Reflection on a Crisis (John Brockman, Nassim Taleb, Daniel Kahneman) | DLD09

really one of stuff here it's one of think what it's it's an amazing panel it's I have for me I hope I can follow this panel but I'm I'm so sad thankful Jon Brockman that you brought together this too extraordinary man John what made you to do this pressure dee da dee pressure pressure wait oh we pushed him so hard this is true actually yes thank you so much last year John brought craig venter another extraordinary edge moment you know John is doing edge dark beside many other things and now is this panel is a premiere it has never happened before this dialogue so enjoy j-jake Nasim yeah great thanks we have water here no water right here how you gonna see in the middle see that so yeah ready sorry about that a picture for Mac Mac's thank you thanks for coming I'd like to read a couple of sentences written by Nassim Taleb around 2003 to 2004 or 5 thank you thank you everybody worked starting globalization creates interlocking fertility while reducing volatility and giving the appearance appearance of stability true we now have fewer failures but when they occur I shiver at the thought the government-sponsored institution Fannie Mae when I look at the its risks seems to be sitting on a barrel of dynamite vulnerable to the slightest hiccup but not to worry their large staff of scientists deemed these events unlikely this is from now seems quotes and warnings that imbeciles choose to ignore and I seem as the author of the Black Swan he's a scholar of extreme events and randomness and he and dr. Kahneman who I'm about to introduce work together and talk together we have lunch lunches together discussing hindsight bias is the illusion of patterns perception of risk and denial now if you've sat in in some of the panels here you'll realize there's a lot of denial going on in Munich and Davos will be very interested in what these gentlemen have to say Daniel Kahneman of is professor of psychology at Princeton he's generally acknowledged as the greatest living psychologist but don't take my word for it according to Daniel Gilbert Harvard psychologists and author of stumbling unhappiness Danny Kahneman is simply the most distinguished living psychologist in the world bar none trying to say something smart about Danny's contributions to science is like saying something smart about water it's everywhere in everything and the world without it would be a world imaginably different unimaginably different than this one Steven Pinker goes a bit further he says it's not exaggeration to say condom is one of the most influential psychologists in history certainly the important psychologists live today he's made several contributions over a wide range of fields including social psychology cognitive science reasoning and thinking and behavioral economics the field he and his partner Amos Tversky invented and for which Danny was the word of the Nobel Prize in Economics in 2002 we'll start with Nasim I will try to stay out of the way and you'll be able to ask questions before we add yeah this conversation is a conversation that started in Rome in June of 2004 and we had a problem it that we had the best mozzarella ever know that you and I yes okay and it took a while to find that restaurant we we stumbled upon the restaurant accidentally so we finally discovered whose restaurant it was that had that beautiful mozzarella but the conversation kept going on now for about what since 2004 on a regular basis I don't know how many lunches and how many dinners including a car ride to Maryland four and a half hour car ride in which we got lost No so you know conversations make you are not very compatible with driving in strange places anyway so this is we're synthesizing a long conversation about ideas I initially had on rare events that were puzzling me why is it that this problem is staring at us and people are not acknowledging it now what do I mean by the problem of rare events very very simple rare events are rare therefore you're not going to see them in past history so you have to invent a story to understand their properties a hundred year flood is not going to be visible when you have ten years of data however rare events can be massively influential massively consequential in some domains like for example in the book publishing business a few authors make up the bulk of the profits in pharma for example a few drugs represent the bulk of the profits of the entire industry and you have about a million to two million hitting the market okay and maybe five or six make up most of the profits so the rare event is massively consequential in some domains now that the banking system was massively exposed to the risk of rare events and people were making up stories it was a puzzle to me it was a puzzle I mean I was I was I could not figure out what was going on there why did people not want to accept that they're taking massive amount of risks and where why were there inventing theories after I ran into kind of Dani things got a lot better in my life my life improved markedly visibly I had to rewrite fooled by randomness nobody noticed and then I was writing the Black Swan and sure enough Danny has a lot of explanations of why is it that people do not understand the role of rare events in society and what do people take exposures to them and it's very simple society would be a lot better place if we accept that that some events you cannot predict with any precision let's not take these risks so I that's my point this is should I explain more that's my point and then danny has explanations sorry I thought you'd be a little more ok so what did I discover and Danny's work that can explain to me what was going on with these people taking massive amounts of risks the first thing was that and I remember that was in Rome that they put before the mozzarella before that magic mozzarella right the Danny came on stage and told the crowd if you think people take risks because of bravado and because of the remarkable ability to calculate probabilities you're wrong he had shown in his work that if people take risks is because they're both ignorant of the odds and cowards and he shows it ok that's the first thing he shows it with his some experiments he did in which when you make people aware of these risks they're so cowardly they already estimate these risks one extension of his work done by other psychologists is that people pay more for terrorist insurance than for general insurance that includes terrorism so he showed effectively that this risk taken by banks and stuff like that is not boring because people are remarkably good at assessing risk simply because they're fooled by them so I call that and the Black Swan people love to cross the street blindfolded so don't cross the street blindfolded and worse do not drive a school bus blindfolded as Bernanke did so that's the first element of psychology I found to explain what was going on with the risks were taking in economic life so that should I should I say more or more yes ok and and and there are few things I have not been we've had a lot of conversation visibly typically at 12 o'clock sharp except for once all right you definitely say more than it's a mental jetlag and surly doing you see usually we start our conversation much later you know in New York I'm the other element that I found and Danny's work to explain this you see I'm focused on rare events when you bet against a rare event you tend to make small gains steadily and eventually you blow up now why is it what's the psychological explanations for that phenomenon why do people like to make bets and make pennies pennies pennies pennies pennies pennies in in my book I say that they tend to go to eat like chicken but once they go to the bathroom they go to the bathroom like elephants and that's what happens with banks why do people accept these kind of payoffs well the first explanation that they're ignorant about the odds but the second one was explained in his prospect theory the beautiful theory that tells you the following I'd rather make a hundred times a dollar then make one time a hundred dollars any minute this he calls the convexity of the utility in a positive domain the profits you'd rather make a lot of small profits than one big lumpy profit on the other hand I'd rather make a huge loss at once rather than have incurred a lot of small losses and so utility that of negative hundred dollars is a lot higher than one hundred times utility of negative dollar and that he calls the convexity of losses in a negative domain so this is a second explanation I found my work coming from Danny of course they're about twenty-eight more but I'm gonna summarize and this can explain what I call the mechanism of bleed versus blow up why do people not you know incur small losses to make a bundle what is it referred to make small profits but that's alone with a stochastic payoff time and eventually they're going to lose everything in one block that's why why do people accept that bale well visibly Wall Street has another problem is that typically when you lose a lot of money it's not yours and as we see now we have backward capitalism where it's capitalism for the profits of Wall Streeters but it's socialism for the losses in other words when they make money when they make money they private capitalism beautiful private enterprise but when they lose money it's our problem and you can open up your wallet now to pay back for their losses okay because they've got their bonuses and they're sitting on a beach okay so there is an element I would call it a moral hazard involved but there's also psychological element because you know people sometimes that who don't have moral hazard also incur that the third thing I learned from Danny but indirectly from your work is that you cannot trust humans with information you can't trust someone with information and of course he guided me to the literature over these many lunches dinners and car rides in which we get lost but but that's to me was central I was waging the war against value at risk something called value at risk that doesn't work to me charlatanism pure charlatan it doesn't work it tells you the risk of rare events so people calibrate the exposure to it it doesn't work but people say well we know it doesn't work but it doesn't know it doesn't cause any harm what do you mean it doesn't cause any harm to nonsense there is harm in giving an idiot never give a fool sterile information because he cannot ignore it and I found that and to think in his work when I went when one day you told me and of course it's in his work then he said if you ask someone for his the last four digits of his social security number and ask him to predict or guess the number of dentists in Hatton phonebook these numbers will be correlated if you ask him the questions in Reverse the numbers will not be correlated so this is another element from his work that identified with why do people use you know why our numbers harmful and and later on I called it the non neutrality of representation in other words don't give anyone a map and tell them the map is wrong he's gonna use it so these are the streets should I stop no thanks Nasim is doing something very unusual I think I mean he's best known for being very very hard on people and today is being very very nice to me and I you know I'm not prepared for that I was I was expecting him to be hard on other people enough I have a few reflections on you know on the crisis and and many of my thoughts of course are influenced by the same it is I have learned at least as much from him as he has from me for me one of the interesting moments in this crisis has been what I call Greenspan's confession and many people I think here are aware of it that you know it is actually quite striking when you see a man his age and after his life experience saying my theory of the world was wrong my framework was wrong and it is interesting to see what was his framework and why was it drawn and he articulated the framework he said that he had expected firms financial firms in particular to be the best possible in the best possible position to protect their interests and to protect their long-term survival and he had not expected them to engage in what turned out to be essentially suicidal policies and when you stop to think about this there are really two elements that are very surprising in you know in Greenspan's framework the one that he would like to give up now one is really the assumption that Adrienne's are fully rational and there is a lot of evidence clearly that they are not the other is the idea that firms are actors that firms are rational agents but firms are really not actors and certainly financial firms as we have learned are not actors there are agents making decisions their executive making decisions the interest of those executives and the interests of that abstract idea that we call a firm are clearly not aligned and if we want to understand why firms are suicidal it is in part because the agents are behaving and as Nasim indicated they are actually quite frequently not committing suicide so there is a mismatch between firms and the actors who act on their behalf and the mismatch is in part a mismatch in timescales for a firm in principle there is a long horizon people have a much shorter timescale they have to have three meals a day a salary every month a bonus every year if they are in the financial industry and so their scale of rewards is on a completely different scale than what is in principle the best interest of the corporation and we must take that into consideration when we we think about what they do but this goes a little deeper the smiths matter of timescales there is the mismatch at the level of expectations and here I'll digress just a bit into a bit of technical psychology but really not too much psychologists these days speak very often of two systems in the mind system 1 and system 2 where system 1 is more intuitive and system 2 is more calculating and more reasoning and does and it turns out that there are some experiments indicating that system 1 and system 2 develop expectations in different ways and so I almost was looking I thought of it only last night and I didn't well I couldn't have shown a picture anyway but let me describe an experiment to you there is an image that I think every one of you has seen it's a medallion around medallion and they're really two phases they are marked by a mouth and an ear and the one is looking right and the other is looking left all of you have seen this medallion an experimenter one of my heroes actually ran an experiment very simple he showed people first one medallion looking this way then the other medallion then this one again and this one again not the medallion dressed the figures the single figures the halves of the medallion and then he showed and what is typical with that medallion you only see one face at the time you look at the medallion and you see either the one on the left looking right or the one on the right looking live and now the question is what will people see when for the first time they have a conflict they could see the one looking at the right or they could see the one looking at the left if they were following what they know they would alternate so if the lastly dalian that they saw was the left one there left one they would expect the right one to come on next this is the rational thing to do things have been alternating this is not what people see you show them the medallion they see the thing they just saw the expectations that we have in our intuitive system are different from the expectation that we have in a reasoning system and typically we expect things to repeat themselves and we develop ideas about living in a new world or in a new regime very very easily I remember when I was living in California if there were three years in a row that were that the rain was there was little rain people immediately started feeling that the climate had already changed it takes about three years for people to think that they're in a new regime this turns out to be very important when you're looking at mass phenomena in in the economy the speed at which people will feel that things will go on forever they may know that it's a bubble they may know but this is like system to knowledge it is not system one knowledge and people do act a great deal on system one knowledge now nassim I would like you to describe because that's that's what I was expecting you in a way to say why why you think that people have trusted models that they shouldn't trust because that's been your big quarrel with economists and and I would like to defend them a bit but okay you need to attack them first okay the Ivan since I finished my last book I've been immersed in history of knowledge and then I got stuck in the history of medicine on the history of medicine and simply out of curiosity I'm not interested in medicine I'm interested in how people can be fooled by ideas for a long time not see reality simply because ideas are bad for you and here I quote you Danny one day you said ideas cost you money to to crowd I was present so ideas are bad for you what I call rationalism you start having ideas in your head and you start framing reality in a way that's not compatible with empirical evidence and you ignore evidence so it's called rationalism it really affected medicine for a long time for a long time doctors were killing patients and the break even didn't happen till much later than you think and actually today even today I believe that the medical practitioner at the margin kills more than he helps right at the margin all right was type 2 error increasing anyway and what was the problem with medicine because medicine was theoretical and there's something about whenever you have ideas you despise evidence whereas practitioners were heuristic based had little things so he had two medicines the medicine that came from the doctors at you know Bologna the Sorbonne and they were in a business of killing patients and their I mean if you bleed someone that he has to bleed someone and it was well known that you triple the chance of death but they did it because that was a thing to do and then you have the practitioners bottom up you know the new tricks they were called charlatans quacks but nevertheless they did cure patients on a balance I mean the medicine we have today clinical medicine of course did away with that theoretical is complete no medicine so I noticed that how can medicine fool people for 14th century because all this problem was known by the empiricists of the 3rd 2nd 3rd 4th century can you fool people for a long time and that explains to me what hat was happening in economics I Danny and I had one of Davos today and that and you can expect me to be less nice than then experiencing currently in Davos because I'm gonna not mince words you gotta explain to me why they have a profession that never replicates out-of-sample the only person who got a Nobel in economics for something that replicates out-of-sample is him the only person alright in other words I can go test here on you his prospect theory and odds are it will work I've bet my money it will work explain to me why these papers never replicate it's not that they're not replicate why why I figured out the first reason why is because economics belongs to what I call extremist an is dominated by rare events they don't have stable properties and anything that affects rare events is not computable from data and I show the paper that's coming out in a formal Journal but I put a preview on edge in which I put the data I put 40 years up to 48 years whatever I could find that economic variables about one every single piece of data that exists today for economic variables I analyzed in 40 years for example of stock market returns one observation determines one observation 80% of what we call the kurtosis and the kurtosis is a number that tells you how far away you are from normality it means everything is marked by sampling error that's my analytical is anything so therefore that is based on econometric or statistical analysis in economics is just entertainment but you don't need that piece of evidence I put on edge which looks like a smoking gun you don't need that you just look at the data and again one of our breakfasts that we had Donna 2005 he sent me to deadlock to the work of deadlock alright that lock who showed that I'm sort of idealizing that cab drivers probably will have as accurate ability to predict economic events as economists but they're gonna be much more humble they're not gonna wear suits and ties and you know they're not gonna be and you if you take advice from cab driver although it's not going to take the risks you will take if you take advance on Bernanke staff all right so therefore I kept looking at the data at economists and I was shocked number one to realize that it was a profession that even you know made claims that did not have so it makes I mean so I kept asking people explain to me what's the difference in astrology astrology sounds rigorous and they have their own lingo and they predict the same way actually economists little worse why when it comes to rare events they predict worse because I look at the data and the data messes up on rare events so it's just entertainment my particular specialty my war started was something called Value at Risk these financial models that try to predict rare events and visibly if I don't know if you own a TV you know at home or if you have the radio or three papers but just turn the TV on and you'll hear about financial crisis my opinion came from the other estimation by banks of the risks of rare events so like a pilot who doesn't know their storms okay and that came from financial models visibly the plane is going to crash alright if the pilot doesn't know about storms because they are storms out there now the economics profession was made aware of storms by a lot of thinkers started Pareto Mendel brought a lot of people throughout history but these go in a dustbin I didn't know about Mandelbrot that know he existed till I saw him in 2004 okay you don't these people don't publish in normal Journal why it's not that the financial profession doesn't know or the financial economics profession that they are rare events is that these are so hard to model they prefer to ignore him exactly like someone you know the drunk person looking for his keys in the dark corner in under the light and you ask him did you lose your keys here say no no no I lost them over there but but I'm looking here because there's light that's that's pretty much what they're doing which is okay I mean so well I just said so would you even know that the rare events about to happen your example of iceland's currency becoming worthless is something no one in Iceland for months before I was there had any idea this was going to happen no but if you look at the exposure of banks well no what I started doing progressively starting in 2003 is in 2003 journalists walked into my office with a position at Fannie Mae with a risk report of Fannie Mae and I looked at the report and I freaked out okay that was a New York Times journalist defector from Fannie Mae gave him his risk I freaked out I say oh my god they're gonna blow up so I wanted to say anybody I could from a doorman to anybody I run into Fannie Mae is gonna blow up there's fire here okay and nobody's seeing it okay when I saw it and then they countered Fannie Mae countered that they have 15 phd's the stolid the guy is an idiot they have 15 PhDs with deemed that these events are unlikely right but finally me was the only bank or the only financial institution okay you know that has risks that I saw all right so I start assuming that all Fernet other financial institutions are similar and I told myself all you need is two or three like that and the system gotta blow up it turned out that every single financial institution has these risks every single one pushed by the pressure of an economic system that want you to have study returns so financial models abetted okay what I call hidden risk-taking you take a lot of risk on rare events and then someone or you know says oh we're not taking risks were under control and this talent guy is alright alright so and we have a pH DS around with 15 pH DS right so I had to go get a PhD so people you know listen to me alright so let me continue the situation here that people don't realize by the second so I started making bets at the system the financial system was gonna go to zero that was my year to me it was clear like like you know it was gonna go bust based on that but it's all these financial models the second thing I wanted to say is that where are we going perhaps I should say later because there's I thought about it I said the only way society is getting more and more exposed to rare events because the data that I had showed more and more what I call kurtosis in other words contribution of rare events to the total with increasing not decreasing and we're creating financial instruments that were more and more complex and the system was getting a lot more efficient so that was the soul and let me add one thing here what we're going I thought about acid this system gotta blow up because anything fragile will break the system is very fragile it has to break anything that depends on rare events eventually would go bust and where did I take my intuition for mother nature mother nature does not like to be exposed to rare events mother nature built us to be redundant have redundancies have insurance I don't know how many of you have kidneys or I'm most of you know almost all of you but usually come was two of them no typically you come with two kidneys to two lungs to so we have spare parts the the economic life does not have spare parts it's too costly for a bank to have spare money on the side you see that is that is what so the system the economic system was based was becoming more more fragile because capitalism makes you more and more fragile just like Iceland till things blow up and break that's my idea abetted by financial models now you've seen and that was mild I mean he can be much more severe than nothing was here one of the points that really follows is that the models that are used in finance are Nasim has argued useless is that fair oh actually very dangerous and and the people that use the models are less than useless I'm not going to discuss the people that use the models but I would like actually I am because I'd like to explain why useless models are actually used and why in some sense it's very difficult to get by without them and as I want to say two things about this one is think of a weather forecasting system that does a very good job of forecasting weather so you know in the morning you check the radio you know whether to take an umbrella to take snowshoes the system works there's one thing it doesn't do it doesn't do hurricanes and you live in a place that occasionally has hurricanes will people use it and the answer is of course they will unless they have a system that also does hurricanes but if hurricanes are very difficult to predict then people will adopt that model system one that I talked about will trust that model because it's right they have today day after day until it's wrong until it fails to predict and there is a story that is quite famous in organizational psychology and famous organizational psychologists called Wieck told it I think for the first time in 1982 and last night I googled it and I found out that he had taken it from somebody else and not give nevermind but the story is the story I think's in the Swiss Army have the Swiss officer who sends and patrol out and they are caught in a dreadful snowstorm and three days passed and they haven't come back and eventually they come back and he had thought that they were dead that they were lost and he asked what happened to you and he said they said yes we were lost but fortunately we had a map so we came back and then he looks at the map and he says but this is not a map of the out this is a map of the Pyrenees and they tell him yes but we had a map and the the point of that story is that you know it's been used a lot since making and so on the the point of that story is that having a useless number or useless map we are so built that it does contribute to confidence and that it does make that very peculiar contribution to people's well-being and to their ability to go on so when and if we design a better system and a seam is working on a book that will have a better system for society when we have a better system it will need to accommodate people's needs it will need to accommodate the needs of system one the intuitive system and it will need to accommodate they need for feeling confident which in some cases are satisfied by things that are useless yeah I have actually I've answered you Danny in and by some coincidence on the edge piece is I'm coming up with a pro I mean I look if you take I'm not particularly more intelligent and then anybody else I know but the only difference I think that I like to take my ideas to the limit so he's not really shy so people tell me well how can you forecast better and I said no I want to change the world to make it resistant to forecast errors so it's the only time is the only way in the world I want to live in and I want by the sentence to live in and and I want your descendants to live in and humanity to live in it's a world that's resistant to blight what I call Black Swan that's the only way you can rebuild the world so gotta change the world in such a way that it's resistant to hurricane so you don't give it that you can you curse you know so you don't really care about forecasting hurricanes you're resistant to them and that's the world that should start first with nationalization of banks because you can't trust them was risk-taking they make huge bets on hurricanes in that world then a weather forecaster okay will can be trusted because so what the error is inconsequential if he makes an error so let's change that that's that's the idea it's not to try to improve our forecasting methods to change the world to only live in the world but I think what I don't have to make much you know to do a lot of personal eating there the world is gonna break and establish itself in a way that resists forecast error and and if you look at history we have had crisis in the past death for example doesn't allow you to make a forecasting error so that should disappear and in fact it's disappearing lenders are no longer lending and borrowers are bust so that is disappearing as we you call this an Islamic style of Islam it is not Islamic if you go back to Babylon very unstable that is very unstable you have cycles of debt cancellations and Julie Caesar had to fight wars to pay pay back his debt both Christianity Judaism and Islam the three ancient Mediterranean when our safety coalitions did not like that and of course in Newark we found that quote in in a Bible neither borrower nor a lender okay so you should be so we have this the the ancient world did not like debt and that started rising after the Reformation I think and and and a lot of the growth we've had today came from that now that makes you a lot more vulnerable to forecasting error at the same time let's not forget what's going on in the world that's the reason we have dld the world's getting more complex it's one layer of complexity introduced by the internet that makes a world a lot more fragile so you have to defrag relies the world we cannot fight the internet we have to find the financial instrument and let me give you the intuition in the past I don't know how many of you partook of run on the bank but usually have to wake up put your you know shower put your jacket on goes take a bus wait in line okay and then maybe you get your money at four o'clock or the next day today how did the runs on a bank take place you know how did it take place there's this device called blackberry and you can go and bankrupt Iceland in few minutes okay so you can no longer afford to make mistakes and the past we could so the system is too fragile and was fragile eyes further by Bernanke and Greenspan by their policies of health of making banja gigantic bureaucratic firms and there's one thing I would like to mention is that don't think that regulators are particularly intelligent okay regulators help banks taken risks particularly with a value at risk so what we should you know be doing is is is not encourage this because we have a facing complexity we should have simplicity with the financial instruments to counter this complexity because the world is getting more complex I think when you're designing this brave new world some of the problems that that you are going to encounter or that this brave new world is going to encounter is the mismatch of timescales between the individual and society and the fact that in the short run the person who does not invest in hurricane protection is going to be richer and the affero cane protection is very expensive very much richer than the person who does invest in hurricane protection so how to set up when people are built as we know they're built so that they they're very present oriented their system of expectations intuitively begins to feel safe after a very few a very short time what are the institution that we have to build in order to prevent the fragility that is you know that's a problem that you'll have to struggle with I have an answer for it I have a very simple answer my point is as follows banks cannot be entrusted with risk taking because I pay the bills when they lose money and the two gentlemen I will not name because you don't want me to name names the head of a certain firm pocketed 115 million dollars a former government official 150 million dollars in bonuses and left he was a hero and the government now has to bail out that bank okay the only smart people were the Swiss they clawed back the bonuses of the heads of UBS they said give us back your past bonuses you were fooling us with your risk-taking okay but so the banks cannot be entrusted risk taking because of this asymmetry okay so what you have is nationalized banks and then have freedom for some people to take all the risks they want provided they do not endanger the system in other words I don't have to bail them out so there's something called hedge fund hedge fund should be able to take all the risks they want but we should make sure Society will never bail amount if they go bust that's okay you know be nice newspaper article and and a lot of entertainment for the schadenfreude therefore the enemies but no society involvement in that so should have a two-tier system because a bank is a utility why are we bailing banks out because when I come to Munich from New York I would like to be able to access my checking account so it's a utility it's like having the right to have water in your house okay it's like having an army that is one problem the other thing is Dani there's a problem here that I don't quite understand what its domain separation how if a corporation is uninsured for losses it's gonna make $2 per share if it's insured against black swans it's gonna make it a buck 80 per share so it's gonna make less than a competitor and the the idiotic analysts at some investment bank will say oh this guy is inferior to that one and then eventually of the long run the one making $2 a share is going to lose $200 go by to go bust the other one will be around okay so there is some evolutionary elements there but there's one big question in domain and that's again happened in Rome 2004 I that I was wondering why was that people would buy a house spend a million dollars for a house so their house is worth million dollars and the portfolio is worth a million dollars okay why do they buy insurance on the house and they don't think for a second how many of you do not drive a car or have a house without insurance okay one all right okay self-insured all right how many okay now how many this very same person would have a portfolio of a million dollars and not insure the portfolio says too costly will lower my return so fine explain that inconsistency explain the inconsistency of society paying between one and seven percent of GDP depends on time in or a defendant defense that's insurance okay and you don't pay that okay to insure again stock market losses you see people so there is an inconsistency there that I noticed and a notice from a friend someone who blew up of course eventually all these people who don't have insurance will blow up typically in the complex world a person he keeps selling out of the money options for a living and he the person had before he got poor in eight million dollar house he had he was paying overpaying for insurance on his house but he was selling insurance on the other hand so there's domain what I call domain that I wrote about on a Black Swan I noticed that domain is like people going to the health club they take the escalator to go to the stairmasters alright these are two different things for them right so perhaps it's for us it's a matter to explaining to society that just like you have insurance you should spend money insuring your portfolio or make less money or company should spend money insuring themselves by having more redundancies and things like that okay in the US a new secretary of the Treasury was confirmed yesterday what would you explain to him and and what psychological tasks would you put before him that he should be considering I still think there is a big difficulty in in implementing I mean if you nationalize this is another story and then the question becomes you know the who's running the show who is running the show how much we trust them and the loopholes and many people are going to try to exploit it if you don't nationalize it is really what I was talking about earlier the conflict between short term and long term and that the scale of interest that the people are managing the organizations and the scale of interest of the organizations are very different because the people that you're accusing whose names you're going to name in Davos they remain very rich I mean their institutions their institutions blew up but they are doing very well and and in some sense it's hard to accuse them of irrationality I mean it's not because it's paying for your you're all subsidizing them there's some of them are here sorry some of these feats okay the rest those of you who didn't accumulate knows you're subsidizing them taxpayers anybody paying taxes today subsidizing people who own I mean the have networks of 100 200 300 million euros but net net have gamed the system so what what are you going to tell the people in Davos in terms of what they should do not what you know not a critique of what they've done what we should do is first of all I don't want what I was saying about three months ago when they started you know this business of nationalizing the bank is an emergency and let me tell you why you know that the bailout we gave the banks that's what the banks did with it guess what they did with it two things no no no the first first of all the paper bonuses their employees they say other key employees we need them they can go elsewhere we need key employees so you overpaid someone four million five million dollar bonuses I know I have friends we got four five million dollar bonuses right down from eight but still decent alright and the second thing they did and it's in the papers now the big scandal at a certain investment bank if they took massive amount of risk they doubled up it's not their money what do you do when you're underwater you double up the increase the risks so continue so this we don't know what you know we don't know it's it's I don't like this the situation Danny I do not like the situation I did not like it before I don't like it now and I think we have enough evidence of these people misusing the funds this is why I want to clean I don't like the semi government profits are theirs losses are ours and this is continuing and now not only that what we're subsidizing them to pay for their mansions alright so this is why I want to clean nationalization right away alright that's the first thing I say tomorrow morning I want these banks to be nationalized every single person fired the second point and maybe you're not gonna like it Danny or I am NOT I don't like governments I distrust government officials I think that the people who crash the plane the pilot to crash the plane they're still flying the plane I want anybody involved in what the so-called Great Moderation when banks were taking a lot of risk central bankers were saying oh the Great Moderation their system one was steep speaking to them and then they were inventing theories so there's a gentleman a Princeton professor who later on had the promotion right as chairman of the Federal Reserve who wrote the paper say it's a great moderation the world is becoming a more rational place which is right so I want these people out tomorrow not today not tomorrow I want them out okay and they're helping their friends that's the second thing I want the third thing and here I'm going to say it there's an organization today I'm here because I cancelled a lecture I was supposed to give in Copenhagen for an organization affiliated with such a degree called CFA to become financial officer these people teach portfolio theory like business schools teach portfolio theory and they haven't changed they teach portfolio theory all this crap that got us here they teach it to their people I told them listen I gave you a lecture from the thirty eight hundred of your members in Vancouver warning you about these methods okay I would like you to suspend teaching now I'm gonna send you to change a curriculum but when the plane crashes responsible airline companies what do they do they grind ground their fleet when there was a Tylenol killing people what did they do they will do everything from the market to investigate first you stop and then you investigate they did not like my suggestion so of course I told them okay find someone else to lecture you okay and I'm going to the LD alright so I would like business schools tomorrow morning to stop I'm calling for a boycott or any business school that teaches portfolio theory without stopping because business good curriculums have not changed they're still teach you things that don't work and as if there was side they say well you know what's gonna teach the students we got nothing else to teach them nothing there's one thing I learned nothing is better than something bad and that's I mean you're describing you are describing business schools as giving students a map of the Pyrenees basically and when they are going to be in the Alps but it matron out that you know they want that map that's one thing and the other they and you are I think giving them a system for forecasting the weather that doesn't do hurricanes but that does most of the time so there is a short term appeal to what you want them to give up and you have a problem there I think in trying to convince people to give something up without giving them a fairly specific alternative let me think I've been I've been investigating this from a history of medicine for a long time people will just hurt the patient simply because they wanted to do something and I discovered and I make that claim and I can back it up that the reason religion works in the ancient world was because anything that took you away from the doctor prolonged your life so if you go to the temple of apollo anything that takes you away from that illusion of control alright you want to have to do something prolong your life okay and effectively in america there's some you know that it took a long time to understand the notion of yet regenexx yet regenexx is the healer causing harm they don't I mean we have to study and I can only give you a drug now if I'm certain that it outperforms nothing so business school should only teach something if it outperforms nothing and they can it doesn't sink in just like in the history of medicine it took a long time and effectively people like me who are accusing at the time the doctors who are accusing other doctors they say well do nothing to the patient because what you're doing is harming him bleeding him is increasing probability of deaths all right they were accused of one thing that's called therapeutic nihilism okay so as always if you're killing patients it was better than doing nothing okay and now you have to explain Business School so the only solution is not to wait for business schools to change their curriculum what you have to do is discredit them and they're sensitive to that hopefully the cuts in funding coming from the recession I think the recession can be vastly worse vastly worse than I've seen was on television with Mandelbrot saying the times of the worst trial that was in September September say yeah but people don't know it's September the worst trial for America since the Revolution our time is over less questions good okay thank you thank you

Channel: DLD Conference

Views: 30,791

Keywords: John Brockman, Nassim Taleb, Daniel Kahneman, dld09

Id: LjGl6bZF6zs

Length: 59min 8sec (3548 seconds)

Published: Fri Feb 13 2009