Tag Archives: risk

When Smart Investors Do Stupid Things

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The article closes by asking, “how long can they produce those kinds of returns before suffering some spectacular crash?”

We now know the answer: about a year.

LTCM was a glaring reminder that past volatility is a terrible measure of future risk. Yet we still obsess over volatility, convinced that it tells us how safe an investment is.

Nassim Taleb describes using volatility as a measure of risk as the “turkey problem.” He writes in his book Antifragile:

A turkey is fed for a thousand days by a butcher; every day confirms to its staff of analysts that butchers love turkeys “with increased statistical confidence.” The butcher will keep feeding the turkey until a few days before Thanksgiving. Then comes that day when it is really not a very good idea to be a turkey.

So if volatility isn’t a good measure of risk, what is?

via When Smart Investors Do Stupid Things.

Taleb Says Fed Policymakers `Do Not Understand Risk’

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http://www.youtube.com/watch?v=mhSRaehWSvY
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The risks stemming from the Federal
Reserve’s efforts to stimulate the economy through bond
purchases are “humongous” and the central bank doesn’t fully
understand the potential effects, said Nassim Taleb, author of
“The Black Swan.”

“These people do not understand risk,” Taleb said in an
interview on Bloomberg Television’s “InsideTrack” program with
Erik Schatzker. He compared U.S. central bank policy makers to
the managers of Long-Term Capital Management LP, the hedge fund
that failed in 1998.

The Fed, led by Chairman Ben S. Bernanke, announced a plan
to buy an additional $600 billion in government debt last week
to support the economy after purchasing $1.7 trillion of assets
from December 2008 through March. Bernanke doesn’t understand
that the plan risks unintended consequences such as
hyperinflation and that it may ultimately backfire and introduce
a new crisis to global markets, Taleb said.

“He is someone who talks about returns without talking
about risk,” Taleb said. “It’s identical to a pilot talking
about speed and not talking about safety. The measure he’s
taking, quantitative easing, may work but should it fail the
risks are humongous.”

Nassim Taleb: Don’t Listen to Geithner or Krugman – Nicole Allan – Business – The Atlantic

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Taleb took issue with Krugman’s support of deficit spending. “This transformation of private debt, with all the moral hazard it entails, into public debt is, number one, from a risk standpoint, bad,” he said. “And from an ethical standpoint, I find it immoral. The grandchildren should not bear the debts of the grandparents.”

Taleb called Friedman’s book The World is Flat “very bad for society,” arguing that it did not adequately assess risk. 

One person who did see the crash coming? Nassim Taleb. “In 2008, when the crisis happened, a lot of heads of state were interested in my message,” Taleb said. “Including David Cameron.”

Asked where the economy would be in 25 years, Taleb gave the vague response that “everything fragile will break.” Oh, and that the Fed won’t exist anymore. It will be replaced by something “I think more organic and that makes more sense.”