Nassim Taleb on the Benefits of Uncertainty

one of the other things that you touch on in the book counteracts is sort of this common phrase we hear about investing in Wall Street all the time which is that the market hates uncertainty and one of the cases that you make is that unser is a necessary thing and maybe even a desirable thing it's actually a immensely desirable people in trading understand that outside of training they don't and let me start with an example of two brothers all right the careers of two browsers where you realize what variability in volatility helps one of them and from there we can translate into markets in the book I have the example of two brothers one who is a taxi driver and his twin brother who was actually even born in same place Cyprus who's a bank works in as a as a clerk in the bank doing something that earns about the same amount of money and they both lived in London same suburb the taxi driver has a vault of income the the one employed in a personnel department has a very stable income he's been employed the same Bank for 38 years and you know you get a gold watch every time right yeah right so the taxi driver has very small risk of ending up with zero income being unemployed because he adjusts all the time every day he's fit to the exact needs of the environment every error he makes every you know wasted afternoon teaches them something about neighborhoods so he converts error and and into his variability converts into activity and information complex system and I think organic come any case for the environment via stressors stressors teaches you something this is this is how we learn not through lecturing now his brother has no idea by the way that's hilarious that you're a professor and you're saying we don't learn through lecturing how do you have you pass that on to your students yeah I mean I actually teach students along that that optionality is vastly more important and intelligence and I mean they the other academics don't like it and as I can tell from I can predict the book review of my book and the emotion in the book review based on the name of the reviewer I don't have to read the reviews I can tell you exactly how angry and how was it going to say alright based based on this idea of and anyway the second one the second brother therefore is much more fragile so let's compare two political system and then the economic system Saudi Arabia zero political volatility zero zero variability compared to Italy where you have since the war the Great War that's a great war second Ward had was seventy sixty five seventy five I don't know how many government that nobody counts anymore Italy's much more volatile Saudi Arabia much riskier it was the same thing with markets you know we have tried currency control exchange controls everything it destabilizes markets our information the problem in finance is that people want to fear volatility so they do a Greenspan a Greenspan Rundgren somatization is you try to artificially stabilize everything and just like a forest in which you repress every small fire to stabilize the big the flammable material and hidden risk accumulate and then the big one is monstrously bad so this is what happens in economic system you have to learn to love volatility for the sake of the system because variability if you embrace gives you information that makes you adapt very quickly and of course protects from big these big big tail events and you can apply to so many things you know in like in life you can have no variables in your life by spending six years in bed hopefully raining now that have all my books and complete works I have 600 pages of maths or so you can probably do that I would take me about six years to get it well or you can read this I have the soprano entire episode but anyway spent six years in bed you had no volatility now what happens to you when you get out of bed and someone invites you traffic you your bones you know go break a limb very easily you both would be brittle and and the first term you know make use you may you may not survive a subway ride particularly in New York so this is this illusion of warning there if you embrace vault you get a lot more out of it than if you fear it and and I know know that people who invest in fixed income instruments and sell tail options their income is so steady because they want steady income and all these people end up blown up and I know I only lost money once like the banking system like a Citibank 1982 they blow up lost everything you know money beside a bank lost everything made in history banking and one said only we only had one time quarters you know that's what they say and it happened to them again of course in 2007-2008

Channel: The Motley Fool

Views: 6,321

Rating: 4.8823528 out of 5

Keywords: Nassim, Taleb, on, the, Benefits, of, Uncertainty

Id: Xtsyxtx6r30

Length: 5min 4sec (304 seconds)

Published: Tue Dec 11 2012