Casey Neistat and Success by Doing (Plus Stochasticity)

If you aren’t familiar with Casey Neistat, allow me to remedy the situation.

Casey Neistat is likely the most burgeoning YouTube star of 2016. Here’s his channel. I’m approaching a year having subscribed to his daily vlog videos and to my eye what Neistat is doing on YouTube is a testament to the democraticization of video content.

First a little context: Neistat has racked up over a billion video views and is likely to cross the 5 million subscriber mark sometime in the next few days. He’s 35 (a month younger than me), lives in NYC, and has been in film and video production for almost 15 years though he never went to school for it and got his start on an iMac/

You might have come across Casey’s work in the past. See: real-life Alladin/magic carpet in New York (he worked to produce this) or his Jan 2016, mid-NYC-blizzard snowboarding  the streets video set to “New York, New York.” For more background, take a watch on Reddit’s Formative Moment video on Casey Neistat.

For a classic Neistat video, watch this video of him retrieving a drone he lost on top of a building in New York. It showcases his wild use of cameras and general scrappiness with both his videos and his approach to life.

Just think about what he’s doing. Every single day he records a slew of content using a mix of DSLR cameras, handheld point and shoot cameras, drones, smartphones, and god knows what other equipment, bringing to life the adage that the best camera is the one you have with you. He takes all this content at the end of the day and then spends a few hours editing it down into a video that is less than 10 minutes.

In so many ways, Casey’s channel is a one-man reality TV show that is direct to viewer and without all the absurd drama that you’ve come to associate with “reality TV.” Neistat’s body of work is reality TV “IRL,” but unlike real life which is often boring, it’s been supercut into something fun to watch.

(It also helps that Neistat’s life is, actually, pretty fascinating, particularly as he has ascended into celebrity status, gets sent on trips around the world, and is almost a mascot for NYC.)

Bear in mind what’s not seen on camera — all the work and effort Neistat puts into getting the raw content that makes his daily vlogs visual treats. Note that you don’t usually see the cameras. Or think about how when you see a shot of Neistat walking or running “on scene” (a common shot is him entering his production studio, as seen from his desk): Casey had to do that very action at least twice — once to set up the camera and once to record the action. In other words, this “real life” video is manufactured. It’s deliberate. It’s not really “real” in the “your life just sorta unfolds” way and more real from the perspective of telling a story about life. It’s a story. Duh.

That Casey Neistat does all of this every day is a serious feat. Kudos to his dedication; he’s upleveled the conversation on YouTube (in the off chance you’re reading this, thanks!).

So about that stochasticity …

Right, so now that you’re familiar with Neistat and realize that he’s putting out solid work every day (each video is getting a million plus views), let’s talk about his viral successes.

I remember when Casey’s snowboarding video hit. I recall waking up and actually wondering, “I wonder how NYC is doing amidst this blizzard — I bet Neistat will do a video,” and (no joke) about 30 seconds later I saw the notification that he’d uploaded his snowboarding NYC video.

That video has received nearly 15 million views to date and got re-shared all over the web and picked up by all sorts of news stations. It was a big moment for Casey and got him a whole lot of attention and new subscribers.

It also spawned another wave of questions about how Casey creates viral videos. Not surprisingly, he’s vlogged about this subject. And like anyone who has had success, Casey has a few thoughts about how to create viral videos — things like tapping into the zeitgeist, timing, relevance, generality — he even made a diagram in that video:

Note the bottom right …
What’s refreshing about Neistat is his self-awareness about viral success — he wraps that diagram up with a statement:

The truth is I have no idea how or why the video goes viral.

Casey echos this sentiment some 240 videos later after his $21K First Class plane ticket video published about 10 days ago achieved 20 million views in ~7 days, bumping his subscriber base by about 500K subscribers. Mind that any YouTuber would kill for 5K subscribers.

That’s repeat success. So is Neistat a viral video machine or are his viral video hits just dumb luck?

It’s neither, and Neistat outright says as much. Neistat’s viral success is due to lots and lots of attempts, lots of everyday successes (most of his videos still achieved around a million views), and the occasional colossal blow-up.

And to borrow on Nassim Taleb, you can attribute Casey Neistat’s viral success to taking a stochastic approach to content creation. Casey noted in his “viral video secrets” video (the one with the diagram) the following:

I’ve gotten lucky and had a few viral hits beyond just this snowboarding one but I’ve also uploaded 310 movies in the last 305 days so if 2 of them or 1 of them has gone viral that’s less than 1 third of 1 percent of every movie I make so I don’t know what it is.

For most people, this rate of success might be a deterrent to even trying. But to someone like Casey Neistat — a real “doer” — it’s just the way to live life.

And that’s the takeaway. Expose yourself to upside success in life by writing a lot of options or buying a lot of lottery tickets — in the figurative sense — that is, by engaging in activities that you enjoy, that are hard, and that pay off by themselves but also have huge upside potential.

And really, that’s why I blog*.

* Yes, I’m trying to blog again. Been quite a hiatus and it’s not easy to get back but I’m trying!

Chance Wins

http://www.blog.sethrober…what-causes-it/

This bit by Seth Roberts reminds me all at once of Nassim Taleb’s work (Status quo, the fed turkey, works until it completely implodes), Seth Godin’s “This is Broken” idea, and the dinosaurs going extinct.

Who is flying this plane? Do they really know what they are doing? Does chance win over purpose?

Seth’s blog post is centered around the broken U.S. healthcare system — a system which suffers both from a burgeoning status quo as well as no means of introducing alternative solutions. In other words, it is entrenched.

And just like the dinos, when that entrenchment ultimately leads to social upheaval, the failure may be catastrophic.

A robust system must be dynamic.

Nassim Taleb is no friend of academics

http://www.fooledbyrandomness.com/notebook.htm

Nassim Nicholas Taleb’s latest from Opacity, no 114 titled “Where is the evidence?” launches into Nassim’s current interest in how we know things given the lack of evidence (That is probably summed up poorly, but it is a focus on the absence of evidence/evidence of absence problem and humanity’s gross ignorance. Taleb mentions the concept in the hour long podcast at EconTalk if you’ve got the time to listen to it).

Taleb’s admonition of academia is brutal — he basically says Ben Bernanke and Larry Summers are “arrogant, formal-thinking civil servants, and Ivy-league semi-retards.” Don’t pull any punches there Nassim!

I’m still not convinced the admonition about negative advice is exactly right, but why quibble? (See prior discussion on Nassim Taleb and Expert Advice)

Finally, I’ve ordered two books by John Gray, who Taleb cites as the “greatest living thinker.” And to think I hadn’t even heard of the guy.

Note: If you are like me, and wants to be updated on Taleb’s latest posts to his non-feed-friendly blog, feel free to use this change detection RSS feed I created: Taleb’s Opacity Change Detector Feed.

I leave aside the confusion absence of evidence/evidence of absence–and the misunderstanding of the very notion of “empiricism”. It is a fact that in the real world of our daily decision-making 1) we do not have much evidence of most relevant things, yet we need to take action; 2) in most situations, “true/false” is never symmetric (one side is more harmful than the other), so the burden of evidence is one-sided. Which is why once these fakes “doing science” lose their tenures after the endowments (and charity) run out of funds, they will be barely fit to do anything in the real-life ecology. I wonder what you can do with an unemployed, say, academic orthodox economist. You could do better with non-post-academic cab drivers. Clearly those the most fit at dealing with “just evidence” will be idiot savants outside their evidence domain.

And I can expect that with the SP500 about 20% lower than here, you will see tenures unexpectedly evaporating. The silver-lining of the crisis, perhaps, with the de-academification of society.

So let me take this into more interesting territory, and express my anti-social-planner views. Even more that in Hayek’s days, the ecology of the real world is becoming too complex for Aristotelian logic: very, very little of what we do can be safely formalized, meaning asymmetries matter more than ever. Which puts the Western World today at the most dangerous point in its history: unless we get the Bernanke-Summers crowd out of there, it will eventually be destroyed by the machinery of arrogant, formal-thinking civil servants, and Ivy-league semi-retards.

Finally, beyond the current mess, I see no way out of this ecological problem, except through that tacit, unexplainable, seasoned, thoughtful, and aged thing crystalized by traditions & religions –we can’t live without charts and we need to rely on the ones we’ve used for millennia.

On Nassim Taleb’s Ten principles for a Black Swan-proof world

http://www.ft.com/cms/s/0…?nclick_check=1

Nassim Taleb‘s latest from the Financial Times titled Ten principles for a Black Swan-proof world provides a brief insight into what Taleb believes caused our current financial crisis and what might prevent a similar crisis going forward.

I’ve excerpted those principles below (pushing the fair-use envelope a bit, perhaps). All italics are NNT’s.

Before delving into Taleb’s ten, I’d like to suggest that NNT’s principles can be (and should be) boiled down to more simpler structural problems/observations. Taleb’s folksy expressions make for useful analogies, but they needlessly complicate some simpler realities:

  • Government-made negative externalities [1, 2, 7] — Legal constructs like corporations and limited liability companies are exploited to offload risk to the public. This subsidizes risks resulting in agents (CEOs, Managers, etc.) taking more and more chances with other people’s money. This is related to the principle-agent problem, which Taleb indicts in [4]. The Ponzi aspect of all of this is intrinsically tied to our leveraged financial system, which is inextricably tied to our centralized, fiat-“money” banking system. To me, this is the biggest point that I’ve yet to see Taleb make — centralized fiat currency is a fragile entity that is inherently leveraged (out of thin air) but can be used to build complex systems of finance. This won’t tend to break early (as we’ve seen). To kill the leverage you have to kill the source of it, which is our centralized non-robust banking system!
  • The Authority Complex [3, 4, 6, 9] — we need a great deal more skepticism in our system and we should not have such centralized power. The problem here is the authority complex — the so-called experts all pontificate to the “ignorant” masses. The masses are too busy or too confused by the magical words of the experts to deduce that the experts don’t know what they are talking about. And like any good con, the con-artistsexperts are able to trick the masses into giving them all the power. I would argue that NNT’s #9, which more or less argues that we should question authority and not trust experts, completely negates NNT’s #6, which suggest that we should be protected from ourselves. Well who is going to protect us when we can’t trust the would-be protectors? That is a problem.
  • Robust complex systems have simple base units that scale [5, 8, 10] — This is the biology angle that is exemplified by metabolic rate scaling over 27 orders of magnitude. A robust system requires simplicity at it’s base. Accounting is a good example of this. Accounting can get incredibly nuanced and complex but can always be brought back to debits and credits. The simplicity of this fundamental rule still enables incredibly complex book-keeping, but puts a governor on the system. You can’t make up assets without creating corresponding credits to the books.

    Compare this to our non-simple, non-robust banking system that holds as it’s core principle the notion of stability in prices and jobs while allowing for unlimited credit (money creation). Not simple.

    Simplicity lends itself to ease of understanding and puts a governor on shenanigans. It’s this fundamental simplicity that enables massive scalability and the emergence of complex systems that are robust.

I’m afraid I might have gotten overly complex in the above. I think what Taleb wants is an organic financial system, one that starts from real economic transactions between human beings and scales upwards from there. Thus, the solution is pretty simple. The base unit is the individual. Fictitious business entities that exist apart from owners are made illegal. No systemic credit structures, which fundamentally follows from the base unit being limited to the individual. This is because such a system would have decentralized banking that would evolve out of whatever needs such an organic economy would require.

This would be the (completely free) market solution, which incidentally most closely mimics biological systems. After all, where in biology do you see stuff created out of thin air (like Corporations or fiat currency)?

And life has been getting along fine for untold millions of years with a simple base units that are the molecules that make up DNA.

1. What is fragile should break early while it is still small. Nothing should ever become too big to fail. …

2. No socialisation of losses and privatisation of gains. …

3. People who were driving a school bus blindfolded (and crashed it) should never be given a new bus. The economics establishment (universities, regulators, central bankers, government officials, various organisations staffed with economists) lost its legitimacy with the failure of the system. …

4. Do not let someone making an “incentive” bonus manage a nuclear plant – or your financial risks. …

5. Counter-balance complexity with simplicity. Complexity from globalisation and highly networked economic life needs to be countered by simplicity in financial products. The complex economy is already a form of leverage: the leverage of efficiency. …

6. Do not give children sticks of dynamite, even if they come with a warning . … Citizens must be protected from themselves, from bankers selling them “hedging” products, and from gullible regulators who listen to economic theorists.

7. Only Ponzi schemes should depend on confidence. Governments should never need to “restore confidence”. …

8. Do not give an addict more drugs if he has withdrawal pains. …

9. Citizens should not depend on financial assets or fallible “expert” advice for their retirement. …

10. Make an omelette with the broken eggs. Finally, this crisis cannot be fixed with makeshift repairs, no more than a boat with a rotten hull can be fixed with ad-hoc patches. We need to rebuild the hull with new (stronger) materials; we will have to remake the system before it does so itself. …

Then we will see an economic life closer to our biological environment: smaller companies, richer ecology, no leverage. A world in which entrepreneurs, not bankers, take the risks and companies are born and die every day without making the news.

Mr. Taleb Goes to Washington

http://tbm.thebigmoney.co…goes-washington

Marion Maneker of The Big Money (part of Slate) has a nice article on Nassim Nicholas Taleb that discusses Taleb’s recent attendance at the Wall Street Journal’s “Future of Finance” conference in Washington D.C. The article describes righteous indignation at the ongoing and deepening financial calamity and what he suggests might be a more robust financial system. It’s a good read it is entirety, though below I’m saving down the major takeaways.

Taleb recently expounded upon the charlatan theme (and their positive advice) on his personal “blog.” Also, note Taleb’s closing words and see if you aren’t reminded of Jon Stewart’s big point in his recent interview with Jim Cramer.

… Taleb’s anger at the economic establishment [3] that drove us over this cliff—and populates the Journal’s conference—makes him a representative figure of ordinary people. Like most Americans, Taleb is seething with rage about the financial establishment’s role in bringing the about credit crash. “Nobody saw the crisis coming,” he says. “Bernanke, all these guys, I want them out. They proved incompetent, they crashed the plane.”

Unlike us … Taleb is comfortable with the theory and practice that undergirds the whole system of options, derivatives, and risk management that has spun so recklessly out of control. That talent mixed with his righteous anger makes him a rare bird: an Everyman who can do the equations. …

In normal times, the conferencariat are an arrogant bunch. This is something [Alan Murray of the WSJ] knows well from his travels on the conference circuit, which begins each year with the World Economic Forum in Davos. “Davos is usually filled with people who have all the answers,” Murray says. “What was so striking about Davos this year was all these people, for once, didn’t have all the answers. No one could tell you with certainty what was happening or what needed to be done.”

No one but Nassim Taleb. Before Davos, Murray read The Black Swan. At the conference, the newspaperman and the trader had many conversations over the course of four days. Murray came to the conclusion that Taleb was the iconic figure of Davos in 2009. “In my mind, he had the perfect message for the moment.” …

[As for the Future of Finance conference, Taleb] left after dinner the first night. While the 130-person conference debated the government’s new regulations that George Soros described as merely “tinkering” with the system, Taleb has a clear-eyed plan.

First, he says, we have to unmask the charlatans of risk like Myron Scholes. To Taleb, Scholes is the Great Oz in this Emerald City because his work on options and derivatives allowed the whole of the financial system to adopt poorly understood products-like the ones that brought AIG down-that hide risk. To Taleb, Scholes’ academic work, which enabled the widespread use of complex derivatives, was like “giving children dynamite.”

“This guy should be in a retirement home doing Sudoku,” Taleb says. “His funds have blown up twice [6]. He shouldn’t be allowed in Washington to lecture anyone on risk.”

With complex derivatives unmasked and, in Taleb’s vision of the future, outlawed, the next step is to create a more robust version of capitalism. Taleb calls it Capitalism 2.0. Robustness begins with a dismantling of debt. Leverage was the gas that inflated the financial system until it was too big, too fragile, and too volatile.

Over the past 20 years, the financial system has grown ever more complex. Building on a greater computing capacity and communication speed—”Bank runs now take place at the speed of BlackBerry”—Taleb recognizes that the financial system now possesses an efficiency that creates volatility. That cannot and will not go away.

We cannot have both debt leverage and a hyper-efficient system—the volatility is just too great. What Taleb explains—which no one else does—is that efficiency is already a form of leverage. A highly efficient system removes slack and magnifies small changes. Think of the efficient system as a high-performance aircraft. Each minute of steering input creates a rapid and violent shift of course, speed, or altitude. The system itself is souped up even before you add the debt. Once you do, the pilot is equally jacked up and twitchy, creating an explosive combination. Now imagine that fighter jet trying to fly in a 1,000-plane formation, and you get an idea of the world financial system in the 21st century.

We can’t erase the technology that created the planes, so we’ll have to make sure we fly sober, maybe even with an onboard computer that dampens the controls. That means getting rid of the debt. It’s that simple.

A deleveraged financial system is a stable one, especially if we increase the redundancy within the system. That’s an idea Taleb has taken from biology. But in finance, redundancy means two things: not having players in the game who are “too big to fail” and not allowing anyone—from the individual to the institution—to play with too much money. Redundancy means have cash on the side, not risking it all, and not becoming dependent upon financial assets for your economic well-being.

Nassim Taleb on Experts and Negative Advice

Nassim Taleb’s latest from Opacity #113 titled Negative Advice; Why We Need Religion makes the brief case that human beings are “suckers for charlatans who provide positive advice (what to do), instead of negative advice (what not to do).” Below is the entirety of his post, take a read (Emphasis mine):

At the core of the expert problem is that people are suckers for charlatans who provide positive advice (what to do), instead of negative advice (what not to do), (tell them how to get rich, become thin in 42 days, be transformed into a better lover in ten steps, reach happiness, make new influential friends), particularly when the charlatan is invested with some institutional authority & the typical garb of the expert (say, tenured professorship). This is why my advice against measuring small probabilities fell on deaf ears: I was telling them to avoid Value-at-Risk and the incomputable rare event and they wanted ANOTHER measure, the idiots, as if there was one. Yet I keep seeing from the history of religions that survival and stability of belief systems correlates with the amount of negative advice and interdicts — the ten commandments are almost all negative; the same with Islam. Do we need religions for the stickiness of the interdicts?

Telling people NOT to smoke seems to be the greatest medical contribution of the last 60 years. Druin Burch, in the recently published Taking the Medicine

The harmful effect of smoking are roughly equivalent to the combined good ones of EVERY medical intervention developed since the war. (…) Getting rid of smoking provides more benefit than being able to cure people of every possible type of cancer”

It is easy to read Taleb’s argument as meaning that negative advice is both more routinely followed and better than positive advice. However, this is clearly not the case as there are countless examples of bad negative advice. For example, look at the “Don’t eat fat” mantra that developed over the past few decades. This is negative advice that I believe Taleb has personally acknowledged as poor (Taleb is a friend of Art De Vany’s and an adherent on some level to the low-carb evolutionary nutrition/fitness theory). The low-fat or lipid hypothesis that has been the driving force behind public health policy over the past few decades may ultimately be proven to have caused the premature deaths of millions of human beings (via cancer, cardiovascular disease, Alzheimer’s, obesity, diabetes, etc.). Clearly, not all negative advice is good to follow.

However, negative advice or bright-line rules seem to take hold more strongly than positive advice. Christianity and Islam are the two most dominant religions of the world. Both contain prescriptive, bright-line rules. In the case of Christianity the prominence of rules is particularly ironic: Jesus openly argued for the destruction or irrelevance of the law (The bright-line rules of Judaism at the time). Regardless, the dominating sects of both Islam and Christianity appear to have more negative advice (What not to eat, drink, do) than positive advice (Love your neighbor), and the negative advice tends to be much more concrete: “Do not commit adultery” is much more cut-and-dry than “Love everyone.” It’s the time-tested success of hard-line, negative-advice-based religions that lends the most support for Nassim Taleb’s argument.

Agreeing somewhat with Taleb’s theory, I think it is too limited in scope, and should be expanded and clarified. Simply put: human beings are sucker’s for bright-line rules be they positive or negative; adherence to and success of these bright-line rules is dependent upon their prescriptive strength. Based on conclusions drawn from observing health and religion idealogies, it seems that negative advice promotes the greatest adherence and zealotry, both of which lead to idealogical success**.

That it is human nature to want others to tell us what to do seems hard to deny. Why are we this way?

I just finished reading Daniel Gilbert’s Stumbling on Happiness (SoH), which discusses how we perceive things and how that affects our happiness. One argument Gilbert makes is that it is human nature to prefer action over inaction. This is because it is easier to justify our action-based decisions after the fact because they have clearcut consequences whereas inaction does not, making inaction difficult to imagine and thereby difficult to justify. I would add to this that I believe it is human nature to put greater faith in our ability to control outcomes; therefore, we act out of the misguided belief that our action can elicit the responses we want.

Regardless of the source of our preference for action, I believe it’s from this bias that springs the need for bright-line positive advice. For proof of concept, look no further than the pervasive mentality that, “We must do something to mitigate the economic crisis!” Charlatans and politicians fully exploit the bias of action over inaction to propagate their own prerogatives.

On the other hand, there is a second contention in SoH that seems an extension of the preference for action over inaction, which is that the elimination of choice can trigger our psychological immune systems. Once triggered, these systems work to make us happy or content with a more restricted existence. Imagine this: having bought the farm, you’re quick to articulate the benefits of the purchase and figure out a way to love the cows. In keeping with this understanding, we can readily explain the human preference for ideologies that drastically reduce choice via negative, bright-line rules.

Thus, here we have two psychological explanations for why humans crave bright-line rules, both positive and negative.

I’d imagine Taleb would agree: life is incredibly more complex and uncertain than our bright-line rules, either positive or negative, allow. We should be aware of our tendency towards dogmatic over-simplifications and be wary of overly prescriptive, bright-line advice.

* It’s always interesting how Jesus is written to have claimed he came to free man from the law. Yet Christianity, via any number of particular denominations like Catholicism or Protestantism all adhere to stringent rules and edicts.

** I can’t help but wonder if its just easier to prescribe negative advice than positive advice even though both are likely to instill dogmatic behaviors.

Further reading

Why Nassim Taleb’s Black Swan idea won’t catch on

http://www.nakedcapitalis…black-swan.html

While not quite a book review, Yves Smith of nakedcapitalism.com discusses Nassim Nicholas Taleb’s The Black Swan from the perspective of how likely the ideas in the book are to spreading and being widely understood and internalized.

It’s an interesting post. Even in these times where we are increasingly observing the effects of long tails and fundamental unpredictability/randomness, people still cling to the idea that the world will unfold as planned even though it’s rarely ever this way.

NNT discusses this problem within the book. In particular, the problem of hindsight bias causes us to overstate our own control over event outcomes that are fundamentally more random — particularly when it is a positive outcome. On the flipside, we acknowledge how uncontrollable things are when the event has a negative outcome. This sinister bias inflates our belief in our own predictive power. Sort of silly, right?

I particularly like Yves’ conclusion (see bolded bit). You have to love that the success of a book about unpredictability and luck is, itself, a sort of black swan. Mind, this is Taleb’s second book on randomness and unpredictability; however, Taleb’s success as a stock trader, making massive sums and achieving widespread acclaim for his correct trading of the 1987 stock market crash, is arguably a black swan event — right? Or does expecting a black swan cause the expected event to cease being a black swan?

Further still, is Taleb’s success anecdotal proof that awareness of black swans and exposing yourself to upside potential from random events, planning for the unplannable, is not only possible, but could be a wildly profitable pursuit? I tend to think this may be the case, but maybe my human control bias is creeping in.

Fundamentally, I just don’t know.

Here is Yves:

I sincerely doubt [Nassim Taleb’s ideas] will be internalized. . . . The very fact that his construct has been reduced to the soundbite “black swan” when it is more complicated and richer is telling.

What are some of the reasons? Let me speculate.

First, Taleb goes to some length to establish that he is not the first to go down this line of thinking; he has quite a few intellectual ancestors. Yet these observations never took hold.

Of course, one reason is that the implications are pretty uncomfortable for a lot of professions . . .

But second, and perhaps as important, people do not want to see the world as subject to chance to the degree that Taleb says it is. This is hugely unsettling if you really do come to terms with the implications of his argument. We like to believe we have some measure of control over our lives. . . .

Third, if our mental construct of how the world works is off in some fundamental respects, it also calls into question our ability to make good decisions. And apart from Taleb, there are reasons to question our abilities here. It has been pretty well documented in brain research that humans can only hold so many variables in their consciousness at once. Our decision-making capabilities are more limited than we’d like to believe. And confronting every situation as if it were new would be simply exhausting, That is why we rely heavily on rules of thumb (more fancily called heuristics). Now we also have certain types of analytic processes, what I like to think of as pattern recognition, that can serve us well (this was the topic of Malcolm Gladwell’s Blink). The problem is that this quick pattern recognition can work very well, or be absolutely wrong, and we have no easy way of telling which.

Essentially, Taleb paints a picture of the world and human behavior that is unflattering. So as much as his work makes a fundamentally important set of observations, its success may be largely a function of luck. It came out just when the credit markets were starting to unravel and well established practices, both among traders and the broader financial community, were being shown to have serious flaws. Had his book come out at another juncture, it probably would not have been as well received.

The Black Swan by Nassim Nicholas Taleb

The Black Swan by Nassim Nicholas Taleb
Nassim Taleb’s The Black Swan is a fantastic, eye-opening book that will challenge not only what you know but also what you think you know. Taleb is widely renowned as the guy who made beaucoup amounts of money off of the 1987 stock market crash. He profited not by predicting the crash would happen, but that the system would eventually produce a “black swan” event that would make options insanely profitable.

Recommendation — Nassim Nicholas Taleb (or “NNT” as I like to refer to him) opened my eyes with this book. Any book that can blow open your understanding of the world is a must-read — and this is one of those books. The role that randomness and unpredictability play in our lives is completely under-appreciated, when it is acknowledged at all. Just one attempt at appreciation I’ve made can be found in my post “But For,” which is an attempt to string together a series of unplanned events that have cumulatively had an enormous impact on my life.

Going forward, I want to garner a greater appreciation for power law, stochasticity, black swan events, and living in “Extremistan.” On my immediate reading list are related books: The Drunkard’s Walk: How Randomness Rules Our Lives, Stumbling on Happiness and The Luck Factor: The Four Essential Principles. I’ve yet to order it, but NNT’s first book, Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets, is also on my list.

I’ve become a bit of a Nassim Taleb junkie and typically link down stuff he puts out (videos, articles, posts to his low-tech blog “Opacity,” etc.).

Review — Rather than recant what others have said better, I’ll selectively quote a thorough and informative review of the book from Amazon:

The Black Swan is probably the strongest statement of enlightened empiricism since Ernst Mach refused to acknowledge the existence of the atom. Of course, in theory, everyone today is supposed to be an empiricist – all right-thinking intellectuals claim to base their views solely on positive scientific observation. But very few sincerely confront the implications of rigorous empiricism. Specifically, few confront “the problem of induction,” illustrated here by the story of the black swan.

Briefly: observing an event once does not predict it will occur again in the future. This remains true regardless of the number of observations one adds to the pile. Or, as Taleb, recapitulating David Hume, has it: the observation of even a million white swans does not justify the statement “all swans are white.” There is no way to know that somewhere out there a black swan is not hiding, disproving the rule and nullifying our “knowledge” of swans. The problem of induction tells us that we cannot really learn from our experiences. It makes knowledge very problematic, if not impossible. And yet, humans do behave -almost without exception- as though they believe that experience teaches us lessons. This is forgivable; there is no better path to knowledge. But before proceeding, one must account for the limits that the problem of induction places on our claims to knowledge. And humans seem, at every turn, to lack this critical self-awareness.

Taleb explains that conventional social scientists use induction to collect data, which is then plotted on the good old Gaussian bellcurve. With characteristic silliness, Taleb dubs the land of the bellcurve “Mediocristan” – and informs us that it is the natural habitat of the white swan. He contrasts Mediocristan with “Extremistan” – where chaos reigns, the wholly unexpected happens, power laws and fractal geometry apply and the bellcurve does not. Taleb’s fictional/metaphorical ‘stans’ share something with the ‘stans’ of the real world: very ill-defined borders. Indeed, one can never tell whether one is in the relatively safe territory of Mediocristan or if one has wandered into the lawless tribal regions of Extremistan. The bellcurve can only help you in Mediocristan, but you have no way of knowing whether you have strayed into Extremistan – beyond the bellcurve’s jurisdiction. This means that bellcurves are of no reliable use, anywhere. The full implications of this take a while to sink in, and are sure to cause huge controversy. In July, Taleb will debate Charles Murray (author of -what else?- the Bell Curve). I’ll let you know who wins.

How bank bonuses let us all down

http://www.ft.com/cms/s/0…0077b07658.html

More from Nassim Nicholas Taleb (See prior at tag nassim-taleb) on our current system that fosters the “free option,” which is most easily summed up as, “Heads I win, tails you lose.”

NNT has previously argued that our banking system is built to blow up, and how can you argue with the reality that banks steadily earn profits for years only to suddenly blow up, losing all past profits and more?

Why does this happen? I think there are two reasons, only one of which gets press generally. The other is at the root of Taleb’s discussion on a broken incentive structure (free options).

The widely accepted and discussed reason for our current mess is leverage — a.k.a. credit. By way of a simple example of the power of leverage, in a booming housing market, leverage enables a homeowner to turn little-to-no-equity into a hefty profit ($10k down, $90k loan to buy a house; sell in two years for $150k and you made 500%!). However, when that housing market goes bust (or even just stops booming), the levered homeowner suddenly can’t cash out or see his minimal equity position wiped out. Since he has little skin in the game, he lets the loss go fully to the bank. We are now seeing this happen en masse.

Heads I win. Tails you lose.

It is the same with banks, except in a monstrous, centralized, global, and ridiculously more complicated (thanks to derivatives) way.

So it is becoming widely understood how credit and leverage can muck things up.

The less (or not-at-all) acknowledged problem is our corporatist legal system whereby businesses can incorporate and separate personal loss from business loss. By default, creating a corporation is essentially creating a public negative externality. How so? Well, a corporation can only bear the cost of its failures to the extent of the capital invested. So even without any leverage, the corporation is incentivized to take on more risk than it has capital to cover in order to maximize profits. When times are good, this is incredibly profitable. When times are bad, corporations go bankrupt even as the CEOs and risk-taking managers who messed up get off with their wages and bonuses!

Tack onto this corporatist system the aforementioned system of leverage you key a system built to blow-up.

Despite all of the free option discussion, I’m not sure NNT understands the bald-faced simplicity of the problem of severing risk from loss. However, Taleb hints at a clearcut understanding when he makes mention of Roman soldiers. Soldiers have skin in the game – their lives. If they screw up, they risk their own life. When a CEO of a corporation screws up, they risk the wealth of their investors and that of general stakeholders in the event that their screw-up pushes waste onto society.

In fact, the incentive scheme commonly in place does the exact opposite of what an “incentive” system should be about: it encourages a certain class of risk-hiding and deferred blow-up. It is the reason banks have never made money in the history of banking, losing the equivalent of all their past profits periodically – while bankers strike it rich. Furthermore, it is thatincentive scheme that got us in the current mess. . . .

If capitalism is about incentives, it should be about true incentives, those resistant to blow-ups. And there should be disincentives to remove the asymmetry of the free option. Entrepreneurs are rewarded for their gains; they are also penalised for their losses. . . .

However, when it comes to banks and other “too big to fail” entities, the problem is severe: we taxpayers in our respective countries are funding these global monsters and are coughing up money for mistakes made by bankers who retain their bonuses and are hijacking us because, as we are discovering (a little late), banking is a utility and we need them to clean up their mess. We, in fact, are the seller of that free option. We should claim it back. . . .

Indeed, the incentive system put in place by financial companies has produced the worst possible economic system mankind can imagine: capitalism for the profits and socialism for the losses.

Finally, I was involved in trading for 21 years and I can testify that traders consciously play the free option game. On the other hand, I worked (in my other job as risk adviser) with various military organisations and people watching over our safety. We trust military and homeland security people with our lives, yet they do not get a bonus. They get promotions, the honour of a job well done and the disincentive of shame if they fail. Roman soldiers signed a sacramentum accepting punishment in the event of failure. This is prompting me to call for the nationalisation of the utility part of banking as the only solution in which society does not grant individuals free options to look after its risks.

No incentive without disincentive. And never trust with your money anyone making a potential bonus.

Nassim Nicholas Taleb: “Bankers Designed Banks to Blow Up”

http://www.bloomberg.com/…mMd4PSxEKeE.asf

Just watched a fifteen minute interview by Bloomberg of Nassim Nicholas Taleb (The Black Swan). In the interview Taleb discusses the current crisis, robust systems, nationalizing the banks and the fallacy of using narratives of history to guide present-day policy/response.

Below are some quotes from NNT, which I’ve organized into like-nuggets of wisdom:

  • Looking at biology, things that survive have redundancy . . . we have spare parts, which is the exact opposite of leverage. . . . We have diversity and nothing is too big. Things fail early. . . . Banking is organized in a completely opposite way. . . . Complex systems have properties that banks don’t have. And biological systems have survived.
  • [We have an] Illusion of stability and then blow-ups are larger. Imagine if half-country was fed by one restaurant it’d be okay except one day people would starve.
  • Bad news travels immediately . . . This environment won’t tolerate the smallest mistake . . . I don’t know the system can allow for too much leverage.
  • People can invest in real things – they don’t have to invest in paper. . . .
  • What we have is a system of deposit where people buy a company, they borrow against it, and buy another company. . . . If that disappears we have less growth but it would be a more robust economic system.
  • The government is neither nationalizing the banks nor letting them break.
  • [With regard to banking,] separate the payment system from the risk taking system.
  • It looks like we have no control. The government has no control over what the banks are doing. The banks aren’t in control of what they are doing.
  • The press reports everything except the important stuff. September 18th . . . we had the run on money market funds and the government had to step in.
  • The situation is not comparable to the Great Depression. The situation is very different.
  • This crisis is not so much a Black Swan to me. It’s like saying you’ve got a pilot who doesn’t know about storms. . . . The Black Swan for me would be to emerge out unscathed and go back to normalcy.
  • We should be very careful when we make a historical analogy like the Great Depression because the world is not like it was in the Great Depression.
  • Capitalism is you let what’s breakable break fast.

Bloomberg also ran an article on the interview with Taleb, but it is spartan as far as quotes or insights from the actual interview.

From what I can tell, it seems Taleb views bank nationalization as similar to taking out plane hijackers. It’s an interesting, more palatable way to look at nationalization in that it frames the situation as one where the public will be harmed unless someone (in this case the government) steps in and takes drastic action.

Having said that, I don’t get the impression that Taleb is a proponent of long-term nationalization. NNT would prefer banking be structured similarly to a biological system where there are redundancies and fragile things “break early.” This system wouldn’t foster as much leverage and therefore would slow growth, but it would be considerably more robust.

This is more or less what I believe, as well. A free market is an organic, naturally forming system that is decentralized and redundant. It’s robust because market actions failing apart at any micro level will not break the entire system.

How do we get there from here? Good question.

(H/T to Jesse)