The Unbearable Lightness of Nassim Taleb

As Conor notes, Nassim Taleb offered up some less than sage advice in a recent “article” in the Financial Times. The article, which takes the form of a talismanic list, was crafted in order to the deliver humanity from its suffering by pointing our mind’s eye towards the failures of our regulatory dogma. Wielding powerful metaphors such as “Make an omelette with the broken eggs,” Taleb fails to meet even the lowest of standard for a statement on regulatory policy. “Counter-balance complexity with simplicity” might be an acceptable policy position for Deepak Chopra. But it is certainly unacceptable for an economist.Looking beyond Taleb’s absurd delivery, the substance of his policies is, in large part, absent, and where present, addresses the real issues at play in a superficial and borderline whimsical fashion. It is unclear whether this is the product of haste, or the product of a complete lack of command over the issues and concepts. For example, Taleb states that:

7. Only Ponzi schemes should depend on confidence. Governments should never need to “restore confidence”. Cascading rumours are a product of complex systems. Governments cannot stop the rumours. Simply, we need to be in a position to shrug off rumours, be robust in the face of them.

To say that only Ponzi schemes depend on confidence — they don’t, since they’re the product of fraud and misrepresentation — is factually incorrect and suggests intellectual laziness. The extension of credit and contracting depend on confidence in the ability of a counterparty to perform. In a broader sense, the organizational structure of society depends on people being able to rely on the predictability of certain events around them (e.g., bus, train, and plane arrivals, banks maintaining deposits, etc.).

This organizational structure is itself a product of confidence. I am confident that the train will arrive shortly after I get to the train station in the morning, and as a result, I plan on taking the train to work each day. I am confident that my bank will maintain my deposit level, and so I don’t have a mattress full of cash. When confidence is eroded, the incentives of individuals become misaligned.

Take, for example, the case of a bank run. Each depositor has an incentive to withdraw its deposits based solely upon the assumption that all other depositors are doing so, since we have a fractional reserve banking system. Yet each would be better off if none of them withdrew their deposits. When the assumption rings true in the minds of enough depositors, that is, when confidence breaks down, the bank will experience a run. To deal with this problem, we have deposit insurance, which the Government provides to create and maintain confidence in the banking system.

Also published on the Atlantic Monthly’s Business Channel.


Originally published at Derivative Dribble and reproduced here with the author’s permission.

12 Responses to "The Unbearable Lightness of Nassim Taleb"

  1. AG   April 13, 2009 at 7:31 pm

    I completely agree with Charles Darvy with a Caveat. Please let the banks fail. Would you?Charles is again doing the classic mistake of theorising something which in which in Practice, complex manipulations cannot be stopped by any amount of regulations. Unless we have the ability to allow the banks to fail, we just cannot depend on TRUST. That is lot of BS we have already paid for.

  2. J. Fredrickson   April 13, 2009 at 11:13 pm

    No one should really have any “confidence” in a fractional reserve banking system. The money isn’t there, it isn’t backed by specie, it is simply a debt upon debt upon debt system. We can call them “deposits” but this is simply a checkbook balancing act. When broken down due to a lack of “confidence,” the fractional reserve system implodes. If on the other hand all loans were backed by a truly valued asset(see gold) there would be no crisis of confidence, the asset would simply be returned, and rumors would be proven unfounded. That system deserves the word confidence, on the other hand, the current fractional reserve system, not to mention the Federal Reserve System should never be trusted.Ever heard of a “confidence” man? They play the same tune. It’s the same game you are defending.

    • HarshView   April 14, 2009 at 12:01 pm

      In what way is gold a ‘truly valued asset’ more than paper? Other than its electrical conduction properties and some use in dental work, it has no value other than the illusory ‘nice yellow metal’ appeal for luxury. The lure of gold is as much of a sham.

      • J. Fredrickson   April 14, 2009 at 5:02 pm

        Okay, let’s play a game. I will give you $10,000 in cash(USD) or gold today. You have to put it away where no one can touch it for 20 years. Which one would you choose?You want the paper, right. LOL

        • Guest   April 18, 2009 at 4:23 pm

          I might not want the stack of bills, but that’s not a fair comparison. I might take the paper if I can put it in a money market account or bond fund or stock fund.

  3. ziaul_ahemd   April 14, 2009 at 11:12 am

    The current world order/financial/economic system is totally flawed , no matter how much regulation you put in place there cant be hapiness under current mindset , the reasons are below :-1. US expenditure on defence is $1.3 trillion and rising at 7% annually , it has 49% of world military spending .- Where does all this money come from ? Until you play games and ponzi2. US has world’s highest debt at $14 trillion and it buys everything on loan/credit card.3. Tax havens / Drug havens / Terror havens exist in the world becuase world governments dont follow same ideologies and laws .4. Developed world does wasteful spendings on addictive consumerism like drugs, prono ,swanky cars, beauty industry etc . The developed world spends so much time/money/energy on such wasteful things .

  4. renzo   April 14, 2009 at 1:09 pm

    well isn’t theb FED and fractional reserve banking a kind of “trusted” ponzi scheme ? it’s time to think about money a bit differently. The crisis is just a crisis about too much debt sustained by too little disposable income. Maybe… people will awaken one day an realize that we could live in a different monetary system. So far…i just feel that people are getting tired of serving their government instead of being served by their government.

  5. AR   April 14, 2009 at 8:55 pm

    Hello Renzo, now that you have my attention, what kind of monetary system would you propose? I like your focus on the future.

  6. John Van Praag   April 17, 2009 at 10:46 am

    Thank you for pointing me toward Taleb’s article. It’s brilliant. If you don’t get it, I suggest you read or reread Fooled By Randomness and The Black Swan. Also the works of Robert Shiller. We need to move to multiple new paradigms. Banging the drum for the old, failed paradigms merely sets us up for more catastrophes.

  7. Guest   April 19, 2009 at 6:14 pm

    First, (I would) separate fact from fiction, the fact is that FDIC has 252 banks that could potentially have problems. Of those 252 there are 19 that are a real cause for concern.The second fact is that of those 19 the probability of a bank run is unlikely with in the special circumstance that that those lobbyist are the darlings of Congress/ Senate and the Treasury. There outmost collapse wouldnt be feasible to those writing the regs at the moment. The concern is which direction the administration and senate are going to turn, Capitalist, Socialist, mix of both, nationalization, ect. The smaller 252 have more of a chance of bank run’s than the top 19 considering the top 19 are in bed with those writing regs, removing small competition would be favorable to the top 19 and this would increase their capital asset base. And that is a reality, and that was a reality during the depression.My concern is that first politicians would be in favor, and second I find that many economist that are full-fledged capitalists are also pressing the matter of bank insolvency. Though would this create a domino effect? And how pandemic would this domino effect, affect society? The economy as fragile as it currently is could it weather this type of situation? Corporate defaults in billions, that those banks are holding, mass layoffs as a result of the liquidation of bank assets? No doubt it would effect world trade thus deepening the recession. Financial centers are not a game to be played with, and maybe the “essentials of capitalist economics” needs to take in special considerations to areas that have serious consequences on the entire economic system.The double handed matrix, are banks to big to fail? Yes. Unless the U.S wants to invite international banks into the country to take their place. Are smaller banks to important to society to fall? Yes. of course.So how to get big banks to succeed without pushing smaller banks to liquidate? The answer is smarter regulations, refit the boxes of each so they essentially become better banks. <– If the government says “Our solution is to improve banks, to make better banks” that will restore confidence. Our situation is at the moment a little rocky, and institutions are wiggly, but it will get better with more stable foundations.

  8. AR   April 20, 2009 at 3:03 am

    I would just like to point out that, as Dorothy discovered after returning from Oz, that the solution is right there in the junkyard of securitization along with the rest of the crap.Right under our noses, a “parts market” for capital developed. But, while some of us are still arguing whether it’s even possible for to buy and sell capital parts rather than the whole corporation (it’s impossible under the current accounting framework) others have been cashing in at fire sale prices before the first of (i) rules being put in place or (ii) the market collapsing.Nobody yet has argued for or against the paradigm of creating a transparent discounting window not only discounts bundles of risky cash flows but re-discounts them every time there is new performance information. For that is what the CRAs were, and they did this well until they figured out they made more money not doing it well – the American way? – and the best way to keep people guessing was never to re-discount. Ie, never to re-rate.

  9. JRT   April 27, 2009 at 1:48 pm

    “True expertise only comes after making all possible mistakes” -Niels Bohr