Tuesday, July 19, 2011

Taleb's World: "Knowledge is (not) Good"

From DealBreaker:
At this point, Nassim N. Taleb has explained many times (1) what caused the financial crisis and (2) what will cause the next one. This is actually pretty simple stuff and as he’s sick of repeating it, we’ll summarize:
(1) the Nobel Prize Committee, and
(2) knowing things.

We learned the second part when Taleb dropped by the U.S. Congress last week to warn them away from the dangerous trap of setting up an Office of Financial Research to collect statistical data from banks and try to analyze it to reduce risk. Taleb’s prepared testimony included some polite objections to this plan:

Allow me to present my conclusions upfront and in no uncertain terms: this measure, if I read it well, aims at the creation of an omniscient Soviet-style central risk manager. It makes us fall into the naive illusion of risk management that got us here —the same illusion has led in the past to the blind accumulation of Black Swan risks.
It’s what Taleb has been saying for years – backwards-looking data can provide no guidance about future risks, any indication that you can beat the market or manage risk is just a temporary anomaly, and the only way to protect yourself is to buy out-of-the-money puts and/or Taleb’s books. Brad DeLong summarizes:
His argument is that you should actively seek to be completely ignorant of everything, for if you learn something then you will be overconfident about how much you know and will run unacceptable risks as a result. Better to just shut your eyes and act completely at random.