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The Tim Ferriss Show
#691: Nassim N. Taleb & Scott Patterson — How Traders Make Billions in The New Age of Crisis, Defending Against Silent Risks, Personal Independence, Skepticism Where It (Really) Counts, The Bishop and The Economist, and Much More
Sep 7, 2023
Nassim Nicholas Taleb, renowned author and risk-taker, joins investigative reporter Scott Patterson to discuss managing risks in hedge funds, navigating uncertain times like pandemics, robustness against criticism, and the application of the precautionary principle. They also touch upon the importance of honest debates, Germany's nuclear program, and the fragility of startups in the venture capitalist world.
02:07:50
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Quick takeaways
- The book explores the concept of the precautionary principle and its application to various areas of risk, including pandemics, economic instability, and climate change.
- The mindset and temperament of successful traders are examined, highlighting their focus on making money, independence, contrarian thinking, and skepticism.
- The book delves into the concept of poly crises, where multiple global crises interact and magnify each other, creating greater risks and challenges for society.
- The intersection of finance and philosophy is explored, emphasizing the author's interest in Stoicism, skepticism, and their influence on risk management and finance.
- The podcast emphasizes the importance of the precautionary principle and understanding fat tail risks in risk management, as well as the inadequacy of traditional risk models in capturing extreme events.
Deep dives
The Precautionary Principle: Protecting Against Extreme Events
The book explores the concept of the precautionary principle, which advocates taking extreme precautionary measures to protect against systemic risks and fat-tail events. The authors argue that this principle should be applied to various areas of risk, including pandemics, economic instability, and climate change.
The Psychology of Successful Traders
The book delves into the mindset and temperament of successful traders, highlighting their focus on making money and their relentless drive. It explores the role of independence, contrarian thinking, and skepticism in their approach to markets.
The Poly Crisis: Overlapping Global Crises
The book examines the concept of the poly crisis, which refers to the interaction and magnification of multiple global crises, such as pandemics, economic instability, financial crises, and climate change. It explores how these crises overlap and create greater risks and challenges for society.
The Intersection of Finance and Philosophy
The book delves into the intersection of finance and philosophy, highlighting the author's interest in Stoicism, skepticism, and other philosophical ideas. It explores how these philosophies have influenced his thinking on risk management and his approach to finance.
The Precautionary Principle and Fat Tails
The podcast episode discusses the importance of the precautionary principle and the concept of fat tails in risk management. The speaker explains that the precautionary principle suggests that in the face of uncertainty, it is better to take preventive measures to avoid potentially harmful outcomes. This principle applies to various areas, including climate change and GMOs. The speaker also highlights the concept of fat tails, which refers to the occurrence of extreme events that have a significant impact, even if they are infrequent. Understanding and managing fat tail risks is crucial in financial markets, and traditional risk management models are often inadequate in capturing these risks.
Applying the Precautionary Principle
The podcast explores how the precautionary principle can be applied on a policy or regulatory level. The speaker suggests that incorporating the precautionary principle into decision-making processes can help mitigate potential risks. Examples are given, such as the use of the precautionary principle in regulating GMOs in Europe. The speaker also emphasizes the importance of considering uncertainty as a reason for taking precautionary measures, especially in areas like climate change. By recognizing uncertainty as a potential risk factor, decision-makers can prioritize actions that mitigate potential negative outcomes.
Convexity and Non-BS in Risk Management
The podcast delves into the concepts of convexity and non-BS (non-bullshit) in risk management. The speaker explains convexity as a characteristic that describes how risks and rewards are not linearly related. Understanding convexity is crucial in various fields, including finance, medicine, and even nutrition. The speaker also introduces the concept of non-BS, referring to the rigidity of meaning in communication and decision-making. Non-BS implies consistent and meaningful language use that avoids ambiguity and confusion. By embracing non-BS thinking, individuals and organizations can enhance their risk management practices and make more informed decisions.
Interconnected World and Investor Risk
The podcast discusses the potential risks that investors can catalyze in an interconnected world. With the increasing interdependence and connectivity among various markets, there is a temptation for investors to take on risky positions that can lead to greater crises. The example of George Soros breaking the Bank of England is mentioned to highlight how an investor's actions can impact the global financial system. The podcast also explores the role of negligence and bad risk-taking in creating a contagion effect, similar to what happened in the banking sector. It emphasizes the importance of understanding the potential risks and interconnectedness in the current financial landscape.
Globalization, Shortages, and Gluts
The podcast delves into the effects of globalization and its impact on shortages and gluts in various industries. It is highlighted that international diversification is no longer effective due to the integration and interconnectedness of markets. The example of shortages in shipping containers is mentioned to illustrate how globalization can lead to imbalances in supply chains. Additionally, the podcast emphasizes the need for understanding the potential risks and disruptions caused by shortages and gluts, as well as the importance of diversifying sources and supply chains to mitigate these risks.
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Nassim Nicholas Taleb (@nntaleb) spent 21 years as a risk-taker (quantitative trader) before becoming a researcher in philosophical, mathematical, and (mostly) practical problems with probability.
Taleb is the author of a multivolume essay, the Incerto (The Black Swan, Fooled by Randomness, Antifragile, The Bed of Procrustes, and Skin in the Game), covering broad facets of uncertainty. His work has been published into 49 languages.
In addition to his trader life, Taleb has also written, as a backup of the Incerto, more than 70 technical and scholarly papers in mathematical statistics, genetics, quantitative finance, statistical physics, medicine, philosophy, ethics, economics, and international affairs around the notion of risk and probability (grouped in the Technical Incerto).
Taleb is currently Distinguished Professor of Risk Engineering at NYU's Tandon School of Engineering (retired). His current focus is on the properties of systems that can handle disorder ("antifragile").
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Scott Patterson (@pattersonscott) is an investigative reporter for The Wall Street Journal, currently based in Washington DC, working on climate and energy policy. His new book is Chaos Kings: How Wall Street Traders Make Billions in the New Age of Crisis, a profile of the rise of “black-swan traders,” such as Nassim Taleb and Mark Spitznagel, as well as a survey of the many perils the world faces today—and how we might fix them.
Scott has covered everything from Berkshire Hathaway to stock exchanges to high-speed traders to the financial regulators. His first book, The Quants, describes the rise of mathematical finance and delves into its role in the 2008 financial blowup. Dark Pools, his second book, tells how computer traders took control of the U.S. stock market, starting from the birth of computer trading in the 1980s to the explosion of high-frequency trading in the late 2000s.
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[09:44] How Scott and Nassim first connected.
[12:02] Why Nassim would rather be remembered as a scholar than a trader.
[14:01] You can’t forge a new friendship without breaking a few eggs.
[16:22] Silent risk, tail events, and one-trick ponies.
[25:56] What prompted Scott to write Chaos Kings?
[33:41] Pseudo-efficiency, pseudo-optimization, and pseudo-sorries.
[36:49] The joy of writing a preemptive resignation letter.
[37:39] Developing resilience against criticism.
[40:33] Recurring patterns in successful investors.
[44:15] Nassim: contrarian, or simply independent?
[46:44] Jiving with skeptical turkeys.
[51:53] Living in the polycrisis.
[53:54] The precautionary principle.
[1:00:07] Fat tails, thin tails, and the COVID vaccine.
[1:11:03] GMO risks and Monsanto intimidation tactics.
[1:14:45] Implementing the precautionary principle at a large scale.
[1:16:49] Uncertainty and the climate crisis.
[1:19:45] Convexity in the face of financial crisis.
[1:27:12] Are investors overpowered in an interconnected world?
[1:31:36] Utilizing the precaution principle in the real world (for better and worse).
[1:36:53] The flow-on effect of having skin in the game.
[1:39:37] The ponzification of startups and an overdue reckoning.
[1:42:51] What convexity at the center of all things conveys.
[1:49:27] Where to find Scott and Nassim.
[1:50:44] What Nassim is working on now.
[1:53:37] New insights from ancient words.
[1:57:26] Parting thoughts.
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For show notes and past guests on The Tim Ferriss Show, please visit tim.blog/podcast.
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