Can you recall a moment when you could honestly say ‘I told you so’, but when no one listens? Well this just might be one of those for me.
This Thursday September the 10th marks perhaps a historic development for both Washington and the financial markets. The US Congress’ Committee on Science and Technology held a hearing on the responsibility of mathematical model Value at Risk for the credit crisis.
Nassim Taleb has been invited as expert witness by the Committee. Being a real derivatives trader for decades, Taleb has been warning about VaR’s potential for destruction for at least 13 years.
Read the official Report on The Risks of Financial Modeling, VaR and the Economic Breakdown by Dr. Nassim N. Taleb here.
While Taleb was kicking ass in the US capital, I would like to contribute to the crusade by illuminating some insights from the now famous book The Black Swan.
For those mortal bipedal, carbon-based humanoid lifeforms with any significant level of complexity in their neo-cortical pathways who didn’t realize; ‘The Black Swan’ is not just another book. It in fact is a compilation of empirically valid phychological and logically coherent philosophical insights into the human mind and behavior, including the world around us, in which some thoughtful guy warns us for our ‘intellectuall arrogance’ and predisposed incompetence to harness the consequences of randomness in life, or any social situation for that matter.
This he eloquently calls ‘The Black Swans’, which is a technical name for the problem of induction in philosophy of science, especially social sciences that is.
I’ve always hoped, but never thought, that Nassim Taleb would get to be heard by the US congress. Is he just casting ‘pearls to swines’ here (as some guy called Jesus once said it) or is he really being heard?
Taleb, after 13 years of fighting against complex derivatives and bogus quantitative risk management, finally got his say in congress last week on 10-09-2009. In this video compilation you can see a few of the points he made there.
Nassim Taleb testifies before Congress, under oath, and uses his insights in errors conducted by humans in complex systems, like the financial markets, to warn against mishandling of these errors and the (im)morality of deficit spending and the culture of incentivizing failures with bonuses.
In short, the man gives his view on the current financial and economic crisis.
In addition, he also warns of the risks of hyperinflation and presents his technical work on the concept of ‘too big to fail’ (also discussed earlier here) which is directly applicable to the comtemporary banking and monetary systems. Taleb also refers to his previous articles, also discussed on this website, concerning the ever growig complexity in the world, economic ‘charlatanism’ and how to identify the situations that are inherently unpredictable. He also discusses his “Fourth Quadrant” of risks society should not bear because we cannot measure them.
Taleb also opens a, not so suprising, frontal attack at the ‘Value at Risk’ (VaR) method. Value at Risk are the risk measuments methods used by Wall Street to hide risks and collect bonuses, and are, by the way, still taught at business schools accross the world albeit out of mere ignorance or paradigmati intellectual arrogance.
Although I didn’t compile the video, I would guess that these are just some of the rhetorical highlights needed to give an impression of his testimony to the congress about the financial markets and the contemporary economic situation the US, and the world. Surely, more is to follow so stay tuned.
- To know more about the congress testimony read also the article at Huffington Post: Obama Should Stop by Taleb’s Historic Congress Testimony
- To learn more on Nassim Taleb’s conceptualization of the world watch the follwing video LEARNING TO EXPECT THE UNEXPECTED