Taleb’s thinking quite deliberately does not take the form of any kind of traditional academic theorizing. If there’s anything like a formal theory in this book, it is so enmeshed in his personality and biases that I couldn’t really make much sense of it. This is despite the fact that I share a large subset of his biases, his contempt for high-modernist central planning for instance. He is so confident of the correctness of his biases that he feels free to build them into this theorizing without much justification. The result is that the book quite often reads like a personal brag than a philosophical or scientific treatise (his habit of boasting about his physical strength and calling his opponents “half-men” also contributes to this impression).
So for me the actual content of this book remained tantalizingly obscure. This was frustrating, because it did seem like there were some deep, important, and profound truths hidden away, but they weren’t conveyed in as effective a way as I would have liked. Perhaps it is too much aimed at the world of standard economics that he despises, a foreign territory to me (but he despises all of academia just as much). If I try to summarize my understanding of what he is saying, it comes out both trivial and contradictory. For instance: apparently the secret of economic antifragility is to arrange your resources so they have limited downsides but at least small probabilities of large or unlimited upsides. Sounds like a great principle, but doesn’t sound like any more useful (to an economic naïf like me) than “buy low, sell high”.
The contradictory part is when he gets into ethics, where his main principle seems to be that one is obligated to have “skin in the game” – that is, personal exposure to risk. He is exquisitely scornful of the Wall Street types who manage to profit while destroying value for others, but how is that different from what he does? Financial trading (unlike actual economic production) is inherently zero-sum, if you profit, you are inherently always taking advantage of somebody else. I’m missing some distinction that I’m sure is there. Perhaps taking advantage of your peers (those who have the same skill and risk portfolio as yourself) is OK, but preying on the defenseless masses is not? A deeply ethical/aesthetic sensibility pervades Taleb’s work, and I find that quite appealing, but his sensibility is different from mine in ways I can’t quite tease out.
This short quote:
You cannot sit and moan about the world. You need to come out on top. (p 386)encapsulates an important quality of Antifragile. He advocates action and winning over being right in any abstract academic sense. Academics don’t have skin in the game, they don’t suffer when they are wrong, thus their pronouncements have no weight. This makes some sense, but also doesn’t seem to leave room for any standard of value but money or power. The frank acknowledgement of the brutally competitive nature of life, while no doubt common on Wall Street, is pretty jarring in a book with the intellectual ambitions of this one. It’s an anti-intellectual stance, denying the possibility of any sort of un-self-interested enquiry. Taleb is well aware of this problem and his rhetorical strategy is to create a couple of separate personas to manage the contradiction of being an anti-intellectual intellectual. Fat Tony is the street-smart winner, uninterested in ideas for their own sake, while Nero Tulip represents the more cultured and cultivated side of life (but he too must play and win financial games).
One passage in the book really clarified Taleb’s position in the intellectual firmament for me: where he figures out a way to describe himself by identifying his polar opposite:
I was just reading…about attempts to use science, in a postreligious world, to achieve immortality. I felt some deep disgust — as would any ancient — at the efforts of the “singularity” thinkers (such as Ray Kurzweil) who believe in humans’ potential to live forever. Note that if I had to find the anti-me, the person with diametrically opposite ideas and lifestyle on the planet, it would be that Ray Kurzweil fellow. It is not just neomania. While I propose removing offensive elements from people’s diets (and lives), he works by adding, popping close to two hundred pills daily. Beyond that, these attempts at immortality leave me with deep moral revulsion. (p370)I’ve mentioned Kurzweil a few times here, mostly to note his boring drone of a speaking style. Taleb seems to have the opposite flaw – he is so determined to be interesting that he doesn’t know when to put his personality aside and let his ideas speak for themselves. My own background is a lot closer to Kurzweil’s though, so maybe I am just too much of a nerd to catch the antifragility train.
Speaking of Kurzweil and AI – it occurs to me that minds and biological systems are necessarily antifragile (or at least robust), due to their evolutionary history. Every biosystem that exists has managed to do so despite being situated in a chaotic, dynamic and often hostile world. Computer systems are nothing like that. Like the formal theories of mathematical logic that gave rise to them, they are practically designed to fall apart at even a single mistake or contradiction. People are pretty aware of this and have been trying to back-fit various kinds of robustness onto computers, but it never goes very deep. Someday someone will reconstruct computation and computational intelligence on a truly robust foundation.
10 comments:
As Eric Falkenstein puts it, one way to operationalize Taleb's financial advice is buying out of the money put options. Basically the opposite of selling insurance. But that has not historically been a good strategy, rather selling insurance seems to work rather well (not that an insurance company can't go spectacularly bankrupt, lots of companies can do that).
Financial markets are not strictly zero sum, there can be gains from trade (hence the "no trade theorem" is not universally true). An obvious example is hedging, where one person has an existing exposure and would like to reduce it and someone else is alright with taking that on. I mentioned insurance and that's another example where the expected value in terms of utility rather than dollars needs to be remembered, although I suppose it's more of an economy of scale than gains from trade (unless you imagine it as a huge number of individuals each trading each other some of their unique idiosyncratic risk). Then there's the time preference of borrowers vs lenders, and we could go on and on. And I'm not even someone interested in finance.
Thanks for that link, I was looking for a comprehensive critique of Taleb from someone like that. (Although I was going to also write about the obvious self-contradiction of bragging about his humility, but someone convinced me that it was so glaring that it was obviously a form of trolling).
My remark about zero-sum was kind of flip, but not central to my point which was that Taleb has (or claims to have) a very strong ethical boundary in finance, but I didn't understand it.
"Financial trading (unlike actual economic production) is inherently zero-sum, if you profit, you are inherently always taking advantage of somebody else. I’m missing some distinction that I’m sure is there."
The claim that trading is zero-sum is belied by the constantly changing total market capitalization of the securities traded. In a rising market, most traders profits; in a falling one, most lose.
As an example, suppose trader 1 buys 1,000 shares of XYZ Corp. at $25. Six months later, the price has risen to $33. He decides to sell, realizing a profit of $8,000. Trader 2, who bought the stock trader 1 sold, holds it for another two months, by which time its price has risen to $40. He then sells it and realizes $7,000.
Can either trader be said to have lost anything? It is true that trader 1, by selling after six months rather than eight, has forgone an additional $7,000 profit. However, we can't say what motivated him to sell at that time; he might have needed the liquidity, or he found an even better opportunity to make a profitable trade.
It is a stretch to say that Trader 2 "inherently took advantage" of Trader 1. He can't complain, because he's made a profit, and neither can trader 2, because he also made a profit. There was no zero-sum trade in either instance, nor need there have been at any time before or after the two events. Few stocks are without their short-term fluctuations, but many of them demonstrate long-term rising prices, because the underlying companies are sound and profitable businesses.
Hm, Paul Krugman's headline writer agrees with me.
@scw -- the price of stocks is a combination of the actual value of the company and speculation. In the first case, it's not pure finance, but actual useful economic activity. In the second, it is going to be zero-sum eventually -- someone gets caught holding the bag when the bubble bursts.
Interesting that you mention biological systems vs. computers.
In Neuroscience, we use the robustness (I won't say antifragility, because it would be wrong) of a neural net as one factor in deciding how biologically plausible the net is, for the purposes of modelling.
mtraven wrote: "the price of stocks is a combination of the actual value of the company and speculation. In the first case, it's not pure finance, but actual useful economic activity. In the second, it is going to be zero-sum eventually -- someone gets caught holding the bag when the bubble bursts."
By the "actual value of the company" what do you mean? Its book value, i.e., stockholders' equity as shown on its balance sheet?
The "value" of anything - be it a company, or a commodity, a day's work, or an idea - is imponderable, and not really the subject of economics. Economics is about price theory, not value theory. The market-clearing price of any of these assets is whatever someone is willing to pay for it at any given time. People value things according to their perceived utility - which varies from one individual to another - and the market-clearing prices of those things express a consensus of the participants in a market about the perception of their utility.
It's really impossible to separate the "actual value" of a share of stock from whatever element of its price is contributed by "speculation." We may, for example, note that a share of stock clears the market at some multiple or fraction of its book value, but it is not at all clear that the difference between the market- clearing price and book value is a premium or discount due to "speculation."
The principles of accounting on which book value is based are themselves arbitrary. A credible argument can be made that the stock might better be valued by some measure such as expectations of future earnings, market conditions in the industry of which the company is a part, etc., or a combination of such measures with book value. Many businesses are not publicly traded companies, and there is an entire profession made up of people who appraise the value of those businesses for such purposes as preparation for sale, succession planning, or taxation, by using formulations of this kind. Still, the only way you can know what a company is really worth is to find out what a buyer is willing to pay for it.
As for being left holding the bag when the bubble bursts, the alleged zero-sum nature of financial markets all depends on the unit of time over which you calculate it. Over the long term, stock market indices go up. They do not collapse back down to zero. See, for example, this:
http://stockcharts.com/freecharts/historical/djia1900.html
The total market capitalization of the DJIA or any other index is constantly changing and by-and-large expanding. This is why it is not a zero-sum operation. Were it a zero-sum operation in which any participant's gain was matched by another's loss, total market capitalization would have to be fixed, neither increasing nor decreasing.
Finally, bubbles are not inflated solely by "speculation," nor are they burst because the markets are zero-sum operations. The (mis)management of central banking is the chief culprit in the overextension of credit that is responsible for bubbles. Central banks are not run by, or for the benefit of, speculators. "Speculation" is to a great extent a reaction to the operations of central banks.
@scw: Economics is about price theory, not value theory.
Well, I am not even a big fan of economics and I think more highly of the field than that. By the standard definition, it is about the social organization of the production of good and value, and pricing is only one small aspect of one possible way of doing that.
I don’t think I’m being particularly deep or unconventional in my view of stock prices. The actual value of a stock is supposed to reflect its expected future earnings, which in turn are at least partially based on the production of actual human value as reflected by the market’s willingness to pay the company for its products. Not completely of course. Some stock prices just reflect speculation and bubbles (but those necessarily cancel out over the long term, at least that is my intuition). Others represent corporate profits that are counterbalanced by huge negative externalities that they impose on society (such as pollution, or selling crap food that creates medical costs). But some largish fraction of it represents actual value.
Oddly, I seem to be the one making the better argument for capitalism here, since I am saying both that corporations increase actual value and productivitiy over time and that their stock prices reflect that. If you are saying the opposite, then you are basically saying that it’s all a big con game and we ought to overthrow it. Perhaps you a closet communist.
No, I'm not "saying the opposite." I'm just reiterating the standard price theory accepted by all schools of economists (except Marxists) since the time of Böhm-Bawerk - namely, that the price for which a thing is bought by a willing buyer is based on the buyer's perception of its utility, and that market-clearing prices reflect the consensus of the market's participants about the utility of the articles bought and sold. This is a subjective judgment, both in the individual and in the collective case. Hence all economics rests upon, or is indeed just a branch of, mass psychology.
"Good and value" is the noumenon or Ding-an-Sich; price is the phenomenon, or one of the phenomena, through which we express our perception of it. Of course it is imperfect. Real wealth is reflected in living standards. We may contemplate with benefit the historical facts that, on cold days, water froze in the wash-basins in the Versailles of Louis XIV, or that Prince Albert of Saxe-Coburg-Gotha died at Windsor castle of typhoid fever, a disease contracted by drinking contaminated water - and consider that in terms of basic amenities, the humblest American citizen, enjoying central heating and a sanitary water and sewer system, is in at least these aspects immeasurably wealthier than the crowned heads of Europe were in centuries past. It is of course very difficult to put a price on such things.
You observe that "speculation and bubbles...necessarily cancel out over the long term," which is in agreement with what I've previously said, so that over the long term the generally rising prices of stocks (as shown by the indices) DO reflect that overall, investment in stocks (which implies trading in them) is not a zero-sum operation. In like manner, whatever may be the short-term and local "negative externalities" imposed by some businesses' operations on their neighborhoods are, from a perspective of greater time and distance, negligible, compared to the improvement in average living standards brought about by the growth of productive business enterprise.
The great majority of "negative externalities" we have witnessed during the past century, such as two world wars, many other smaller wars, the rise of totalitarianism, engineered famine, genocide, and the threat of nuclear annihilation, are the byproducts of politics, not commerce.
"Someday someone will reconstruct computation and computational intelligence on a truly robust foundation."
Thats pretty much what Jeff Hawkins argues in On Intelligence.
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