It is Black Friday in the financial world. As each hour passes, billions are
being wiped off the value of shares. But Nassim Nicholas Taleb, the
financial thinker of the moment, is enjoying a light-hearted lunch in a
North London restaurant called Flaneur. It is one of his in-jokes - he is
the epitome of Baudelaire's flâneur, a man who strolls the city, absorbing
the spirit of the place: part of the crowd while also set apart from it.
Taleb is in a state of considerable excitement. He is greatly in demand
because his recent book, The Black Swan, includes a scathing attack on the
financial system. For years he has railed against the banks - bad risks
taken for the wrong reasons by incompetent people using bogus financial
models. Any fool can say that now. Taleb saw it coming.
“The financial ecology is swelling into gigantic, incestuous, bureaucratic
banks,” he wrote in The Black Swan. “When one falls, they all fall.” Taleb's
ideas, widely ridiculed by economists at the time, are being vindicated.
Being proved right intellectually is one thing, but Taleb is also winning at a
practical level. He was a trader long before he published books, and his
strategic trading position has been that the stock market would crash. “The
last two days have been the biggest of my life,” he says, apologising as he
quickly checks the stock market on his BlackBerry. Without lifting a finger,
Taleb stands to make a fortune.
The black swan concept has now entered public discourse about the banking
crisis. More people are using it than understand it. A black swan is an
event that you are unable to predict on the basis of past experience.
We used to think that all swans were white until a black swan was discovered
in Australia. No quantity of white swans can prove that all swans are white,
but a single black one demonstrates that they are not all white. The best
you can do, in other words, is to understand that you cannot make absolute
predictions.
Taleb has explored the impact on world history of such improbable events. A
black swan need not be a calamity - they can be bright as well as dark. The
events of 9/11 were a black swan; the discovery of penicillin was a black
swan; the internet was a black swan; the current financial crisis...
“... Is not a black swan,” Taleb interrupts. “Well, it was a black swan for
the turkey [the average investor] but it wasn't a black swan for the butcher
[the banks].” So the banks weren't unlucky? “Not at all. Would you say
someone was unlucky if he was an unskilled pilot and he hit the storm?”
I became interested in Taleb's ideas about luck before this crisis. As a
sportsman I have learnt the hard way about luck. This season, with Middlesex
sitting second in our division, top of our Twenty20 Cup group and on the
brink of winning our fifth game in a row, I broke my ankle in front of a
full house at Lord's. I missed the rest of the season. Now, while my
Middlesex team-mates prepare for two big-money tournaments in Antigua and
India, I am interviewing the pre-eminent philosopher of chance and
randomness. The ironies are inescapable.
Breaking my ankle was my black swan. Before that day - June 12 - I hadn't
missed a game through injury for ten years. There was no X-ray initially,
and I simply had no experience of being injured. I hoped that I'd be playing
again in days. It turned out to be much more serious than that.
One day, while I was hobbling around the Lord's pavilion, a thoughtful
Middlesex member gave me a copy of Taleb's Fooled by Randomness. I was soon
hooked. It was brilliant and timely company. Taleb explores how we all
ignore how much of life is down to pure luck or ill-luck. Fooled by
Randomness, which grew out of Taleb's frustrations with financial orthodoxy,
mirrored many of my experiences in professional sport. First Fooled by
Randomness, then The Black Swan: I not only enjoy Taleb's books, I have also
lived them.
There was good luck, too, of course. I was asked to review The Black Swan last
year but I had no free time from cricket. This year I had more than enough
time. It took my black swan to find Taleb's.
Taleb's writing is a passionate attack on several of modern society's
favourite ideas. First, expertise - “idiots in ties,” Taleb calls so-called
experts.
He is suspicious of received wisdom. 'We think we know infinitely more than we
do. We used to think that mother's milk was no better than bottled milk
because we couldn't find anything special in it. Now we know that Mother
Nature knew better than us.”
Taleb's contempt for self-reinforcing cabals of experts cuts across
disciplines: “Academics are usually subhuman.” When my pen pauses and I look
up, he adds: “You can say I said that - they are. Academia has nothing to do
with producing knowledge. They produce PR. The four most important thinkers
of modern history - Freud, Marx, Einstein, Darwin - none was a conventional
academic.”
You can imagine what Taleb thinks of orthodox financiers. “I kept saying the
risks the banks were taking were crazy, but the economists kept attacking me
as “irrelevant” because my ideas didn't fit their theories.” Far better,
Taleb argues, to have no theories than bad theories, because ideas are
“sticky” - once we have an idea, no matter how useless, we find it hard to
abandon it.
Professionalism is part of the problem. People want to be seen to be doing
something. It is an engine of office politics. So they formulate plans and
theories based on forecasts of events - including potential black swans -
which are impossible to predict. In other words, much “planning” is worse
than doing nothing.
“When someone says he's busy, he means that he's incompetent,” says Taleb.
Having a stupidly busy schedule isn't a sign of being important. It means
that you become insulated from the real world.”
Understanding luck and randomness has practical benefits for us all. “Leave
some space and time redundant,” Taleb says. “It's good for dealing with
black swans.” Like slack in the system? “Exactly. We all need slack.
Capitalism doesn't teach slack. It teaches optimisation - if the banks had
had twice the capital, this crisis never would have happened.”
So is Taleb really against expertise, or is he simply pitting his own against
that of the experts? He got this call right. The fall was forecast-able and
he forecast it. It was not really a black swan.
The colourless conformity of corporate life appals Taleb: “Screw the money. No
money can compensate for being turned into a rat in a cage.” In a typical
piece of intellectual mischief, his next book describes how two of his
fictional characters meet Socrates when the Greek philosopher visits the
modern world. One of them predicts that Socrates will notice the absence of
slaves. “Absence of slaves?” the second replies. “We've got plenty of
slaves. You can identify them because they wear neckties.”
Taleb's intellectual heroes are Aristotle, Montaigne and Hayek. “Platonic”, on
the other hand, is his synonym for being perfectly and elegantly wrong. He
is a bottom-up thinker rather than a top-down theorist, happy when absorbed
with the practical and down-to-earth.
“Just as you played sport and then wrote, I was a trader, then a writer. It's
important to do something in the real world - to gather insights.”
On that basis, today's capitalist economic theorists have a sorry track
record. Perhaps we need to embrace the humility that Taleb prescribes. My
generation grew up laughing about the USSR's planned economy in which
factories produced some good shoes but only left-footed ones because the
machines couldn't be adapted for the right foot. Now what about our own
sophisticated “free market” banking system? How embarrassed should we be by
what has happened?
“Very, very embarrassed,” says Taleb. “We don't understand banking. The people
in charge don't understand banking. The banks should be confiscated from the
bankers. They say ‘the market may go down by 10 per cent'. I say ‘why might
it not go down by 60 per cent?' Ever since the Enlightenment we have deluded
ourselves that we know much more than we do.” He might have added that if
only we who don't know had at least known that the bankers didn't know
either, fewer of us would have been taken for a ride.
But Taleb's victory today is a pyrrhic one. “I wake up every morning at 2am,
scared. I have made money on my bet that the financial world will go under.
But now, if the banks go under, I can't cash my money. If I follow my logic
all the way through, I get scared.”
He knows that it goes deeper than that. Understanding the centrality of luck
in life transcends the financial realm. It is no coincidence that civilised
people acknowledge their good fortune. It has always made practical sense.
The idea of noblesse oblige is a way of turning away the wrath of those who
missed out in life's lottery. Any social establishment that wishes to
survive needs to be concerned with preserving the status quo. A phoney
meritocracy of people who got massively lucky and think they did it all
themselves is a recipe for social disaster. If that is what we have, as
Taleb's logic implies, then the credit crunch will be just the tip of a much
nastier iceberg.
Understanding that we do not, and cannot, live in a perfectly functioning
meritocracy is a civilising concept - because it leads us to be less
self-congratulatory, more charitable and better mannered.
It is no surprise that Taleb's logical struggle with concepts of chance and
luck should lend him excellent manners. He is a sceptic but not a cynic, and
he finds much contentment in his scepticism. Given the threat of a negative
black swan and the devastation that may follow, there is all the more reason
to live politely and honourably - and for pleasure.
Once you understand that luck will probably help you more than planning, you
open yourself to its upsides. Taleb connects his laptop to check the markets
again. The trader in him is winning big, the philosopher is in his element,
but the moralist is deeply concerned. It has been the best of days and the
worst of days.
There is surely, for Taleb, an uncomfortable irony. Much of his present
notability is due to his having made one devastatingly accurate prediction.
Had he got his forecasts for the fall of banking wrong, the error would only
have strengthened his general theory of black swans. But it would have
undermined his popular reputation, which has never been higher. Now that
really is luck. I leave him hoping that it may prove contagious.
Positive black swans
Penicillin Alexander Fleming was cleaning his laboratory when he found that
penicillium mould had contaminated one of his old experiments.
The laser When Charles Townes invented the laser, he was just satisfying his
desire to split light beams - he didn't have retinas on his mind.
The internet There are lots of competing theories about who developed the
internet - the Pentagon, Al Gore - but the world wide web, as it has turned
out, was unplanned and unforecastable.
Negative black swans
9/11 Suddenly we realised just how asymmetric things had become.
Stock Market Crash of 1929. Nothing, surely, could interrupt the optimistic,
hedonistic, utopian jazz age?
World War One was going to be just another short war with “our boys back in
time for Christmas”. But modern warfare was different this time.
