I remember reading FBR and loving it. He was a pompous ass then AND HE STILL IS.
`Black Swan' Author Says Investors Should Sue Nobel for Crisis
- Thread starter Optionpro007
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Both sides of the "table" so to speak are pompous pricks. They are all academics, at heart. And we all know academics are never wrong, never want to be questioned and/or criticized. So it all boils down to whether they have anything of substance to add to a topic. Taleb certainly does, regardless of all of his personal foibles.
I asked what those that insult Taleb think is his fault. I also happen to think he is wrong. Actually he is "fooled by mathematics". The problem is not the models because when mathematicians like Sharpe and Markowitz come up with models they make explicit assumptions these models rest on. If someone violates the assumptions, it is their problem, not of the model.
The problem of Taleb is that he fails to understand that it is not the models but the leverage that is the cause of crisis. In an all cash society with leverage <= 1, there would be no loss of cash wealth but only redistribution in a financial crisis. In the presence of high leverage, like in the recent crisis, there is substantial loss of wealth due to deleveraging. This is not a problem of the models but a problem of inadequate supervision of capital markets. It is a political problem. The crisis we had was not due to people not understanding math models or applying them wrongly. It was a politically driven crisis for reasons we probably never know because they stay inside the brain of a few people, those that allowed financial firms to increase leverage beyond control and ignored all warnings, many of them.
The problem of Taleb is that he fails to understand that it is not the models but the leverage that is the cause of crisis. In an all cash society with leverage <= 1, there would be no loss of cash wealth but only redistribution in a financial crisis. In the presence of high leverage, like in the recent crisis, there is substantial loss of wealth due to deleveraging. This is not a problem of the models but a problem of inadequate supervision of capital markets. It is a political problem. The crisis we had was not due to people not understanding math models or applying them wrongly. It was a politically driven crisis for reasons we probably never know because they stay inside the brain of a few people, those that allowed financial firms to increase leverage beyond control and ignored all warnings, many of them.
Maybe, but it is still something of a chicken or egg argument. Increased leverage is predicated on confidence in the models. You could not raise capital or sell the idea to upper management without a stamp of approval on a specific metric to assess risk. To that end, Taleb's point is very appropriate.
On the other hand, the leveraging of financial institutions is more complicated and related to structural changes in the ownership of the firms, not withstanding the repeal of Glass-Stegall as well.
I disagree it should be that way although you may be right that this is how it works but I insist only because of lack of proper regulation.
You know when you trade FX with 100:1, you may have the best system but if you margin yourself all the way, you may be liquidated before you make your target. Thus, setting risk limits should not be based on confidence in the models but on what you can sustain to lose. Only fools increase leverage because they are confident in their model. Yes, I agree, it happens, I remember LTCM. But those are political decisions, they have nothing to do with models and their proper use.
Exactly.
Why did credit derivatives become such a bestseller product? Wall Street told commercial banks they could eliminate current loans from their books so they could LEND MORE and make more money.
This couldn't have happened if credit derivatives theoreticians had realized that all kind of systemic risk and moral hazard problems were being introduced to the financial system thanks to their theories.
Thus the whole banking system became a gigantic hyper-leveraged irresponsibly run hedge fund.
That the Nobel Committee rubber-stamped the theories contributed to the fact that very few people dared to criticize the models, there were only a few critics those not impressed by all the academic bullying jawboning and pimping.
You are totally confused. Why do you think the theory of derivatives is wrong if someone with 10K in his account trades two ES contracts? Do you think is overconfidence, bad decision or plain stupidity?
The politicians are trying to put the blame on mathematics. People like you who do not understand mathematics, are fooled by them. Taleb is "fooled by mathematics".
For a guy "on permanent MEDIA blackout" (per his homepage) he sure makes a lot of media appearances...