Five years into The
Black Swan: Second Edition: The Impact of the Highly Improbable: With a new
section: "On Robustness and Fragility."
Seldom have I been more impressed with the subtle accuracy of a
generalization than in the case of Nassim Nicholas Taleb’s dictum, “you never win an argument
until they attack your person.” As an essayist and statistician, this
Lebanese American teaching currently at NYU Polytechnic has developed some of
the most original critical thinking on risk analysis and risk engineering. It
reaches far beyond mathematical finance and has game-changing consequences for
decision-making overall. Not many quants have their writings called to be among
the dozen
most influential books since WWII. No stranger to controversy, Taleb made
his assertion first in 2007 that statistics is inherently incomplete as a tool
set because it cannot predict the risk of rare events (which he calls Black
Swans). But despite their rarity, and despite being incapable of prediction by
extrapolation of existing data, they have disproportionally vast effects.
Since I can remember, I have heard people acknowledge, with a snicker,
the ‘theoretical’ possibility of systemic risk, of a meltdown of basic
operating infrastructure and assumptions. Like the presumption of innocence, it
had become one of those exercises in lip service everyone made a ritual of
mentioning while appealing to a near-universal consensus (end-time theorists of
all stripes excepted) that systemic risk was just a theoretical hypothesis.
Prior to 2008, who except few eye witnesses of 1929 et seq. would have given
serious consideration to “major banks not lending to their peers,” bringing the
money market to a virtual standstill? Who would have expected that banks would,
in essence, depart the lending business altogether – at least to the extent it
could not be pushed off their balance sheet? Or that there would not be
significant demand for major-ticket securities blessed by all three major
rating agencies with their highest medals of honor? Or have perceived the Swiss
National Bank as a source of global instability?
If we are to capture by intellect and to deal meaningfully with the
effects of entirely random and unpredictable events in life, we require
different tools than conventional wisdom traditionally uses – and that includes
transcending conventional statistics.