To Time Magazine on Taleb: Quantity and Probability.

Mr. Galdel, of Time Magazine, asks readers what questions he should put before Nassim Taleb, author of The Black Swan, and implies, without understanding his own cognitive bias, that the liberal belief in our own wisdom and control of our own destiny is unquestionable.

Taleb has recently been bashing Bernanke saying he doesn’t know what he is doing because he didn’t see the financial crisis coming. But Taleb has also said that the financial crisis was a Black Swan. But isn’t the definition of a black swan something that people don’t see coming. Yes, we should be ready for unusual events. But don’t think you can criticize someone for not see(ing) something that by definition was unpredictable, or at least very, very unlikely. What say you Taleb?

Mr. Gandel,

“not see(ing) something that by definition was unpredictable, or at least very, very unlikely.”

That’s the whole point. That statement expresses the entire difference between left and right political philosophies, and between quantitative economists, and the austrian school: namely, that the unforeseen is unpredictable because:
1) The foreseen is unquantifiable (this is the entire issue in economics)
2) the unquantifiable is unpredictable
3) the scale of the impact of unforeseen, unquantifiable, unpredictable events is likewise unquantifiable.

Therefore risk is there for not probabilistically measurable by mathematical means.

Therefore risk measurement, and quantitative probability as used in financial speculation is FRAUD if committed by those who understand these principles, and ERROR if used by those who do not. Since these ideas are hard to grasp, a few people commit fraud, and a very large number of people commit error.

Taleb’s indictment of the Nobel Committee is the most serious because it was their awarding of prizes to econometricians that allowed those who wished to commit FRAUD, to convince a lot of people to commit error, and in doing so create this catastrophe.

Taleb’s proposition is that we are applying the mathematics of closed, permutable systems (probability) to the open, innovative, dynamic system of human interaction. In effect this is the warning given by the Austrian school to all political economists: we know how to enable the greatest amount of creative innovation in a marketplace, and in doing so create the greatest competitive advantage and the lowest prices, for the benefit of all. But political systems must aim at enabling that process, not achieving any particular end, while assuming that that innovative process will tolerate infinite manipulation.

Taleb’s recommendation in The Black Swan, is that we must build our nations such that we recognize the COMMON-NESS of disruptive, unforeseen events. Therefore we should seek stability, security, and safety, and not expose ourselves to risks.

We should never have assumed that such a thing as complex derivatives would provide risk mitigation — regardless of corrupt rating companies and bankers.

We should build policy that expects the unforeseen. We should avoid policy that invites fragility from the impact of the unforeseen.

This is probably an anathema to Time’s editorial staff. Because Taleb’s premise is core of Conservative political philosophy: take small risks, work through the market, and do not empower politicians to expose us to risks: Maintain strength and capital, both human and material, so that we can survive the inevitable shocks to our system.

Of course, if we just read Aesop’s Fables we can learn the single lesson that Aesop attempted to teach us: avoiding the error of hubris – overestimating our knowledge and understanding.

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