Interview With Nassim Nicholas Taleb

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L.G.: Yes, it almost made me hate you when you wrote in your book that it "wrote itself."

N.N.T.: Yeah, I only do things where there's a natural stimulation. I had no natural stimulation to sit in a meeting, so I would not sit in a meeting, and that has worked for me. I want to free up the time to think—that requires the details in my reading and my writing and thinking. Enjoyable activities. When I'm writing, if I get bored, I'll stop immediately, mid-sentence, that's it, I don't write anything that bores me...You have a copy of The Black Swan? Let me show you, I think I have it here, page 225, in the footnote. Read it.

L.G: [Reads] "Likewise, the government-sponsored institution Fannie Mae, when I look at their risks, seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup. But not to worry, their large staff of scientists deem these events 'unlikely.'"

N.N.T: That's the central point. The rest is noise.

L.G.: You wrote that footnote in 2005?

N.N.T: Yes, but actually I saw their positions in 2003, when a very smart journalist, Alex Berenson of the New York Times, came to me and said, Can I show you the risk of Fannie Mae? When I saw it, I almost choked. [In Berenson's August 2003 article, Taleb was quoted as saying Fannie Mae and other major holders of mortgages and mortgage-backed securities chronically underestimate the odds of a big move in interest rates that could decimate the value of their portfolios, over-relying on computer models that don't account for rare but devastating events, i.e. black swans. "The fact that they have not blown up in the past doesn't mean that they're not going to blow up in the future. The math is bogus," he told the Times.] The core of my idea, the central problem here, is not to be a sucker for 1,000 days—not to be a turkey. See?

L.G.: In other words, just because you're a turkey and being well fed for 999 days doesn't mean the butcher isn't going to get you on the 1,000th day?

N.N.T.: Correct. The problem of The Black Swan is that people don't understand the place in the world that we know the least about, where our knowledge is the softest, are where the most charlatans exist—and that's pretty much predicting rare events. I'm talking about "Extremistan" [the complex real world, as Taleb defines it, where an unpredictable and devastating event can dictate the outcome, as opposed to "Mediocristan," a bogus model of reality favored by "charlatans" where no rare events occur and probabilities are distributed along a predictable bell curve.] That is my big problem. In 2003, I saw that they didn't have a clue about the risks. So I looked at the report, I made a statement in the New York Times that these guys don't know what's going on, and I was pestered by bankers completely. And then, right after, of course, the chairman of Fannie Mae [Franklin Raines] resigned, so they left me alone, but I later heard people on it wanted to sue me for defaming Fannie Mae. I heard that they were very angry about my statement that you can't manage the risks. But I wish someone had sued me because I would've had the chance to warn society about this.

The way that I look at it, people who live in Extremistan, not understanding that they're in Extremistan, build up positions on rare events because "they don't happen"—and  businesses blow up when these events do happen. It doesn't take long to understand if you're exposed to it or not. Instead, they produce all these theories, there's a Nobel Prize in economics for them, and these theories don't work. So my request for people making bets against the black swan is to just tell us "We don't know anything." They'll come in with some scientists to produce numbers, but they're unreliable. In other words, if you're piloting a plane, tell the passengers, "I don't know the probability of this plane crashing." That's not what they did. The other problem I have is, most people don't realize that some businesses are positively exposed to black swans and some are negatively exposed to black swans.

L.G.: Like high-tech businesses?

N.N.T: Positively exposed. Some of them are both—like real estate. But what happened was that individuals get the upside, and banks lose the downside. Big business is exposed to negative black swans. Take banks. I wrote in The Black Swan that 193 banks lost 100 percent of everything they ever made on Latin America, but not to worry—that can't happen to other businesses, right? Now it's a big $1.4 trillion loss. Look at how much money that banks have made in history. These institutions are very good at losing every penny they make outside the risk-taking, like Citibank and all these firms. We're bailing them out now.

At a micro level, I don't have a lot of things to say, except, "Don't rescue banks." ...  I  think that the longer you defer the big non-bailout, the harder it's going to get for us, because banks aren't learning. Think about it. The biggest problem we have on Wall Street, the classical one, is "How many people do you know who made millions when their investments went wrong?" The Fannie Mae chairman, all these guys, didn't they make a lot of money? Did they pay back when they lost? They had a moral hazard, and you and I are financing it. I don't know what we should do in a particular case. In general, if there's some guiding principles, I think government makes things worse. Now that we face globalization, the government is out there to create more volatility and more instability because the nation-state is not a structure that's adapted to the modern world. So they still use bogus metrics.

L.G.: What about all these mortgages that are going into default? Does the government have no role?

N.N.T.: I don't know now what to do. I told people about the subprime problem before it happened, so I told people how to prevent it, by looking at risk of banks. And people for 10 years would make fun of me, for 10 years made my life miserable, more than 10 years, from 1994 on. Eleven years ago, 1997, is when I attacked these methods to evaluate risk, and people have been giving me a hard time. And now look at what was caused by their pseudo-science, "measuring" risk! 

Economics is a tragedy for me. Because look at how the whole world now is designed according to some ideas that have not proved adequate. The whole financial system. We don't understand economic policy, do you realize that? Alan Greenspan lowered interest rates thinking it would help the economy. All it did was push banks to take risks—hidden risks. Do you realize that we don't understand globalization? Globalization increases Extremistan. That's one problem with this Tom Friedman guy—he [the bestselling author of The World Is Flat, which argues the advantages of globalization in the internet age] didn't seem to understand the very simple dynamics that globalization forces redundancy out of the system. And whenever you don't have redundancy, you have Extremistan. Things are way too efficient, so the smallest mistake blows up. We depend so much on the internet. Tomorrow, if there's a problem in Bangalore, we're toast for a long time, you see?

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