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ALMOST EVERYONE KNOWS WHAT YOU MEAN NOW WHEN YOU TALK ABOUT BLACK SWANS

That unexpected event, which upends all the plans you had and turns your life – or everyone’s – upside down. An apparent surprise, but which, once the event has happened, is rationalized, making it seem predictable and giving the impression that it was expected to happen. Weirdness, extreme impact and the ability to understand in retrospect are the three defining features. There are many examples, such as World War I or the 1918 flu.

The concept refers to the fact that it was thought it impossible to see a black swan, until one day, the first one was found. It was popularized by the Lebanese economist and essayist Nassim Nicholas Taleb in 2007, who with his work “The Black Swan” -translated into more than 30 languages- got the timing right, since in a certain way, he predicted the Lehman Brothers crisis and how it was going to submerge the world economy into chaos in the following years. Then came the film by Darren Aronofsky and Natalie Portman playing the dancer.

There is debate about the pandemic we are living through: Taleb himself recognizes that it could be seen as a black swan by some people, although he thinks it is not, since it was quite predictable before it happened. As, for example, Rob Wallace had done in his magnificent essay “Big Farms Make Big Flu” or Bill Gates himself in a TED talk. If it is predictable, the event is considered more like a Gray Rhinoceros, because of its obviousness. The Gray Rhinoceros is something in front of you and coming at you, according to Michele Wucker -the author of the book that popularized the idea-, who warns: “We should look at the three Gray Rhinoceros I always talk about: inequality, climate change and financial products”.

…click on the above link to read the rest of the article…

Global Financial System Is A Big Rube Goldberg Machine

January 2, 2020

Global Financial System Is A Big Rube Goldberg Machine

While pondering the current economy that is becoming more of a conundrum every day, I stumbled upon an analogy I would like to share. The global economy is like a giant “Rube Goldberg” machine. It is a ridiculously complicated contraption built to perform what should normally be a simple task. Rube Goldberg machines often mimic the real world in that they are goal-oriented with many parts coming together to complete a task.

In the real world, things are usually not intentionally designed to be complicated but the reality is that they just are. It is an understatement to say the global financial system is not a well-oiled machine. More often than we would like to admit various systems and parts are thrown or “cobbled together” in a haphazard way to get the job done. We tend to try and explain events in terms of cause and effect but in doing so the bigger picture has a way of getting lost. Often hidden away is the nature of the risk that results from complexity and systems becoming codependent upon others. Bestselling author Nassim Taleb who wrote, “The Black Swan” detailed in his book how when something is highly complicated highly improbable and unpredictable events can and do occur.

Some of this is playing out right now and can be seen in the Fed’s key reversal in policy. In an effort to avoid a crisis the Fed has been forced to deal with a liquidity issue in repo rates since a sudden and dramatic surge began in September. While it is difficult to see the difference between QE and an injection aimed at maintaining liquidity, in this case, several reasons exist to believe this is not QE but something far more disturbing.

…click on the above link to read the rest of the article…

How Anti-Fragile are you?

September 25, 2019

How Anti-Fragile are you?

I arrived back home to Puerto Rico late last night after traveling back from our Total Access event in Las Vegas.

It was probably around 11:15 pm when I climbed into bed. And, within minutes, just as the sound of the waves outside was carrying me off to sleep, the whole house started violently shaking.

It turned out to be a magnitude 6.0 earthquake, about 20 miles off the west coast of the island.

I lived in Chile for seven years before this– one of the world’s earthquake capitals– so I’m no stranger to seismic activity.

But earthquakes are EXTREMELY rare in Puerto Rico… as in, they almost NEVER happen. People simply do not expect them.

Hurricanes, tropical storms, etc., sure, those are common occurrences here.

And you might remember that Puerto Rico was almost wiped out from 2017’s Hurricane Maria. It devastated the island and much of the Eastern Caribbean, and two years later they still haven’t recovered.

Today there’s supposed to be some Tropical Storm coming through, which, by comparison to Hurricane Maria, is barely a bit of drizzle.

But the government here is on pins and needles, and so anxious to show that they’re ready for anything that they closed schools, many government offices, and even called up the National Guard…

I can’t help but feel bad for them. They’re so scarred from Hurricane Maria two years ago that they overreact in desperation at the first warning sign of a storm.

And then, in an instant, something completely unexpected happened: Puerto Rico was hit with a 6.0 earthquake, and the government has no idea how to react.

…click on the above link to read the rest of the article…

To Save Lives, We Need More Conflicts. And a Strong Economy Needs More Failure.

December 1, 2018

To Save Lives, We Need More Conflicts. And a Strong Economy Needs More Failure.

How could more conflicts be a good thing?

Well, imagine 50 wars among city-states that each kill 30,000. That is a staggering 1.5 million deaths.

Or one war among nation-states, say World War II, which killed an estimated 60 million people.

Call me crazy, but I’ll take more conflicts if it means fewer deaths overall.

And according to Nassim Nicholas Taleb in his book Antifragile, smaller governments resembling city-states produce overall more peaceful results for society. Even when there are more conflicts, they claim fewer total lives than years of buildup to explosive large wars.

Or consider that the Soviet Union post-World War II was relatively peaceful towards other nation-states… while Stalin murdered millions and millions of Soviet citizens.

“Stalin could not have existed in a municipality.”

Small is beautiful in so many other ways. Take for now that the small–in the aggregate that is, a collection of small units–is more antifragile than the large.

This means that the overall group is more likely to survive if it is made up of smaller units. And the units which survive will be better for withstanding the tests.

Even in the Soviet Union, this proved true. For instance, under centralized control, Stalin stole the food of the entire nation of Ukraine, orchestrating a famine which starved somewhere around 6 million people.

But most of the Soviet Union did not starve, because food production remained relatively decentralized. Each village produced much of the food it needed, so they were less affected by the horribly inefficient food distribution of the Soviet centralized state. And cities which did not produce their own food fared much worse.

…click on the above link to read the rest of the article…

Nassim Taleb Explains How The Global Economy Is More Fragile Today Than In 2007

November 5, 2018

Nassim Taleb Explains How The Global Economy Is More Fragile Today Than In 2007

In what was incredibly appropriate timing given the ‘shocktober’ market blowup, Bloomberg News invited “Black Swan” author Nassim Taleb to its set on Halloween for a discussion about the increasingly fragile market ecosystem in which we all reside, and the mounting risks that, Taleb believes, could soon ignite another financial crisis that will be even more severe than what we saw in 2008.

Taleb, dressed up as “black swan man”, wasted little time in explaining how the global economy is becoming increasingly vulnerable to a global debt crisis, how the global quantitative easing did nothing to fix the underlying problem of too much debt – instead it exacerbated it – and how the inevitable reckoning might play out in markets once the long-dreaded “inflection point” finally arrives.

Taleb began the interview by describing how the global aggregate debt burden has only climbed since the crisis. And while this debt is no longer dangerously concentrated in a single sector, like, say, the housing market, it doesn’t change the fact that the overall credit risk in the system has been amplified. And while central banks have for years managed to impose metastability in global markets, as they transition from a period of low interest rates back to “neutral”, the destructive forces that they long suppressed will surge back to the surface.

Just like he did in the run-up to the 2008 crash, Taleb isn’t trying to forecast the next crash; he’s only trying to explain how the global economy has become “more fragile today” than it was in 2007.

“You put novocaine on cancer, and what happens? The patient is going to look better, he’s going to feel better, but at some point, you pay a higher price.”

…click on the above link to read the rest of the article…

Sustainability Boils Down to Scale

May 18, 2018

Sustainability Boils Down to Scale

Only small scale systems can sustainably impose “skin in the game”– consequences, accountability and oversight.

Several conversations I had at the recent Peak Prosperity conference in Sonoma, CA sparked an insight into why societies and economies thrive or fail: It All Boils Down to Scale. In a conversation with a Peak Prosperity member who goes by MemeMonkey, MemeMonkey pointed out that social / economic organizations that function well at small scales (i.e. localized) fail when scaled up and centralized (i.e. globalized).

I was immediately struck by the impact of scale on markets (Capitalism) and the state (Socialism), an ideological spectrum I’ve written about recently.

Both markets and governance function well at a small scale because those making the decisions must absorb the consequences of their actions/choices.

In large-scale centralized systems, those at the top of the wealth-power pyramid who wield the greatest influence are typically immune from the consequences of their (self-serving) decisions.

Indeed, the entire point of centralized hierarchies is to buffer top decision-makers from the consequences of their actions and choices.

This ties directly into Nassim Taleb’s most recent popularization of the critical role played by participants having “skin in the game,” i.e. exposure to the consequences of their actions and choices.

In a small localized group, it’s basically impossible for anyone, even those at the top of the local welth-power pyramid, to escape the consequences of extractive activities that disupt the local ecosystem.

For example, should overfishing destroy the local fisheries, even the leaders no longer have access to fish.

Should the leadership pursue a conflict with a neighboring tribe, the leaders are just as likely to be killed or maimed as any participant (and very possibly more likely to be killed/injured, as leaders are naturally high-value targets).

…click on the above link to read the rest of the article…

Nassim Nicholas Taleb Has Never Borrowed a Cent in His Life

April 21, 2018

Nassim Nicholas Taleb Has Never Borrowed a Cent in His Life

The author of The Black Swan and Skin in the Game on what it’s like to have true financial freedom.

Redux

People ask me my forecast for the economy when they should be asking me what I have in my portfolio. Don’t make pronouncements on what could happen in the future if you’re immune from the consequences. In French, they use the same word for wallet and portfolio.

I have never, ever borrowed a penny. So I have zero credit record. No loans, no mortgage, nothing. Ever. When I had no money, I rented. I have an allergy to borrowing and a scorn for people who are in debt, and I don’t hide it. I follow the Romans’ attitude that debtors are not free people.

I carry euros, dollars, and British pounds. What I do with my money is personal. People who say they give it to charity, that’s a no-no in my book. Nobody should ever talk about a charitable act in public.

I FOLLOW THE ROMANS’ ATTITUDE THAT DEBTORS ARE NOT FREE PEOPLE.

Better to miss a zillion opportunities than blow up once. I learned this at my first job, from the veteran traders at a New York bank that no longer exists. Most people don’t understand how to handle uncertainty. They shy away from small risks, and without realizing it, they embrace the big, big risk. Businessmen who are consistently successful have the exact opposite attitude: Make all the mistakes you want, just make sure you’re going to be there tomorrow.

Don’t invest any energy in bargaining except when the zeros become large. Lose the small games and save your efforts for the big ones.

…click on the above link to read the rest of the article…

Why Nassim Taleb Thinks Leaders Make Poor Decisions

April 4, 2018

Why Nassim Taleb Thinks Leaders Make Poor Decisions

Why do experts, CEOs, politicians, and other apparently highly capable people make such terrible decisions so often? Is because they’re ill-intentioned? Or because, despite appearances, they’re actually stupid? Nassim Nicholas Taleb, philosopher, businessman, perpetual troublemaker, and author of, among other works, the groundbreaking Fooled by Randomness, says it’s neither.

It’s because these authorities face the wrong incentives.

They are rewarded according to whether they look good to their superiors, not according to whether they are effective. They have no skin in the game.

Seasoned readers of Taleb will be pleased to see the so-called “experts problem” pop up in living color in Skin in the Game: Hidden Asymmetries in Daily Life, Taleb’s latest collection of essays on risk, rationality, and randomness. According to Taleb, dentists, pilots, plumbers, structural engineers, and “scholars of Portuguese irregular verbs” are real experts; sociologists, policy analysts, “management theorist[s], publishing executive[s], and macroeconomist[s]” are not.

The difference is that, when people from the first list are wrong about something, it’s obvious from the results and they suffer; they have skin in the game. Bad teeth, crashed planes, and leaky pipes are bad for business. People from the second list rationalize by substituting a different theory. They were not really wrong but just early, and, if they’re lucky, which is to say skillful at apple-polishing, earn promotion after promotion by not failing utterly. (Financial advisors can argue that the fiduciary standard is the most powerful tool for putting them in the first list.) Skin in the Game is full of insights like this, some recycled from his earlier work but many of them new. It is well worth the relatively quick read.

…click on the above link to read the rest of the article…

The Controversy around Skin in the Game

February 26, 2018

The Controversy around Skin in the Game

Skin in the Game is another addition to the Incerto, now volume 5; I avoided duplication by referring to where in the Incerto some points were developed such as via negativa or monoculture of forecasters or expert problems. You simply don’t repeat in chapter 23 what was said in chapter 5, but can make reference to it.

Now it so happens that I am in the BS busting category, which includes journalists (especially journalists). And the book is designed to be hated by BS operators who can be book reviewers. I instructed publishers to send the book to only doers, not people who make a verbagiastic living.

Let me say it again. I am intolerant of BS; I suffers no fools except when the BS is harmless.

So far three journalists have, while uninvited, attempted to do a (sort of) hack job: John Gapper (FT), Zoe Williams (Guardian), and Phil Coggan (Economist; yes I am outing him, SITG). The problem however is that they agree with the general message of the book (who doesn’t ?) except in what concerns them, so the best way is to perform some assassination on side points: 1) find what appears to be a “flaw”, 2) use the technique of Sam Harris, i.e. make the author look like a hateful spiteful person who hates everybody simply because he doesn’t like bullshitters. The problem of course is that it is hard to claim I am against all experts, not just the .1% faux experts so they disguize the claim as a he is a “hates everybody” type of fellow.

Also note that the book isn’t about SITG but the weird consequences (modern slavery, looks of surgeons, rationality of survival, religious practices, commercial ethics, Lindy effects, and, mostly, risk taking). You will also notice that given the homework done by journos, the “flaws” happen to be in the beginning, never at the end.

…click on the above link to read the rest of the article…

Ruin is forever (revisited): Why your death isn’t as bad as that of all humankind

February 5, 2018

Ruin is forever (revisited): Why your death isn’t as bad as that of all humankind

It should be obvious that the death of an individual human being isn’t as bad as the death of all humankind. But that’s only true if you accept the following premise laid out by Nassim Nicholas Taleb in his upcoming book, Skin in the Game:

I have a finite shelf life; humanity should have an infinite duration. Or I am renewable, not humanity or the ecosystem.

The quotation actually comes from a draft version of one chapter available here. The book is not yet out.

But what does this mean in practical terms? The simple answer is that human societies should not engage in activities which risk destroying all of humanity. Nuclear war comes to mind. And, most, if not all, people recognize that a nuclear war would not only result in unthinkably large immediate casualties, but also might threaten all life on Earth with a years-long nuclear winter.

But are we humans risking annihilation through other activities? Climate change comes to mind. But so do our perturbations of the nitrogen cycle which we are now at the very beginnings of understanding. In addition, the introduction of novel genes into the plant kingdom with little testing through genetically engineered crops poses unknown risks not only to food production, but also to biological systems everywhere.

The thing that unites these examples is that they represent an introduction of novel elements (artificial gene combinations not seen in nature) or vast amounts of non-novel substances (carbon dioxide, nitrogen compounds and other greenhouse gases) into complex systems worldwide. Scale, it turns out, matters. A population of only 1 million humans on Earth living with our current technology would almost certainly not threaten climate stability or biodiversity.

…click on the above link to read the rest of the article…

Bull in a China Shop

October 30, 2017

BULL IN A CHINA SHOP

“So the modern world may be increasing in technological knowledge, but, paradoxically, it is making things a lot more unpredictable.” – Nassim Nicholas Taleb, Antifragile: Things That Gain From Disorder

“Success brings an asymmetry: you now have a lot more to lose than to gain. You are hence fragile.” – Nassim Nicholas Taleb, Antifragile: Things That Gain From Disorder

I had read Nassim Taleb’s other best-selling tomes about risk, randomness and black swans – Fooled by Randomness & The Black Swan. They were not easy reads, but they were must reads. He is clearly a brilliant thinker, but I like him more because he is a prickly skeptic who scorns and ridicules academics, politicians, and Wall Street scumbags with gusto. There were many passages which baffled me, but so many nuggets of wisdom throughout each book, you couldn’t put them down.

When his Antifragile book was published in 2012, the name intimidated me. I figured it was too intellectual for my tastes. When I saw it on the shelf in my favorite used book store at the beach, I figured it was worth a read for $9. I’m plowing through it and I haven’t been disappointed.

His main themes are more pertinent today than they were in 2012. He published The Black Swan in 2007, just prior to one of the biggest black swans in world history – the 2008 Federal Reserve/Wall Street created financial collapse. His disdain for “experts” like Bernanke, Paulson, and Wall Street CEOs, and their inability to comprehend the consequences of their actions and in-actions as the financial system was blown sky high, was a bulls-eye.

…click on the above link to read the rest of the article…

Something is Broken in the UK Intellectual Sphere.

August 8, 2017

Something is Broken in the UK Intellectual Sphere.

The BBC did some kind of educational cartoon on Roman Britain and represented “diversity” in terms of someone looking African in the show as representative of “diversity” at the time. The BBC was effectively applying quotas retroactively (I mean, really retroactively). Any dissent from the statistical errors made by the politically correct police is treated as apostasy. Effectively, scholarship is dead in the U.K.

What was meant to be a “typical” of Roman Brittain by the BBC: flowing quotas of political correctness backward in time.

Representativeness heuristic. The picture was portrayed as representative (playing on the representativeness/availability heuristic in the minds of children). Some people backtracked later by saying it is was not common but not impossible, which is where I shout “BS!” (More technically, calling events that fall in the tails of the distribution, beyond 2 standard deviations “typical” and, as Mary Beard describe it “accurate” is a lunacy. “Typical” is within one STD).
Anecdotal vs Statistical. The backup is mostly anecdotal from cherry picked stories. We find nothing beyond traces of sub-Saharan genes in areas where Roman legions were located (France, Gaul, and even Spain, where most of it came much later from the Arab trade) — but we find genes of other Roman occupiers. Show the picture to a French or Italian person and tell him “this is the typical…” and wait for the insults.
Fuzzy classification. Even the researchers who deal with physical remains miss the point that people from North Africa looked no different from Spaniards, S. Italians, and Greeks. Punics/Phoenicians we now know, looked Canaanite, just like Southern Europeans. Berbers looked like mountain berbers today. So representing “diversity” should focus on the difference between locals and Romans (Northern European vs Mediterranean), not within Romans (in other words, Butter vs Olive Oil ).

…click on the above link to read the rest of the article…

“Reform” won’t solve our biggest problems

April 23, 2017

“Reform” won’t solve our biggest problems

“You never cure structural defects; you let the system collapse.”

As I contemplated this proposition taken from a recent piece by Nassim Nicholas Taleb, I realized what profound implications accepting it would have for all those engaged in attempting to address our current social, political and environmental ills.

If it is true that modern capitalism is incompatible with effective action on climate change, if it is true that top-heavy, bureaucratic nations always eventually become captive to their wealthy citizens, if it is true that our centralized, complex, tightly networked systems in finance, agriculture, shipping and manufacturing are exceedingly fragile and prone to failure–if these all represent structural defects, then they cannot be addressed by tinkering or “reform.” Those in charge cannot be persuaded to “do something” which is contrary to the structural necessities built into these systems.

The choices then are: 1) Do nothing, 2) insurrection (for which you might be jailed or worse) or 3) start building a decentralized replacement. Since I’m discarding choices one and two, I’ll address choice three.

First, adopting choice three doesn’t mean we should abandon critiquing the current systems under which we live. Quite the contrary. Those systems are where future adopters of decentralized replacements currently do business. They are the Brand X against which new systems can and need to be compared.

Second, we have good evidence that small-scale governments can actually respond to climate change when large-scale governments can’t. Citizens of seaside communities experience the rising ocean waters first hand and have direct access to their elected officials as do those who experience droughts. And those cities have actually taken significant (but still inadequate) steps toward addressing climate change. It is counterintuitive that decentralized governments could act more quickly and effectively on issues of international scope than national governments until we see them in action.

…click on the above link to read the rest of the article…

On Interventionistas and their Mental Defects

April 23, 2017

On Interventionistas and their Mental Defects

Excerpted from the preface of Skin in the Game

Skin in the Game is necessary to reduce the effects of the following divergences that arose mainly as a side effect of civilization: action and cheap talk (tawk), consequence and intention, practice and theory, honor and reputation, expertise and pseudoexpertise, concrete and abstract, ethical and legal, genuine and cosmetic, entrepreneur and bureaucrat, entrepreneur and chief executive, strength and display, love and gold-digging, Coventry and Brussels, Omaha and Washington, D.C., economists and human beings, authors and editors, scholarship and academia, democracy and governance, science and scientism, politics and politicians, love and money, the spirit and the letter, Cato the Elder and Barack Obama, quality and advertising, commitment and signaling, and, centrally, collective and individual.

But, to this author, is mostly about justice, honor, and sacrifice as something existential for humans.

Let us first connect a few dots of items the list above.

Antaeus Whacked

Antaeus was a giant, rather semi-giant of sorts, the literal son of Mother Earth, Gaea, and Poseidon the god of the sea. He had a strange occupation, which consisted of forcing passersby in his country, (Greek) Libya, to wrestle; his trick was to pin his victims to the ground and crush them. This macabre hobby was apparently the expression of filial devotion; Antaeus aimed at building a temple for his father Poseidon, using for material the skulls of his victims.

Antaeus was deemed to be invincible; but there was a trick. He derived his strength from contact with his mother, earth. Physically separated from contact with earth, he lost all his powers. Hercules, as part of his twelve labors (actually in one, not all variations), had for homework to whack Antaeus. He managed to lift him off the ground and terminated him by crushing him as his feet remained out of contact with his mamma.

…click on the above link to read the rest of the article…

The Intellectual Yet Idiot

September 17, 2016

The Intellectual Yet Idiot

What we have been seeing worldwide, from India to the UK to the US, is the rebellion against the inner circle of no-skin-in-the-game policymaking “clerks” and journalists-insiders, that class of paternalistic semi-intellectual experts with some Ivy league, Oxford-Cambridge, or similar label-driven education who are telling the rest of us 1) what to do, 2) what to eat, 3) how to speak, 4) how to think… and 5) who to vote for.

But the problem is the one-eyed following the blind: these self-described members of the “intelligenzia” can’t find a coconut in Coconut Island, meaning they aren’t intelligent enough to define intelligence hence fall into circularities — but their main skill is capacity to pass exams written by people like them. With psychology papers replicating less than 40%, dietary advice reversing after 30 years of fatphobia, macroeconomic analysis working worse than astrology, the appointment of Bernanke who was less than clueless of the risks, and pharmaceutical trials replicating at best only 1/3 of the time, people are perfectly entitled to rely on their own ancestral instinct and listen to their grandmothers (or Montaigne and such filtered classical knowledge) with a better track record than these policymaking goons.

Indeed one can see that these academico-bureaucrats who feel entitled to run our lives aren’t even rigorous, whether in medical statistics or policymaking. They cant tell science from scientism — in fact in their eyes scientism looks more scientific than real science. (For instance it is trivial to show the following: much of what the Cass-Sunstein-Richard Thaler types — those who want to “nudge” us into some behavior — much of what they call “rational” or “irrational” comes from their misunderstanding of probability theory and cosmetic use of first-order models.) They are also prone to mistake the ensemble for the linear aggregation of its components as we saw in the chapter extending the minority rule.

…click on the above link to read the rest of the article…

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