DALLAS Wondering about the best way to handle your business or personal finances? Looking for insights into the health of the global financial system?
Ask your grandmother, who gained wisdom through years of experience, not a university-educated economist, according to best-selling author Nassim Nicholas Taleb, who spoke at the recent Multi-Unit Foodservice Operators conference here.
Taleb is the author of the book, “The Black Swan: The Impact of the Highly Improbable,” a college professor, Ph.D., former standout financial derivatives trader and a regular guest on news talk shows. During his presentation at MUFSO, he questioned the qualifications of high-ranking government and financial industry officials, as well as shared advice that sounded plain and folksy enough to have come from his “sitto,” or mother’s mother, in the tongue of his native Lebanon.
In his MUFSO keynote speech, “The Future Has Always Been Crazier Than We Thought,” Taleb cited examples of what he calls “black swans,” or unanticipated developments that carry massive consequences, such as the first use of the wheel, the discovery of penicillin and the Internet. Of the way the Internet morphed from a Cold War-era Pentagon initiative into the great communications network for the citizen and business masses worldwide, he quipped, “That’s not what Ronald Reagan wanted – for some guy to be able to call his mother [overseas] for 6 cents a minute.”
Taleb stressed that his ruminations about randomness don’t suggest that he can forecast "black swans," so named because until the discovery of Australia, where black swans were found, it was widely believed the graceful birds came in only one color: white. They are intended to steer people in the direction of correct “risk management,” said the near-50-year-old author, who is credited by some with having forecasted in "The Black Swan" the 2008 meltdown of financial institutions from the sub-prime mortgage crisis.
In that 2007 book, he observed, “The government sponsored [mortgage] institution, Fannie Mae, when I look at the risks, seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup.”
“We live in a complex world” that is more and more “dominated by the extreme,” Taleb said of the impact of the global economy, disparate distribution of wealth and resources, instant communication across the Internet and other powerful factors.
Citing examples of this “Extremistan,” as he calls the increasingly complex world that is vulnerable “to exceptions,” Taleb mentioned that of the “one million novels on the market in the English language, about 20,000 will find a publisher,” and, depending on the year, just five to 100 of them will account for more than 50 percent of the industry’s sales. Within the drug business, he noted, despite the development of hundreds to thousands of products, “four or five drugs generate nearly all the profits.” A long-range analysis of the stock market, the speaker said, shows that the 10 most volatile trading days represented 55 percent of the returns during the past five decades.
Trying to forecast commodity prices is becoming very difficult, if not impossible, he indicated, because of the growing interaction between companies and countries globally.
“In ‘Mediocristan,’” Taleb said of his name for a less complex world where no single outlier can create massive consequences, “black swans are inconsequential. In Extremistan they are everything.” And that becomes an enormous problem, he said, because, “you see, Fannie Mae and all of these [financial] companies have this attribute – they don’t take into account the existence of black swans.”
There are some rules that individuals, businesses and governments can live by to thrive in a “random world,” Taleb said.
“If you can, don’t borrow,” he said previewing the theme of avoiding debt, which he returned to often. And opt for “wisdom versus theories,” he said segueing into a side conversation about why certain animal groups, such as elephants, and cultures put their faith in patriarchal or matriarchal authority.
“Here we have the fight between transmission of knowledge through experience and authority for those who have experience, because you can’t [always] explain about these risks, and the transmission of knowledge through mathematical models,” he said. “I’m a university professor and I tell you [the latter] is an inferior form of knowledge.”
Taleb continued, “That’s why we’re here [in recession] – all the economists in the government went to Harvard or went to Wharton and learned stuff from books and that’s it. That is not a healthy transmission [of knowledge] through trial and error.”
He added: “Had people had a grandmother to talk to, she would have told them not to have a lot of debt. She would have told them, take lots of risk after you have three years of income in the bank.”
In fact, taking risks is something Taleb espouses, as they may benefit you or your company when a black swan arises. “Experiment on the side,” he said, “so you have small losses if you are wrong, and big profits if you are right.”
Another of his rules: “Learn to be redundant, don’t be optimal.”
“Mother Nature built humans in a certain way. If economists had to examine our build, they would say it is very inefficient. ‘I have two lungs, two kidneys – I have one kidney too much.’ We have a lot of spare parts. A Wall Street security analyst would make you remove a kidney or sell it. If they were really optimizing, they’d be like the banks and take one kidney and time share it ... But the reason we survive [as humans] is because we have a lot of redundancy to face uncertainty.”
So “have some spare parts” and have a “large financial buffer that allows you to withstand the crisis,” Taleb said. “People think that when you don’t invest, you are doing something wrong. You are not doing anything wrong. The best way for you to make money is not for you to make money off your money, it is to wait until everyone else goes bust.”
In a casual question-and-answer session after his presentation, Taleb criticized large financial institutions and government bailouts of private-sector firms or industries and politely sidestepped thinly veiled requests for portfolio management assistance. The best financial systems are those “that can withstand politicians,” he said.
When asked if he thinks the economic crisis is behind us, he replied, “The risks and pressures of a year ago” -- high unemployment and high debt -- “are still present now.”
For more of Taleb's observations, listen to NRN's audio presentation, “Key Thoughts From Keynotes – The Random Thoughts of Nassim Nicholas Taleb.”
Contact Alan J. Liddle at [email protected].