Inteview with Nassim Taleb
Russ Roberts interviews Nassim Taleb. It’s one of the most fascinating interviews in Roberts’ series.
One implication of Taleb’s thinking is that we are overconfident in our ability to manage risk. Burt Malkiel, who is arguing from a more traditional perspective, thinks that stock markets right now seem to be priced for very little risk.Some notes I jotted down during the interview (my own thoughts in parentheses):
confirmation bias–not taking seriously what you don’t see, taking too seriously what you see. So if you haven’t seen an event, you tend to rule it out
in our modern enviroment, we are more likely to encounter extremes
bankers assume that we don’t have fat tails. (think of sub-prime loans, where the bankers came to think that they had the risks under control. What they were doing was writing out-of-the-money options, which is fine as long as markets don’t move too much. In my view Enron’s collapse came from the same tactic–writing out-of-the-money options, in this case on their own stock.)
hindsight bias. we think we predicted the odd event, or we could have predicted it.
80 pct of epidemiological studies fail to replicate. Thus, when you read in the paper that “X is found to give you cancer” or help with weight loss, do not assume that the study is correct.
easy to predict that after ice cube melts, there will be water on the floor. harder to infer what happened if you observe water on the floor. (but with hindsight bias, we will claim that we knew all along that there was an ice cube)
so many people are in the market, you will have lots of spurious winners. Trying to become a winner on Wall Street is hard, because even if you are smart, you are competing with all the spurious winners.
in a world of statistical extremes, you don’t want to be in banking or reinsurance; you want to be in biotech. (In a world with fat tails, you don’t want to be writing options, as a banker or a reinsurer is doing. You want to be long options, like a venture capitalist.)
go to parties, because serendipity matters. (when I was an entrepreneur, whenever I got the sense that I was just spinning my wheels, I tried to meet new people in order to change my luck.)
people have a hard time seeing animals as randomly selected. but even those who do accept that, do not accept that a car is the product of a random process
we are not good at planning, we’re not good at knowing. we’re just good at doing
most of what people were looking for, they did not find; most that they found, they did not look for
(so with hindsight bias, you tend to make discoveries and inventions appear to be more planned and systematic than they really were)
penicillin was mold that Fleming came across.
national cancer institute discovered almost nothing. accidental discoveries were more important.
However, saying that success requires luck is not the same as saying that only luck determines success.
There is quite a bit more to the interview, including critiques of mainstream economics. I recommend listening to the whole thing.
I briefly posted on Taleb earlier here.