

Black Swan' Author Taleb: Stimulus Made Economic Crisis Worse - cwan
http://www.bloomberg.com/news/2010-09-25/-black-swan-author-taleb-says-obama-s-stimulus-made-economic-crisis-worse.html

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sbaqai
_"[Soros] made a lot more decisions. Buffett followed a strategy to buy
companies that had a certain earnings profile, and it worked for him. There is
a lot more luck involved in this strategy."_

I don't buy that. Even the shallowest read of Buffett's investment history,
you'll find he's always followed a very concentrated portfolio strategy. He
waits for the fat pitch, and loads up when an opportunity comes along. He's
mentioned that if you were to take away his top 20 best investments, Berkshire
would have a pretty average record.

Does Taleb believe more decisions increase the likelihood of reverting to the
mean (ie: average returns in this case)? And by that logic, Soros has made
more decisions, so that must suggest its less random, and more talent? This is
a classic case of man with a hammer syndrome.

By only deploying capital when the odds are disproportionately in your favor,
you are LESS likely to make errors. The less decisions, the more deliberate
your actions are. Inactivity isn't a measure of luck.

~~~
kragen
If you have a hundred would-be Warren Buffetts who each make one investment
per year, and a hundred would-be George Soroses who each make dozens of
investments per year, the variance on the Buffetts' investments will be a lot
bigger than the variance on the Soroses'. Consequently the richest investors
out of the whole group will almost certainly be Buffetts, even if the two
groups do equally well on average. In fact, the average of the Buffetts has to
be quite a bit worse than that of the Soroses in order for a Soros to come out
on top.

That's the argument Taleb is making: that Buffett's success is weaker evidence
for the expected return of his investment strategy than Soros's success is for
his.

Taleb is correct. If you think he's wrong, you don't understand his argument.

Now, you (and Buffett and Munger) argue that there's an additional reason to
believe that Buffett's strategy is a good one: because fewer decisions means
that each decision will be smarter. Well, you could be right. Historically,
though, human beings are pretty bad at distinguishing good investment
strategies from bad ones by logically analyzing their premises. So the
statistical evidence Taleb is discussing counts for more, in my book.

~~~
sbaqai
I understand what you're saying. But don't you have to consider the number of
times Buffett exercised his investment decision, and not only when he's put
money up?

You'd have to consider all those deals he passed up, as using his investment
strategy, no? He may make 1-2 investments a year, out of maybe 200 investments
available to him that he's analyzed. Thats still 200 investment decisions, not
1 or 2, which I'm assuming Taleb is using.

Wouldn't a thorough analysis consider four possible outcomes? The first event
is the decision to invest (Y/N). The second event is whether their decision
worked in their favor (+/-). (Y+, Y-, N+,N-) Y+ and N- are successful use of
strategy. Y- and N+ are failed strategy. Same for Soros.

Example: Consider all of the investments that were passed up, that would have
been terrible investments. That could be considered successful employment of
an investment strategy. Buffett inherently (based on his style and risk
profile) has a larger proportion of these.

~~~
kragen
> But don't you have to consider the number of times Buffett exercised his
> investment decision, and not only when he's put money up?

You might think so, but as it turns out, no. Try simulating it.

------
drallison
I think Nassim is standing on shaky ground here, although we do not have the
full text of his remarks.

I do not think our understanding of real world economics and the way that our
economy actually works is adequate to state anything about the impact of one
strategy versus another. Academic Economics certainly is not adequate to
predict anything in the real world with any degree of reliability. Time series
analysis of indicators does not provide insight into the causes and effects of
complex events. No one seems to be trying to model the impact of various
strategies and compare them to observations.

Policy makers really need better, experimentally validated tools to help them
make decisions. We need an experimentally verifiable model that allows
rational comparison of strategies. It would be nice to have some experimental
validation of the belief systems of the current economic pundits. Me, I doubt
that the unfettered free market economy can deliver what is promised.

Without better understanding, we will continue to fly blind, waste resources,
and make sub-optimal decisions.

~~~
lzw
I would like to point out that the understanding of real world economics is
developed enough to make very accurate predictions.

For instance, I knew in late 2000 or early 2001 that there would be a housing
boom, a housing bubble, and a banking crisis when it burst. I was a slacker so
it wasn't until 2003-2004 that I started putting money behind this scenario
and I profited on the way up and on the way down. (I was way too conservative
in retrospect.)

I applied economic principles (and not my own genius, I just knew who to read)
with real money and profited greatly as history unfolded as predicted.

The school of economics that told me about this upcomming bubble and predicted
it using the same theories they have used for nearly 100 years is the Austrian
School, and you can learn more about them at <http://mises.org>.

I know much of what is presented in mainstream media, the NYT and in many
college courses seems complicated to the point of uselessness, and certainly
we had Bernanke and Greenspan both claiming there was no housing bubble, even
when it was well on its way in 2006-2007.

It is not that economics is so very complicated, it is that these people have
a vested interest in pretending like economics is unpredictable. Their
interest is in unlimited government spending, and so they constantly talk
about deflation (never a real fear) to justify an inflationary policy which is
also known as "letting the government spend whatever they wish to buy votes
and gain power."

Of course you doubt that an "unfettered" free market economy can deliver what
is promised because you've never seen one, and instead all your life you've
seen government interventions result in disaster, and then said disaster being
blamed on "free market principles". Like california, which banned the
generation and sale of electricity in the state blaming "deregulation" for the
energy crisis. Complete with well orchestrated ENRON show trial.

It is not ignorance that causes these suboptimal decisions, it is poltiicians
putting one over on you.

FWIW, the Austrian Schools predictions go back many years, including
accurately predicting the great depression, the fall of communism-- not just
that it would fall, but how exactly it would fall and why-- 70 years in
advance, etc.

I believe the ability to make predictions is the mark of a science.

I shouldn't care that most people buy the government nonsense that economics
is "just too complicated"... because I am able to profit from the ability to
make these predictions.

But I see so many lives destroyed by this, and needlessly, deliberately, by
people who are either extremely ignorant, or dishonest, that it drives me up
the wall. (And so I post here, knowing that I risk being downvoted into
oblivion, not for failing to provide a wealth of information or a relevant
perspective, but for not goosestepping along with the party line.)

As long as you believe it is impossible, you won't hold them accountable when
they cause disaster.

I can predict the next two bubbles... they are already well under way. The
bond market bubble is the next one to pop. I expect we'll have a crisis in
some form before the end of 2012, though timing is hard to predict. The
question is, how are they going to inflate their way out of that one-- because
the prime candidate for the crisis is a failed bond auction. (The fed appears
to be printing money and buying at its own treasury auctions already to keep
them from failing... this is hidden, but the clues are there, and as a result,
buyers are getting wary...who knows when they will be spooked.)

AT some point after that the next bubble- the bubble in the value of the US
dollar, will burst. We'll have hyperinflation, most likely, unless our
government takes as sharp turn towards responsibility.... but how long that
takes to play out is unclear. What is clear is that we have benefited from
exporting our inflation for the past 70+ years, under Bretton Woods and other
agreements, and this was viable so long as we were a major exporter, and our
government was solvent. But the soverign debt crisis sweeping europe right now
is hitting countries whose (real) debt to GDP ratio is similar to ours or
lower--- and our debt is growing at an unprecedented clip.

It is not hard to make predictions, even with some understanding of the
timing.

Economics works. The problem is what is passed off as "economics" in popular
culture is, most of the time, simply political ideology pretending to be
economics.

~~~
waterlesscloud
I voted you up, even though I don't know that I agree with your coming
predictions.

But I've been thinking about a similar topic tonight, as I read columnists and
reporters talking about how complex financial instruments are these days and
how no one really understands them. Because the basics of them aren't all that
complicated. CDOs, CDSs. ETFs, whatever. None of them are particularly complex
concepts. Anyone with a CS degree has mastered concepts many times more
complex. I accept that the details get tricky, but the details of lots of
things get tricky, and a lot of people make solid livings being responsible in
managing tricky concepts. None of these financial instruments are magic. I'm a
curious layman, I get the gist of all of it.

And then there's people who claim their variable rate mortgage was too
complicated to understand. Come now.

So I was thinking that it's really just in everyone's interest to _pretend_
this stuff is hard to understand, that it's complicated, that it's magic.

Because then no one is responsible.

And then, as the saying goes, was I enlightened.

The housing bubble was easy to see. Everyone saw it. Many, perhaps most,
ignored it. Because they wanted to. It let them gamble and not be responsible.
From Joe Homebuyer to James J. Investmentbanker IV.

Some things are complicated, sovereign bonds and currencies among them. There
are many reasons that nearly all the powers that exist want to keep that music
going, and they have many tools at their disposal. I honestly don't know what
will happen there, which is why I'm not sure I agree with your predictions in
those areas. There's real magic at work there, and it's one of the few areas
where make-believe becomes reality. The US has a very strong hold on
centrality in the global economy, and I can't see how it's cleanly broken
without severely damaging anyone who has the power to break it. That's the
magic part.

~~~
lzw
Currencies are a really interesting thing. After I started to get into
commodities and read up on the history of central banks-- the creature from
jekyll island is a good book on the subject-- I found I started tobsee money
fundamentally differently..... I see the paper in my wallet like i see the
huge bundles of worthless notes from Zimbabwe.... Worthless. I know
intellectually that I can exchange it, but knowing it's eventual and
intrinsicev value changed my relationship with it.

And in doing so, I realized just how strongly I'd been conditioned,
emotionally, and thru rationalizations, to see this paper as money.

Not sure if that resonates. One thing I'd like to also put yor ear is the idea
of moral hazard. Even when everyone was in denial about the bubble, and trying
to not be the greater fool, they had in the back of their heads the moral
hazard.... Knwoing if it was really bad, they'd get bailed out by the
government. Im not talking about banks, but about real estate agents and home
buyers, etc...and they were right!

------
fauigerzigerk
When a patient has heart failure, you try to stabalize him first. You don't
immediately put him on the operating table to do stomach reduction surgery in
order to combat the obesity that caused heart failure.

~~~
lzw
Bad analogy. Here's a better one: When a patient is dying of blood loss, you
don't continue to put more leeches on and make charts showing how his cheeks
will be rosy if only we add more leeches.

The "stimulus" destroys jobs, it is a leech on the economy.

~~~
Experimentalist
How about this:

When a blind fat man gets depressed, you console him first. You don't
immediately put him in a go-kart with a fistful of antidepressants,a bottle of
gin and a sword in order to combat the lack of euphoria that caused the
depression.

------
ajg1977
But no mention whatsoever how paying down federal debt instead of stimulus
would supposedly have strengthened the economy.

The argument for paying down our debt is usually to prevent inflation or keep
future borrowing cheap, but despite the plunge in GDP neither of these are
anywhere close to becoming an issue.

Speaking of GDP - it's not the deficit that's responsible for the US's
decreasing GDP/debt ratio, it's the drop in tax income due to the job losses
following the financial meltdown.

There is plenty to dislike about how the stimulus turned out (too small,
partially negated by state-level cuts, focus on tax cuts), but no evidence
whatsoever that it made things worse.

~~~
lzw
You mentioned the evidence that it made things worse, by obama's own numbers,
the unemployment rates are much higher than he claimed they would be if we
DIDN'T pass the bill.

The "stimulus" destroyed jobs, as all government spending does, and it made
the economy worse.

Further, it is deficit spending that is killing us, as we are incurring
unprecedented deficits.

Finally, borrowing is already becomming a problem with indications that the
FED is printing money to participate in the auctions (using a major bank of
convenience, of course) in order to keep auction rates low... this means that
the treasury auctions have already started to fail. Further, the auctions for
the last 2 years have shown a sharp shift towards shorter term notes, which
means the amount that has to be rolled over at each auction is snowballing.

~~~
ajg1977
_You mentioned the evidence that it made things worse, by obama's own numbers,
the unemployment rates are much higher than he claimed they would be if we
DIDN'T pass the bill._

How is that evidence it made things worse? It could be evidence that job
losses were far more severe than anyone anticipated, but with the stimulus
they were still lower than without.

Your following two statements are basically soundbites with no reasoning, or
basis in economic theory.

~~~
lzw
Right, just imagine how much blood loss the patient would have experienced if
we hadn't used the leeches! His is the kind of nonsense you guys trot out to
defend every program... No matter how much damage to the economy, you just
claim that things would have been worse otherwise. You never support these
claims, of course, but you then go on to claim that those who point out the
damage are not supporting their claims, even when they do, and you just, out
of the blue make nonsese assertions like "have no basis in economic
theory".... Without, of course, defending that asertion. I find this mode of
argument particularly anti-intellectual.

~~~
Teckla
Congratulations on knocking down that straw man.

ajg1977 didn't say the economy would have been worse without the stimulus. He
said that what you presented as evidence was not, in fact, evidence, because
it could be interpreted a different way.

------
ruang
I always felt that Soros was better than Buffet but could never adequately
explain why. I like Nassim's explanation that since Soros made more decisions,
his outcome is less likely due to luck.

In other words, the more your ability is tested, the more likely your results
are closer to the expected value as randomness negates itself out.

~~~
allengoodman
His characterization was interesting, but I'm not sure if I agree. Since the
crisis, Warren Buffet acquired 10% perpetual preferred stock of Goldman Sachs,
invested $2.6 billion into Swiss Re, and acquired Burlington Northern for $24
billion. Three deals, each of which was different in composition, cost, and
market. Moreover, I suspect each will be success and none wholly initiated by
a "certain earnings profile." Nonetheless, while I think the comparison is
meaningless, the underlying logic is intellectually attractive.

------
kreneskyp
The initial point of the article is faulty. The federal government was running
a deficit before the bailout and stimulus bill. These bills were deficit
spending, something you can't do to pay down the debt.

------
rubashov
> Canada has the lowest ratio of net debt to gross domestic product among the
> Group of Seven industrialized countries

If we're including household debt this does not square with what I've read
elsewhere.

p.s. I've immensely enjoyed various sharp screeds from recent years ripping
Taleb a new one:

[http://scottlocklin.wordpress.com/2009/07/17/nassim-taleb-
cl...](http://scottlocklin.wordpress.com/2009/07/17/nassim-taleb-clown-of-
quantitative-finance/)

<http://falkenblog.blogspot.com/search?q=taleb>

~~~
lukestevens
Those Taleb take-downs are well worth a read. Taleb makes for good media
soundbites as a contrarian; but to me it seems more like anti-intellectualism
for the educated. I'm not sure why he deserves that platform he apparently
has.

From the first piece: _"So why do people listen to this guy? Part of it is
doubtless the “famous for being famous” effect. Taleb is witty and clever, and
ruthlessly promoted himself as a public figure after his trading days were
over. Not a bad strat for success in the modern media culture: grab the
megaphone and declare yourself a genius. Everyone wants to think they’re more
of a mental bigshot than the eggheads who run things. Plus, it’s not like Jim
Simons has time to write Financial Times articles. He’s too busy making money
more or less proving people like Taleb wrong."_

~~~
kiba
I dislike pyschoanaylsis. They're really neat explanation but they're well,
lack explaining power.

Plus they don't do much for learning about the truth, and they're more about
attacking a person's character.

~~~
houseabsolute
Not sure if psychoanalysis (a.k.a. Freudian psychology) has anything to do
with the subject at hand. I think you mean to say you don't like comments that
delve into a person's suspected motivations. But the comment you're replying
to doesn't talk about motives at all. It just talks about the means this man
has used to achieve fame and why they worked.

~~~
kiba
_I think you mean to say you don't like comments that delve into a person's
suspected motivations._

Yes, this is what I meant.

 _But the comment you're replying to doesn't talk about motives at all._

Then I have completely misinterpret what the comment say.

~~~
lukestevens
Yes, my comment was just that the quality of his ideas don't seem to match the
size of his platform, if I can put it that way :)

------
c00p3r
Such a big discovery!

If you have spent billions and billions of borrowed dollars and got nothing,
but interest payments for your increased debt, it surely seems like you've
made things worse.

