Any semi-regular reader of this Blog knows I can’t say enough and enough that’s laudatory about Nassim Nichols Taleb’s two books, Fooled by Randomness and The Black Swan—they capture my world view with incredible clarity.** Black Swan came at exactly the right moment—it offers a more or less 100% explanation for our deeply disturbed financial markets. I was around Bill Sharpe, the Nobel-holding, more or less father of contemporary portfolio theory, engine of our current woes, when he did the work that won the prize—I was mostly ignorant of what was up, but appalled by the apparent arrogance of Sharpe and his devotees. It was clear—to them—that risk would be tamed, once and for all.
[*Swans do indeed snap—I have them on my farm, or at least their kindred Chinese geese.] [**Gawd, do people get upset when one dwells on the “significant” role of luck in life—stunning and troubling and amusing at once.]
I now eagerly refer you to NNT’s 24 October (sorry for the delay) magical, terse piece in the Financial Times, “The Pseudo-science Hurting Markets.” The pull quote goes like this: “Medicine used to kill more patients than it saved—just as financial economics endangers the system by creating risk.”
The “pseudo-science,” per NNT, is” ‘Nobel-crowned’ methods of modern portfolio theory.” Aiming to erase risk, the quants’ house of cards has increased said risk immeasurably and is blowing us all away—just ask Mssrs O’Neal/Merrill and Prince/Citi about their week—decidedly more harrowing than mine. NNT really rubs it in—and I literally rubbed my hands with glee, tough to do while reading a paper, but possible if the glee-meter was as high as mine—when he pointed out the little known fact that the economics Nobel ain’t the real thing; instead it’s the “Sveriges Riksbank Prize in Economic Science in Memory of Alfred Nobel.”
Selfishly, I don’t want the world to go to hell in a handbasket—but a part of me believes that the arrogant quantocracy deserve a serious public thrashing; some, like O’Neal, will just have to learn how to live off their tens of millions of severance pay.