tag:blogger.com,1999:blog-6798074091942701235.post5170149685059892346..comments2024-03-29T01:35:09.550-04:00Comments on Can Turtles Fly?: Dr. Black Swan - Is Nassim Nicholas Taleb overrated?Sivaram Vhttp://www.blogger.com/profile/06361276466660862882noreply@blogger.comBlogger11125tag:blogger.com,1999:blog-6798074091942701235.post-62440272638755083622009-06-28T21:12:07.000-04:002009-06-28T21:12:07.000-04:00I think you're right that, in this particular ...I think you're right that, in this particular instance, Buffett and Taleb are both speculating. Taleb doesn't publicize and boast his investment activities nor their performances. (This is a point worth mentioning. His books focus on the intellectual ground. He never preaches the idea of using his philosophy to do trading.) But I remember reading that Taleb doesn't betting on the broad market. Instead he puts his bets on individual stocks. We don't know how he picks the stocks. But one would guess it's technical/statistical based. So, Buffett and Taleb are not quite betting against each other.John Ynoreply@blogger.comtag:blogger.com,1999:blog-6798074091942701235.post-28138738892241221792009-06-28T03:42:41.000-04:002009-06-28T03:42:41.000-04:00Thank you for the response.
I guess what I'm ...Thank you for the response.<br /><br />I guess what I'm saying is that both physical goods and organizations often exhibit negative skewness. A company, country, institution, or civilization typically must be painstakingly built over time through the ceaseless efforts of a group of people. <br /><br />But all of these organizations are prone to unpredictable but rapid collapse.<br />This can be seen by simply examining how many organizations from, say, 1000 years ago still remain today. Very, very few. Most generated whatever wealth or utility they gave, continuously year after year, until finally, they collapsed.<br /><br /><br />You are right that it is possible for an individual to protect their assets (to an extent) by keeping cash, or even by using a Taleb-like strategy of betting on fat-<br />tail events. However, it is not possible for society as a whole to protect itself from negative skewness.<br /><br />Society as a whole cannot turn its stocks its cash (the stocks and companies must exist in somebody's hands). Society as a whole cannot withdraw from its companies, governments, and cities, all which seem to me to be negatively skewed assets.<br /><br />I suppose all I am saying is that Taleb may be right about people mispricing assets <br />with negative skewness, but it seems to me that he is wrong about people preferring assets with negative skewness. It looks to me like our economies, organizations, and lives naturally and unavoidably have negative skewness.MrParkerBohnnoreply@blogger.comtag:blogger.com,1999:blog-6798074091942701235.post-62841066447414268042009-06-28T03:38:56.000-04:002009-06-28T03:38:56.000-04:00Thank you for the response.
I guess what I'm ...Thank you for the response.<br /><br />I guess what I'm saying is that both physical goods and organizations often exhibit negative skewness. A company, country, institution, or civilization typically must be painstakingly built over time through the ceaseless efforts of a group of people. But all of these organizations are prone to unpredictable but rapid collapse.<br /><br />This can be seen by simply examining how many organizations from, say, 1000 years ago still remain today. Very, very few. Most generated whatever wealth or utility they gave, continuously year after year, until finally, they collapsed.<br /><br />You are right that it is possible for an individual to protect their assets (to an extent) by keeping cash, or even by using a Taleb-like strategy of betting on fat-tail events. However, it is not possible for society as a whole to protect itself from negative skewness.<br /><br />Society as a whole cannot turn its stocks its cash (the stocks and companies must exist in somebody's hands). Society as a whole cannot withdraw from its companies, governments, and cities, all which seem to me to be negatively skewed.<br /><br />I suppose all I am saying is that Taleb may be right about people mispricing assets with negative skewness, but it seems to me that he is wrong about people preferring assets with negative skewness. It looks to me like our economies, organizations, and lives naturally and unavoidably have negative skewness.<br /><br />move entirely into cash. All of the goods and companies still exist, and must be ownedMrParkerBohnnoreply@blogger.comtag:blogger.com,1999:blog-6798074091942701235.post-82854471486200930372009-06-27T23:13:15.000-04:002009-06-27T23:13:15.000-04:00I agree with what you saying. Both Taleb and Buff...I agree with what you saying. Both Taleb and Buffett believe that risk is being mispriced, and are exploiting it. In this sense both are speculators.<br /><br />But lets imagine a perfectly sane world where the risk is known to all parties...<br /><br />Under these conditions, Buffett would still on average make money, since he would be paid to provide a service (taking on the risk of insuring against fat-tail events), and Taleb would on average pay money, since he would have to pay for the service of moving his fat-tail risk to another party.<br /><br />Another way to put this is that if the real risk were known to all parties, Taleb would no longer have any reason to trade (since he couldn't exploit a perceived mispricing of risk), but Buffett could still demand premiums for selling his put options, since insurance would still be in demand.MrParkerBohnnoreply@blogger.comtag:blogger.com,1999:blog-6798074091942701235.post-68608889139047984192009-06-26T12:17:14.000-04:002009-06-26T12:17:14.000-04:00MrParkerBohn: "Buffett is not speculating, he...MrParkerBohn: <i>"Buffett is not speculating, he is providing a service (insurance against fat-tail events), and is being paid for the service."</i><br /><br /><br />What's the difference between that and speculating? Was AIG speculating or providing a "service"?<br /><br />I would say that Buffett is also speculating based on statistics and economic history. Taleb probably relies on human psychology and behaviour more, whereas Buffett relies on economic history.<br /><br />Strictly speaking, one can perhaps argue that one side is a speculator while the other side is doing it for a commercial reason (sort of like how one side of a commodity futures contract is classified as "speculators" while the other side is "commercials".) But in the grand scheme of things, it doesn't make much difference from an investing point of view. Buffett is trying to make money and so is Taleb.<br /><br /><br />If Taleb claims that market participants are under-estimating the tail risk, in both probability and magnitude of outcome, then that applies to Buffett as well. Perhaps Buffett is charging an appropriate price but we don't know that--that's the whole point of Taleb: we just don't know.Sivaramnoreply@blogger.comtag:blogger.com,1999:blog-6798074091942701235.post-4026506454361025732009-06-26T11:22:46.000-04:002009-06-26T11:22:46.000-04:00It seems to me that Taleb and Buffett are not just...It seems to me that Taleb and Buffett are not just taking opposing trades, but that they are engaging in two completely different activities.<br /><br />Taleb is speculating, based on statistics and behavioral science.<br /><br />Buffett is not speculating, he is providing a service (insurance against fat-tail events), and is being paid for the service.MrParkerBohnnoreply@blogger.comtag:blogger.com,1999:blog-6798074091942701235.post-80641117911986961202009-06-26T10:38:36.000-04:002009-06-26T10:38:36.000-04:00Hi MrParkerBohn,
You are correct. Peolpe can deal...Hi MrParkerBohn,<br /><br />You are correct. Peolpe can deal with negative skewnewsss in physical entities..like cars , ships..<br /><br />But in financial market , there are two layers of skewness..One in underlying entity..and another on Price (influenced by people's emotion)..<br /><br />People drive cars , travel in ships..there are necessacities in urban life..But none force you invest in stock/ bond markets..<br /><br />People can simply protect themselfes by keeping their cash in their pocket.<br /><br />Regards<br />VishnuVishnunoreply@blogger.comtag:blogger.com,1999:blog-6798074091942701235.post-58815001772961638602009-06-26T10:37:25.000-04:002009-06-26T10:37:25.000-04:00Interesting thoughts by all three of you. Thanks f...Interesting thoughts by all three of you. Thanks for the comments. Here is a question:<br /><br />Isn't Warren Buffett (at least with his bet on the 4 stock indexes) going completely against what Taleb is suggesting? It's possible that Buffett extracted a high premium but even so, isn't Buffett doing the complete opposite?<br /><br /><br />The interesting thing will be to see if more participants start betting against low-probability fat-tail events. Will we see more people trying to use strategies similar to Taleb? So far, my impression is that Taleb is one of the few to bet on fat-tail events.Sivaramnoreply@blogger.comtag:blogger.com,1999:blog-6798074091942701235.post-20284102304106907542009-06-26T06:41:10.000-04:002009-06-26T06:41:10.000-04:00Taleb speaks of the 'negative skewness' of...Taleb speaks of the 'negative skewness' of the returns on many investments. By this he means an investment that predictably yields profit most of the time, but very occasionally 'blows up', yielding a large loss.<br /><br />Taleb seems to say that investors irrationally seek situations of negative skewness.<br /><br />Unfortunately, however, it is impossible for investors (as a whole) to avoid negative skewness. This is because life events commonly exhibit negative skewness.<br /><br />Most complex things are built brick by brick, but can fall apart very rapidly under the wrong conditions. For instance, ships, cities, cars, and houses are all constructed one step at a time. All of these goods yield a predictable persistant utility, until disaster strikes. Ships sink, cars wreck, houses burn down, and cities are destroyed by earthquakes or hurricanes. These are all real-life examples of negative skewness.<br /><br />There are many more examples of negative skewness in life events. A worker may produce consistent value year after year, until unpredictably laid low by accident or illness. Electronics serve their function, until one day, they simply stop. Entire products serve a society, until rapidly becoming obsolete.<br /><br />It is very much harder to think of real-world situations with positive skewness. What good produces a constant small loss, with a rare large gain? The only things I can think of are economic constructs that exist specifically to provide positive skewness, such as insurance, and the lottery.<br /><br />So it seems to me that while it is possible for a trader to bet against negatively skewed situations (which is what Taleb seems to do), it is impossible for investors or society AS A WHOLE to bet against negatively skewed situations, since life and the economy are themselves negatively skewed.<br /><br />What do you think?MrParkerBohnnoreply@blogger.comtag:blogger.com,1999:blog-6798074091942701235.post-7815795794693553312009-06-26T05:58:06.000-04:002009-06-26T05:58:06.000-04:00Hi,
You have missed a crucuial point..if you lose...Hi,<br /><br />You have missed a crucuial point..if you lose , how much you lose...and if you gain , how much you gain..<br /><br />Bleeding startegy is fine as long as your loses are extra thin..your gains are extra big...<br /><br />Regards<br />VishnuVishnunoreply@blogger.comtag:blogger.com,1999:blog-6798074091942701235.post-54022330305133566372009-06-26T03:25:22.000-04:002009-06-26T03:25:22.000-04:00As a Taleb fans, let me respond this on 2 fronts:
...As a Taleb fans, let me respond this on 2 fronts:<br /><br />1. I think Gimein misses a key point in Taleb's worldview: the market doesn't only underestimate the likelihood of catastrophic events (the thickness of the fat tail), it also underestimates their out-of-portion magtitudes (the length of the tail) because, as Taleb puts it, the systems are non-linear. So, the 2 sides of catastrophism/non-catastrophism aren't "mirror images". They are anti-symmetric. As for the "long waiting", isn't that precisely Taleb asserting: people underestimate the likelihood? You think it takes too long to wait, but Taleb says it appears far more often.<br /><br />2. Taleb's trading strategy is based on his worldview: a probabilistic worldview. As layman, we may not be able to employ his trading strategy. But that doesn't mean we can't utilise a probabilistic framework understanding events around us. Charles Munger says "you got to have [mental] models in your head". A probabilistic worldview is one of them that I found vital in many aspect of investment.<br /><br />p.s. Not sure if you're interested in reading Taleb. If you do, I would suggest skip "Black Swan". Try "Fooled by Randomness" first. More concise.John Ynoreply@blogger.com