Shared by JohnH
HatTip to Dave Lull. Thanks Dave!
Taleb openly despises those in “suits”—very often mainstream economists or students of finance—who make predictions without bothering to study the record of their previous forecasts. Taleb declares, “Anyone who causes harm by forecasting should be treated as either a fool or a liar. Some forecasters cause more damage to society than criminals. Please, don’t drive a school bus blindfolded.”
Of perhaps most interest to the Austrian reader, Taleb champions Friedrich Hayek and mocks Paul Samuelson (who died in December). In a section titled, “They Still Ignore Hayek,” Taleb lauds the Austrian focus on the pretense of knowledge. Yet of Samuelson, the epitome of the neoclassical mainstream, Taleb issues harsh judgment indeed:
In orthodox economics, rationality became a straitjacket. Platonified economists ignored the fact that people might prefer to do something other than maximize their economic interests. This led to mathematical techniques such as “maximization,” or “optimization,” on which Paul Samuelson built much of his work. . . . I would not be the first to say that this optimization set back social science by reducing it from the intellectual and reflective discipline that it was becoming to an attempt at an “exact science.” By “exact science,” I mean a second-rate engineering problem for those who want to pretend that they are in the physics department—so-called physics envy. In other words, an intellectual fraud.
Coming from a philosopher (or an academic Austrian economist, for that matter), such criticism would not mean much to the so-called experts in various fields. Yet Taleb’s criticisms come with a harsh sting, for he is a respected contributor to the field of quantitative finance; Taleb (and a coauthor), for example, offered a more intuitive derivation of the Black-Scholes formula for option pricing.
Far more important to some readers, Taleb (allegedly) made a boatload of money as a trader. True to his philosophical views, one of his strategies involved using options that went up in value when the underlying asset fell in price. If people really do systematically underestimate the likelihood of improbable (but significant) events, as Taleb claims, then it should be possible to make long-run profits by losing small amounts of money on most wagers but earning large payoffs on a few outliers.