Bogleheads

[Sam2]

Interesting discussions

http://www.youtube.com/watch?v=ABXPICWjFIo

Sam

[supertreat]

I would have liked to seen the unedited version to hear the other guests' comments.
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Assets - Liabilities = Equity + (Income - Expenses)

[mlebuf]

I wish this guy would get on his black swan and fly back to wherever he came from. Just my opinion.

Best wishes,
Michael
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Best wishes,
Michael

Invest your time actively and your money passively.

[ecastilla]

The problem with Taleb is that his strategy in isolation essentially has an expected negative return. He just got lucky very big in 1987; his knack for doing well when the rest of the market does bad makes him a very marketeable employee.

[stratton]

[superlight]

[nisiprius]

That clip is fascinating. I can't tell whether the other participants were just nonplussed by his anger, or whether they are literally incapable of understanding what he's saying. In effect (warning: not a quote, this is willful distortion to make a point):

Taleb: Bankers did risky things, comforted by bogus quantitative risk predictions from a bunch of Ph. Ds that showed there was no risk.

Participant: So you're saying that in times of uncertainty, ideologies become more extreme?

Taleb: No, I'm saying we should stop using bogus predictions because we don't know how to model these risks.

Participant: Well, so what as a policy matter would you suggest being done?

Taleb: We should immediately, immediately stop using something called "value at risk." We should stop using bogus predictions because we don't know how to model these risks.

Participant: So you're saying we need to a develop a market model that includes risks of the unexpected?

Taleb: No, I'm saying we should we don't know how to model these risks.

Participant: You're saying we need to take things like global warming and the possibility of asteroid collisions into account in our predictions?

Taleb: I'm saying we don't know how to model these risks.

Participant: (Blandly) Well, markets are innovative, they will develop a way to take these risks into account...
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Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

[superlight]

nisiprius, that's pretty much the way I heard it too
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"Simplicity is the ultimate sophistication."

[bob u.]

Well done, Nisiprius!

Kinda reminds me of what Donald Rumsfeld was trying to say (and, no, this not a political comment as any sensible person will see):

"as we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns -- the ones we don't know we don't know. "

Bob U.

[Valuethinker]

[soaring]

It scares me that I think I almost understand.

gene
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Desiderata

[Valuethinker]

[VictoriaF]

[brswif00]

Taleb's strategy has a small negative expected return in theory, but a large positive return in reality. I suspect he will take reality and let you keep your expectations.

Referring to the 1987 crash as 'lucky' is ridiculous. Markets occasionally crash. Taleb has a constant bet on. When a crash occurs he will reap enormous rewards, as long as options are priced using inaccurate models.

He doesn't need to time the crashes, as long as they happen at least once every few decades. No investing strategy has a stronger historical case than his. Do you seriously predict there will not be another market crash in the next thirty years? Or that Taleb would be 'lucky' if there was?

[VictoriaF]

[kenschmidt]

[nisiprius]

[matt]

VictoriaF wrote:

[bobcat2]

Taleb

[VictoriaF]

[VictoriaF]

[Joss]

Taleb is a very good thinker, a mediocre-to-decent writer, and an atrocious speaker. I have listened to him on several podcasts and speeches and he's horrendous.

[Prokofiev]

Having watched numerous clips of this guy, I am surprised at how inarticulate he is. Perhaps English is not his first language, but he seems unable to sort out his thoughts and clarify many of his ideas. He also considers himself to be a "philosopher" at this point in time and has some of that "guru" mojo. Even his "canned" talks or lectures are poorly worded and delivered. He definitely needs an editor.
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Everything should be made as simple as possible, but not simpler - Einstein

[Lbill]

As I posted elsewhere this fund using Taleb's approach had gained over 50% this year. The strategy reminds me more of Zvi Bodie than anything else, as it uses puts and calls to profit from "fat tail" events while having negligible returns 90-95% of the time. Bodie's strategy uses long dated calls to profit from market gains while limiting losses to the cost of the calls. I see this as a viable alternative to asset diversification to control loss risk. It is certainly more predictable...
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"Whenever you find yourself on the side of the majority, it is time to pause and reflect." ~ Mark Twain
"Everyone has a plan, until they get hit." ~ Mike Tyson

[nisiprius]

[Ricola]

His AA is 90/10 (TBills/Derivatives of some sort)

[bobcat2]

Hi Victoria,

[stratton]

[VictoriaF]

[stratton]

[superlight]

[stratton]

[dbr]

[Heath]

[bobcat2]

There is nothing wrong and plenty right with writing a book that points out to the general public that financial market returns are fat tailed and that, even worse, the returns in the fat tails typically cluster.

There is plenty wrong in presenting this as if this is your new idea and that everyone else working in the field is too dense to grasp your keen insight.

Bob K
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The real difficulty in changing any enterprise lies not in developing new ideas, but in escaping from the old ones. - JM Keynes
Good questions outrank easy answers. - PA Samuelson

[bookshot]

I don't know if he is right about everything, but he is angry because he is frustrated. He is frustrated because he believes he sees a problem others don't, yet he doesn't have any solutions. How do you tell institutions, for example, to not use discredited financial models?
We still haven't learned the simplest ideas. Here's a simple example: Now we see that the largest banks are going to use bailout money for acquisitions rather than loans, and the Treasury is endorsing the idea. Part of the problem of inordinate complexity is that when large institutions fail, the effects on the system are disproportionate. Creating ever larger opaque networked institutions that are divorced from local real world conditions increases the likelihood of unexpected catastrophe. Based on this and other decisions, I would say the people in charge of the bailout are far from up to the job. Taleb's frustration may stem from the fact that he himself doesn't know what to do beyond trying to personally play the markets for profit.

[Lbill]

[Heath]

I can excuse Taleb's arrogance and give him credit for forcefully stating why the economists continue to get it wrong (because they continue to ignore the points that he/Mandelbrot are making).

Mandelbrot also seems to believe that "there has GOT to be a better way", but he concedes that he can't figure it out.

What is wrong with the approaches most often used on this forum is that they ignore the fat tails because there is not a formula for dealing with them. People who do not build in these fat tails when setting their allocations, i.e., accept and allow for an additional level of risk, are taking on more risk than they can handle.

[stratton]

[Prokofiev]

[Rick Ferri]

Taleb's criticism are right on the money, especially his comments on mean variance optimization (MVO) and other models. Past efficient portfolios will not be the future efficient portfolio, and it is foolish to believe that they will be. Monti Carlo Simulation models are not any better. Model's designed for the known physical sciences are ill equipped for the uncertainties of finance.

See Appendix III of my free on-line book, Serious Money, which I wrote 10 years ago.

"In summary, the returns of asset allocation models overstate the return to investors and understate the risks. Many advisors who use the models to sell investment products don’t really understand the statistics behind them, but use them anyway to push products with higher fees."

Rick Ferri

[bookshot]

Taleb's major point is simple - all traditional measures of risk are inapplicable to extreme circumstances, which given the growing complexity of our systems are more likely than ever.
But I have seen a 2005 article in Fortune by Mandelbrot and Taleb that advised that passive indexing is far better than active selection and one should diversify as broadly as possible. This seems to conflict with Taleb's current approach, which perhaps is driven by recent conditions. As Mandelbrot does not focus on economics as much as Taleb, he also seems a bit more sanguine (or at least agnostic) than Taleb re traditional investing.

[speedbump101]

[SkepticalGuy]

[Rick Ferri]

Talib is right!

See Appendix III of my free on-line book, Serious Money, which I wrote 10 years ago.

"In summary, the returns of asset allocation models overstate the return to investors and understate the risks. Many advisors who use the models to sell investment products don’t really understand the statistics behind them, but use them anyway to push products with higher fees."

Rick Ferri

[bobcat2]

Financial economists have not modeled financial returns based on the normal distribution for decades. For example, since the early 1980's they have used ARCH and GARCH models that take fat tails and volatility clustering explicitly into account in modeling return data.

Many financial economists, probably a majority, believe that risky assets, such as stocks, are risky in the LR as well as the SR. You don't have to believe Taleb's far out rants about black swans everywhere to believe that. However, what Taleb then does is to take the perfectly reasonable POV that risky assets are risky in the LR and stretch it toward the absurd in several directions, e.g. nobody knows anything about financial risk except him and Mandlebrot.

Bob K
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The real difficulty in changing any enterprise lies not in developing new ideas, but in escaping from the old ones. - JM Keynes
Good questions outrank easy answers. - PA Samuelson

[superlight]

What he's able to do, is tell stories all day about people he meets who don't understand risk and fat tails. The fact that he has met, especially apparently his his 'old days' a boatload of them shapes his thinking.

Maybe if he hung with bob's financial economists, or if wall street firms were populated with them, Taleb would have a different nature (as would the entire financial industry).
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"Simplicity is the ultimate sophistication."

[bookshot]

bocat2, maybe, but the financial industry presents risk to investors in terms of factors such as standard deviations, Sharpe ratios, alpha and correlation. It makes AA recommendations using Monte-Carlo simulations. All of these are based on simple distributions and perhaps inadequate samples.

[Lbill]

Prokofiev- What I like about Taleb's approach is that when the "whacking" is going on (as it is now) I would be making lots of money while the blood is running in the streets. I think I'd be willing to not make money 90% of the rest of the time for that. Much better for me psychologically than watching my port shed 50% in the belief that it'll be OK in the long run. Over the last decade, our poor stock investor had to wait 9 years to break even on his stocks, just in time to get whacked again. Not my cuppa tea, I'm afraid.
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"Whenever you find yourself on the side of the majority, it is time to pause and reflect." ~ Mark Twain
"Everyone has a plan, until they get hit." ~ Mike Tyson

[SkepticalGuy]