Review of The Bed of Procrustes: Philosophical and Practical Aphorisms by Nassim Nicholas Taleb

It's pretty arrogant to write a book of your own aphorisms (rather than letting posterity select them from your body of work), but Taleb is a pretty arrogant guy. He and Donald Trump should be a presidential ticket.

There are a handful of worthwhile aphorisms in The Bed of Procrustes, and since the guy wants to be remembered for them, I'll repeat them:

• Nothing is more permanent than 'temporary' arrangements, deficits, truces, and relationships; and nothing is more temporary than 'permanent' ones.
• The test of whether you really liked a book is if you reread it (and how many times)...
• We ask 'why is he rich (or poor)?' not 'why isn't he richer (or poorer)?'; 'why is the crisis so deep?' not 'why isn't it deeper?'
• You remember emails you sent that were not answered better than emails that you did not answer.
• People focus on role models; it is more effective to find antimodels - people you don't want to resemble when you grow up.
• Only in recent history has 'working hard' signaled pride rather than shame for lack of talent and finesse.
• Some books cannot be summarized (real literature, poetry); some can be compressed to about ten pages; the majority to zero pages. 

These are good, but at the same time, for a guy who has a book of aphorisms his aphorisms are not quoted that often.

3/5

The Kelly Capital Growth Investment Criterion: Theory and Practice

This is from Taleb's review of The Kelly Capital Growth Investment Criterion: Theory and Practice:

"There are two methods to consider in a risky strategy.

1) The first is to know all parameters about the future and engage in optimized portfolio construction, a lunacy unless one has a god-like knowledge of the future. Let us call it Markowitz-style. In order to implement a full Markowitz- style optimization, one needs to know the entire joint probability distribution of all assets for the entire future, plus the exact utility function for wealth at all future times. And without errors! (I have shown that estimation errors make the system explode.)

2) Kelly's method (or, rather, Kelly-Thorpe), developed around the same period, which requires no joint distribution or utility function. It is very robust. In practice one needs to estimate the ratio of expected profit to worst- case return-- dynamically adjusted to avoid ruin. In the case of barbell transformations, the worst case is guaranteed (leave 80% or so of your money in reserves). And model error is much, much milder under Kelly criterion. So, assuming one has the edge (as a sole central piece of information), engage in a dynamic strategy of variable betting, getting more conservative after losses ('cut your losses') and more aggressive 'with the house's money'. The entire focus is the avoidance of gambler's ruin.

The first strategy was only embraced by academic financial economists --empty suits without skin in the game -- because you can make an academic career writing BS papers with method 1 much better than with method 2. On the other hand EVERY SURVIVING speculator uses explicitly or implicitly method 2 (evidence: Ray Dalio, Paul Tudor Jones, Renaissance, even Goldman Sachs!) For the first method, think of LTCM and the banking failure.

Let me repeat. Method 2 is much, much, much more scientific in the true sense of the word, that is rigorous and applicable. Method 1 is good for 'job market papers'"

I have a copy which I haven't read yet. It's an academic volume; the layman and investor's book on Kelly is the excellent Fortune's Formula.

Review of Antifragile: Things That Gain from Disorder by Nassim Taleb

In the past I would have described myself as a fan of Taleb - he even has a tag on this blog. Reading his latest, Antifragile: Things That Gain from Disorder, has tempered my enthusiasm.

If you can say that this rambling, bloated, self-indulgent book has a thesis, it is primarily that "antifragility" is a property of systems that have survived, and that depriving these systems of volatility and stressors harms them.

This leads in to a good (but short) critique of the new Steven Pinker book about violence, comparing the idea of a safer world to the bubble era concept of a "great moderation" created by the Federal Reserve. Of the competing explanations for Fermi's paradox, my favorites are vast distances, inverse correlation between intelligence and fertility, and destructive wars. It is just too early to say how often and to what extent nuclear weapons will end up being used.

One reason I've been fond of Taleb is that as a trader he was always long vol, and many of my strategies have been long vol as well (betting on collapses). So, we both know what it's like to have a rather painful stream of P&L's come in because of noise or propaganda, punctuated by discontinuities where a company fails or the market crashes. He points out that "the more frequently you look at data, the more noise you are likely to get" rather than signal. This means that long term investors (long or short) should not obsessively watch prices on their screen - or watch CNBC.

He says that complex systems are vulnerable to "multiplicative chains of unanticipated effects". Less is more. While true, Charles Perrow's book Normal Accidents: Living with High-Risk Technologies was a novel, and much more interesting, discussion of this. Falkenstein has pointed out a tendency of Taleb to neglect to survey what was already known about a subject or point out how his contribution differs.

Another example - he writes about how regulators love complex regulation because their knowledge of the glitches and loopholes gives them an edge that they can sell to private businesses later. Of course! But, James Wilson said it better.

In the climate change discussion where he attacks a petrochemical engineer by saying that we are "doing something new to the planet" and that "the burden of evidence is on those who disturb natural systems". Yet, Taleb's own commentary on iatrogenics is that the burden should be lower for technologies and interventions that deliver immediately obvious benefits. Are we going to stop using fossil fuels and have a 95 percent population die off on the chance that global warming theory is both correct, urgent, and unsolvable through other means? What is the expected value of that for someone in the 95%, i.e. someone not invited to Davos?

Taleb goes to Davos?! And he thought that conversations at Davos happen for the purpose of "saving the world from evil"? Crooks are going to stop looting governments because he writes a ponderous book? Why does he think that he gets invited to Davos - it's so that he can be co-opted! Why does he think he gets so much airtime?

The most interesting thing about Taleb is what it tells you about being a successful book seller. He has even identified it in print: no such thing as bad publicity. Also, there are increasing returns to size where a certain proportion of readers will decide to read everything you write, which means it's beneficial to have a big back catalog.

I think Falky summed it up best: "contra Antifragile I would say: don't bias your portfolio towards lottery ticket investments, even if only 10%. Find something you are good at, become excellent at it, and invest your time and speculative wealth there."

Taleb likes lottery ticket type investments with high gamma. Does he like worthless stocks? If not, how does he differentiate between the many types of high gamma investments - most of which we know for a fact are overpriced because of the longshot bias?

The trouble is that to allocate resources, you need a theory of pricing. Thorp had this for warrants, other great investors have their niches. Falky's idea of becoming excellent at something means having a comparative advantage at pricing (assessing) opportunities.

2/5; also retrospectively downgrading the entire Taleb oeuvre (other reviews forthcoming)

Taleb Essay on the Future

Taleb's new book is getting some bad reviews (some reasonable), partly justified, but he still has interesting things to say:

"To understand the future, you do not need techno-autistic jargon, obsession with 'killer apps,' these sort of things. You just need the following: some respect for the past, some curiosity about the historical record, a hunger for the wisdom of the elders, and a grasp of the notion of 'heuristics,' these often unwritten rules of thumb that are so determining of survival. In other words, you will be forced to give weight to things that have been around, things that have survived."

Taleb: "The 'Long Peace' is a Statistical Illusion"

From a new Taleb essay in response to the Pinker argument that the world is becoming less violent,

"I was confronted with ideas of 'great moderation,' by people who did not realize that the process was getting fatter and fatter tails (from operational and financial, leverage, complexity, interdependence, etc.), meaning fewer but deeper departures from the mean. The fact that nuclear bombs explode less often that regular shells does not make them safer."

E.O. Wilson says that if ants had nuclear weapons, they would end the world in a week. How long is that in human time? Is that the cause of the Great Filter?

Taleb Comment on Iatrogenics

I do not believe that we should take risks with near-healthy people; I also believe that we should take a lot, a lot more risks with those deemed in danger.

[...]In the very ill condition, the benefits are large relative to iatrogenics, in the borderline one, they are small. This means that we need to focus on high symptom conditions and ignore, I mean really ignore, other situations in which the patient is not very ill.

Another way to view it is by considering that mother nature had to have tinkered through selection in inverse proportion to the rarity of the condition. Of the hundred of thousands of drugs today, I can hardly find a via positiva one that makes a healthy person unconditionally “better”. And the reason we have not been able to find drugs that make us feel unconditionally better when we are well (or unconditionally stronger, etc.) is for the same statistical reason: nature would have found this magic pill. But consider that illness is rare, and the more ill the person the less likely nature would have found the solution, in an accelerating way. A condition that is three deviations away from the norm is more than three hundred times rarer than normal; an illness that is five deviations from the norm is more than a million times rarer!

Russia's Energy Resources Give it What Nassim Taleb Calls "Anti-fragility"

Nassim Taleb, the author of Fooled by Randomness and The Black Swan has a concept called antifragility, meaning the opposite of fragility. (See his discussion and draft chapter for antifragility book.)

Taleb's concept is that the opposite of "fragile" is not "robust," because robustness denotes resistance to shocks but not the property of benefiting from shocks. He asks us to imagine a package marked "antifragile" instead of "fragile":

"The contents of such package are not just unbreakable, but benefit from shocks. Let us coin the appellation "antifragile" for such a package; a neologism is necessary for there is no simple, noncompound word in the Oxford English Dictionary that expresses the point of reverse fragility."

It occurred to me that the United States (and other countries like Japan) are very fragile to the extent that they rely on imported oil, and can be brought to their knees by supply shocks. In contrast, Russia is robust because it has already been through a collapse that resulted in resilient institutions with a lower level of complexity (but also lower productivity). Dmitry Orlov calls this the "collapse gap." As one Credit Bubble Stocks correspondent puts it,

Russians own their own houses, such as they are, free and clear because the state that owned them went out of business and left no one else with a stronger claim on the houses. Compare that with the % of Americans underwater on their houses, in debt to lenders who are simply unworthy of payment. Americans would have to repudiate their mortgage debt just to draw even with the Russians.

Americans would have to repudiate federal, state and local debt, too, just to draw even with the Russians, for the Russians do not have a debt-based currency.

Also, Russia has a public transportation network--trains, buses, trucks. Nothing like it exists here. So we have to spend thousands and thousands of dollars a year to maintain private transport

Russians, even when they live in the cities, get part of their food from their own plots of land. We have very little of that here.

A lot of our GDP is vapor. Beauty contests, TV shows, financial manipulations.

But Russia is also anti-fragile to the extent that it benefits from higher energy and commodity prices. They are making money off of the Libya events by selling more natural gas at higher prices to western Europe.

Maybe there is no word for anti-fragility because it rarely exists in nature. As I mentioned in my Conquer the Crash review, "The different parts of economic cycles occur so infrequently that the intervals between them exceed the working lifespans of investors."

It is hard to plan for, let alone benefit from, rare events, because your competitors can use the "What, me worry?" strategy to grow by taking stupid risks. They can be the fastest growing bank for a decade by making really bad loans, and you will look obtuse for refusing to participate. They will only get their comeuppance when the downturn finally rolls around, and that may not even happen during the careers of the executives involved!

It is just dumb luck that Russia has so much natural gas. If the communists could have sold it all in one slug to the west at any point, they would have. But they didn't and these resources have now conferred an anti-fragility on Russia.