By Arnold Kling
David A. Shaywitz reviews Nassim Taleb’s views on randomness.
The problem, insists Mr. Taleb, is that most of the time we are in the land of the power law and don’t know it. Our strategies for managing risk, for instance–including Modern Portfolio Theory and the Black-Scholes formula for pricing options–are likely to fail at the worst possible time, Mr. Taleb argues, because they are generally (and mistakenly) based on bell-curve assumptions.
If we accept Mr. Taleb’s premise about power-law ascendancy, we are left with a troubling question: How do you function in a world where accurate prediction is rarely possible, where history isn’t a reliable guide to the future and where the most important events cannot be anticipated?
I think that sums up where I stand on climate change. The talk of “consensus scenarios” and “90 percent certainty” leaves me cold. I want to know about outlandish scenarios and how to detect their likelihood.
More on Taleb’s “Black Swan” thesis from Niall Ferguson.