Wednesday, September 24, 2008

Book recommendation

So I'm reading Nassim Nicholas Taleb's The Black Swan, and I'm thoroughly enjoying it (as I did his previous book, Fooled by Randomness). His basic thesis is that most of the events that profoundly shape our world--Google, the assassination of Archduke Ferdinand, 9/11--are fundamentally unpredictable, despite what pundits or analysts might say, or how predictable they may appear in hindsight. Pretty interesting stuff. Sections about the effect of using Gaussian thinking for non-Gaussian phenomena, the tendency to apply narratives to history--all kinds of cool stuff. And then, in Chapter 14 he says:

As if we did not have enough problems, banks are now more vulnerable to the Black Swan [the rare, unpredictable, and extremely impactful event] and the ludic fallacy [applying rules for systems with well-defined uncertainty--i.e., games of dice--to situations with poorly-defined uncertiainty--i.e., unknown unknowns, where even the rules of the game are unknown] than ever before with 'scientists' among their staff taking care of exposures. The giant firm J. P. Morgan put the entire world at risk by introducing in the nineties RiskMetrics, a phony method aiming at managing people's risks, causing the generalized use of the ludic fallacy [. . .] Likewise, the government-sponsored institution Fanny Mae, when I look at their risks, seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup. But not to worry: their large staff of scientists deemed these events 'unlikely'.

Well, the book came out a year-and-a-half ago. I'd call him prophetic, but the point of his book is precisely that these kinds of events are unpredictable.

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