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Tuesday, October 14, 2008

"Taleb vs Economists"

Chris Dillow wants help:

Taleb vs economists, by Chris Dillow: Everyone seems to be hailing Nassim Nicholas Taleb as the man who saw the crisis coming. I have a problem with this. It’s not that what Taleb says about risk is wrong. Quite the opposite. It just strikes me as trivially true.

We’ve known for ages that returns are non-Gaussian, that extreme events are more common than a normal distribution predicts, and that risk can’t be quantified simply, if at all. The Black Swan, then, was just an entertaining if a little egocentric way of telling us what we already knew.

So, when I read in it (p43) that bankers “are not conservative at all; just phenomenally skilled at self-deception by burying the possibility of a large, devastating, loss under the rug” I thought: “But surely they’ve learnt from statistics and experience by now. Their risk management can’t be as terrible as Taleb claims. I know bosses are stupid, but they can‘t be this gibberingly, imbecilically, carpet-chewingly, moronically cretinous, can they?” I suspect most economists thought my way.

It looks like we were wrong and Taleb right.

But this isn’t because Taleb had any great insights into the nature of risk. It‘s because he thought banks‘ risk managers were idiots, whilst economists didn’t think so - not even me.

In doing this, however, we were just following economists’ standard procedure - of assuming that agents were if not rational then at least not wholly stupid.

For me, all this is very troubling.  It suggests that what we economists have to learn from Taleb has nothing to do with the nature of risk - we‘ve all known that - but about others’ rationality. We should ditch the assumption - which in a sense is mere courtesy - not only that others are rational but even the weaker assumption that they are nearly so. Perhaps we should indeed regard them merely as “empty suits.”

But this is a vastly greater departure from standard practice than anything Taleb has suggested about the nature of risk.

All of which leaves me genuinely puzzled. Were banks risk managers really that bad? Are bosses an order of magnitude stupider than even I had thought? Or is something else happening? Help me.

    Posted by on Tuesday, October 14, 2008 at 03:06 PM in Environment, Financial System | Permalink  TrackBack (0)  Comments (86)

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