Saturday, October 8, 2011

Fuck Off Taleb: Congress Shouldn't Heed a Quack in the Intellectual Tradition of Sextus Empiricus

A certain professor at the Stanford Business School has been taunting me of late, knowing full well where my weak points lie. He forwarded me this last night with the subject line "Guess Who?"
"I’m not interested in money; I’m not interested in finance, I'm comfortable enough as it is. I don’t need it. Finance should be a footnote in my bio, not a central component. Why should I waste time in finance when my influence as an intellectual is so high?

This latest gem is reported in a Bloomberg article by Seth Lubove and Miles Weiss and yes, it is Nassim Taleb. It was a successful provocation on this occasion for as said nameless professor is well aware, I have have a soft spot for financial intellectuals, the hijacking of quantitative finance  and the extraordinary success a handful of loud mouths have had in determining the perception of mathematics. The unnamed professor (who might not want his name mentioned in a low-brow blog like this) has insisted I write a book with called "Fuck Off ...", and that prompts the title of this post. I'm still open to other less inflamatory suggestions but suffice to say Nassim Taleb is very good at annoying people. Comments like the above go a long way toward explaining this. 

But they don't go all the way. My personal fascination with the Taleb phenomenon does not revolve solely around his relentless pomposity or inventive egotism, though it does seem to help. In the spirit of Hofstadter's Law you have to give the guy some credit. What comes out of Taleb's mouth continues to surprise even when you think you have already heard so much you will not be surprised by anything, and even when you take this into account as well, if you know what I mean. (I'm sure there is some vindication of Black Swan struggling in this regress of doubt, somewhere). In this case it was the 'footnote' comment and use of 'intellectual' that got under my skin. I'll return to 'intellectual' later but foremost, the irony in the footnote comment. 


To be a footnote in anything more permanent than a bio you write yourself someone other than a journalist has to read your work, make sense of it, and tie it into something of merit. That doesn't seem to be happening for this particular overexposed thinker. Taleb's attempts to formalize his thoughts are scattered far and wide but represent an astonishingly low citation to download ratio. In Taleb's case, few have been able to build upon what he has to say and nobody has been able to to so in a technical sense. The reason is simple: Taleb doesn't make sense. 

True, many have quoted Taleb, referred to him in general terms, or intimated that there is some underpinning theory - and this vague  anti-probability bandwagon is one of the more surprising post-crisis phenomena. But the element of surprise isn’t always enough. By necessity this populist crusade is a comedic battle pitched between important sounding prose and the terse but plainspoken language of mathematics: a verbal assault on one of the great abstract constructions, its relevance to the real world, and its role in financial calamity. Or if you prefer sporting analogies, recall the image of gymnast Brian Meeker overstepping the springboard and ploughing headlong into the pommel horse. 

But to Taleb, probability is "outdated". Seriously. That is the word he used to describe probability in a review of fellow post-probabilist Elie Ayache's book The Blank Swan on Amazon. (Taleb may have removed the post after reading this article).  In passing, the notion that probability is outdated is somewhat ironic, because some corners of modern finance have barely begun to use it. And Taleb is not presenting counter-establishment thinking at all, but lazy, unscientific banter. If there is an "establishment" that matters isn't particularly scientific, much less theoretical so Taleb's failure to acknowledge probability theory (or large parts of statistics) is not exceptional but closer to the norm for market participants - not to mention those that regulate them, rather more unfortunately, and certainly those that manage them. 

In fact pissing on probability theory is entirely standard behaviour in the middle to bottom tier of uneducated schmucks given license to trade - some of whome would rather re-invent tiny parts of theory and screw it up in the process than read a book (so they can revel in the seeming profundity of their 'paradoxical', 'novel' insights). It goes a little far though when, in encouraging everyone to eschew the only weapons that work, our 'thought leaders' influence our elected leaders who then invent hair-brained anti-intellectual policies designed to make finance safer (by curtailing the use of mathematics, usually, or adding layers of administration to its use). Probability, not committees, is what automates trading. Theory can help stem the leak, reduce cynical rent extraction, and streamline cumbersome business processes. 

You won't hear that from Taleb. Almost surely (as the probabilists say) you'll hear soft nonsense. Probability was created with the wrong type of intelligence, apparently. Intelligence, “in the sense of IQ tests and SAT scores” is not, we learn from Taleb, “as natural & ancestrally fit as wit”. By not natural, the philosopher explains, “I mean not Black-Swan robust, skills we call intelligence because of a certain construction, but that are not needed ecologically”. The modern day thinker is referring to mating probabilities and poses an important question for humorless nerds without dates. “Is ‘intelligence’ without wit & verbal brilliance really intelligence?” If not, it stands to reason, we should be using ecologically valid criteria to “define true intelligence” and more importantly, to discern “relevant subjects”. One might conclude for example that “painting, wit, music are more NATURAL than abstract mathematics”. 

This kind of ‘bolstering’ is almost as silly as Taleb's central, non-probabilistic message itself. (The flowery waffle is lame, but the attempts to make it rigorous are lamer). Taleb's asserts that estimates of probability should never be too small ... and we are to further infer, as best I understand, that "too small" corresponds to roughly one percent. It is oh so simple. When faced with decision making under uncertainty, otherwise known as life, we should skip over the probabilistic assessment and just ensure that we are betting on the outcome with the biggest upside! That is the 'non-probabilistic' approach, pure and simple, so I sympathize with academics who have stumbled across this and wondered, where is the hidden camera? Is post-probabilism, or pre-probabilism, an elaborate hoax intended to embarrass the media and make a salient point about the superficiality of public discourse?

Maybe. Taleb believes it is jiggy to forget the mean and act as if all probabilities are above a certain minimum threshold ... and that is lovely. But it isn't an impressive assault on probability theory and even it it were, the pioneers saw him coming. As de Finetti and Savage were aware, to name two, one defines probability in several ways and the notion of ‘personal probability’ might help Taleb sharpen his non-argument. That will be difficult but in boring, conventional statistics one can say sensible, logical things about behavior-inferred probability and as discussed in The Foundations of Statistics, for example, Taleb falls right into that wheelhouse. He just happens to be someone who sets a lower bound on his personal probabilities and  whether he thinks he is using probability or not is irrelevant. While some regard this as 'thinking outside the box', it actually places him in a special, pre-reserved idiot box. 

And while his position might sound reasonable for about oh, four seconds, it runs aground on basic notions like symmetry well before we come to empirical evidence for long-shot betting and option writing. The ironies pile high. True empirical sceptics should have more trouble getting around symmetry than the rest of us, because they are reluctant to use past data. So what winning probabilities do they assign to non-elite entrants in a marathon? More than one percent? We'll never know because confronting the obvious contradictions in Black Swan struggling is not on the priority list for post-crisis radicals. They prefer to get by with motherhood words like robust, heuristic, non-linear, ecological and so forth. Too bad a moment’s reflection reduces the Talebian position to head-in-the-sand wishful thinking falling for the world's oldest lure: long odds offered by bookmakers on events with very low probabilities. 

                       Taleb's Intellectual Mentor: Sextus Empiricus

So I sure hope this is a hoax. But joke or not Taleb's baby mush is the perfect food for our leaders, most of whom are so far removed from their studies that they can be classified as mathematically geriatric. He has, with a certain  flanerial flair, convinced pundits, think tanks and one British Prime Minister of his standing as an intellectual. And this would leave us with the problem of defining 'intellectual' had one polarizing intellectual, Noam Chomsky, not already provided a unique, mildly cynical but truly fitting one. 

Whatever you think of Chomsky, his definition of intellectual was made for Taleb. As he commented recently in the Boston Review, an intellectual is defined as someone who: 
  1. Makes public pronouncements about things outside their field 
  2. Fails to fully acknowledge, or even consider, symmetry
Chomsky was referring to higher, ethical symmetry of course: the manner in which we characterize actions of our enemies versus our own. It is a far more controversial topic than symmetries in everyday, mundane, applied probability where approximate symmetry is - dare I say - substantially easier to establish. Professional gamblers routinely estimate probabilities smaller than one in a million, with sufficient accuracy to get by, and no amount of pseudo-philosophical verbiage should be able to distract us from this. When one gets down to business Taleb adds absolutely nothing of value because despite the grandstanding he has not yet rediscovered even simple tricks (like Good-Turing estimates for the probability of novel things).  

Instead, Taleb summons the forgotten wisdom of the ancients and slots himself into, or rather above, two thousand years of skeptical thinking - an interesting vantage point but one from which one might easily overlook the last century or so of non-trivial intellectual accomplishment in many relevant fields. Things started to go wrong around the time of the Enlightenment which is a convenient if extreme anti-establishment slant these days. It makes responding to his 'intellectualism' just as frustrating as arguing with the ancients, because much of what has passed in between - including all of modern statistics - has been ignored. 

To that end Taleb models himself after ancient Sceptic Sextus Empiricus, and even refers to Sextus as his mentor. Sextus Empiricus makes for a better bedfellow than Turing or Laplace, given Taleb’s inter-millennial pose - it would almost be humble to choose someone more recent. We are to presume humans with insights as dazzling as Taleb don't come around too often. And that we're so far off track (with all this learning stuff) that only he can pull us back. Taleb probably assumes Prime Ministers are unlikely to check on whether Sextus actually said anything useful - just so long as he looks good on a dusty portrait.

But I did. And I now must wonder about Sextus' suitability as mentor given his seeming inability to string two rational thoughts together. In fact Sextus' logic was so poor that contemporary reprintings are accompanied by lengthy editorial apologies, begging us to consider Sextus despite tedious ruminations like the following:
What if someone says that ten is divided into one and two and three and four, ten is not divided into these things. For as soon as its first part, i.e. one, is removed - to grant this for the moment by way of concession - ten is no longer present, but rather nine - and in general something different from ten. Thus the subtraction and division of the rest is made not on ten but on the other things which alter at each subtraction. Perhaps, then, it is not possible to divide a whole into what are said to be its parts
Yup, that is Sextus trying to undermine Sesame Street. And if you read on you, like me, might start to wonder precisely what knowledge Taleb has gleaned from Sextus (I am still tossing up a complete reading against the opportunity cost - though I suppose I could try to read it and pass a kidney stone at the same time). No wonder Barnes and Annas, editors of the Cambridge reprinting I refer to, find it "difficult to believe that Sextus ever seriously searched for the truth”. His philosophical arguments aimed at the Dogmatists of his day are “not only ad hominem” but also “vastly unsympathetic”.  Sextus was a “quack”, to use their word (only partially out of context) and he “rarely considers how a Dogmatist might react to his sceptical objection, or what he might then say in replay to the reaction”. The commentators go so far as to say that “for someone who professedly continues the inquiry, Sextus shows little interest in intellectual exploration" (and that is why anyone purporting to denigrate mathematics or applied probability can take the ancient Sceptical school, and all their accumulated wisdom, and shove it up their arse). 

We should be careful about attributing Sextus' mediocrity to his tendency to step outside the bounds of his expertise, because apparently he was pretty mediocre in the field of medicine too. I shall not be sending my newborn child the way of Dr. Sextus Empiricus any time soon, or anyone following the Empiric tradition of medicine. In treating patients Sextus took a philosophical stance: one should rely on experience alone, and downplay rational enquiry, inference and theory. 

As I started to read Barnes and Annas lengthy apology for this poor sod I couldn't help noticing some parallels between Sextus and Taleb. Annas and Barnes confess that Sextus’ text is “transparently sophistical”, comprising “embarrassingly bad” arguments that “will not delay a half-competent philosopher for more than a minute”. They suggest his approach has "zero probative value". But the editors come up with an ingenious defense based on his equally illogical contemporaries. Sextus arguments are “no worse than, say, the arguments in Plato’s dialogues” and might not have been subject to such a relentless pounding had Sextus not expresses his poorest arguments clearly and distinctly. Shame on Sextus for not hiding the inadequacy of his logical arguments better! 

                   Hey Dudes! Let's all just forget about the mean!  
                              ( are you fucking serious Taleb? )

I feel that is a tribute we should also pay to the author of The Black Swan who has presented the “central idea of uncertainty” upon which we might “build an overall theory of decision making” in a manner that could not possibly be more straightforwardly daft: 
"But the idea behind Pascal’s wager has fundamental applications out-side of theology. It stands the entire notion of knowledge on its head. It eliminates the need for us to understand the probabilities of a rare event (there are fundamental limits to our knowledge of these); rather, we can focus on the payoff and benefits of an event if it takes place."
Aside: I happen to be an athiest but in principle I've no problem with founding a new philosophy on the single most moronic theological argument ever made (Pascal's Wager only works on those with a blind-spot for symmetry, but remembering Chomsky's definition, we expect it to find success with "intellectuals" of Taleb's ilk). 

But hang on a minute.  When it comes to ignoring the mean, as Taleb would have us do, I may require more convincing. That's because I'm pretty sure I've heard this one from just about every mug who has ever entered a racetrack. Mean-ignorers exist in great abundance and there must have been even more before the "concept" of the mean became prominent in that sphere. 

You probably think I'm joking, because the notion of considering the expected return on a bet and not just those big tasty 500/1 odds on offer seems rather obvious. Yet a glance over the history of Australian punting suggests the contrary: it required a lawyer named Don Scott to invent it. Scott unleashed a "value revolution", in which those placing good value bets started to make money. Who would have thought?

Great First Moments in Statistics

Taleb's achievement trumps Scott though, because he has managed not to invent the mean, but forget about it. We might churlishly suggest that Taleb has shunned the post 1957 "philosophy" of the great Don Scott, handicapping guru, preferring the ancient wisdom of Sextus Empiricus. 

There I go beating up on Sextus again. In fairness, something intelligent was surely written by the Sceptical school which stretched from 400 B.C. to 200 AD, roughly, and included Pyrrho,Timon, Aenesidemus, Agrippa and Menodotus. You'll have to find it yourself though. Sextus was, like many philosophers of his time, actually a doctor of medicine. Sextus attacked the arguments of his Dogmatic adversaries but could not apply the same scrutiny to his own arguments. So we can say by Chomsky's definition he was indeed an intellectual. I would agree that Sextus is a suitable mentor for Taleb, and more so than Bertrand Russell or Kurt Godel (to whom we would never expect Taleb to compare himself to, incidentally, unless of course, he already had).

            Taleb's Policy on Research into Systemic Risk: Don't Bother

No why does any of this matter? Only because Nassim Taleb, a modern day Sextus Empiricus of sorts, has for some time been advising the U.K. government and now, it would seem, seeks to guide the United States Congress. True, congress takes pseudo-science seriously on a regular basis so this is nothing new, but surely it need not move into pseudo-probability? Taleb feels otherwise and the House Financial Services Committee entertained what can only be described as his Sceptical report recently, on the effectiveness and possible side effects of the newly created Office of Financial Research. I suppose it took quite a lot 'Empirical' work treating patients before anyone noticed the circulatory system, but sending a sick financial system in the direction of “less is more” heuristics and “non-probabilistic risk measures” seems reasonable. 

The author of this fine document, Nassim Taleb, appeared before the committee arguing against efforts to measure systemic risk without a hint of self-consciousness, citing heady tombs like Lecturing Birds on Flying by Pablo Triana (see my prior post) and his own populist piffle. It is all beyond the pale but this if we are talking about the implications of ditching probability this merely scratches the surface. Outside of systemic risk, the topic of the hearing, downplaying quantitative methods will cost taxpayers another trillion dollars over the next decade, while they are fed folksy finance by trader-thinkers promoting experience, intuition, gut instinct and just about anything else that sounds good over theory or scientific method. That's because the only thing that will reduce the cost of finance is automation, and that means mathematical, probabilistic technology.

Taleb’s remarkable memo argues against any such thing, naturally, and alerts us to the generic danger of increasing knowledge. He predicts that we will fail to predict risk in the future because we have failed to predict risk in the past, a claim from a distant observer of fixed income markets, in particular, that might generously be classified as an inductive error were it not for the counterfactual premise: central banks have already tried using “thousands of PhDs on their staff” to build elaborate models for systemic risk. That premise, and hence the scene, is ridiculous but I suppose there are new measures by which we assess probabilistic insight these days. 

We will have to put up with this nonsense for quite some until someone writes a revolutionary business book about the mean, or creates a bigger distraction questioning real numbers. In the meantime, the mascot for intellectual post-probabilism has made it into the Thinkers 50 and if you are wondering how that came about you need only consult their methodology: a survey of “business people, consultants, academics and MBA students throughout the world”. No problem here I guess, except that the nutritional content of the more ‘conceptual’, 'abstract' business ideas exhibits something of a long tail. One might have to consume it all like plankton to reach any kind of tipping point. 


Note: Taleb's report is titled "Report on the Effectiveness and Possible Side Effects of the Office of Financial Research" Section b includes the following: “Had the last crisis been predictable, or the risks been measurable, then central banks with access to all manner of information, and thousands of PhDs on their staff, would have been able to see it” [so there].

1 comment:

  1. I like the cloud of dust that lifts of the pommel horse after the impact. Oh yeah and that Nasser guy's a complete mong.