Davies on Taleb

Insightful series of posts from Dan Davies about how Taleb has been mis-understood by many. (Thus, he is a “miseducator.”)

taleb as miseducator (part 1) - Dan Davies - “Back of Mind”

The barbell portfolio was never meant to be an actual portfolio – it was (and is, in the later books, really clearly) a philosophical device, meant to make you think in a different way about your investment risks.  Shall we say, this isn’t how the investment management industry took it.

Fooled By Randomness talks about the idea of the “barbell portfolio” — betting on a lot of low-risk things, and then some high-risk things. Taleb kind of presents this as a literal investment strategy, I think he actually talks about using this idea to structure his portfolio when he was in finance. Davies points out that Taleb was trying to make the point that you don’t know which ones are safe — the entire world is Extremistan, we just don’t realize it most of the time.

taleb as miseducator (part 2) - Dan Davies - “Back of Mind”

Trying to take a book like TBS and turn it into a list of stock calls is, intrinsically, a ridiculous thing to do.

But that’s the key issue here.  Thinking of Black Swans as intrinsically impossible to predict is itself an epistemic coping mechanism.  More often, they are things that you could have predicted, but you didn’t.

It’s not really so ridiculous to create that list of stock calls after all. Black Swans are things that you could have predicted, but didn’t, because attention is finite. So those types of lists are maybe a good way to raise certain ideas to the attention of others.

I think Taleb might reply, it’s not that no one thought of the possibility, it’s that we don’t think about the probabilities the right way.

taleb as miseducator (part 3) - Dan Davies - “Back of Mind”

and I might argue (like for example, in part 4) that a significant part of the motivation for writing “Skin In The Game” was to try and stop the brooms from marching.

The ability to make a decision or refrain from doing so is in many cases equivalent to a financial option, and it’s an absolute basic principle of finance theory that an option has positive value as long as it remains unexercised.

“Antifragility” does not mean “good at taking advantage of you;” it means “it’s good to have options because you can react more easily to new situations; creating options and ability to make a variety of different decisions makes you robust to unknown situations.”

Of course it turned out that the one thing this business model couldn’t tolerate was materially positive interest rates; a classic example of the “not exactly a Black Swan, is it?” species of Black Swan.

Some people gradually re-interpreted the idea to mean the “move fast and break things” style of building companies. Produce at under-cost to bankrupt your competitors. This isn’t antifragile.

taleb as miseducator (part 4) - Dan Davies - “Back of Mind”

“Skin in the Game” isn’t just a rehash of the economics literature on the principal/agent problem – a core theme of the whole “miseducator” series is the tendency for economists to take a look at something which appears to be covering the same ground as part of the economics literature, and presume that it’s covering _exactly_the same ground, and then usually dismiss it in the manner of apocryphal Koranic scholar as being necessarily either superfluous or erroneous.

the point of a lot of the mathematical appendixes (and the Precautionary Principle) is that it never makes sense to take risks of the sort that can fundamentally impair your ability to come back.  That’s what SITG is about; not aligning payoffs between parties across the distribution, but ensuring that the person making the decision lives with all the consequences.