This link has been bookmarked by 1 people . It was first bookmarked on 28 Mar 2008, by Zhuu Ming Ang.
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28 Mar 08
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In The Black Swan, he returns to the idea that we all, including Wall Street traders, tend to underestimate the risk and impact of rare events. It came out last year, a few months before it became clear that Wall Street had underestimated the risk of an unprecedented downturn in US house prices – with disastrous consequences.
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After working on Wall Street for 20 years, Taleb is scathing about its risk management and forecasting models which are more “therapy” than anything useful. This is because they rely on past experience, like the Europeans who thought all swans were white until they discovered black swans in Australia.
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Although most attention tends to focus on “bad” Black Swans, there are also good Black Swans, he says, for instance in scientific research and drug discovery. “There is a lot more randomness in biotechnology and any form of medical discovery. The role of design is overestimated. Every time we plan on trying to find a drug we don’t because it closes our mind. How are we discovering drugs? From the side-effects of other drugs.” Researchers very often “change their story” when they discover something by accident to give the impression it was by design. “The biggest discovery in cancer came from a mustard gas accident in Italy, not from the 130,000 compounds systematically tested by the National Cancer Institute. They were not looking to improve the lives of older men when they discovered Viagra.”
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He became convinced that the financial markets systematically underestimated the risk of big improbable events and says he made a fortune for his then employer – First Boston – when the stock market crashed in October 1987.
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This triggered a very simple idea that he has been thinking about all his life. “That is that things in the real world are far messier that in recorded history or in memory.” But we find it hard to live with such messiness so we tend to look for causes and patterns that do not exist, what he terms the “narrative fallacy”.
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The real villains are those whose refusal to admit the limits of their knowledge can cause serious damage. These include economists “predicting 30 years of social security deficits when we don’t know what we are going to have for lunch tomorrow” and the doctors who thought they knew more than they did and killed their patients. “Until the 20th century, the risk of dying was increased by going to a doctor, particularly in a hospital.”
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Some of his critics have claimed that, taken to its logical conclusion, Taleb’s scepticism would lead to a kind of passive nihilism. Not so, he says. He is not arguing that all forecasting is pointless, for example. “I am saying that we should first know the error rate and then make the prediction. Because the error rate is far more relevant that the prediction.”
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Taleb is conducting experiments to test his theory that we can only cope with so much scepticism and that people who are sceptical about religion are gullible in other ways. “Most people are sceptical about the wrong things and gullible about the wrong things.” He admits his extreme scepticism can lead to extreme conservatism. “I believe it is dangerous to mess with complex systems and traditional things, such as religion or the environment.”
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