Last night on PBS Newshour, economics correspondent Paul Solman interviewed Nassim Nicholas Taleb and his mentor Benoit Mandelbrot (link to interview transcript). It was timely.
Taleb's second book (Fooled by Randomness) was the seventh book that I read this year, I got it last year for Christmas. I wrote back in March of how it changed my life and way of thinking. So, mark it down as one of the best Christmas gifts ever gotten.
In the book, Taleb railed at the financial economists and math wizards on Wall Street who said everything they were doing was risk free. Here's an interview with him back in April. His point was partly that the probabilities simply can't be properly determined. He has his "turkey" analogy-- a turkey is raised on a farm and fed large meals for 100 days. The turkey gets used to the routine and estimates a 100% probability of him being fed a big meal the next day. Then, on the 101st day he gets his head chopped off. It doesn't surprise anyone but the turkey.
Taleb was, of course, right.
I found this clip on YouTube of Taleb on a BBC Newsnight broadcast where he is clearly angry and quite worried about how bad the financial crisis will eventually get. Ken Rogoff, a hero of mine, was also on the show that night but unfortunately the clip edits him out (and there is no transcript or full video on the BBC site). Taleb and Rogoff together on the same show, my head would explode!!
Taleb's interview last night was equally intense as he's worried about hedge funds deleveraging. He considers this to be the worst crisis for the U.S. since the American Revolution! But, he is first to admit he doesn't know.
He got my attention.
In the fall I have to teach Risk Management, which means Portfolio Theory and things that Taleb calls unscientific bunk. I read his op-ed in the Financial Times here and cringe.
Mathematicians often hate economists for being quacks and trying to pretend to do things with mathematics that can't actually be done. Economists hate journalists and politicians. The journalists on NewsHour are the only ones I would say have a right to be called journalists, I'm definitely thankful for them.