Nassim Nicholas Taleb (LBN)

Nassim Nicholas Taleb (Arabic: نسيم نيقولا نجيب طالب‎, alternatively Nessim or Nissim, born 1960) is a Lebanese American essayist and scholar whose work focuses on problems of randomness, probability and uncertainty. His 2007 book The Black Swan was described in a review by Sunday Times as one of the twelve most influential books since World War II.

He is a bestselling author, and has been a professor at several universities, currently at Polytechnic Institute of New York University and Oxford University. He has also been a practitioner of mathematical finance, a hedge fund manager, a Wall Street trader, and is currently a scientific adviser at Universa Investments and the International Monetary Fund.

He criticized the risk management methods used by the finance industry and warned about financial crises, subsequently making a fortune out of the late-2000s financial crisis. He advocates what he calls a "black swan robust" society, meaning a society that can withstand difficult-to-predict events. He proposes "antifragility" in systems, that is, an ability to benefit and grow from random events, errors, and volatility as well as "stochastic tinkering" as a method of scientific discovery, by which he means experimentation and fact-collecting instead of top-down directed research.

Taleb was born in Amioun, Lebanon to Minerva Ghosn and Najib Taleb, a physician and an oncologist and a researcher in anthropology. His parents were Greek Orthodox Lebanese with French citizenship, and he attended a French school there, the Grand Lycée Franco-Libanais. His family saw its political prominence and wealth reduced by the Lebanese Civil War, which began in 1975. During the war, Taleb studied for several years in the basement of his family's home.

Both sides of his family were politically prominent in the Lebanese Greek Orthodox community. On his mother's side, his grandfather, Fouad Nicolas Ghosn, and his great-grandfather, Nicolas Ghosn, were both deputy prime ministers. His paternal grandfather was a supreme court judge; his great-great-great-great grandfather, Ibrahim Taleb, was a governor of the Ottoman semi-autonomous Mount Lebanon Governorate in 1861. The Taleb family Palazo, built in 1860 by Florentine architects for his great-great-great-great grandfather, still stands in Amioun.

Taleb received his bachelor and master in science degrees from the University of Paris. He holds an MBA from the Wharton School at the University of Pennsylvania and a PhD in Management Science (his thesis was on the mathematics of derivatives pricing) from the University of Paris (Dauphine) under the direction of Hélyette Geman.

A polyglot, Taleb has a literary fluency in English, French, and classical Arabic; a conversational fluency in Italian and Spanish; and can read classical texts in Greek, Latin, Aramaic, and ancient Hebrew, as well as the Canaanite script.

Taleb considers himself less a businessman than an epistemologist of randomness, and says that he used trading to attain independence and freedom from authority. As a trader, his strategy has been to safeguard investors against crises while reaping rewards from rare events, and thus his trading career has included several jackpots followed by lengthy dry spells. Taleb was a pioneer of tail risk hedging (now sometimes called "black swan protection"), whereby investors are insured against extreme market moves. He says that reaping dividends the way he has means dwelling in the land of "Mediocristan" instead of "Extremistan", the latter being an environment where huge things (black swans) can happen to you, whereas Mediocristan is the land of dentists who earn an above average income but with less extreme variations.

He has held the following positions: managing director and proprietary trader at UBS; worldwide chief proprietary arbitrage derivatives trader for currencies, commodities and non-dollar fixed income at CS First Boston; chief currency derivatives trader for Banque Indosuez; managing director and worldwide head of financial option arbitrage at CIBC Wood Gundy; derivatives arbitrage trader at Bankers Trust, proprietary trader at BNP Paribas, as well as independent option market maker on the Chicago Mercantile Exchange; and founder of Empirica Capital, after which Taleb retired from trading and became a full-time author and scholar in 2004. Taleb is currently Principal/Senior Scientific Adviser at Universa Investments in Santa Monica, California, a tail protection firm owned and managed by former Empirica partner Mark Spitznagel.

Taleb reportedly became financially independent after the crash of 1987 and made a multi-million dollar fortune during the financial crisis that began in 2007, a development which he attributed to the mismatch between statistical distributions used in finance and reality. Universa is a fund which is based on the "black swan" idea and to which Taleb is a principal adviser. Separate funds belonging to Universa made returns of 65% to 115% in October 2008. In the wake of the economic crisis that started in 2008, Taleb has become an activist for a "black swan robust society" and as of July 2011, Taleb is working with the International Monetary Fund on identifying and mitigating tail risks in financial markets.

Taleb became a full-time researcher in 2004, as a university professor. He is currently Distinguished Professor of Risk Engineering at Polytechnic Institute of New York University, and Distinguished Research Scholar, Said Business School, Oxford University. He was Visiting Professor at London Business School and the Dean's Professor in the Sciences of Uncertainty at the Isenberg School of Management at the University of Massachusetts Amherst, Adjunct Professor of Mathematics at the Courant Institute of New York University, and affiliated faculty member at the Wharton Business School Financial Institutions Center. He jointly teaches regular courses with Paul Wilmott and occasionally on the Certificate in Quantitative Finance. In May 2012, he ranked fourth in terms of the number of downloaded papers on the Social Science Research Network (SSRN).

Taleb's first non-technical book, Fooled by Randomness, about the underestimation of the role of randomness in life, was published in 2001.

His second non-technical book, The Black Swan, about unpredictable events, was published in 2007, selling as of February 2011, close to 3 million copies. It spent 36 weeks on the New York Times Bestseller list ; 17 as hardcover and 19 weeks as paperback and was translated into 31 languages. The Black Swan has been credited with predicting the banking and economic crisis of 2008.

Taleb's non-technical writing style mixes a narrative style (often semi-autobiographical) and short philosophical tales together with historical and scientific commentary. The sales of Taleb's first two books garnered an advance of $4 million for a follow-up book on anti-fragility.

A book of aphorisms, The Bed of Procrustes: Philosophical and Practical Aphorisms, was released in December 2010.

In 2007, in The Black Swan, Taleb warned about the coming crisis:
Globalization creates interlocking fragility, while reducing volatility and giving the appearance of stability. In other words it creates devastating Black Swans. We have never lived before under the threat of a global collapse. Financial Institutions have been merging into a smaller number of very large banks. Almost all banks are interrelated. So the financial ecology is swelling into gigantic, incestuous, bureaucratic banks – when one fails, they all fall. The increased concentration among banks seems to have the effect of making financial crisis less likely, but when they happen they are more global in scale and hit us very hard. We have moved from a diversified ecology of small banks, with varied lending policies, to a more homogeneous framework of firms that all resemble one another. True, we now have fewer failures, but when they occur .... I shiver at the thought.

The government-sponsored institution Fannie Mae, when I look at its risks, seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup. But not to worry: their large staff of scientists deem these events "unlikely".


Among the people Taleb's writing has influenced is writer Malcolm Gladwell of The New Yorker. Gladwell wrote, "We associate the willingness to risk great failure – and the ability to climb back from catastrophe – with courage. But in this we are wrong. That is the lesson of Nassim Taleb."

His book The Bed of Procrustes summarizes the central problem: "we humans, facing limits of knowledge, and things we do not observe, the unseen and the unknown, resolve the tension by squeezing life and the world into crisp commoditized ideas". Taleb disagrees with Platonic (i.e., theoretical) approaches to reality to the extent that they lead people to have the wrong map of reality rather than no map at all. He opposes most economic and grand social science theorizing, which in his view suffer acutely from the problem of overuse of Plato's Theory of Forms.

Relatedly, he also believes that universities are better at public relations and claiming credit than generating knowledge. He argues that knowledge and technology are usually generated by what he calls "stochastic tinkering" rather than by top-down directed research.

He calls for cancellation of the Nobel Memorial Prize in Economics, saying that the damage from economic theories can be devastating. He opposes top-down knowledge as an academic illusion and believes that price formation obeys an organic process. Together with Espen Gaarder Haug, Taleb asserts that option pricing is determined in a "heuristic way" by operators, not by a model, and that models are "lecturing birds on how to fly". Pablo Triana has explored this topic with reference to Haug and Taleb, and says that perhaps Taleb is correct to urge that banks be treated as utilities forbidden to take potentially lethal risks, while hedge funds and other unregulated entities should be able to do what they want.

Taleb's writings discuss the error of comparing real-world randomness with the "structured randomness" in quantum physics where probabilities are remarkably computable and games of chance like casinos where probabilities are artificially built. Taleb calls this the "Ludic fallacy". His argument centers on the idea that predictive models are based on Plato's Theory of Forms, gravitating towards mathematical purity and failing to take some key ideas into account, such as: the impossibility of possessing all relevant information, that small unknown variations in the data can have a huge impact, and flawed theories/models that are based on empirical data and that fail to consider events that have not taken place but could have taken place. Discussing the Ludic fallacy in The Black Swan, he writes, "The dark side of the moon is harder to see; beaming light on it costs energy. In the same way, beaming light on the unseen is costly in both computational and mental effort."

In the second edition of The Black Swan, he posited that the foundations of quantitative economics are faulty and highly self-referential. He states that statistics is fundamentally incomplete as a field as it cannot predict the risk of rare events, a problem that is acute in proportion to the rarity of these events. With the mathematician Raphael Douady, he called the problem statistical undecidability (Douady and Taleb, 2010).

Taleb sees his main challenge as mapping his ideas of "robustification" and "anti-fragility", that is, how to live and act in a world we do not understand and build robustness to black swan events. Taleb introduced the idea of the "fourth quadrant". One of its applications is in his definition of the most effective (that is, least fragile) risk management approach: what he calls the 'barbell' strategy which is based on avoiding the middle in favor of linear combination of extremes, across all domains from politics to economics to one's personal life. These are deemed more robust to estimation errors. For instance, he suggests that investing money in 'medium risk' investments is pointless because risk is difficult if not impossible to compute. His preferred strategy is to be both hyper-conservative and hyper-aggressive at the same time. For example, an investor might put 80 to 90% of their money in extremely safe instruments, such as treasury bills, with the remainder going into highly risky and diversified speculative bets. An alternative suggestion is to engage in highly speculative bets that are insured against losses of more than a specified amount. He asserts that by adopting these strategies a portfolio can be "robust", that is, gain a positive exposure to black swan events while limiting losses suffered by such random events. Taleb also applies a similar barbell-style approach to health and exercise. Instead of doing steady and moderate exercise daily, he suggests that it is better to do a low-effort exercise such as walking slowly most of the time, while occasionally expending extreme effort. He avers that the human body evolved to live in a random environment, with various unexpected but intense efforts and much rest.

In a 2008 article in The Times, the journalist Bryan Appleyard described Taleb as "now the hottest thinker in the world". The Nobel Laureate Daniel Kahneman proposed the inclusion of Taleb's name among the world's top intellectuals, saying "Taleb has changed the way many people think about uncertainty, particularly in the financial markets. His book, The Black Swan, is an original and audacious analysis of the ways in which humans try to make sense of unexpected events." Taleb was treated as a "rock star" at the World Economic Forum annual meeting in Davos in 2009; at that event he had harsh words for bankers.

Taleb contends that statisticians can be pseudoscientists when it comes to risks of rare events and risks of blowups, and mask their incompetence with complicated equations. This stance has attracted criticism: the American Statistical Association devoted the August 2007 issue of The American Statistician to The Black Swan. The magazine offered a mixture of praise and criticism for Taleb's main points, with a focus on Taleb's writing style and his representation of the statistical literature. Robert Lund, a mathematics professor at Clemson University, writes that in Black Swan, Taleb is "reckless at times and subject to grandiose overstatements; the professional statistician will find the book ubiquitously naive."

Aaron Brown, a finance professor at Yeshiva University, said that "the book reads as if Taleb has never heard of nonparametric methods, data analysis, visualization tools or robust estimation." Nonetheless, he calls the book "essential reading" and urges statisticians to overlook the insults to get the "important philosophic and mathematical truths." Taleb replied in the second edition of The Black Swan that "One of the most common (but useless) comments I hear is that some solutions can come from 'robust statistics.' I wonder how using these techniques can create information where there is none". While praising the book, Westfall and Hilbe in 2007 complained that Taleb's criticism is "often unfounded and sometimes outrageous." Taleb's contentious style, they say, "describes writers and professionals as knaves or fools, mostly fools. His writing is full of irrelevances, asides and colloquialisms, reading like the conversation of a raconteur rather than a tightly argued thesis." Taleb felt that academics showed "bad faith" by criticizing a literary book that claimed to be a literary book and by ignoring the empirical evidence provided in his appendix and more technical works.

The late Berkeley statistician David Freedman said that efforts by statisticians to refute Taleb's stance have been unconvincing. Taleb wrote in the second edition of The Black Swan that he had a session in 2008 with statisticians in which the hostility changed:
I found out that telling researchers "This is where your methods work very well" is vastly better than telling them "This is what you guys don’t know." So when I presented to what was until then the most hostile crowd in the world, members of the American Statistical Association, a map of the four quadrants, and told them: your knowledge works beautifully in these three quadrants, but beware of the fourth one, as this is where the Black Swans breed, I received instant approval, support, offers of permanent friendship, refreshments (Diet Coke), invitations to come present at their sessions, even hugs(...) They tried to convince me that statisticians were not responsible for these aberrations, which come from people in the social sciences who apply statistical methods without understanding them.


Taleb and Nobel laureate Myron Scholes have traded personal attacks, particularly after Taleb's paper with Espen Haug on why nobody used the Black-Scholes-Merton formula. Taleb said that Scholes was responsible for the financial crises of 2008, and suggested that "this guy should be in a retirement home doing Sudoku. His funds have blown up twice. He shouldn't be allowed in Washington to lecture anyone on risk." Scholes retorted that Taleb simply "popularises ideas and is making money selling books". Scholes claimed that Taleb does not cite previous literature, and for this reason Taleb is not taken seriously in academia. Haug and Taleb (2011) listed hundreds of research documents showing the Black-Scholes formula was not Scholes' at all and argued that the economics establishment ignored the literature by practitioners and mathematicians (such as Ed Thorp), who had developed a more sophisticated version of the formula.

Citing his academic works on the same topics covered in The Black Swan, Taleb said that "Academics should comment on data there, not make technical comments on a literary book". He has said that no direct published criticism has been directed at his ideas, but rather at his person and style. He wrote, "you never win an argument until they attack your person." In an interview on Charlie Rose, Taleb said that he was pleased that none of the criticism he received for The Black Swan had any substance, as it was either unintelligent, ad hominem, or style over substance, which convinced him to "go for the jugular" with a huge financial bet on the breakdown of statistical methods in finance.

Taleb's aggressive attitude against the finance industry has led to personal attacks, including a smear campaign and death threats from former employees of Lehman Brothers.

Though a non-smoker, Taleb suffered from throat cancer in the mid-1990s, which he overcame. He has stated that his major hobby is "teasing people who take themselves and the quality of their knowledge too seriously and those who don't have the guts to sometimes say: 'I don’t know ...'" Some reporters have commented that information about his personal life is difficult to extract, though Taleb appears to enjoy being in the limelight. Others find him more talkative: Malcolm Gladwell, in What the Dog Saw, wrote: "We would have lunches that would last for hours. The delight I took in his company was offset only by the dread I felt at the prospect of transcribing all those hours of tapes."

Bibliography:

Literary and nontechnical books:
Taleb, Nassim Nicholas (2001/2005). Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets. New York: Random House and Penguin. ISBN 0-8129-7521-9.
Taleb, Nassim Nicholas (2005). Le Hasard Sauvage. Paris: Les Belles Lettres. ISBN 2-251-44297-9. The French edition of Fooled by Randomness with revisions and changes to the English version.
Taleb, Nassim Nicholas (2007/2010). The Black Swan: The Impact of the Highly Improbable. New York: Random House and Penguin. ISBN 978-1-4000-6351-2..The book was completed in 2010 with the second edition including a long essay "On Robustness and Fragility".
Taleb, Nassim Nicholas (2010). Force et fragilité, reflexions philosophiques et empiriques. Paris: Les Belles Lettres.
Taleb, Nassim Nicholas (2010). The Bed of Procrustes: Philosophical and Practical Aphorisms. New York: Random House. ISBN 978-1-4000-6997-2.

Scholarly and technical publications:
Taleb, N. N. (2012) “Electronic Book: Technical Companion to the Works on Uncertainty"
Taleb, Nassim Nicholas (1997). Dynamic Hedging: Managing Vanilla and Exotic Options. New York: John Wiley & Sons. ISBN 0-471-15280-3.
Taleb, N. N. (2004) Bleed or Blowup: What Does Empirical Psychology Tell Us About the Preference For Negative Skewness?, Journal of Behavioral Finance, 5
Taleb, N. N. (2004) “These Extreme Exceptions of Commodity Derivatives.” in Helyette German, Commodities and Commodity Derivatives. New York: Wiley.
Taleb, N. N. (2004) “Roots of Unfairness.” Literary Research/Recherche littéraire. 21(41–42): 241–254.
Taleb, N. N. (2004) “On Skewness in Investment Choices.” Greenwich Rountable Quarterly 2.
Taleb, N. N. (2004) "I problemi epistemologici del risk management " in: Daniele Pace (a cura di) "Economia del rischio. Antologia di scritti su rischio e decisione economica", Giuffrè, Milano
Taleb, N. N. (2005) "Fat Tails, Asymmetric Knowledge, and Decision making: Essay in Honor of Benoit Mandelbrot's 80th Birthday." Technical paper series, Willmott (March): 56–59.
Derman, E. and Taleb, N. N. (2005) The Illusion of Dynamic Replication, Quantitative Finance, vol. 5, 4
Taleb, N. N. (2006) "Homo Ludens and homo Economicus." Foreword to Aaron Brown's The Poker Face of Wall Street. New York: Wiley.
Goldstein, D. G. and Taleb, N. N. (2007) We Don't Quite Know What We Are Talking About When We Talk About Volatility, Journal of Portfolio Management, Summer 2007.
Taleb, N. N. (2007) "Black Swan and Domains of Statistics", The American Statistician, August 2007, Vol. 61, No. 3
Taleb, N. N. and Pilpel, A. (2007)Epistemology and Risk Management, "Risk and Regulation", 13, Summer 2007
Taleb, N. N. (2008) Infinite Variance and the Problems of Practice, Complexity, 14(2).
Taleb, N. N. (in Press), Errors, Robustness, and the Fourth Quadrant, International Journal of Forecasting (forthcoming)
Haug, E. G. and Taleb, N. N. (2008) Why We Have Never Used the Black-Scholes-Merton Option Pricing Formula, Wilmott
Taleb, N. N., Golstein, D. G., and Spitznagel, M., 2009, "The Six Mistakes Executives Make in Risk Management", Harvard Business Review , October
Taleb, N. and Tapiero, C.Too Big to Fail and the Fallacy of Large Institutions (forthcoming)
Makridakis, S. and Taleb, N., 2009, "Decision making and planning under low levels of predictability", International Journal of Forecasting (in press)
Mandelbrot, B. and Taleb, N. N. (in Press). Random Jump, not Random Walk. In Francis Diebold and Richard Herring (Eds.), The Known, the Unknown, and the Unknowable, Princeton University Press
Taleb, N. N. and Pilpel, A., 2010, “The Prediction of Action”, in (eds. T. O' Connor & C. Sandis) A Companion to the Philosophy of Action (Wiley-Blackwell).
Taleb, N. N., 2010, Common Errors in the Interpretation of the Ideas of The Black Swan and Associated Papers,Critical Review, Vol 21, No 4
Taleb, N. and Tapiero, C., 2010, The Risk Externalities of Too Big to Fail in press,Physica A
Haug, E. G. and Taleb, N. N., 2011, "Option traders use (very) sophisticated heuristics, never the Black–Scholes–Merton formula", Journal of Economic Behavior and Organizations, 77(2), Feb. 2011.
Taleb, N.N., 2010,Robustness and Model Error inside the Fourth Quadrant, forthcoming.
Taleb, N.N., 2011,Why Did the Crisis of 2008 Happen?, forthcoming, New Political Economy
Douady, R, and Taleb,N.N.,2011, Statistical Undecidability, forthcoming.
Taleb, N.N. and Blyth, M, 2011, The Black Swan of Cairo,Foreign Affairs, 90, 3
Taleb, N.N. and Martin, G., 2012, How to Avoid Another Crisis, SIAS Review of International Affairs
Taleb, N.N. and Martin, G., 2012,The Illusion of Thin Tails Under Aggregation (A Reply to Jack Treynor), Journal of Investment Management
Taleb, N.N., 2012, A Map and Simple Heuristic to Detect Fragility, Antifragility, and Model Error, under revision, Quantitative Finance
Taleb, N.N., 2012, The Future Has Thicker Tails than the Past: Model Error as Branching Counterfactuals, preprint, Mandelbrot Memorial
Taleb, N.N., and Goldstein, D.,2012,The Problem is Beyond Psychology: The Real World is More Random than Regression Analyses, International Journal of Forecasting

Essays in literary journals:
Taleb, N. N. (2009) Le cygne noir de Yevgenia in Delicious Paper (Paris)
Taleb, N. N. (2010) Be a gentleman on the treadmill in The Drawbridge (London)

Other essays:
Taleb, N. N. (2005) Edge article: The Opiates of the Middle Class
Taleb, N. N. (2006) "On Forecasting." In John Brockman, ed., In "What We Believe But Cannot Prove: Today's Leading Thinkers on Science and the Age of Certainty. New York: Harper Perennial.
Taleb, N. N. (2008) Edge article: Real Life is Not a Casino, in John Brockman, ed., Edge Question 2008. New York:Harper Perennial. The article explains Taleb's position on global warming and why we need to be green regardless of models.
Taleb, N. N. (2008) Edge Essay: The Fourth Quadrant: A Map of the Limits of Statistics
Taleb, N. N. (2009) Edge article: The Idea of Iatrogenic Science, in John Brokman, ed., Edge Question 2009. New York: Harper Perennial.
Taleb, N. N. (2011) Edge article: AntiFragility Or the Property of Disorder Loving Systems, forthcoming in John Brockman, ed., Edge Question 2011. New York: Harper Perennial.

Collaborations:
Taleb was collaborating with Benoit Mandelbrot on a general theory of risk management.
Taleb also works with Daniel Goldstein on a project to test empirically people's intuitions about ecological and high impact uncertainty.

Source: http://en.wikipedia.org/wiki/Nassim_Nicholas_Taleb