Interview With Nassim Nicholas Taleb

I'm on a committee at the Pentagon, [the Highland Forum, a study group on risk] and one of the founders of the internet is on it and all these people understand that we need more redundancy in the system to avoid a second crisis that may come from the internet, because we don't understand it. So, in other words, I have a lot of lists of what to do, you see, but they're all unpopular or unpleasant.

The structure of uncertainty in the world is vastly greater than we think. So let's stop playing the narrative fallacy. Take economics, for example. How many economists figured out that when people go to the store to buy products from China, they're raising the price of oil at the pump? How many people thought of that? They raise the price at the pump just by going there.

L.G.: Buying things from China, whose economy then has an exploding demand for oil?

N.N.T.: Yeah, people don't think of that. We don't live in a simple structure, and all these models are useless. How did the internet come about? From Ronald Reagan spending a lot of money for defense against Russians, his obsessive disorder with the Russians. Thanks to him I can call my mom for 8 cents a minute in Lebanon.

L.G.: An unintended positive outcome. Viagra is another example. [Pfizer scientists discovered the erectile dysfunction remedy while trying to develop a heart medication.]

N.N.T.: Beyond Viagra. Almost everything. A lot of things in medicine that we thought came by design in fact came by serendipity and were dressed up later as design. My point is what I call "rationalism" versus "empiricism." Rationalism is a platonic way of viewing the world—I call it "platonicity"—where you want to put the world in a box. But empirical reality is different. In my next book, Tinkering [due at some indeterminate point in the future, because Taleb refuses deadlines], I've made the case that medicine failed when it was platonic, because we're suckers for pseudo-experts that will kill you. We know that in the past, surgeons multiplied your risk of death by four times.

L.G.: If you went to the hospital in the 19th century, you were increasing your risk?

N.N.T.: Up until Semmelweis [mid-19th-century Hungarian physician Ignaz Philipp Semmelweis, who, over much official opposition, introduced hand-washing with chlorinated lime solutions], there was a high probability of a death sentence attached to giving birth in a hospital. But then again, life expectancy did not increase thanks to doctors. The big break didn't even come until 1940 when we had penicillin. So what I'm saying is we're suckers. We'd go to a doctor just to have the illusion of control. Likewise, we give ourselves to pseudo-experts simply because we believe these people help us.

Montaigne understood it. Don't ask a doctor if you need an examination. Montaigne said, "Don't ask a general if you need peace." Warren Buffett repeats it as "Don't ask a barber if you need a haircut." I mean, I'm not providing the answer because I don't want to sound like a charlatan, but in fact when I dig down, I wrote some rules. For my next book, I'm calling for more bottom-up tinkering, less top-down theorizing. I have a lot of things to say, but I'll talk to you about it when the thing comes out.

L.G.: Whenever that is, because you don't do deadlines?

N.N.T.: My minimum is three years from today to deliver the manuscript. With The Black Swan, they were very, very nice to me at Random House. They said "when you're ready." It's the same thinking with Tinkering. You've got to tinker with a book.

L.G.: I read that you got a $4 million advance.

N.N.T.: I don't know if it's true.

L.G.: Have you already put it in euros and you don't know what the dollar value of it is now?

N.N.T.: Some of it comes from euros, but I have no idea.

L.G.: Are the people who are running our financial institutions capable of learning from their mistakes and fixing them?

N.N.T.: No, and this is the problem with incentives. A C.E.O.'s incentive is not to learn, because he's not paid on real value. He's paid on cosmetic value. So he's paid to be nice to the Merrill Lynch analysts or the Wall Street analysts. So this is where the problem starts.

L.G.: What if you hear that a bunch of Wall Street folks got together and decided to offer some risk-management prescriptions so we won't have this kind of subprime meltdown again? [Last week, top risk managers at several Wall Street firms presented just such a report on the fiasco to the secretary of the Treasury.] Are you skeptical?

N.N.T.: I don't know, I just try to stay out of it, to just not lose my intuition. It seems to me that a lot of these people who shot the poor guy are now trying to medicate him. The very same people that were responsible for the crisis are trying to fix it. The problem is, I'm so suspicious of government, particularly the Federal Reserve, that I see self-serving stuff all the way, particularly in hindsight. I don't want to talk about the crisis in hindsight. I spoke about it in foresight beforehand, and that's it. So now I'm moving on to the next crisis.

L.G.: Describe to me the fallacy involved in coming at a crisis with hindsight and reinterpreting it and then coming up with solutions for it.

N.N.T.: Because then you get a Maginot Line problem. [After World War I, the French erected concrete fortifications to prevent Germany from invading again—a response to the previous war, which proved ineffective for the next one.] You know, they make sure they solve that particular problem, the Germans will not invade from here. The thing you have to be aware of most obviously is scenario planning, because typically if you talk about scenarios, you'll overestimate the probability of these scenarios. If you examine them at the expense of those you don't examine, sometimes it has left a lot of people worse off, so scenario planning can be bad. I'll just take my track record. Those who did scenario planning have not fared better than those who did not do scenario planning. A lot of people have done some kind of "make-sense" type measures, and that has made them more vulnerable because they give the illusion of having done your job. This is the problem with risk management. I always come back to a classical question. Don't give a fool the illusion of risk management. Don't ask someone to guess the number of dentists in Manhattan after asking him the last four digits of his Social Security number. The numbers will always be correlated. I actually did some work on risk management, to show how stupid we are when it comes to risk.