep 11 2012