How Mr. Taleb Got Utterly Fooled by Randomness

Nassim N. Taleb wrote Fooled by Randomness in 2004. It became an instant success. And no wonder. It’s lively to read. It’s funny. It fires verbal torpedoes into the sides of floating tubs of Establishment lard. It is merciless on CNBC’s investment gurus. It shows readers how and why investment hot-shots have lost enormous amounts of money — other people’s money, but also their own. This is the stuff of best-sellers.

Yet when we look more carefully at Mr. Taleb’s operating presuppositions, we find that he has made a supreme error. In his quest to uncover the undoubted mysteries of the financial universe, he has come to a conclusion so utterly incorrect that if it were widely believed, it would undermine the moral and intellectual foundations of civilization.

He admits that he is often fooled by randomness. He has no self-awareness of just how fooled he is.

His book has reinforced a popular philosophy of life that runs counter to Western civilization. Yet he does not seem to comprehend the implications of what he is saying. Or, if he does comprehend it, he is the Darth Vader of pop investing. He is a press agent for the Dark Side of the Force.

EINSTEIN AND KEYNES

We get an inkling of what this book is all about on page 48 of the second edition: “The two greatest minds to me, Einstein and Keynes. . . .”

I don’t want to get into an argument about how great Einstein’s mind was. I freely admit that I don’t know what the photo-electric effect is, let alone why Einstein’s 1905 essay on it won him a Nobel Prize. I do know that he was smart enough to “creatively appropriate” Olinto de Pretto’s 1903 formula, e=mc2, in his 1905 essay on special relativity, without getting caught during his lifetime.

As for Keynes, that’s another matter. Here, I am smart enough to assess the man’s abilities. John Maynard Keynes was a bright enough fellow in his academic field, probability mathematics. But hardly anyone, other than Mr. Taleb, pays attention to his Treatise on Probability. That is because Keynes’ father, an academic economist at Cambridge, put up the money to get his son hired as an economist at Cambridge, a subject which his son had not formally studied. He never returned to probability theory.

Keynes made a name for himself by spending his entire career arguing for policy positions that he would abandon within five years — sometimes less. Taleb does not mention this aspect of Keynes’ career, but he would surely approve of it. He writes: “Loyalty to ideas is not a good thing for traders, scientists — or anyone” (p. 92). In a universe where randomness governs, fixity is potentially suicidal and often unprofitable.

Keynes’ final book, The General Theory of Employment, Interest and Money (1936), is one of the most garbled, incoherent, and poorly argued books that has ever reached the level of universally acclaimed masterpiece. It remains as unread today as it was in 1936. It justified the growth of state power over the economy — just what the politicians wanted to hear in the Great Depression.

The best evidence that the book is a political tract is its incoherence. Keynes wrote compelling prose throughout his life — just not when he wrote to promote British economic policy. The very incoherence of The General Theory is the tip-off that the author was self-deluded in arguing for nonsense, namely, denying that sellers will lower their prices when they find that nobody will buy at a higher price. Keynes’ arguments rest on this bedrock presupposition: “Sellers really do believe that no income is preferable to some income.” He believed in permanent gluts.

Why is Taleb so impressed with Einstein and Keynes? Because they were advocates of a theory of the universe to which Taleb is deeply committed: “The universe is at bottom random.” Einstein supplied evidence for this belief in his third paper (out of five) in 1905: his essay on Brownian motion. He dismissed this essay years later as unimportant, but it is his paper most quoted today. Why? Because, as physicist Mark Haw writes, it laid a foundation for the modern view of the universe: “random fluctuations are fundamentally important in many, if not most, of the phenomena around us.”

Keynes did the same in his Treatise on Probability.

Einstein refused to accept this idea when applied to quantum physics. “God does not play dice,” he famously quipped. But Taleb, who does not argue for God’s existence, does argue for the existence of cosmic dice.

COSMIC DICE

Taleb presents his view of the universe early in his book, on page 26.

Reality is far more vicious than Russian roulette. First, it delivers the fatal blow rather infrequently, like a revolver that would have hundreds, even thousands, of chambers instead of six. After a few dozen tries, one forgets about the existence of a bullet, under a numbing false sense of security. . . .

Second, unlike a well-defined, precise game like Russian roulette, where the risks are visible to anyone capable of multiplying and dividing by six, one does not observe the barrel of reality.

Throughout the book, he speaks of the random event as personal. He does not believe that God controls the universe. He self-consciously has returned to the view of the world which was held by late classical Romans, wherein all of life is understood as a war between impersonal luck and impersonal fate. He is a skeptic, and says so repeatedly. He declares his respect for Rome.

Until the Mediterranean world was dominated with monotheism, which led to the belief in some form of uniqueness of the truth (to be superseded later by episodes of communism), skepticism had gained currency among many major thinkers — and certainly permeated the world (p. 237).

This is true, although what communism has to do with anything here mystifies me. If Taleb has read Charles Cochrane’s Christianity and Classical Culture (1944), it is not apparent in his bibliography. He should read it. The book shows that classical culture broke down, above all, because the leading thinkers of the era adopted a non-mathematical view of causation that was very similar to Taleb’s. Taleb is also correct when he observes that it was monotheism (in the form of Christianity) that replaced the morally collapsing civilization of classical skepticism.

Taleb knows this, and it angers him. His book appears to be a lighthearted romp through the vagaries of investing, but when he gets to his religion — the religion of skepticism — he drops his cloak of lightheartedness. “I despise moralizers beyond anything on this planet,” he announces in his Prologue.

He believes that all men are condemned — as if an impersonal universe can condemn — to be fooled by randomness. We cannot change morally; we can only adopt what he calls “tricks” to deal with nature’s randomness on the one hand and our own biologically programmed — i.e., biologically determined — inability to recognize randomness on the other.

Perhaps ridding ourselves of our humanity is not in the works; we need wily tricks, not some grandiose moralizing help. I despise the moralizers beyond anything on this planet: I still wonder why they blindly believe in ineffectual methods. Delivering advice assumes that our cognitive apparatus rather than our emotional machinery exerts some meaningful control over our actions (p. xlv).

On the same page, he asserts with the confidence of an Old Testament prophet: “We are faulty and there is no one to bother trying to correct our flaws.”

He uses the metaphor of a machine to describe man, who is the victim of an impersonal system of causation. Man is metaphorically a two-brained machine: cognitive apparatus vs. emotional machinery.

Metaphors are significant. The metaphors of mechanics are metaphors of cosmic impersonalism. Yet machines are designed. In his chapter on “Randomness and Our Mind,” he presents this long metaphor, which is supposed to persuade us of the weakness of reason. Here is a fine example of the metaphor of mechanism run amok.

For a long time we had the wrong product specification when we thought of ourselves. We humans have been under the belief that we were endowed with a beautiful machine for thinking and understanding things. However, among the factory specifications for us is the lack of awareness of the true factory specifications (why complicate things?) The problem with thinking is that it causes you to develop illusions. And thinking may be such a waste of energy! Who needs it! (p. 185).

He presents this metaphor of a machine that misunderstands itself. This machine was deliberately designed (by whom?) to misunderstand itself. When it attempts to understand itself, it misunderstands itself because it has the wrong product specifications.

This is rhetoric. What is he trying to prove? This: “Our minds are not quite designed to understand how the world works, but, rather, to get out of trouble rapidly and have progeny” (p. 56).

Spoken like the true believing Darwinist that he is! Who designs our minds? Uncaring, random yet law-bound, impersonal, autonomous nature.

Here is a man obsessed with a desire to affirm a totally impersonal universe. Yet, as he says, this impersonal universe is simultaneously vicious — more vicious than Russian roulette. Or maybe he doesn’t mean vicious. Maybe he means dangerous. Then why not say “dangerous”?

His message is a counsel of despair. “We need tricks to get us there but before that we need to accept the fact that we are animals in need of lower forms of tricks, not lectures” (pp. 232—33). Again, he rejects calls to personal repentance, to lifetime self-improvement. “I am tired of moralizing slow-thinkers who pound me with platitudes like I should floss daily, eat my regular apple, and visit the gym outside of the New Year’s resolution.”

I do not suggest that he floss regularly. I suggest that he cease trying to undermine Western Civilization.

POPPER’S ARDENT DISCIPLE

Where did he get all this? From Karl Popper, mainly. That is what he says, anyway. Popper made him a philosophical skeptic.

Popper was a brilliant philosopher whose career was helped by F. A. Hayek in the mid-1940s. Popper was a skeptic. He proposed a rule for scientific inquiries. Nothing can be verified empirically, he said. Science must not rest on any concept of verification. Instead, it must rest on a process of falsification. There are only two kinds of theories: (1) theories known to be wrong; (2) theories that have not yet been proven wrong — not yet falsified (p. 126). “Putting the matter in context, Popper was rebelling against the growth of science” (p. 127). Indeed, he was. “To him, verification is not possible. Verificationism is more dangerous than anything else” (p. 128).

To Popper, the sophomore’s retort is appropriate, despite its sophomoric standing. “In what way is Popper’s hypothesis subject to falsification?” He should have written a lot of pages presenting criteria for how his theory of falsification could be falsified. I guess I missed that article. It surely is not in any of his books that I have read.

I read the main one, The Open Society and Its Enemies, in 1963. In that book, which Hayek helped to get published, is an assumption: The truly free society is a society without permanent truths (other than the truth of falsification, of course). Taleb summarizes the book’s thesis: “An open society is one in which no permanent truth is held to exist; this would allow counter-ideas to emerge.” Again, it’s time for the sophomore’s retort: “How about ideas that deny Popper’s theory?”

I can see why Hayek loved the book. Not because it took Plato to task, Hegel to task, and Marx to task. That was why I loved the book. Hayek loved it because it reinforced his own personal revolt against Ludwig von Mises’ defense of economic theory.

Mises defended the free market economy because it is the outcome of the deductive logic of human action, coupled with informed free choices by rational, self-interested people. Hayek, Mises’ early convert to capitalism, defended the free market on an inductivist basis. I summarize: “Nobody knows what is true, because nothing can be said to be permanently true, so may the best ideas win in this phase of social evolution!” He built the case for freedom on the survival of the fittest — ideas, institutions, and moral rules. (So does Taleb.) I wrote about this aspect of Hayek’s thought in 1982: “The Evolutionists’ Defense of the Market,” Appendix B of my book, The Dominion Covenant. You can download it free (if you have the DjVu reader installed).

Why should we believe in anything for longer than a year or two? Things change. So must ideas if they are to remain relevant. Hayek argued this way. So does Taleb. He praises George Soros because Soros keeps changing his mind (pp. 122—24). As Taleb says, “Self-contradiction is made culturally to be shameful, a matter that can prove disastrous in science” (p. 238). Then he goes on to say that the person “most visibly endowed” with this trait is Soros (p. 239).

Taleb correctly identifies David Hume as the modern world’s supreme philosophical skeptic. Hume was obsessive, Taleb says. He “never believed that a link between two items could truly be established as being causal” (p. 127). This is exactly what Hume believed. The question is: What is to prevent Taleb or Popper or Hayek from becoming equally obsessive? Personal aesthetics, I guess. Or in Taleb’s case, his current position in the options market.

WHAT ARE THE OPTIONS?

Taleb makes his claim to fame that he successfully makes money — enough money to live in New York City — by trading options. We must take his word on faith — a highly unskeptical attitude on our part, by the way. He does not tell us how to make money trading options. He says only that he makes money by losing small amounts of money on lots of trades in order to make lots and lots of money when the market moves radically against the conventional wisdom.

The book summarizes contemporary scholarship on randomness and major market moves that, statistically speaking, cannot possibly happen. He mentions the mathematician Benoit Mandelbrot one time, as an aside, yet Mandelbrot is the master of this field, who makes the case for randomness in markets far more cogently and believably that Taleb does. He puts Mandelbrot’s book, Fractals and Scaling in Finance, in the bibliography. I strongly recommend his recent book, The Misbehavior of Markets.

Taleb makes lots of intriguing observations on how to lose money. He says that random moves of markets are inescapable. But how can anyone predictably make money? Because there really are patterns that repeat. There really is coherence in the apparent chaos. This is Mandelbrot’s claim. Ultimately, there is no true randomness, Taleb says (p. 169). So, there has to be order. But why isn’t order the rule and randomness the exception? He affirms the law of large numbers. Fine. But he argues that the law of large numbers rests on impersonal statistical probability — nothing more. Moral cause and effect has nothing to do with social order. We machines live in a vicious universe in which “the black swan” — randomness with a vendetta — will probably get even with us in the end (p. 251). He ends his Epilogue with this message. He is not just being clever. He believes it.

He gives us insight into fear and greed. He says that the pain of loss is greater than the joy of success. He cites recent psychology to this effect. Is he correct? I don’t know. I have heard this before.

He says that hard work doesn’t pay off predictably. He dismisses the work ethics (plural). “Mild success can be explainable by skills and labor. Wild success is attributable to variance” (12).

Like all the other proponents of statistically random profitability, he cannot explain Warren Buffett. He doesn’t even try. Instead, he launches into a tirade against Buffett. On what basis? Buffett’s lifestyle. Buffett still lives in the same modest house he bought when he was young.

. . . I certainly do not see the point of becoming one [a billionaire] if I were to adopt Spartan (even miserly) habits and live in my starter house. Something about the praise lavished upon him for living austerely while being so rich escapes me; if austerity is the end, he should become a monk or a social worker. . . ( p. 144).

My comment: A monk or a social worker is not able to write the Bill and Melinda Gates Foundation an annual check for $1.5 billion, up to $30 billion, plus $12 billion more for other foundations. A monk or a social worker has no ability to serve as a steward of a hundred billion dollars in capital, directing it to its most productive uses, as determined by consumers through their market decisions and actions.

CONCLUSION

Taleb describes himself as a fool. This is the most accurate assessment in his book. He is a fool for the reason that he repeatedly says he is a fool. He is fooled by randomness.

He is fooled by a few statistically unpredictable oddities found in nature, including the human mind, into believing that there is no ethical cause and effect in the universe. He is exactly what he claims to be: a consistent Darwinist. “One must be either blind or foolish to reject the theories of Darwinian self-selection” (p. 94). As such, he hates moralists above all, as he says. Why? Because he hates the idea that morality, not evolution through impersonal natural selection, governs the universe.

The fact that his book is a best-seller indicates just how far gone morally the intelligent public is. Yes, the book is clever. True, it has a useful bibliography. No question about it, it has some great one-liners. But at bottom, it is the work of a suicide bomber. His targets are people who still believe that there is a predictable relationship between honesty and success, between hard work and success, between thrift and riches. In short, it is a hand grenade against people who think that Warren Buffett got rich through decades of entrepreneurial service to consumers, not by statistically improbable luck.

Throughout the book, he describes the person who works hard, makes a decent living, and never gets rich except through impersonal luck. That person is a dentist.

The fact is, the dentist is perhaps the most representative figure in the history of progress. I quote P. J. O’Rourke: “When you are told about the good old days, think ‘dentistry.'”

What Taleb identifies as luck, I identify as the providence of God. He is a would-be Roman skeptic of the Stoic variety. I am a Christian. My spiritual forefathers inherited the remains of the broken civilization left behind by his spiritual forefathers. Or, as the Preacher put it 3,000 years ago:

A good man leaveth an inheritance to his children’s children: and the wealth of the sinner is laid up for the just (Prov. 13:22).

March10, 2007

Gary North [send him mail] is the author of Mises on Money. Visit http://www.garynorth.com. He is also the author of a free 19-volume series, An Economic Commentary on the Bible.

Copyright © 2007 LewRockwell.com

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