"We associate the willingness to risk great failure – and the ability to climb back from catastrope – with courage. But in this we are wrong. That is the lesson of Nassim Taleb."
-- Malcolm Gladwell, The New Yorker
An epistemologist of randomness, Nassim Nicholas Taleb was once described as "the hottest thinker in the world". Born in 1960, he is a Lebanese American essayist whose work focuses on problems of randomness and probability.
His book "The Black Swan" was described in a review by Sunday Times as one of the most influential books since World War 2. In it, he advocates for a society that can withstand "black swans" or difficult-to-predict events --- what he calls a "black swan robust" society. Taleb favors "stochastic tinkering" as a method of scientific discovery, by which he means experimentation and fact-collecting instead of top-down directed research.
According to Taleb, "we humans, facing limits of knowledge, and things we do not observe, the unseen, the unknown, resolve the tension by scueezing life and the world into crisp commoditized ideas".. This, he said, makes us victims to the Ludic Fallacy, or the misuse of games and dice to model real-life randomness.
THE LUDIC FALLACY
Taleb detests the error of comparing real-world randomness with "structured randomness" in quantim physics /where probabilities are remarkably computable/ and games of chance like casinos where probabilities are artificially built.
He said, predicitive models /such as those based on Plato's Theory of Forms/, gravitate towards mathematical purity, thus fail to take some key ideas into account; such as:
1.That it is impossibile to possess all relevant information
2.That small unknown variations in the data can have a huge impact
3.That theories or models based on empirical data are flawed because they fail to account for events that have not yet taken place but could have taken place.
He claimed that the foundations of qualitative economics are faulty and highly self-referential. He states that statistics is fundamentally incomplete as a field as it cannot predict the risk of rare events.
TALEB'S CHALLENGE is how to live and act in a world we do not understand and build robustness to black swan events.
An application of his most effective, or least fragile, risk management approach is one in favor of linear combination of extremes. In other words, Taleb advocates a dualistic approach -- to be both hyper-conservative and hyper-aggressive at the same time, as these two extremes are more robust to estimation errors. This approach of avoiding the middle option is also known as The Barbell Strategy.
For example, an investor might put 80 to 90 percent of his money in extremely safe instruments, such as treasury bills, with the remainder going in to highly risky and diversified speculative bets.
Taleb believes The Barbell Strategy is applicable across all domains, from politics to economics and to one's personal life.