PBS Video: Taleb & Mandelbrot
Economist Nassim Nicholas Taleb and his mentor, mathematician Benoit Mandelbrot, speak with Paul Solman about chain reactions and predicting the financial crisis.
click for video
Excerpt:
RAY SUAREZ: Finally tonight, we return to a subject on many minds these days: the financial crisis. Our economics correspondent, Paul Solman, checked back in with one particularly prominent voice in the investment world and his colleague, who guided his thinking.
Here is the pair’s sobering conversation on what may lie ahead.
PAUL SOLMAN, NewsHour Economics Correspondent: One of the world’s hottest investment advisers these days, Nassim Nicholas Taleb, author of "The Black Swan," who’s been warning of a crash for years, betting on one, and winning big.
He’s been ubiquitous in the financial media of late, from cable TV’s "Colbert Report" to the BBC’s "Newsnight," where he was infuriated by what he called "bogus accounting."
NASSIM NICHOLAS TALEB, Scholar and Author: The first thing I would get immediately, immediately, I would suspend something called value at risk, quantitative measures of risk used by banks, immediately.
PAUL SOLMAN: We sat down with Taleb and the man he calls his mentor, mathematician Benoit Mandelbrot, pioneer of fractal geometry and chaos theory. And even more than feeling vindicated, they’re both scared.
NASSIM NICHOLAS TALEB: I don’t know if we’re entering the most difficult period since — not since the Great Depression, since the American Revolution.
PAUL SOLMAN: The most serious situation we’ve been in since the American Revolution?
Source:
Top Theorists Examine Rippling Economic Turbulence
PBS, October 21, 2008
http://www.pbs.org/newshour/bb/business/july-dec08/psolman_10-21.html
October 29th, 2008 at 12:43 am
BR,
Come on, Taleb is soooooooo overrated. He is certainly on my ignore list.
October 29th, 2008 at 1:17 am
Scary! Just in time for Halloween.
October 29th, 2008 at 1:19 am
He’s been right – like Roubini.
October 29th, 2008 at 1:32 am
Those two, Mandelbrot y Taleb, Genius Both, are the perfect refractive vehicle for understanding why ‘Keynesianism’ is, truly, The Polaroid School of Economics–theme song, of course, by The J. Geils Band.
The Economagicians that fall out of, said, ‘Freeze Frame’, do nothing much more than set the still-life for the, inevitable, Minsky Moment that would have never occured without their addition of their surreal = signs.
October 29th, 2008 at 1:34 am
Taleb gets lots of press, but there’s one equity mutual fund manager I can think of that gets little press but saved his shareholders from huge losses this year: John Hussman, Ph.D., of Hussman Funds. Maybe he needs to have someone like Malcolm Gladwell ghostwrite an accessible book for him with a catchy title.
Regarding Mandelbrot, does he know Jonathan Coulton wrote a song about him (“Mandelbrot Set”)? I tried to ask Mandelbrot via e-mail once, but got no response.
October 29th, 2008 at 1:47 am
Well, I know the felling.. let’s hope we are all wrong however so far so bad. I can’t believe that my best hope is inflation.
October 29th, 2008 at 1:58 am
Great seeing Mandelbrot. Read his paper on cotton prices 20+ yrs ago. Fascinating stuff. Although, I hate to rain on Nassim’s parade, I didn’t really hear any earth shattering info in the video. Do they just roll these guys out when the markets are down 40%?
October 29th, 2008 at 2:05 am
Nassim is a funny guy but he couldn’t explain the doomsday scenario well enough, or I misunderstood.
This crisis to me is becoming a little overrated. Yes we are in deep shit caused by funding an unnecessary war and excessively lax economic policies and right oversight, but the burden should be the people who chose their presidents and government by questions on abortion, likability, presentability, drink-a-beer-with-ability and on and on. They gotta think better to keep the wealth and health of the country as a whole.
It is time to pay the cost of wrong judgements.
October 29th, 2008 at 3:18 am
If I understood correctly, Roubini is fluffy kittens and puppies compared to Taleb.
October 29th, 2008 at 3:34 am
After watching the interview I am less impressed with Nassim. But I’ve suddenly become interested in Mandelbrot. Good post.
October 29th, 2008 at 3:36 am
Proposed punishment for Bush for bringing us to this sorry state. He has to work on a graduate thesis titled “What I should have learned at Yale but didn’t as a result of which you are all screwed!” His advisers will be Taleb and Roubini.
October 29th, 2008 at 4:00 am
I am here to stick up for Black Swan guy. He is not so much predicting that doomsday will happen, he says that YOU cannot rule it out and so what are the chances of this happening. Also he says here that since the global economy is soooo complex, it is impossible to model, therefore you cannot conclude that it is stable and can only go up. He does not predict HOW it can happen, only that it COULD happen.
I work in biotechnology and can think of alot of ways that something can happen in that complex system that can affect everything including global economies. It used to keep me awake at night, but I have been happily wrong and nothing has happened, but the technology for bad things is getting cheaper and more ubiquitous. How can you lend for 30 year periods when technology is causing time to shorten. Thats why we have high volatility, time is compressing.
As technology accelerates and communication gets faster weird feedbacks can happen that are out of the control of us mortals. That might be turbulence as Mandelbrot said.
Thats why I am voting for Google for Benevolent Overlord in 2020 and you should too
Google should get Taleb as a consultant to engineer different logic into their system.
October 29th, 2008 at 4:27 am
Taleb is pointing out the small, but real and growing, possibilty for a financial catastrophe that could rival the 1929 crash. As the months of 2008 unfold, and the crisis worsens, the “possiblity” of ruin has increased, and can no longer be dismissed.
Frankenstein financial engineering has spread across the globe like the influenza pandemic of 1918. Now in October 2008 world leaders are taking extreme steps to save the world from financial chaos and calamity…to save the world from a financial disaster of historic proportions that Taleb warns about.
World leaders can not talk as straight as Taleb, but they clearly are focused on avoiding a world market crash of magnitude 1929.
October 29th, 2008 at 5:14 am
Interesting interview. They seem to focus on globalization and financial institution consolidation as the great destabilizers of the global economy.
I think there’s some validity to this, but they miss more important considerations, perhaps.
The money supply system (and thus inflation, deflation, and the “business cycle”) has built in POSITIVE FEEDBACK mechanisms. This is most powerful (and destructive) on the downside of money supply contraction. The changes in values of all assets cause accounts and assets of all types to be cashed out. This creates more contraction of the money supply.
The relentless depreciation of assets is synonymous with appreciation in value of cash. With cash appreciating in value, all people aware of this have even more powerful incentives to cash out accounts of all types. The farther and faster the process goes, the more it accelerates.
Once a bottom is reached, putting cash back into banks and investments expands the money supply and the resulting inflation makes it expensive to hold cash, driving more cash into deposits and investments.
All systems dominated by positive feedback mechanisms oscillate. Up and down, up and down….
The above has been true since banking was invented. What’s changed is the very nature of all the money that isn’t physical currency. And the vast majority of all money isn’t in physical currency–it exists as ledger entries, pure data.
When data can be spun around the globe and transformed in the blink of an eye, in unimaginable volume, then the same is now true of money, capital. The electronic age has brought increased, relentless volatility to the economy.
Oscillations driven by positive feedback mechanisms thus become faster, steeper, deeper and higher–but briefer.
The US and global economy went from inflation in energy, food, and commodities to generalized deflation in the blink of an eye. It is now also perfectly capable of hitting a bottom and reversing course just as precipitously.
We’ll hit a market bottom within weeks, if we haven’t already. As before, market changes will precede changes in the “real economy.”
As an analogy, the global economy has developed manic-depressive (bipolar) disorder. Just like the psychiatric disorder, there’s a tendency for untreated cases to cycle faster and faster, with lower lows and higher highs as time goes on.
The needed treatment, the economic lithium, must be coordinated central bank activity of much greater prescience, rapidity, and vigor.
So, yes, Google for Federal Reserve Chairman. It’s only a moderate distortion to call for such a remedy.
Steve from Maryland
October 29th, 2008 at 5:44 am
Starting to sound like Y2K.
October 29th, 2008 at 6:12 am
One question I have is why isn’t Taleb’s fund performing more astronomically, given that his strategy is to bet on random unknown events happening and on major maket dislocations. I believe his fund is up 50% YTD. Paulson & Co made 591% last year betting against subprime and Andrew Lahde returned 1000%. This would seem to be the moment when Taleb should be hitting it out of the park.
October 29th, 2008 at 6:45 am
That’s the first time I’ve heard someone who didn’t think the Great Depression was a sufficiently dire comparison. What’s the next comparison after the American Revolution? I vote for the asteroid that wiped out the dinosaurs.
October 29th, 2008 at 7:01 am
Bubble, bubble, toil and trouble…
If the world is ending this has been the most orderly ending I have ever seen. As bad as some are making out the markets the reality is they have performed remarkably well. As a trader, no matter the size, all the fills have been spot on–no time and sales necessary.
True there have been several dozen stocks that have gaped down hard on some days locking people away but it has been nothing compared to 1987. The only real change has been the market’s taking on the personality of the futures markets. Today’s stock market chart looks likes hundreds of individual commodity charts from the late 70’s, 80′ and 90’s.
Despite the headlines this is no big deal unless it is new to you. In fact the Dow and S&P charts from Oct 07-til now look very similar to Oct 73-Oct 74. Interestingly that was the last time they said the world was ending.
Here’s the authors own Black Swan:
“NASSIM NICHOLAS TALEB: Let me tell you why it’s not like before. Look at what’s happening. The world is getting so fragile that a small shortage of oil — small — can lead to the price going from $25 to $150.
PAUL SOLMAN: A barrel.
NASSIM NICHOLAS TALEB: A barrel. A small excess demand in an agricultural product can lead to an explosion in price.
We live in a world that is way too complicated for our traditional economic structure. It’s not as resilient as it used to be. We don’t have slack. It’s over-optimized.”
Nothing of the sort happened like that. It’s called a bubble. Too much cash rushing through a small opening. Bubbles and there study have been around since the 1600’s. They have the same start, middle and ending. They generally run 6-8 years. It takes about that long for a universal belief to set in about the fundamental story–ie peak oil, insatiable Chinese demand for commodities, ethanol, higher housing prices, Internet, etc, all the while prices going parabolic as the belief inbeds society.
In the end you can overlay scaled charts of each and they all look the same–they have to, human nature and the psychology of price and time have not changed in 500 years.
What we are going through now are the DT’s of all these bubbles bursting at the same time. Scary to be sure but not the end of the world. The end result will be what it has always been–a return to value and wealth to it’s rightful owners as someone famous once said.
In a perfect world we will go down and take out the 2002 lows setting the hook. Panic and belief in the “end” will be finalized. At that point the next great bull run will start.
October 29th, 2008 at 7:02 am
I believe the money quote from years ago is:
“Not only are economists stranger than we imagine, they are stranger than we CAN imagine”
or something like that…now back to your economic universe..
October 29th, 2008 at 7:17 am
“The end result will be what it has always been–a return to value and wealth to it’s rightful owners as someone famous once said.”
Yeah, that’s a real gem all right, like how America became what it is today via killing the native Americans. Rightful owners my ass – they’re ruthless thugs with no morals and the least civilized humans you can find on the planet.
We’ve (all of humanity) failed as a species to learn the basics of civilized life: cooperation, interdependence, limited growth (of population and everything else), group (ie. the entire planet) thinking rather than personal gain (the whole idea of wealth), etc. and will pay the price – chaos and extinction in that order.
October 29th, 2008 at 7:33 am
“We don’t have slack. It’s over-optimized.”
–Taleb
Patrick,
I hear your points, and don’t disagree, but you have to appreciate the audience he was speaking to, and the time he, knew beforehand, was allotted.
That said, I think you may be missing his point re: ‘over-optimized’.
if you reflect it through: JIT
http://clusty.com/search?input-form=clusty-simple&v%3Asources=webplus&query=JIT
for starters, and:
http://outsourced-logistics.com/searchresults/?terms=JIT&rp=
you’ll get a better feel for what he was intending.
In many fields of endeavor, the Days-to-0 #/ Stock-on-hand Metrics have never been lower..
IOW, you can gain better cornering dynamics by replacing your shock-absorbers with steel rods, but watch-out for those potholes..
October 29th, 2008 at 7:44 am
chaos and extinction in that order
And suffering! You forgot suffering!
(I just wanted to make this the gloomiest thread ever).
October 29th, 2008 at 8:07 am
Mark,
I think I grasp their intended remarks but I was talking to the much larger issue of bubbles. Not enough can be said about them as regards human nature and their necessity in a free wheeling financial universe.
It sounds counter intuitive I know, but as everyone looks at the entrails trying to prevent the next one I posit that to set up a system to prevent them constructs a system that prevents anything. In easier understood terms I present a simpler comparison–prostitution!!! Technically we could stamp it out. But to do so we would basically stamp out society as we know it. The requirements to stamp it out would leave us in some N. Korean gulag so we choose to live with it. Not to mention all the great pulp fiction that would be lost.
Absurdist to be certain but you get my drift.
October 29th, 2008 at 8:20 am
The Black Swan in one sentence: Equity returns are not normally distributed but rather discretely and finitely distributed.
There, I just saved you a bunch of time. And a ton of anecdotes about Lebanon.
It’s not that I disagree with the guy – the fact that Black Scholes is still taught at the best B-schools in the country even after LTCM is akin to Harvard’s Biology Department having an Intelligent Design wing – it’s more of a “tell me something we didn’t already know” kind of feeling.
Is he brilliant, in addition to being a great trader? Without question. Does he deserve credit for bringing an accessible book on just how random the markets are to the layman? Most certainly. Could he become the Carl Sagan of financial writing? No reason why not.
But, it’s not that quants didn’t already know the thrust of his book. It’s the fact that they chose (choose?) to ignore it that’s a story you could make an entire career out of.
October 29th, 2008 at 8:24 am
It’s called a bubble. Too much cash rushing through a small opening. Bubbles …
I like that Pat
imo its starts from short changing the laborer at the base of the economy
trickle down has failed
cause trickle down found foreign lands to trickle out to
short circuiting the flow
October 29th, 2008 at 8:25 am
Just a quick note to a comment above, Taleb is not an economist and actually has great disdain for the practitioners of the ‘dismal science’…[and journalists LOL]
I am not a Taleb guru–no one is my guru, but he’s on a short list of people i like to mentally wrestle with in formulating my macro strategies.
IN BRIEF–the Black Swan can be summed up as: “The absence of proof is not the proof of absence”.
Models are built on historical data and therefore are at risk for violating the above quote.
Over a year ago, when i came across two separate obscure [and not widely reported] studies that showed all asset classes were now correlated [r=.9], i threw out modern portfolio theory because I realized people thought they were ‘diversified’ when they in fact were not. I sold all my stocks, and then read Black Swan. Have employed Taleb’s ‘barbell’ strategy he discusses [80% assets safe, 20% aggressive/speculative] since, and i am up for the year [but exhaustive-- ]
October 29th, 2008 at 8:26 am
I guess I am surprised no one else mentioned it but Mandelbrot’s (math/science)is what underlies wave principle and Taleb essentially states a long term forecast that Prechter developed. Bad raps develop a lot faster than understanding using ideas that need more than sound bites to explain.
No worries, I am totally sure the new President and Congress will fix everything.
October 29th, 2008 at 8:29 am
I saw the live version of this “interview”, ( more of a “set up”) and these two are the living example of why it’s known as the “Dismal Science”.
Even a broken clock is right twice a day.
I admit I’m an optimist but then the “Markets” do go up 70% of the time.
October 29th, 2008 at 8:29 am
Patrick,
Totally, I hear ya. Like I was saying, “I don’t disagree”. Was just trying to provide add’l context that Solman wasn’t bringing light to..
October 29th, 2008 at 9:03 am
Over a year ago, when i came across two separate obscure [and not widely reported] studies that showed all asset classes were now correlated [r=.9], i threw out modern portfolio theory because I realized people thought they were ‘diversified’ when they in fact were not.
Great. There goes my plan. I guess I should just join the technical analysts and spend my days guessing what the herd is going to do. Yay for investing in modern America!
Do you have links for those studies?
October 29th, 2008 at 9:05 am
Hey HT: How can all asset classes be correlated? It doesn’t make any sense to me that TIPS would be correlated with emerging makets, or REITS with long-term treasury notes.
October 29th, 2008 at 9:07 am
J’aime Mandelbrot & his description of turbulence. Taleb has nothing much to say, and strikes me as stagey & somewhat insincere. Roubini, otoh, always appears genuinely worried.
October 29th, 2008 at 9:30 am
Taleb has a slightly more sophisticated mathematical point than either “absence of proof is not proof of absence”, or “returns are not normally distributed”.
Non-normally distributed functions are not problematic to traders, if (a) their tail distributions are well understood and (b) their variances are finite. His point is that there are many non-pathological distribution functions–Cauchy not least among them–which have infinite variances. (Cauchy, for instance, arises as the distribution of the ratio of two normally-distributed functions, say , P, and E…) However, any finite sampling of those functions necessarily has a finite variance. So the historical record will always appear to satisfy both conditions above.
However, for such a distribution, as more and more samples are taken, the variance grows without bound.
Power-law distributions, depending on the exponent, may also fail to have finite variance. Power-law distributions appear frequently in study of chaotic dynamics.
Note that for trading purposes, distributions that have finite variances which are extremely large compared to “typical” deviations, and dominated by tiny probabilities in the far-tails, have the same kinds of problems as those with infinite variance, because due to their large variances, they nearly always fail condition (a) above.
Personally I take no position on whether the underlying distributions of things really are Cauchy / other infinte-variance; I simply don’t know enough. That’s why I study X-rays and didn’t join the quants like many of my physicist brethren. But Taleb’s point is simply that no amount of historical data can really tell you whether the distribution has a finite variance.
October 29th, 2008 at 10:05 am
Personally I take no position on whether the underlying distributions of things really are Cauchy / other infinte-variance; I simply don’t know enough. That’s why I study X-rays and didn’t join the quants like many of my physicist brethren. But Taleb’s point is simply that no amount of historical data can really tell you whether the distribution has a finite variance.
Posted by: Andrew Foland | Oct 29, 2008 9:30:45 AM
Andrew,
that, your whole post, was really well put.
I’d just say that the ~only things that are finite, are the minds that believe: They Know.
past that, it’s interesting to hear that you’re in x-rays, because, switching topics, you’re probably familiar with some of the ‘eyeballs’ we’ve fitted to ‘Silly, the Satellite’, to say nothing of those we’ve hung off the arm during various STS-’missions’, and, with that, you might know, exactly, how FOS the ‘Peak Oil’ hoax really is..
though, again, really well put..
October 29th, 2008 at 10:09 am
just to be clear, this: “I’d just say that the ~only things that are finite, are the minds that believe: They Know.” is in reference to Taleb’s I-view w/ the two trollops on BBC
and, Andrew, I hear you saying: “Personally I take no position on whether the underlying distributions of things really are Cauchy / other infinte-variance; I simply don’t know enough. That’s why I study X-rays and didn’t join the quants like many of my physicist brethren. But Taleb’s point is simply that no amount of historical data can really tell you whether the distribution has a finite variance.”
October 29th, 2008 at 10:27 am
tom: “We’ve (all of humanity) failed as a species to learn the basics of civilized life: cooperation, interdependence, limited growth (of population and everything else), group (ie. the entire planet) thinking rather than personal gain (the whole idea of wealth), etc. and will pay the price – chaos and extinction in that order.”
It is starting to look as though we live in some sort of Darwinian system as opposed to, say, for example, a Christian world. In both these systems extinction is possible. I’m thinking we may not be “special” after all.
October 29th, 2008 at 10:31 am
thanks for this one.
knowing you really have no f-ing clue as to outcomes is fine when you can trade against those who believe they do.
mandelbrot’s overweight cash 90% and 10% long OOM options is still the best portfolio design out there for preserving wealth.
but that’s just me, i could be wrong.
October 29th, 2008 at 10:36 am
“the “Markets” do go up 70% of the time.”
Until they don’t.
I think that is the kind of the point of Black Swan. Unknowable events can occur that break the statistical models.
“I believe his fund is up 50% YTD. Paulson & Co made 591% last year betting against subprime and Andrew Lahde returned 1000%”
Getting lucky in betting on a downturn, does not a long term strategy make. If Taleb can beat the market consistently while providing protection or even profit in a bad environment would be quite an achievement. Taleb’s management of low probability high impact risk, is kind of the point.
October 29th, 2008 at 10:51 am
@ Renting– sorry, i searched [quickly, i am a trader!] for the articles and even did a quick Google search, can’t find the links. Some were proprietary. I think the FT did a piece on it in the main stream press but maybe 6 months ago. I have my theories as to how this could occur, including globalization of markets, and hedge funds levered up 30x and hedging assets classes against each other which, i believe would create this scenario.
@Andrew
With all due respect [BTW, i have a background in neural network and genetic algorithm prospective predicative modeling, but prefer to avoid the mathematical diatribes], my quote says what your mathematical treatise does–the fact that we have imperfect knowledge, and what knowledge we have is based on deductive [historical] knowledge, leads to imperfect models [unknown variance]. My quote is much better for cocktail talk, as well…
I am intrigued at applying hybrid techniques like neuro-psych theories etc…
October 29th, 2008 at 10:57 am
A question raised here and elsewhere is, “why isn’t Taleb’s fund performing more astronomically?”
Think of Taleb’s approach: The financial system – its adherents, its MBAs, its VAR professionals – misprice risk. Taleb proposes that you bet against “them.” He buys a whole slew of low-probability derivatives at a price that mis-calculates their outcomes.
So… he’s up 50-60% when the rest of the market is down 50-60% because the “rest of the market” mispriced things. And they misprice things consistently. In epochs like 2003-2006, he’s down a little… now he’s up.
He’s not betting with the Paulson’s and Lahde’s he’s betting against the financial orthodoxy. (FYI anagram of mispriced is empirics, LOL)
October 29th, 2008 at 11:07 am
Correction: Misprice is an anagram of empirics.
October 29th, 2008 at 11:23 am
@renting [BTW if that means you sold R/E in '06 good move--I did!]
To be clear, I am not saying r=.9 across ALL asset classes still as the deleveraging goes on, it may[be?] return[ing]… although anyone who bought the decoupling theory between emerging markets and the States in equities lived it… And look how uncorrelated [joking] commodities have been v. equities…
October 29th, 2008 at 11:40 am
“All systems dominated by positive feedback mechanisms oscillate. Up and down, up and down….”
Not always…under some circumstances they
can LOCK UP.
October 29th, 2008 at 11:46 am
HT,
if you ever want to bust out with your take on ‘the network effect’–that Taleb, briefly, alluded to in the clip, feel free
though, simply, it has a lot to do with the same(Hedge/Levered) ports following similiar strategies learned at similiar schools teaching the same equations..
October 29th, 2008 at 11:53 am
Academics and intellectuals are always wrong in their worst-case predictions. In the 50s they predicted nuclear war, in the ‘60s it was the eventual worldwide dominance of socialism, in the ‘70’s it was widespread starvation due to overpopulation and massive unemployment because of robotics and computers, and currently it is that global warming is going to make the planet nearly unlivable.
These guys are too smart; they see deeper into the complexities of what COULD occur. They see how bad it COULD get. But fortunately for us, what we fear most never happens and a black swan is just another bird.
Consider Roubini who is about as negative as any economist and seems to revel in the prospect that this is the end of American leadership in the world, even he is not predicting a depression, of any sort. In fact today on Bloomberg he commented that the recession would probably end by the end of 2009.
Worst thing since the American Revolution? Hardly.
http://www.bloomberg.com/avp/avp.htm?N=av&T=Roubini%20Says%20S%26P%20May%20Fall%2030%25%20More%20Over%202-Year%20Recession&clipSRC=mms://media2.bloomberg.com/cache/v.8Wcra7zbSE.asf
October 29th, 2008 at 12:18 pm
Financial panics used to be a regular occurrence…
October 29th, 2008 at 1:08 pm
I must agree with some of the other comments that seeing Talib all over the news circut is getting kind of tiresome. If he appears on The View it will definately be a contrarian indicator. Don’t get me wrong I thought his book was great and I’m sure he’s selling them like hot cakes now that everyone seems to think he’s a present day Nostradamus. You can only hear the sky is falling so many tires before getting sick of it, even if it really is!