I met Nassim Nicholas Taleb a few weeks ago at a friend’s party. Fascinating guy with a variety of interpretations of the credit crisis. His own history as a derivatives trader gives him a special edge as an academic taking potshots at the financial establishment.
His theories of risk-modelling are at the center of his recent best-seller The Black Swan. Loosely, they are a jazzed-up collection of anecdotes based largely around David Hume’s philosophical tradition of empiricism. Hume said that because we have witnessed the sun rise every day for our entire existence, we cannot say for certain that it will rise tomorrow. Our past experience is the only known territory. Taleb takes this a step further to highlight the importance of unknown, unpredictable events that break our chain of experience and force us to rethink our assumptions.
He provides the example of a turkey who has been generously fed every day for 1000 days. Based on this track record, it could be assumed that this would continue indefinitely. On the 1001 day, however, the turkey is killed and served for dinner. The pattern of the first 1000 days had little resemblance with the one outlier event that would prove disasterous for the turkey:
Check out this essay from Taleb for more on flawed assumptions and the failure to predict the credit crisis.
