Why I will read Taleb's Antifragile

Photograph taken from Business Insider

Soon after my post Are economists idiots?, I read that Nassim Nicholas Taleb in a speech at London School of Economics said “before we had economists, the world was functioning very well.”  
Trust the fearless 21st century Confucius to make this declaration on the very bedrock upon which economists are bred. 
But then, one should not be surprised. 
Taleb would not be Taleb if he did not cloak himself in controversy. 

Taleb has made a reputation and a fortune (he got $4 million as an advance for his last book) by bashing conventional economics and finance. Even though monetarists and Keynesians seem to arrive at no consensus on the methods of dealing with the financial crisis, they probably cringe at his thinking. He was quoted in Macleans.ca as saying that the prescription lies in "discarding the entire discipline of modern finance and portfolio theory." He goes on: "There is a class of people in economics who are very good but the establishment is rotten. Financial economists hate me because I come from the field of derivatives. I do practical applied mathematics. Asking academics about that is like asking nuns about sexual positions."

His earlier book on Black Swans (see list below) gained traction after the financial collapse.

At that time, in an interview to Bryan Appleyard in The Sunday Times, he said that it was his greatest vindication. He went on to say: "But to me that wasn't a black swan; it was a white swan. I knew it would happen and I said so. It was a black swan to Ben Bernanke. I wouldn’t use him to drive my car. These guys are dangerous. They’re not qualified in their own field.” 

Need it be said that bankers too are at the receiving end of his wrath? 
He wrote a piece called End bonuses for bankers in the New York Times. In this article, he says that the essential problem with the bonus system of bankers is its asymmetric nature, meaning that there is an incentive for success without a corresponding disincentive for failure which causes hidden risks. He draws a comparison to the homeland security and military personnel who are trusted. They get promotions and honor of a job well done if they succeed but the severe disincentive of shame if they fail. Bankers, on the other hand, make short-term profits and get a bonus. If they go bust, they get a bailout. 
He then drew a parallel to Hammurabi's code written in Babylon 4,000 years ago and arrives at the solution on why banning bonuses addresses the principal-agent problem in economics: the separation between an agent's interests and the client. 

Naseb's talent lies in his stimulating exposition of ideas. He puts forth seductively provoking thoughts in a kinetic writing pattern as he laterally presents seemingly non-related issues by delving into a deep repository of knowledge. While I admire his brilliance, his thought process and ability to package his ideas in a narrative driven by passion and reason, I cannot say I am a die-hard fan. But I am waiting to get my hands on his latest book even though it apparently fails to invoke the same adulation that his earlier two books got. 

The blogger in Scientific American called him a pain in the ass and said that from all the speakers he invited to Stevens Institute of Technology, none agitated him as much as Taleb who made all kinds of demands about where, when and how the event should or should not be publicized. But he goes on to recommend the book because it is entertaining and provocative and the author, brilliant, despite his prima donna tactics. 

The Economist says that "antifragile" is an interesting idea and the book makes for an ambitious, entertaining and thought-provoking read. However, the writer believes that the book has its flaws and Taleb overstretches the argument and is not as iconoclastic as he likes to think.

Christina Lamb in The Sunday Times, wrote that for a thinker who reckons we all need a bit of randomness in life to make us stronger, he was surprisingly bothered that his usual table in his usual restaurant in Brooklyn was occupied when they met for an interview. 

The Guardian, in an extremely well written critique, says that the idea is neat but the book is a big, baggy, sprawling mess. 

In Antifragile, he speaks of all the people of the world being composed of Triads: 

• The Fragile: You avoid disorder and disruption and want to be safe. Wrong! You are actually making yourself more vulnerable to the shock that will make everything fall apart.

• The Robust: You stand up to shocks without flinching or changing who you are.

• The Anti-Fragile (he coined this word): The shocks and disruptions make you stronger and more creative and better able to adapt to each new challenge you face. 

According to Taleb, the opposite of fragile is not robust but anti-fragile. Bureaucrats are fragile while entrepreneurs are antifragile. Politicians are fragile, a truck driver is robust and an artist is antifragile. Debt is fragile, equity is robust and venture capital is antifragile. 

I am curious to read his musings on the upside of unpredictable upheavals probably because I seem to gravitate towards a secure habitat.  Though I am not sure if people stick to one label all their life or shift between categories. The book should enlighten me. I shall surely gift it to myself this Christmas (if nobody does me the honor, that is). 

Taleb's books

Dynamic Hedging: Managing Vanilla and Exotic Options

The Bed of Procrustes: Philosophical and Practical Aphorisms

Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets

The Black Swan: The Impact of the Highly Improbable

Antifragile: Things That Gain from Disorder

All the investing advice you ever need

Everyone is always looking for investing advice (whether they follow it or not is another issue). Here are some assorted quips which should leave you wiser. Don't take it too personally if what you respect is being ridiculed. Even if they are just witty sound bites to you, there is no denying the quality of the vitriol and the art with which it is thrown. So enjoy & smarten up!

On where to invest....

Go for a business that any idiot can run - because sooner or later, any idiot probably is going to run it.

- Peter Lynch, asset manager & author

Never invest in anything that eats or needs repainting.
- Billy Rose, American impresario, theatrical showman and lyricist

On how to invest....

Don't try to buy at the bottom and sell at the top. It can't be done except by liars. 

- Bernard Baruch, American stock investor, financier and statesman

Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it. 

- Will Rogers, American vaudeville actor & humorist

On relying on the brains of the intelligent on Wall Street...

Everyone has the brainpower to follow the stock market. If you made it through fifth-grade math, you can do it.
- Peter Lynch, asset manager & author

Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway.
- Warren Buffett, American investor & philanthropist

There are two kinds of investors: those who don't know where the market is headed, and those who don't know that they don't know. Then again, there is a third type of investor -the investment professional, who indeed knows that he or she doesn't know, but whose livelihood depends upon appearing to know.

- William Bernstein, American financial theorist

On crappy predictions & tips from the experts....

Every day, self-proclaimed stock market "experts" tell us why the market just went up or down, as if they really knew. So where were they yesterday?

- Anonymous

If stock market experts were so expert, they would be buying stock, not selling advice.
- Norman R Augustine, American aerospace businessman & ex-Under Secretary of the US Army

The stock market has forecast nine of the last five recessions.

- Paul A Samuelson, the first American to win the Nobel Prize for Economics

When asked what the stock market will do, J P Morgan once replied: "It will fluctuate."

On the respectable stock market & stock brokers....

With an evening coat and a white tie, anybody, even a stock broker, can gain a reputation for being civilized.
- Oscar Wilde, Irish writer & poet

The United States have developed a new weapon that destroys people but it leaves buildings standing. It's called the stock market.

- Jay Leno, American stand-up comedian & television host

Derivatives are financial weapons of mass destruction.

- Warren Buffett, American investor & philanthropist

Bulls make money. Bears make money. Pigs get slaughtered. 

- Anonymous 

Ever wonder why fund managers can't beat the S&P 500? 'Cause they're sheep, and sheep get slaughtered. 

- Gordon Gekko (character played by Michael Douglas) in the movie Wall Street

On buying & selling......
If you hear that everybody is buying a certain stock, ask who is selling. 

- James Dines, investor & author 

One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute.

- William Feather, American publisher & author

I made my money by selling too soon. 

- Bernard Baruch, American financier & investor  

If I have missed some good ones, send them across........

Crazy mind games that mess with your money

A friend of mine once asked me to loan him cash to clear his mother’s medical bills. He promised to pay back from his salary over the next three months. When I reminded him about the money tucked away in his bank account, his reply: “That is for the down payment for a bike, I cannot touch it.”

What my friend possessed, besides oodles of chutzpah (and a good heart, I must add), was a case of bad mental accounting.

Let me make my point by narrating a famous story known as the “Legend of the Man in the Green Robe”.

A newly-wed couple head to Las Vegas for their honeymoon. They set aside $1,000 as play money for gambling. They predictably lose all of it. On the last night, the groom notices a $5 gambling chip on the table. Unable to sleep, he gets up, puts on a robe (a green one, of course) and heads to the roulette tables. 

Roulette is a game in which a ball is dropped onto a revolving wheel (known as the roulette wheel) which has numbered compartments. The players bet on the number at which the ball will come to rest.

The groom bets on 17 and bingo, that’s where the ball lands. He gets $175 (the odds are 35:1). He lets it ride, which means that the winning chips remain on the table. His lucky streak continues and he gets $6,125. This goes on till he has a few millions credited to him. Virtually delirious with exuberance and optimism oozing out of every pore of his being, he decides to take one more chance thinking his luck will never run out. He bets his millions.

He loses.

Everything!

In a daze, he stumbles back to his room dejected.

“Where were you?” his bride asks.

“Playing roulette,” he says.

“How did you do?”

“Not bad. I lost just $5”.

Talk of being delusional! 

He logically avoided the horror of his loss by believing that he began with $5 (which he paid for) and since he returned to his room with nothing, he lost just $5.

He might have tricked his wife but that’s not true, is it? The millions he lost was real money. If he stopped and cashed his earnings, he would have been a millionaire (even after the IRS was done with him). 

You may think this story as strange, but you cannot deny that it is bang on as far as a reality check goes. A dollar is not always a dollar (or rather rupee, in our case). Money is always viewed differently depending on the source.

Not convinced?

Take a look at your own behaviour. 

Have you not noticed that you view an unexpected bonus at work, a sudden investment windfall, a tax refund, a gift from a relative, a surprise inheritance or a lottery win with a different perspective from how you would view your earnings? 

Or, if you got a freelance assignment which did not interfere with your work and the remuneration not clubbed with your monthly salary, you would tend to be more liberal in spending it?

Yet again, if you made a killing in a rampant bull run, chances are you would be more than enthusiastic to put some of the earnings in a stock tip or a volatile sector fund which you would have shirked in your regular monthly investing plan. 

John Allen Paulos in his book A Mathematician Plays The Stock Market says that we categorise money in odd ways and treat it differently depending on what mental account we place it in. He goes on to give an example.

Let’s say someone lost a $100 ticket on the way to a concert. He is much less likely to buy a new one, unless he is desperate to watch the show.  

Let’s say he did not lose the ticket but lost $100 on the way to buying the ticket. Chances are he would still buy the ticket.

Why? In both scenarios he lost $100.

In the former, he would tend to think that $200 is too large an expense for entertainment. While in the latter, $100 is for entertainment, $100 just turned out to be an unfortunate loss.

Paulos sums it well: Personal accounting can be plastic and convoluted.

I remember reading an anecdote by psychologist Hal Arkes. Employees of a firm were taken to the Bahamas on a retreat and each were given a cash bonus for bagging a contract. I don’t remember how much but I think it was $50. Almost all of them headed to the casino to blow it up. What was interesting was that none lost more than the allocated amount ($50). The moment it crossed that, they got more cautious and slowed down or stopped altogether because they felt they were playing with their “own” money rather than the “free” money.

Ironical is it not? The $50 was their “own” money too.

In Why Smart People Make Big Money Mistakes & How to Correct Them, authors Gary Belsky and Thomas Gilovich talk about an experiment conducted where 24 students of Harvard University were told they were receiving $25 windfall as part of a research project and could spend as much as they wanted at a particular store. The unspent amount (from $25) would be sent to them by cheque.

Here’s the clincher.

• 12 of them were told that $25 was a bonus
• 12 of them were told that $25 is a rebate 
• 84% of them who were told it was a bonus, spent some or all of the amount
• From the group that was told it was a rebate, only 21% spent any money at all

The authors conclude: Like it or not, mental accounting is a powerful driver of our actions.

Mental accounting is a psychological phenomenon that causes us to mentally separate money into different accounts. So lottery winnings, refunds and surprise bonuses are invariably counted as “free money” while our salaries is what we must be frugal and most responsible about. In actuality, we must be responsible for all our money, irrespective of the source. 

Along the same lines, a vacation allowance is presumably treated with less gravitas than the same amount of money socked away in a retirement account. And this need not be a bad habit. In fact, if used wisely, it could prevent you from being illogical and irrational. Because even die-hard spenders will tend to halt themselves from recklessly poaching from their retirement kitty. 

The way forward? Don't be a slave to your thought process. Use the ability to corral money into different mental accounts to effectively save for future goals. In the end that is what will give you the biggest kick.

Are economists idiots?

Paul Krugman is very much in the news for his views on fighting the fiscal phantoms. And from the bottom of my heart, I wish this economist a long life. But when the inevitable does happen, I wonder what he will be most remembered for? 

1) Winning the 2008 Nobel Prize in Economics

2) Suggesting that America prepare for a non-existent alien invasion to fix her fiscal woes (apparently it will get people working)

3) Calling some of his fellow economists idiots on radio ("There are some idiots who've won Nobels")

Source: http://school.discoveryeducation.com/clipart/clip/dunce2.html

I will certainly remember him for referring to some of the Nobel laureates as certifiable idiots. Martin Fridson in Forbes, questions whether Krugman should tip off the presidents and prime ministers of various countries in case their governments are pursuing the policies of these imbeciles. But then again, one wonders how many of the economists, whose reputations are now questionable thanks to Krugman, will in turn call him an idiot. 

I am sure Krugman won't take offense. In fact, in that very interaction on air, Krugman did say that winning the Nobel prize did not shut up his critics but it certainly stopped people from calling him an idiot for 2 weeks. 

I wonder if Alan Greenspan regarded Krugman as an idiot? Krugman certainly thought he was one. Years ago, Krugman wrote this: "If you want a simple model for predicting the unemployment rate in the US over the next few years, here it is: It will be what Greenspan wants it to be, + or - a random error reflecting the fact that he is not quite God." Last year in a blog post, he stated that "the exceptional Mr Greenspan continues his efforts to cement his reputation as the worst ex-Fed chairman in history".

What about Paul Volcker? In another blog post, Krugman stated that "Volcker is worrying about re-fighting the 1970s when we're actually re-fighting the 1930s. And fighting the wrong war is a good way to lose the one we're in." 

So what does this mean? While we widely regard economists as brilliant, they tend to regard each other as boneheads.

Justin Wolfers in Freakonomics.com speaks of one of the best-kept secrets amongst economists. According to him, there is remarkable agreement among economists on most policy questions. This consensus is obscured by 2 laws of punditry. 
First, for any issue, there's always at least one idiot willing to claim the spotlight to argue for it.
Second, that idiot may sound more respectable if he calls himself an economist. :) :) :)

A few months ago, a blogger on the Economist wrote about the history of macroeconomics. It stated that economists spent 30 years debating what the experience of the Great Depression meant and then another 30 seeing if they had arrived at the right answer. 

That it was man made became the economic consensus; the rest was intensely debated by squawking heads. Not surprisingly. According to Edgar Fiedler (an economist of course), "ask 5 economists one question and you will get 5 different answers; 6 if one went to Harvard". 

So the Keynesians focused on fiscal policy as an engine of stabilisation. They held that central banks were relatively helpless because interest rates fell to very low levels. 

Others vociferously protested - Milton Friedman led this pack. He said that interest rates were low because the Fed has pursued a too-tight monetary policy. Friedman argued that the Depression indicated that monetary policy was extremely powerful and the central bank had an important influence over money supply and in the short run this could have a significant impact on the real economy.

Later on Robert Solow had something to say about this: "Everything reminds Milton Friedman of the  money supply. Everything reminds me of sex, but I try to keep it out of my papers." If he is an idiot, he is an honest one!

But the funniest of all is this quote by John Kenneth Galbraith: "Economics is extremely useful as a form of employment for economists." Seriously, I am not one to judge specially since I hold no Ph.D in Economics. But was that not an idiotic statement? Or am I missing some profound meaning? If yes, then maybe I am the one who is an idiot. And on that, I am quite sure I could get a consensus. 

The myth of diamonds & romance

A friend asked me to accompany him shop for an engagement ring for his girlfriend.

We saw some fabulously eye-catching stones – fantastic clarity, great saturation of colour, large size and brilliant cuts. But he consistently ignored the rubies, emeralds or sapphires. He was fixated on a diamond. His reasoning: That is what men give women they love and what women want to feel loved (seriously, how overly clichéd was this?). I reminded him that even Mark Zuckerberg bypassed the diamond and went for a ruby. "But he must have had stock options to compensate," my friend argued.  

Earlier this year, Ashleymadison.comcommissioned a survey across 2,600 ‘actively-cheating husbands’ across the US. The driver behind this survey? To obtain a better  understanding of male infidelity. I doubt there are any more interesting revelations to unearth on this subject, but a few tit-bits from this survey were worth noting.  

• 53% of the cheaters said they would buy diamond jewellery for their mistresses, and only 27% considered doing the same for their wives
• 38% would buy flowers for their mistresses, only 19% would do so for their wives
• While just 8% would buy household items (like toasters, I guess) for their mistresses, 27% would happily gift such stuff to their wives (how practical)

So diamonds might hint at romance, but not at fidelity. 

In an earlier post, I wrote about Paco Underhill's reasons on why men purchase jewellery for women from his book Call of the Mall.

1) Keys to the front door

When men want to make blatant declarations of affection or intention they gift jewellery. These occasions don’t present themselves very often - engagement, marriage. And if the woman is lucky, an anniversary or birthday down the line. This is their way of convincing/ reminding the woman of the extent of their love. After all, you would not blow up thousands if you were not committed right? My friend falls in this category.

2) Keys to the back door

When they need the convenience of a relationship without the commitment that comes with front-door entry. Hence, mistresses, lovers and girlfriends are recipients of jewellery. Their way of convincing the woman it is worth her while to hang around. Ashleymadison’s ‘actively cheating husbands’ would feel right at home here. 

3) Keys out of the doghouse

Their way of saying sorry and want to make amends for bad behavior, specially if the woman at the front door has found out about the woman at the back door. Flowers wither too quickly, perfumes don’t last forever and chocolates will only make you fat. Nothing says “please forgive me for being such a jerk” better than a fine necklace that has caused a sufficient dent to the bank balance.

But then again, this is jewellery at large. Why are diamonds so stereotypically associated and synonymous with romance?

Apparently, the blame is to be squarely laid at the feet of De Beers. Ira Weissman, Founder, Truthaboutdiamonds.com, believesthat the entire tradition of the diamond as a gift given during a marriage proposal is a modern-day invention of Fifth Avenue real-life Mad Men. :)

The De Beers ad campaigns in timeless black and white used the slogan “A diamond is forever” in what has been expressed as one of the best marketing campaigns ever (credit to agency N. W. Ayer). In this particular one,  it tells you how two month’s salary lasts forever. Of course, it does not say that the size of the salary will also determine the size of the diamond and the eventual return on the investment. In another, a man screams "I love this woman" on a public square much to her embarrassment. The ad suggests a better way - give her a diamond ring. On getting that she throws her arms around him and whispers "I love this man, I love him, I love him".

Decades ago, Edward Jay Epstein wrote a legendary piece in The Atlantic on this very subject. Advertising agency N. W. Ayer drew up a well-orchestrated advertising and public-relations campaign to impact the "social attitudes of the public at large and channel American spending toward larger and more expensive diamonds instead of competitive luxuries."

The agency romanticized diamonds by altering the public's picture of the way a man courts -- and wins -- a woman. Since "young men buy over 90% of all engagement rings" it would be crucial to inculcate in them the idea that diamonds were a gift of love: the larger and finer the diamond, the greater the expression of love. Similarly, young women had to be encouraged to view diamonds as an integral part of any romantic courtship.

Movie idols, the paragons of romance for the mass audience, would be given diamonds to use as their symbols of indestructible love. 
The agency offered stories and society photographs to select magazines and newspapers to reinforce the link between diamonds and romance. Stories would stress the size of diamonds that celebrities presented to their loved ones, and photographs would conspicuously show the glittering stone on the hand of a well-known woman. 
Fashion designers would talk on radio programs about the "trend towards diamonds".

The Ayer plan also envisioned using the British royal family. "Since Great Britain has such an important interest in the diamond industry, the royal couple could be of tremendous assistance to this industry by wearing diamonds rather than other jewels." Queen Elizabeth later went on a well-publicized trip to several South African diamond mines, and she accepted a diamond from Oppenheimer.

Lecturers were arranged to visit high schools across the country. "All of these lectures revolve around the diamond engagement ring, and are reaching thousands of girls in their assemblies, classes and informal meetings in our leading educational institutions," the agency explained in a memorandum to De Beers.

And that for me explained the link between romance and diamonds - all the fabrication of smart marketing executives. 

But of course, as an investment, diamonds outshine many rivals. This month itself, the auction of diamonds created waves across the globe. A flawless deep-blue diamond sold for little over SFr 10 million (Sotheby, Geneva). The Archduke Joseph Diamond fetched around SFr 20.35 million (Christie’s, Geneva). 

SFr = Swiss Franc

While this is beyond the reach of virtually all humans on this planet, it has indicated a trend of holding diamonds as an investment. Eric Valdieu, an expert formerly with Christie's  launched an investment fund last year called Divine Jewels. In September, Financial Times reported that IndexIQ, a New York company, is supporting the first diamond-backed exchange-traded fund. The proposal is being reviewed by the Securities and Exchange Commission. Harry Winston, the largest publicly traded diamond company, is also collaborating with a Swiss asset manager on a $250m fund to buy diamonds wholesale to store in a vault, using money from hedge fund investments.
The article went on to state that diamonds have proved to be a low volatile investment and the super rich are giving it serious thought. Prices of polished diamonds have risen 100% since 2004 and show no signs of abating. 
A few months ago Business Today wrote on how Indians are considering diamond purchases though we are apparently way behind the Chinese.

If you are considering an investment in diamonds, there is no fund (as mentioned above) available in India. You will have to purchase the stones, so make sure you buy certified ones. Gold is gold. But each diamond is different and unique and the pricing tends to be opaque. Do your homework before venturing into this territory.