#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

1149 snips

Sep 7, 2023

Guest

Scott Patterson

Guest

Nassim Nicholas Taleb

Nassim Nicholas Taleb, author and former quantitative trader, and Scott Patterson, investigative reporter and author, delve into navigating uncertainty in trading and finance. They discuss the importance of skepticism in financial decisions and personal independence. The conversation explores risk management strategies, historical responses to crises like COVID-19, and the dynamic between robustness and fragility in financial markets. Both guests emphasize critical thinking in addressing contemporary global challenges, especially in the realm of climate and energy policy.

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ANECDOTE

First Encounter

Tim Ferriss and Nassim Taleb first met around 2001-2002 after corresponding about hacking.
They consumed all the eggs at a Madison Avenue restaurant, alarming the staff.

ANECDOTE

Lehman Collapse Celebration

When Lehman Brothers collapsed, Nassim Taleb was on a plane.
He received an SMS from Tim Ferriss about dinner, then news of the collapse, leading to a celebratory champagne night.

INSIGHT

Tail Risk Mitigation

Nassim Taleb's focus is on mitigating harm from silent risks, not betting on tail events.
Tail events offer trading opportunities because they represent unseen systemic risks.

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Dark pools

Scott Patterson

Dark Pools explores the transformation of the global stock market through the rise of high-frequency trading and dark pools. It tells the story of how trading robots, executing trades in milliseconds, have become increasingly self-directed, often beyond human control. The book delves into the history of electronic trading, from its early days to the current era of machine traders.

The quants

How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It

Scott Patterson

The Quants tells the story of a new breed of mathematicians and economists, known as 'quants,' who used complex algorithms and high-speed computers to make billions on Wall Street. The book focuses on key figures such as Peter Muller, Cliff Asness, Jim Simons, and Aaron Brown, and explores how their methods contributed to the 2007-2008 financial crisis. It delves into the world of quantitative finance, profiling colorful personalities and examining the implications of their work on the financial markets[1][3][5].

The bed of Procrustes

Nassim Nicholas Taleb

The Bed of Procrustes is a philosophical book by Nassim Nicholas Taleb, written in an aphoristic style. It contrasts classical values like courage and elegance with modern issues such as nerdiness and phoniness. The book critiques how modern society often forces reality into preconceived frameworks, much like the mythological figure Procrustes who adjusted his guests to fit his bed. It offers insights into human delusions and the importance of understanding uncertainty and complexity.

Fooled by randomness

the hidden role of chance in life and in the markets

Nassim Nicholas Taleb

In 'Fooled by Randomness', Nassim Nicholas Taleb discusses the pervasive influence of chance and randomness in our lives and financial markets. The book argues that humans tend to underestimate the role of luck and overestimate the role of skill, leading to biases such as hindsight bias, survivorship bias, and the narrative fallacy. Taleb emphasizes the importance of recognizing and coping with uncertainty, and he critiques the tendency to seek deterministic explanations for random events. The book is part of Taleb's Incerto series, which also includes 'The Black Swan', 'The Bed of Procrustes', 'Antifragile', and 'Skin in the Game'.

Chaos Kings

Scott Patterson

The 4-Hour Body

An Uncommon Guide to Rapid Fat-Loss, Incredible Sex, and Becoming Superhuman

Tim Ferriss

In 'The 4-Hour Body,' Tim Ferriss shares the results of over a decade of self-experimentation and research, involving hundreds of elite athletes, dozens of MDs, and thousands of hours of personal testing. The book covers more than 50 topics, including how to lose weight quickly, gain muscle without steroids, sleep less and perform better, and improve sexual health. Ferriss emphasizes the importance of finding the smallest changes that produce the biggest results, making it accessible for readers to achieve significant improvements in their physical health and performance.

Antifragile

Things That Gain from Disorder

Nassim Nicholas Taleb

Albino Santos Mosquera

Genís Sánchez Barberán

In 'Antifragile', Nassim Nicholas Taleb delves into the concept of antifragility, arguing that some systems not only withstand stress and disorder but actually benefit from them. The book builds on ideas from his previous works, such as 'Fooled by Randomness' and 'The Black Swan', and is part of his five-volume philosophical treatise on uncertainty, 'Incerto'. Taleb provides examples from various fields, including science, economics, and history, to illustrate how antifragility can be achieved and how it contrasts with fragility and robustness. He also discusses strategies like the barbell strategy and optionality, and critiques modern society's attempts to eliminate volatility, which he believes are harmful. The book is praised for its revolutionary ideas and multidisciplinary approach, though it has also received criticism for its style and some of the author's views on mental health and other topics.

The Black Swan

The Impact of the Highly Improbable

Nassim Nicholas Taleb

David Chandler

Nassim Taleb

The Black Swan is a landmark book by Nassim Nicholas Taleb that investigates the phenomenon of highly improbable events with massive impacts. These events, termed Black Swans, are unpredictable, have a significant impact, and are rationalized after the fact to appear less random. Taleb argues that humans are hardwired to focus on specifics rather than generalities, leading to a failure to consider what we don’t know. The book delves into cognitive biases, the limitations of mathematical models, and the importance of robustness and antifragility in navigating a world filled with uncertainty. The second edition includes a new essay, 'On Robustness and Fragility,' offering tools to navigate and exploit a Black Swan world.

Skin in the game

Nassim Nicholas Taleb

In 'Skin in the Game', Nassim Nicholas Taleb argues that having personal stakes in the outcomes of decisions is crucial for fairness, commercial efficiency, and risk management. The book highlights how individuals and systems that are insulated from the consequences of their decisions often make poor choices. Taleb draws on historical and contemporary examples to illustrate the importance of symmetry in risk and reward, and how this principle affects various domains, including politics, economics, and personal life. The book emphasizes that true learning and improvement come from experiencing the consequences of one's actions, a concept encapsulated in the Greek idea of 'pathemata mathemata' or 'guide your learning through pain'.

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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").

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.