Falkenstein on Taleb’s Black Swan

The best informed review of Taleb’s Black Swan I have read — here

…just because selling puts is a bad strategy, it doesn’t mean buying puts is a good strategy. A Sharpe of 0.2 is a bad long position, but a worse short.


I could imagine Taleb teaching a statistics class to freshman and instead of starting with the arithmetic mean and standard deviation, asking ‘what was the probability of an airplane taking down the World Trade Center on September 10, 2001?’, and waxing poetic about how ‘we just don’t know!” Students might think such talk is much “cooler” than boring formulas, but such confused thinking leads nowhere in particular and can be indulged indefinitely without producing anything useful, as Taleb demonstrates.

The current financial crisis may make radical theories that suggest junking existing theory more attractive, but remember that the Great Depression was a Black Swan, and this did not help macroeconomic theory so much as lead it into the desert for 40 years, giving many a wasted life championing not merely a welfare state, but socialism and all its unintended horrors.

The Black Swan may popularize the concept of low probability events, what were called ‘peso problems’ (see Rietz 1988), and that would be a good thing. But ultimately, the bumper sticker “shit happens” is kind of funny, kind of true, but hardly profound.

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