When Did Nassim Taleb Cut Off Our Balls?

by robekulick

Nassim Taleb is famous for his vitriolic hatred of economists and economics. The following Taleb quote is a particularly good example of this and the inspiration for the title of this post:

“Those with brains but no balls often become mathematicians; those with balls but not brains join the mafia; and those with no brains and no balls become economists. There are exceptions (for mathematicians).”

Taleb has also added that Wall Street Traders have both brains and balls (lucky them!).

Taleb’s bitterness towards economics is deeply entwined with antipathy towards the Black-Scholes-Merton options pricing formula and its creators. An interviewer of Taleb’s writing in the Chronicle of Higher Education relates the following:

“Taleb singles out his least-favorite economists, including Robert C. Merton, a professor of finance at MIT, formerly of Harvard, and Myron Scholes, a professor emeritus of finance at Stanford, who jointly received the Nobel Prize in 1997 for their model of valuing derivatives that’s designed to hedge against risk. Merton is “serious, mechanistic, boring,” according to Taleb, and the two used “fictional mathematics” in their research. He calls this “unsettling” in a footnote, though in the earlier draft he sent me he used a harsher word. I’d wager that punch may have been pulled by Random House’s legal department.”

Given the depth of Taleb’s hatred for economics, I had always assumed that these feelings had been percolating within him for the entirety of his adult life. And from the quote above, you would probably assume, say, that he had never written an article in praise of Robert Merton, the BSM Formula, and economics. But apparently, we’d be wrong.

I’ve been following Taleb for a long time now, so when I came across this article today, I almost fell out of my chair:

http://www.nickdunbar.net/wp-content/uploads/2012/12/Taleb-praises-Merton1.pdf

I’ll share a few of my favorite quotes:

“In other words, the entire neoclassical apparatus has been criticized for being a normative, not a positive or descriptive science. A normative theory describes how things should be, instead of describing them as they effectively are. We are indeed lucky to have had such normative prescriptions since the world of finance has agreed to resemble the textbook, in order to operate better.”

Did Taleb just imply we are lucky to have economics? And did he put economics in the realm of science??

“In a similar way, in spite of the criticism levied against the efficient market hypothesis, markets have been gaining in efficiency over the past twenty years, simply because the inefficiency has attracted traders and profit seekers. This point should strengthen the argument of general economists under assault because of the seeming lack of realism of assumptions of rationality and maximizing behavior.”

Did Taleb just defend economics??

“…the BSM formula allows the traders to be smart.”

Did traders just get some of their brains from economists??

Given this, I would think that in his initial books, a man as smart as Taleb would, at the very least, have written carefully about his evolving views. And, you might also think that he would be more thoughtful and respectful in his approach. But again, we would be wrong.

So the question is: when did Nassim Taleb cut off economists’ balls?

The article is dated June 1998. His first popular book, Fooled by Randomness, came out in 2001 and contains attacks on Scholes and Merton, so this evolution in thought must have come about very rapidly.

My best guess is that the key event that changed his perspective was the bail out of Long-Term Capital Management in September 1998, orchestrated by the New York Federal Reserve. Scholes and Merton were principals in LTCM, and indeed, Taleb criticizes them strongly for this failure in Fooled by Randomness.

Even if this guess is correct, however, it would still be edifying for Taleb to discuss how this event led to such a passionate hatred of economics as a whole. After all, most of economics has nothing to do with finance, and the failure of a highly leveraged hedge fund is a very poor basis for labeling a theory as totally useless. 

Advertisements