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Interview With Nassim Nicholas Taleb

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Sunday, March 15, 2009

Options trader Nassim Nicholas Taleb made his name and career anticipating the powerful historic events he calls "Black Swans,"which include World War I, the rise of the Internet and the stock market crash of 1987. In two books published in 2001 and 2007, he urges readers to concentrate more on what they don't know than on what they do.

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More recently, Taleb has blasted bankers and economists who issued reassuring forecasts right up to the brink of the current global financial crisis. He spoke recently with Washington Post reporter Peter Whoriskey. Excerpts:

You're a fierce critic of the entire field of economics. Don't economists know anything?

You have close to a million people out there in economic life. How many people saw the extent of what could happen in this financial crisis? Some people said we'd have a problem of too much leverage, but very few saw the potential total impact that could come out of it. They didn't see the cascading effects that can be produced by a complex system.

Years ago, I noticed one thing about economics, and that is that economists didn't get anything right. I wanted to find out the reason. They would say their models are not perfect. But data show that you do much worse using their models than you would without them. It's a bull [expletive] science.

Can you give a specific example?

Every time I saw [Federal Reserve Chairman Ben] Bernanke [on television], I would have a fit of rage. He claimed that we were in a period of "great moderation." He did not understand that Black Swans are preceded by low volatility and the buildup of hidden risks. He mistook absence of volatility for the absence of risk. It was like someone sitting on dynamite and saying "It's okay, we're safe because nothing has happened."

In a complex system, things that are fragile should be allowed to fail very fast. [Former Fed Chairman Alan] Greenspan and Bernanke let something fragile, like the banks, survive very long. The longer it takes to break, the worse the outcome.

That's why I think Obama needs to start with a new economic team -- Treasury Secretary Tim Geithner and Lawrence Summers were among those who didn't see this coming in the first place. He needs new people who understand complex systems.

What about economist Nouriel Roubini? Wasn't he calling attention to the potential danger?

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