Nassim Nicholas Taleb: Economists and bankers are subhuman

[jimmygu3]

Re: Nassim Nicholas Taleb: Economists and bankers are subhuman

Another take is Jocks and Geeks Theory of Financial System Dysfunction.

At my high school we had a definite third group: the Freaks. Freaks smoke pot and listen to Led Zepplin and Pink Floyd (surprisingly this choice of music has not seemed to change over the last 30 years). Some of the freaks end up burning out, but many end up being really cool independent thinkers and entrepreneurs later in life. Is it possible that Freaks fit into the Jocks and Geeks Theory of Financial System Dysfunction?

While Geeks want the praise and acceptance of Jocks, Freaks hate jocks and are ambivalent toward Geeks. Often on Monday mornings there would be a spray painted message outside the school: FREAKS RULE! JOCKS SUCK!

[FRED]

Re: Nassim Nicholas Taleb: Economists and bankers are subhuman

For confirmation, read "Secrets and Lies" by John Sakowicz

[bart]

Re: Nassim Nicholas Taleb: Economists and bankers are subhuman

For confirmation, read "Secrets and Lies" by John Sakowicz

Indeed... the very dark and heinous side of the very few scum. Good and pretty accurate treatment, and one of the reasons why I believe EJ's "jocks & geeks" analogy doesn't go far enough.

[Rajiv]

Re: Nassim Nicholas Taleb: Economists and bankers are subhuman

We refer to hedge funds here as Unregulated Speculative Investment Pools (USIP).

For confirmation, read "Secrets and Lies" by John Sakowicz

About a decade ago, I was cross-country skiing in Aspen with another trader from Wall Street, a guy named Vince who worked at Bear Stearns. At the time, Vince was worth perhaps a few million dollars. Today, he's worth about 3 or 4 hundred million.

We were as happy as blue jays as we skied through the groves of pine. At the old Independence Homesite, the once thriving mining camp and stagecoach stop along the Roaring Fork River that became a ghost town once the fast-moving trains came to Aspen and the gold played out, Vince called out to me. "Hey, Johnny," he said. "Let's stop for a minute."

I turned to him.

"Wanna know something?" he asked. "There's gonna be a new gold rush. It's called swaps and derivatives."

"What are swaps and derivatives?" I asked. "Never heard of 'em."

"You will, Johnny," Vince said. "You will."

We leaned against a log fallen from a roofless cabin. "It's a market that's gonna be in the trillions of dollars," he said. "And it's gonna be a very esoteric market. Too hard for lawmakers and regulators to understand. So lawmakers and regulators won't even try.

"It's gonna be an unregulated and unrestricted market. We traders are gonna have this gold rush all to ourselves. Swaps and derivatives are also gonna be hard for auditors to value. So auditors won't bother us either."

I blinked stupidly.

"Swaps and derivatives are gonna be hard even for the senior executives at the companies we work for to understand. So our bosses won't bother us. How cool is that?"

He smiled. "And guess what? Swaps and derivatives are gonna be virtually hidden from the American public. No class-action investor lawsuits. No pension funds blowing up. No stories on the front page of the Wall Street Journal. No election year calls for reform. Swaps and derivatives won't ever be a campaign issue, because no one will have ever heard of them. At least not for a while. I'll give us 10 years."

Vince poked my ribs. "We're gonna make a ton of money originating and underwriting this shit, and then another ton of money trading this shit. We're gonna be able to gamble with borrowed money and take really crazy risks. How beautiful is that, huh?"

I nodded.

"But the really beautiful thing is that, if we get into trouble, the American taxpayer is probably going to have to bail us out."

He paused."That isn't true for stocks and bonds, of course." He winked. "Stocks and bonds are fuckin' old school."

[FRED]

Re: Nassim Nicholas Taleb: Economists and bankers are subhuman

"Taleb created his own hedge fund, Empirica, designed to help other hedge funds hedge their risks by using a refined form of his options wins – running small losses in quiet times and winning big in turbulent markets. It did okay but, after a good first year, performed poorly when the market went though a quiet spell. He’s still involved in the markets, but mainly as a hobby – 'like chess'. "

I wonder what the real story is here. If Taleb has a company designed to help hedge funds hedge their risks, he's not running a hedge fund per se. He's running a consultancy. He might have had a hedge fund and a consultancy or occasionally did consultancy (for his competitors? How likely is that, though,) under the umbrella of Empirica, but the way it is stated here it'd be a very peculiar activity for the head of a hedge fund, if it is true at all. But then again the whole notion that "hedge" funds had anything to do with "hedging" was verging on fraudulent...Taleb kind of plays on the fraudulence in this statement, I think.

We refer to hedge funds here as Unregulated Speculative Investment Pools (USIP).

[Yusef Asabiyah]

Re: Nassim Nicholas Taleb: Economists and bankers are subhuman

"Taleb created his own hedge fund, Empirica, designed to help other hedge funds hedge their risks by using a refined form of his options wins – running small losses in quiet times and winning big in turbulent markets. It did okay but, after a good first year, performed poorly when the market went though a quiet spell. He’s still involved in the markets, but mainly as a hobby – 'like chess'. "

I wonder what the real story is here. If Taleb has a company designed to help hedge funds hedge their risks, he's not running a hedge fund per se. He's running a consultancy. He might have had a hedge fund and a consultancy or occasionally did consultancy (for his competitors? How likely is that, though,) under the umbrella of Empirica, but the way it is stated here it'd be a very peculiar activity for the head of a hedge fund, if it is true at all. But then again the whole notion that "hedge" funds had anything to do with "hedging" was verging on fraudulent...Taleb kind of plays on the fraudulence in this statement, I think.

[grapejelly]

Re: Nassim Nicholas Taleb: Economists and bankers are subhuman

yes I agree completely. And those of us who have been expecting it will say "the signs were all there but nobody listened."

Of course, this is after years of being "wrong".

[Sapiens]

Re: Nassim Nicholas Taleb: Economists and bankers are subhuman

I firmly believe that there is a black swan that no one has imagined, and of unimaginable proportions, out there now. It is embedded geopolitical, financial market, currency and economic risks accumulated over decades. After more than ten years on the iTulip project, in the process of developing the thesis for The New New Deal, I am certain that we're going to see mean reverting of risk and asset prices at an astonishing rate, including a re-alignment of relationships between commodity prices and money values that has been distorted by political arrangements as markets reassert control. The geopolitical fault line will be drawn between nations with the purchasing power to acquire energy at an affordable percentage of GDP and those that cannot.

I agree. It is like ratcheting a device that is spring loaded into compression which will eventually reach its bursting point. Case in point is the overpopulation of the planet in reference to sustainable resources. We will be mired in a bloody war for survival that will unfortunately vindicate the writers of the Apocalypse.

Pass the scotch.

[FRED]

Re: Nassim Nicholas Taleb: Economists and bankers are subhuman

EJ writes in:

From WikiPedia:

In Nassim Nicholas Taleb's definition, a black swan is a large-impact, hard-to-predict, and rare event beyond the realm of normal expectations.

A black swan then is not necessarily a "surprise" as in "not imagined." A black swan can be imagined but assigned such a low probability as to be believed impossible. By this definition, the housing bubble was a black swan to iTulip, but perhaps not to someone else with a darker imagination who was expecting the Fed to allow it.

Don't forget, back when iTulip started we were kept busy trying to convince readers that there was No New Era when most everyone believed we were in one. Now there's a phrase you don't hear much anymore. We have all advanced greatly since then but have a long way to go. For example, a few stragglers on iTulip believe oil is an asset bubble, as if Wall Street was making a bundle off high energy prices, as if the government favored high energy prices, with politicians getting elected and capital gains tax revenue was pouring in because of oil is trading over $100.

In any case, once the housing bubble got underway, even in August 2002 it was obvious how it was going to turn out:

Will home prices collapse like dot com stocks once the era of cheap credit and low unemployment ends? According to David Berson of Fannie Mae, "You have to go back to the Great Depression to find the last time that house prices in the US actually fell." The Great Depression was the last deflationary event in U.S. history that caused a sustained loss in home prices nationally. Home prices fell on average more than 80%. Mr. Berson's statement offers little reassurance when you consider that in Japan residential real estate sells for around 40% of peak prices ten years after the real estate market collapsed there. While the residential real estate market is essentially different in Japan, a recent statement by Bill Gross suggests that such a decline could happen here. Gross runs what is now the largest actively managed mutual fund as of last week, succeeding Bob Stansky and his Fidelity Magellan. Pimco Total Return, a fixed-income fund, reached $61.2 billion in assets under management. In an interview for the Boston Globe August 18, 2002, Gross said, ''The overarching force today is this potential for deflation, not only in the US but the global economy,'' he says. ''That's the danger.''

We have reason to believe the deflationary collapse Bill Gross fears will not come to pass. What the Fed and Treasury seem to lack in common sense they make up for with a seemingly endless bag of tricks.

We may be in for a housing market collapse on a par with previous real estate bubble collapses, such as in Houston Texas when one million men, women, and children lost homes throughout Texas between 1985 and 1990. Such a deflation of the residential real estate will mark the beginning of the second deflationary stage predicted by iTulip.com Ka-Poom Theory as competitive asset liquidation moves from businesses to households.

The high technology industry is already familiar with deflationary processes. Assets of high tech start-up companies that sold for several billion dollars two years ago now sell for several million. Commercial real estate that rented for $60 per square foot now rents for less than $10. Where once prices reflected the expectation of unlimited future demand, now they reflect expected future demand near zero. If you don't think this can happen to home prices, ask yourself this: In 1998 when iTulip.com predicted an average 87% decline in Internet stock prices, that forecast seemed utterly unintuitive to most readers. We even though it was extreme. Think back to that time and recall how it felt to be in it. The market had been rising for so many years, a reasonable person might conclude that the prevailing conditions must be normal. Then ask yourself, if iTulip.com is right that the housing market is a bubble that will collapse, what can the Fed do about it when short term interest rates are already at 30 year lows? U.S. households aren't sitting on a few trillion dollars in savings like their counterparts were in Japan when their housing bubble popped, in fact they are sitting on piles of short term debt.

I firmly believe that there is a black swan that no one has imagined, and of unimaginable proportions, out there now. It is embedded geopolitical, financial market, currency and economic risks accumulated over decades. After more than ten years on the iTulip project, in the process of developing the thesis for The New New Deal, I am certain that we're going to see mean reverting of risk and asset prices at an astonishing rate, including a re-alignment of relationships between commodity prices and money values that has been distorted by political arrangements as markets reassert control. The geopolitical fault line will be drawn between nations with the purchasing power to acquire energy at an affordable percentage of GDP and those that cannot.

[Spartacus]

Re: Nassim Nicholas Taleb: Economists and bankers are subhuman

Just to echo everyone else, and reiterate the post I made before - remember in Scurlock's movie, the woman university researcher who gave the presentation to some investment house or other about defaults, and whose work was summarily dismissed by the executive in the audience who said "those abusive loans are where all our profit lies".

The executives and sales droids knew (but again, some really sordid emails need to turn up & be made public before anyone will be punished).

"And what he knows does not sound good. The sub-prime crisis is not over and could get worse. Even if the US economy survives this one, it will remain a mountain of risk and delusion. “America is the greatest financial risk you can think of.”

Its primary problem is that both banks and government are staffed by academic economists running their deluded models. Britain and Europe have better prospects because our economists tend to be more pragmatic, adapting to conditions rather than following models. But still we are dependent on American folly."- from the article

See, Taleb is asserting that our problem is our inability to take into account and manage risk-- our lack of understanding of probability--our "academic economists running their deluded models." I simply do not agree. We have thousands of "quants" working in various capacities in government and private who have mastered statistical theory as well or better than Taleb and know how to apply it. They aren't deluded. What they are is out of the power loop just the way the rest of us are. Even if they perceive these escalating financial crises, there is not much they can do to stop them except try to draw peoples' attention to what's happening...But this is in competition with the message people get from most media outlets, where people are being systematically deceived.

[Spartacus]

Re: Nassim Nicholas Taleb: Economists and bankers are subhuman

welcome! if taleb thinks the housing bubble and sub-prime were random, he hasn't been reading itulip... where they were documented and their demise forecast years in advance. for the securitization debacle, see

Those who paid for[*] statical analysis, mathematical modeling and considered professional/expert banking and lending opinions that the risk was low can claim it's a black swan.


[*] as long as they don't admit it and no incriminating emails turn up, the fact that they paid for the results they wanted (and everyone knows it, wink wink, nudge nudge) doesn't matter - until their "state of mind" is discredited, it's a black swan.

[Sapiens]

Re: Nassim Nicholas Taleb: Economists and bankers are subhuman

I simply do not agree. We have thousands of "quants" working in various capacities in government and private who have mastered statistical theory as well or better than Taleb and know how to apply it. They aren't deluded. What they are is out of the power loop just the way the rest of us are. Even if they perceive these escalating financial crises, there is not much they can do to stop them except try to draw peoples' attention to what's happening...But this is in competition with the message people get from most media outlets, where people are being systematically deceived.

Congratulations, this is profound insight.

[FRED]

Re: Nassim Nicholas Taleb: Economists and bankers are subhuman

"And what he knows does not sound good. The sub-prime crisis is not over and could get worse. Even if the US economy survives this one, it will remain a mountain of risk and delusion. “America is the greatest financial risk you can think of.”

Its primary problem is that both banks and government are staffed by academic economists running their deluded models. Britain and Europe have better prospects because our economists tend to be more pragmatic, adapting to conditions rather than following models. But still we are dependent on American folly."- from the article

See, Taleb is asserting that our problem is our inability to take into account and manage risk-- our lack of understanding of probability--our "academic economists running their deluded models." I simply do not agree. We have thousands of "quants" working in various capacities in government and private who have mastered statistical theory as well or better than Taleb and know how to apply it. They aren't deluded. What they are is out of the power loop just the way the rest of us are. Even if they perceive these escalating financial crises, there is not much they can do to stop them except try to draw peoples' attention to what's happening...But this is in competition with the message people get from most media outlets, where people are being systematically deceived.

We learned from our interviews with banking industry specialists Martin Mayer, Jim Finkel, Michael Hudson and others we cannot name is that quants are asked to develop risk models that allow them to sell product and have the product hold up though their tenure at the bank. Sales and Marketing took over the banks under Greenspan and Engineering took a back seat. The ideological cover was free-market fundamentalism.

Another take is Jocks and Geeks Theory of Financial System Dysfunction.

[Yusef Asabiyah]

Re: Nassim Nicholas Taleb: Economists and bankers are subhuman

"And what he knows does not sound good. The sub-prime crisis is not over and could get worse. Even if the US economy survives this one, it will remain a mountain of risk and delusion. “America is the greatest financial risk you can think of.”

Its primary problem is that both banks and government are staffed by academic economists running their deluded models. Britain and Europe have better prospects because our economists tend to be more pragmatic, adapting to conditions rather than following models. But still we are dependent on American folly."- from the article

See, Taleb is asserting that our problem is our inability to take into account and manage risk-- our lack of understanding of probability--our "academic economists running their deluded models." I simply do not agree. We have thousands of "quants" working in various capacities in government and private who have mastered statistical theory as well or better than Taleb and know how to apply it. They aren't deluded. What they are is out of the power loop just the way the rest of us are. Even if they perceive these escalating financial crises, there is not much they can do to stop them except try to draw peoples' attention to what's happening...But this is in competition with the message people get from most media outlets, where people are being systematically deceived.

[Sapiens]

Re: Nassim Nicholas Taleb: Economists and bankers are subhuman

oh, don't get me wrong. i'm emptying out my safe box.

Beat ya by a mile, did my out five years back. Good for you though.