Robustness and Fragility, A Lecture by Dr. Nassim Taleb

By: Daniel_Bruno

He starts the sold-out presentation with a tale of two readers on a business trip. Settled in for a long flight, Dr. Taleb pulls a book out of his bag while the fellow next to him pulls out the fashionable,expensive, razor thin, 500 book capacity Kindle to pass the time. A conversation ensues and comparisons are made. Common sense and marketing tell us that the Kindle is far more efficient, But Dr. Taleb is not so sure. He has reams of work on 1990s era floppy discs that he can no longer access. But books, the product of technology essentially unchanged in 500 years, present no such problem and will outlast the Kindle when it too becomes obsolete.

The controversial point of the anecdote is this: efficiency is fragile; simple and redundant systems are robust and Mother Nature, and by extension natural selection, favors simplicity, including in financial markets. The Kindle, like debt, especially complex financial instruments that no one understands, embody the opposite of simplicity and will not stand the test of time. In fact, they will be short lived.

I was reminded of the story of the zero gravity ball point pen. NASA reportedly spent a lot of time and money in the 60s developing a pen the astronauts could use in space. What did their arch rivals do? They gave their cosmonauts pencils.

Building on the airplane allegory, Taleb goes on to ask the audience how many times a flight has been cancelled or delayed, and by how many hour?. He then asks, how many times has a flight arrived early, and by how many minutes? Some statistical model errors are skewed towards certain outcomes and one does not wade through a river that is, on average, four feet deep. The probability of rare events canot be accurately measured. This is how Taleb breaks down convexity bias and the flaw in much of current business school thinking about risk management. When you think about it, it rings true: how many times have we seen pundits and experts declare that the probability of a four airplanes hijacked simultaneously, a killer hurricane, a repeat of 1929 or a catastrophic offshore oil spill is one in some gigantic number every zillion years? Then it happens in our lifetime.

The wild success of his paperback The Back Swan happens about as often as an actual Black Swan sighting, but randomness is an unlikely factor: the reasons for the book's great appeal are a combination of good timing and good storytelling, the keys to successful entertainment in any venue. His iconoclastic ways stir debate, stoke sales and earn detractors. "The fact that you never died before does not prove your immortality." Pithy sayings like this make the audience laugh and relax.

By the time Taleb delves into standard deviations, Gauss, kurtosis and heuristics to make his point and argue his case, his listeners are already receptive to his views even if they don't get the technical mumbo-jumbo. Therein lies Taleb's success as an author and speaker. It also doesn't hurt that he lampoons the banks and academic/financial elites as incompetent and responsible for the economic crises that have buffeted the world lately. He's not afraid to step on toes and tell it like it is.

By Daniel Bruno
Chartered Market Technician

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