Let me start by saying that I like Nassim Nicholas Taleb and Benoît Mandelbrot quite a lot. I don’t agree with them all the time, but that is generally true of people I like. I recall reading Mandelbrot’s book The Misbehavior of Markets: A Fractal View of Financial Turbulence some years ago and being struck by how much sense Mandelbrot makes. It helped that his early work related to markets was in cotton prices and I am an agricultural economist.
Taleb is a bit harder to like than Mandelbrot. He’s mouthy, arrogant, and demands that his publisher not edit his books. If he crosses your ideology you will find yourself wanting to write him a pissy letter starting with the greeting, “Look you arrogant ass…” But he also has some really great intuition about risk. Most folks get religion after they have a near death experience. Taleb got his religion after he got rich. NNT was holding a double butt load (that’s a technical term, go look it up) of calls when the financial world went to hell in 1987. NNT knew that the reason he got rich was not because he was smarter or had more foresight than anyone else. He did know one thing, there is no way to know what the probability of a huge price swing is. So he bought out of the money options in both directions since he suspected that the probability of these options paying off BIG was not properly accounted for in the price. It seems he may have been right. He’s also waged a war against value at risk or VAR which I don’t fully agree with, but C’est la vie.
Below is a video segment from PBS News Hour where they interview NNT and Dr. Mandelbrot (notice how I did not use his initials? gotta show him some respect). It’s a good interview, but it cracks me up that the host clearly has Mandelbrot’s ideas confused with Edward Lorenz, the man who coined the phrase ‘Butterfly Effect.’ See 4:55 in the video for the most blatant confusion. Mandelbrot does a good job of ignoring the confusion but eventually at 6:20ish he starts to redirect the host to his true thought contribution which is that big movements are under-anticipated. To the host’s credit Mandelbrot and Lorenz have co-authored papers so it’s not like they are totally disconnected.
I can’t mention Mandelbrot without posting this great tribute song/video made in honor of his namesake Mandelbrot Set.
Shameless commerce (yeah, I stole that from those Car Talk Guys) related to this post:
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