Nassim Nicholas Taleb, author most recently of The Black Swan: The Impact of the Highly Improbable and subject of one of Malcolm Gladwell’s best-ever pieces in the New Yorker, is much in demand these days. It seems that few if any of the biggest hedge fund managers in the world were paying attention to Taleb when he described their highly-leverage, computer-concocted quantitative investment strategies as “picking up nickels in front of steamrollers.” In other words, computer models can’t foresee events which had never happened before and so all the funds’ small profits were destined to be wiped out when one of these previously unknown major calamities struck.
And that’s exactly what seems to have happened to Goldman Sachs, Barclays Global Investors, Sowood Capital and on and on. Virtually none of the losses suffered by these sophisticated players came directly from investments in subprime mortgages or related securities. Instead, it was the resulting run-for-exits behavior of many investors cutting back on borrowing and risky positions that hit the computer models below the belt. And of course you get the absurd statements, like Goldman’s CEO claiming the markets were hit by a once in 25,000 year storm. Not exactly.
And so, as one of the loudest Cassandras relegated to the dustiest corner of the financial market’s basement, Taleb now finds himself the man of the hour. Taleb’s been on vacation, at least from blogging, all month. My own unanswered email to him a few weeks ago said little more than “too bad you’re not online - right again.” But he poked his head back into his (virtual) office this morning to tell us:
“I am at the Edinburgh literary festival and the last thing I care about is you finance people. I’ve been swamped by emails telling me that I was right (forwarding stories about “25 sigmas” by the Goldman Sachs CEO —who needs to be replaced or banned from speaking to the press — or the Rothman guy in the wsj on 1 in 10,000 year events). I don’t understand these emails. It is as if I didn’t know that I was right.”