Gillian Tett, Editor at Large at the Financial Times interviews Nassim Taleb, Scientific Advisor for Universa Investments on capital market at Greenwich Economic Forum (Greenwich, CT)
- Universa investments is a tail risk investment fund with $4.1 billion in AUM
- Trying to remove risk can create more risk
- Brexit is a reaction against bureaucrats with no skin in the game
Julia La Roche – Correspondent, Yahoo Finance: 00:00
I’d like to introduce our keynote speaker today. We are fortunate to be joined by Nassim Nicholas Taleb the distinguished scientific advisor at Universa Investments. Dr. Taleb spent 21 years as a risk taker, also known as a quantitative trader before becoming a researcher in philosophical, mathematical, and mostly practical problems with probability. Dr. Taleb is the author of a multi-volume essay, the inch in the uncertain. You might be familiar with these books, the black Swan, fooled by randomness, antifragile and skin in the game covering a broad facet of uncertainty. It has also been translated into 39 different languages in addition to his trader life. Nassim has also written as a backup to Inserta more than 70 scholarly papers in statistical physics, statistics, philosophy, ethics, economics, international affairs in quantitative finance, and all around the notion of risk and probability. He is currently the distinguished professor of risk engineering at NYU Tandon school of engineering only quarter of his time dedicated to that position. And he’s a scientific advisor for university investments. His current focus is on the properties of systems that can handle disorder, which is antifragile. Nassim refuses all honors in anything that turns knowledge into a spectator sport. Nassim. I know this is going to be an interesting conversation. You will be interviewed by none other than Gillian Tett editor at large at the Financial Times. Welcome to you both.
Gillian Tett – Editor at Large, Financial Times: 01:46
Well, thank you very much indeed for that kind introduction and I’ve been hugely looking forward to this conversation for three reasons. Firstly, because Nassim is one of the most brilliant minds that I know. I think we first met seven, eight years ago. I had the honor of trying to interview him and Danny cannon on a stage at the same time. And it was a challenge. It was a challenge. But secondly, you in the room may not know, but we really are very lucky to have him on say today because you don’t get out very much on platforms like this. Do you?
Nassim Taleb – Distinguished Scientific Advisor, Universa Investments: 02:25
You know every three years and four months.
Gillian Tett – Editor at Large, Financial Times: 02:30
Every review is a few months. While he very rarely agreed to do interviews like this. But thirdly, as we heard from Mohamed El-Erian earlier, we live at a moment in history when our cozy late 20th century ideas of stability and how to put a future and how to assess risks are frankly being blown apart in a way that’s left many investors and many politicians, many journalists feeling very deeply disorientated. Mohamed El-Erian talked about moving from a world of a bell-shaped curve of probabilities to a bi-modal world, to a world where there’s potentially fact tales, great extreme, the risk potential, potential great uncertainty. And Nassim, you’ve spent your, almost your entire life looking at risk and essentially telling people in the Western world or they get it mostly wrong.
Nassim Taleb – Distinguished Scientific Advisor, Universa Investments: 03:29
Yeah, I mean, I was an option trader all my life. I’m still an option trader. Universe is you know, the project started 20 years ago as option trading many on telephones. So I’m an off shore trader and off shore traders have different view of the world. You know, because you’re exposed to seeing the car pulling the car in the circuit and driving it 300 miles per hour. It’s a different environment. But when you trade off. shore, so it’s a different world and we’re more cynical. But let me make one comment. If I had a Mexican pestle every time, every time someone told me we live in a different environment, okay, the world has more uncertainty ahead. That Mexican festival, you know, every time someone told me that over the past, say 30 years and now own a big chunk of Mexico. Because it is normal to feel that the future is going to be different from the past. And it’s normal to have an anxiety and to feel something. But let me tell you, distributions, the world have always been non-Gaussian. You’ve always had a lot of Indian risks. And, but once in awhile, people who have a common sense, the tech, these risks and, and act on them. And, and it’s typically when you feel there’s a largest amount of risk, that the fact the system is the most stable.
Gillian Tett – Editor at Large, Financial Times: 05:10
Well, one of the messages on your book “Antifragile” was that chasing after a super safe world and trying to remove risk actually creates more risks in the long term.
Nassim Taleb – Distinguished Scientific Advisor, Universa Investments: 05:22
Exactly. So, let me give the metaphor two levels you know, systemic and an individual if you want to remove the risk from your life. Okay. what would you do? Is it an option? You stay in bed? Of course you can you know, order a copy of your Serco five volumes and then of course it can other, other books. Stay in bed, don’t leave your bed. You make sure it’s a sterilized environment, no germs. Okay. You will have no risk. And then right after take a ride in a Tokyo subway at peak hour. How many seconds did you survive? Three, four or five before. Okay. So, the route to safety is not necessarily the route that has small, the least amount of volatility. In fact, and there’s something that sharks risk analysts, typically the metric for a healthy company is a company that has a lot of authority, conditional surviving Montessori.
Nassim Taleb – Distinguished Scientific Advisor, Universa Investments: 06:26
It’s the opposite of fit stable companies, you know, in 2009 you know, there’s something called sharp ratio that that usually doesn’t measure anything that’s measure something is a high sharp ratio gives you a hypo. The blow it up. Okay. And, and since the thing it measures the most, okay, if you have high sharp ratio, stable income, 2008, 2009 and the friends that blew up was the ones with the high sharp ratio. So just to tell you that trying to avoid the risk doesn’t come via avoidance of volatility. It’s exactly the opposite. You know, I compare the regimes of Saudi Arabia, no political vaults in the past, almost the past 100 and some years versus Italy. Italy is very volatile politically, which one is safest. Last time I checked, Italy was standing right. Saudi Arabia, sorry, I lose concentration is not enough.
Gillian Tett – Editor at Large, Financial Times: 07:24
So some risk takings volatility and regular small failures. In a way the better way to guard against big cataclysmic problems.
Nassim Taleb – Distinguished Scientific Advisor, Universa Investments: 07:34
Exactly. So another comment systemically, the industry in America that has a high, the second industry, general industry, it has the second highest failure rate is the restaurant business. And I haven’t seen any bail out. Generalize me, allows them, and the first one, of course, it’s Silicon Valley, right? And America has the highest rate of bankruptcy in the world, right? So you’d like to have increased that rate. You want to make it healthier.
Gillian Tett – Editor at Large, Financial Times: 08:05
So your booklets, one essentially said that people need to recognize that unexpected dramatic risks can happen that we don’t have to see, imagined to see imagination to see. Antifragile argued that we should embrace that, that actually regular small failures are a better way to create a robust system than chasing after endless stability. And now you have a new book out, which is called “skin in the game”, hidden asymmetries in daily life. What are you trying to say in this?
Nassim Taleb – Distinguished Scientific Advisor, Universa Investments: 08:36
Okay. So you as aware write books, you write a book and then then you realize you would you love that. Okay. So, you continue. All right. And at the end of the antifragile, antifragile is mostly by convexity, lots of doors or misses, how system was font, but also about me, long voltaltility when you learn about do you have more upside than downside on an option, if you’re selling me an option, that’d be long volatility, but you’d be short volatility. So there’s a lot of transfers of that option between individuals and typically you have someone ripping off the system that for example, bankers have the upside and you know, they transfer the downside to others. Okay. So in antifragile of course the last chapter was skin in the game. The idea that you should have a symmetry between risk takers and risk receivers.
Nassim Taleb – Distinguished Scientific Advisor, Universa Investments: 09:33
Okay. So usually people, some people own their own risks, some people trust a risk or others. And some people, the saints take risks away from others. So that was the idea of antifragile and, but I noticed that some people couldn’t go sweaty federal, it’s too complicated for them. Hit on that point. They loved it and they thought was about that last chapter about risk transfer. So I started writing. And you know, if you have no schedule, you don’t have a publisher, you don’t take and faster for a publisher, they just write a book. And when you’re done, you’re done. So this one came naturally as a footnote, as from the rib of anti-fragile. Okay. And about symmetry and then, but, but in the process of writing, I started, I discovered a few things. For example, why was Donald Trump elected?
Nassim Taleb – Distinguished Scientific Advisor, Universa Investments: 10:22
The first thing that effectually I wrote down is why was he, why did he what did he get the nomination? So I was, you know, I watched CNBC with the sound off. Okay. So perfectly. And, and that was watching. And then I saw the scene was Donald Trump to beating 12 people or whatever, that it was. A sound was up. Not that it makes any difference, but still very important. Symbolically, I looked at it, I said, this guy’s going to make it. It was during the nomination. And then I was wondering, so I started, I don’t know why it hit me, that this guy’s going to make it. And I started telling everyone the doormat, everyone, you know, the Uber driver, social kind of thing, you know, so excited. It’s like information. Why? Because then I realized him because he was alive and the others were sort of like dead and wondering why it’s another, there was a smear campaign against them and the New York times that he lost $1 billion, but losing $1 billion makes you real.
Nassim Taleb – Distinguished Scientific Advisor, Universa Investments: 11:27
You see, you have skin in the game. You’re not, you know, playing with numbers and not some bureaucrats. So losing $1 billion if it’s your own money makes you sort of a, you know, a real person. So what was the history and look that a lot of things with, you know, how people trumpet that there is speaking the society, how Roman emperors for example, two thirds Roman emperors died and how people did not give any respect to number stakers, whether economic risk takers or physical risk takers to third of the Roman, as I said, that battle, but largely the battle by the violent deaths. The rest may be poison, but largely that violent thing was a badge of honor. Like people, you know, showing their scar.
Gillian Tett – Editor at Large, Financial Times: 12:19
So you need to have leaders who look as if they’ve actually taken risks in order to earn and understand status.
Nassim Taleb – Distinguished Scientific Advisor, Universa Investments: 12:24
So status skin was risk-taking. Exactly. So I have a few of said, maybe he’s not, he’s effective speakers, but he fixed it very well. Right. Cause and all of these attacks by the New York guys built him and sure enough, that’s what we’ll, you know, we, we know the rest of the story. So, and that was, I didn’t put it you know as an edit that’s footnote, you know, related footnote to antifragile. But they had the feeling that’s what people want.
Gillian Tett – Editor at Large, Financial Times: 12:55
So do you think we need today to be thinking much more clearly about where people actually have skin in the game and when they don’t in terms of evaluating whether we’re going to invest in an institution or what kind of policy framework we wanted to design. I mean, should we be talking much more about that?
Nassim Taleb – Distinguished Scientific Advisor, Universa Investments: 13:13
Yeah. Well, you are an anthropologist. Yeah. And that’s part of the reason we’re friends. I mean, give a compliment the best of at least Financial Times, the best person, but the most qualified or the deepest end of course, probably wrong all the London journals, but and of course New York ones, but the so the reason, so you have to answer. So you have to answer my question. You can answer the question. Okay. People detected that Laurie can only be a Lord if he takes risks on behalf of others because you are treating status or his thinking, which is why during the Falkland war, they forced one of those princes to take more risks with you. What’s the point of view in the Lord? Okay. And I suspect the French revolution happened because you had a cast of people who were lords and novel men without respecting and doesn’t work.
Nassim Taleb – Distinguished Scientific Advisor, Universa Investments: 14:16
Plus a Louie the 14 created a new class of people. Now bless the hub. People who are you know measure threats will became something that didn’t work. I mean, you know, you don’t mind if someone with X more risk has a high ranker society, but your mind that someone holds, you know, it doesn’t take risk. And it’s the same thing in economic life that people don’t mind if a trader makes a lot of money or someone makes a lot of money. Entrepreneur makes a lot of my Steve jobs gets, no, nobody’s bothered that the chairperson of the company or basically it don’t have any downside risk. It has a free option, makes more than X number what the truck driver of the company makes. That upsets people, right? So people detected so, in societies, those, there’s practically one society I found where the highest rank was not the restatement, the physical respect from all the societies I looked at.
Gillian Tett – Editor at Large, Financial Times: 15:20
So when you look at the current environment today in America and we had a remarkable statement by Ray Dalio yesterday who said that rising income inequality is going to lead people fighting each other and creating global instability. We have a lot of concern about whether the financial system as it’s currently constituted is stable or not. Are you concerned or do you not concern, but do you expect to see America see a sort of big upsurge in political upheaval?
Nassim Taleb – Distinguished Scientific Advisor, Universa Investments: 15:53
I think it’s the other way. There was a reaction against people that’s going in the game that’s going to gain running. Bureaucrats have, this is a reaction to Brexit as a reaction to get through the most important chapter. I mean the least interesting chapter for me, the sort of like a parody I put on a web that had, that was immediately pirated in Russia right after I posted this on a way of called intellectual yet idiot. People who are very good at school or are good at taking exams, hired by poor people who are good at taking exams and populating administration and especially, I’m becoming very opaque. And I’ll give you an idea. The ministers come and go in the UK. So the minister after reading skin in the game called me up. He said, listen, you’re unfair to me why I have not been following my ministry.
Nassim Taleb – Distinguished Scientific Advisor, Universa Investments: 16:45
He said, it’s opaque, you know, you don’t even know who owns wishing decision. And I’m here, you know, for maybe a year, maximum three years. Okay. These people have been here for 30 years and it’s like a calf gas Gasol. Nobody knows what’s happening in Europe. And all of these are big, large administrations. Washington. The deep state. It’s not like the deep States, the deep administration. So this is what people are detecting and they get it. People get it. They’re like, you’re an anthropologist. You know, people get it. People they know when there’s sort of like taken for a ride. I mean maybe not immediately, but it doesn’t take long. Maybe a century is long enough for people to figure it out. So that I intellectual yet idiot was published before, before the election, before Trump’s election. And not sure I say people are writing in India where they sort of not like bureaucrats.
Nassim Taleb – Distinguished Scientific Advisor, Universa Investments: 17:43
I mean, I can understand. I mean the know bureaucrats are not more than, but there is a reason it’s, there’s a the government controls today 10 times more as proportional GDP. What is controlled in mechanisms like I’ve seen in France within 50 or 75%, it was below 7%. Sweden, you think any country, the United States less but still much more than we did a hundred years ago. So when you see that the governments are controlling more and more GDP and the agents are the bureaucrats, then you know, it doesn’t take people a too long to figure out. And then also they see that it’s the same bureaucrats also running large corporation S and P 500 the corporation, they’re like what they call the empty suit. So that piece of page on a half or maybe two pages
Gillian Tett – Editor at Large, Financial Times: 18:42
The intellectual idiot chapter, it’s called any of you look at page 123.
Nassim Taleb – Distinguished Scientific Advisor, Universa Investments: 18:50
We can find that. If you Google it on the web, you can even find it.
Gillian Tett – Editor at Large, Financial Times: 18:53
And you said earlier that that chapter when you posted it online had, was it how many downloads in Russia has immediately translated into Russian? Yeah.
Nassim Taleb – Distinguished Scientific Advisor, Universa Investments: 19:01
Presley now and for so many publishers, languages at, at some point that Huffington post posted it in Greek, in Greece. So I wrote at the bottom, anybody can copy it and publish it except the Huffington post. I mean, on the most at the bottom, you can see anybody can publish in any journal. The New York observer, what it still existed wrote to me, you know, they wanted to publish a copy of it. And of course, frustrated 3000 French, I think it has by now, 8 million downloads. If you Google you see now it’s a standard term on the web.
Gillian Tett – Editor at Large, Financial Times: 19:43
I mean, it’s basically, it’s a shriek of outrage against the bureaucracy and the bureaucratic elite. Exactly. If you like the elite that runs both of our lives and the fact you’re going to the game without skin in the game, the fact you had 8 million downloads. Yes. And people translated it voluntarily into all these languages so fast. It’s really quite striking. I mean, one of the things I find fascinating about your ideas is that you come from a really quite technically complex background of options, pricing and derivatives trading, which isn’t the sexiest thing in the world to turn into a popular best seller. You’ve produced this five part series on how to deal with uncertainty and risk, and you’ve now had what, 8 million sales and English and it’s been translated lesson four in England. Okay. Only 4 million, sorry, 4 million, few million. Who’s counting the 4 million sales in English? It’s not quite Harry Potter, but it’s still astonishing. And you’ve been translated into 41 languages. One or two languages. So the point, the point I’m trying to make about bringing us out is that you know, your ideas about risks, yes. Have really seeped into popular consciousness in quite a profound way. Anyone who’s interested in sort of tracking the way the zeitgeists change should look at this because it’s fascinating.
Nassim Taleb – Distinguished Scientific Advisor, Universa Investments: 21:05
Because it was deleted because my first book was fooled by randomness, published the, you know, 20 years almost. No, actually it was on a web 23 years ago and nobody wanted to publish it. It was still whimsical. And then of course one of the published did very well. So it’s like say 19 years old. Okay. Pulled by randomness now fooled by randomness. Those who read fooled by randomness when they’re 25. Okay, I understand that. Yeah. But for existing
Gillian Tett – Editor at Large, Financial Times: 21:35
Who read people fooled by randomness when they were 25 or younger?
Nassim Taleb – Distinguished Scientific Advisor, Universa Investments: 21:38
And is that you have to wait for it, the ordinary generation to either die or go to Florida. It’s the same thing, you know, for retire. So, so what happened that you can then I discovered you can, not to have an impact if want to have an impact with your ideas. Don’t work on people who already have, who are done. Okay. Work on kids because these kids will w you know, it’s much easier to convince someone who had, don’t have any idea than someone who has already been established in something, particularly if the idea is against their income causing answer income, which is you know, so, the main idea. So this idea, so fooled by randomness started to have an impact now. Okay. And those will read for by randomness what are now in government and stuff like that. You know, this is the send very long emails unfortunately. But there’s still some impact on perception and risk and some of the mistakes people make, but sorry, go ahead.
Gillian Tett – Editor at Large, Financial Times: 22:39
Well, I was going to say, cause I see your way, you’ve shaped the design guys. It’s fascinating. The question I have is that when you wrote black, when you wrote fooled by randomness, people didn’t want to listen to originally because the CFA and every MBA course in the world has taught for years that there isn’t such thing as a randomness. And you can actually, you know, clot it all and analyze it all. When you wrote Black Swan, again, you were writing against the tide because that was pre-financial crisis. And when Black Swan came out, no one could imagine the entire world blowing up.
Nassim Taleb – Distinguished Scientific Advisor, Universa Investments: 23:13
That I mentioned Fannie Mae was, I was targeting Fannie Mae. I had an obsessive disorder. It was spending me that lasted from 2003 until where it blew up in 2008 but that’s sort in the black Swan and make sure propel had of course, the doorman, the taxi drivers, there was no Uber. Every buddy I met, plenty me was going to go bust. Just like Fannie Mae was saying, you must destroy Carthage, you know, the Linda Cartago. So my way was ended up finding me. So Fanny me and of course went bust. So that was the you know, the message and the Black Swan is that there are a lot of structure sitting on dynamite and you can identify them.
Gillian Tett – Editor at Large, Financial Times: 23:53
So my question really now, and I’m going to turn it to the audience of questions. In a moment, but like key question, it says now black Swan has been a bestseller. Fannie Mae has gone bust. Yeah. Everyone in the room has learned in a very immediate way that systems can go bust. Does that mean that we are now today a lot safer? There won’t be another financial crisis in our lifetimes because we’re all wiser. Or do you think the financial system could go bust again or could produce another shock?
Nassim Taleb – Distinguished Scientific Advisor, Universa Investments: 24:25
To answer you is, I guess I’m certain Fannie Mae is going to go bust again the second time. In an identical way it went bust the first time this is, and the cure to that anyway is in Principia political, which is like a pamphlet on localism and on the anti-verbal list where they call it the thing that really said that institution should have a expiration date. Public funded institutional should have an expiration date because you don’t have the laws of the markets. But let me give you an idea of what’s going in the game and what inspires skin in the game. The reason is a true inspiration aside from the continuation of anti-fragile you know, I retired from trading, you know, sort of like passive, but, you know, at Universa. So I retired from trading into doing mat mass at NYU because I, I don’t know why I have no abilities in tennis and skiing and stuff like that. I mean, there’s a little skiing, but I don’t have the ability.
Nassim Taleb – Distinguished Scientific Advisor, Universa Investments: 25:26
Yeah, whatever. So a friend of mine retired. Okay. Same thing from Goldman, who was a partner in Goma, retired. And he had the idea to lose his money slowly in the restaurant business. So, so what, so what, so one day he called me up, he said, look, it’s so funny, there’s a gala dinner, okay. Where they have had, or the prizes, what the year till restaurant. And there was that gala and he said, all of these restaurants, prices, praises. We’re not there because they’re out of business. So Bailey, so now we have two categories of people, you know, because the restaurant does, you know doesn’t get the payment of your plastic, not, you know, the orange, you know, and the orange is given by home my peers, but his peers or journalists or people who are not the customer. So when you, so I figured out one thing, any business that depends on judgment of peers is going to rock academia. So they go into blind alleys where they become, you know, like some kind of close circle or something. Whereas your plumber, how do you compensate your plumber? You have a meeting of plumbers?
Nassim Taleb – Distinguished Scientific Advisor, Universa Investments: 26:39
Is your peers, you know, who was going to give you a prize and then a bonus. No, it’s your credit card or whatever. Cash under the table, whatever it is. So the two kinds of businesses, a business that has survival from PNL, okay, that’s going to, again, so in other words, you blow up, you disappear. And businesses where you’re immune to that kind of stuff where you get awards from other people. So you have people with a resume in Washington was just four or five pictures, resumes and nothing was nothing but awards. Okay. And, and of course it’s meaningless. I mean, the last week that I’ve led the head of the central bank who really was everybody knows what organizing this Ponzi scheme last week got an award or global finance award for the top central bankers and governance. The guy who was, yeah, there’s no connection between reality.
Gillian Tett – Editor at Large, Financial Times: 27:31
So you have to be connected to your customers.
Nassim Taleb – Distinguished Scientific Advisor, Universa Investments: 27:33
You have to have a P and L or some way in exits or Darwinian evolution can only work if you die or if you’re somehow, you know, like a restaurant go bankrupt, physically die or if you’re out of, out of the system, if you don’t have that, okay. The system doesn’t work. The SD has a P and, L. Okay. So the ft but, but the universities, they don’t have P and L so they can, they can sit down and they’re not accountable to anybody except their peers. So it can have like the two parallel system. So based on that, the two kind of businesses will say the plumber we know is an expert on plumbing. Okay. But some people macroeconomics, I don’t know if they’re an expert in macro economics. Well, okay. You don’t know. They may be, maybe not. Okay. People detect that person in the street detector. They know who is potentially a fraud and who’s not.
Gillian Tett – Editor at Large, Financial Times: 28:28
Well it seems like good moment to turn to the audience and see if anyone has any questions for Nassim about any of these ideas or anything else or Black Swan or risks? And as, I bet it would be courteous but not compulsory just to identify yourself, briefly.
Speaker 1: 28:58
Companies or structures on top of dynamite. I thought that was quite an image. Can you, can you give us a couple of ideas that you have on some of those sorts now?
Nassim Taleb – Distinguished Scientific Advisor, Universa Investments: 29:08
Okay. The problem, I mean I’m not going to identify cause tiny me definitely, they still use the same risk management system as still the same scam that we had last time. So it’s kind of a blow up. And again, because they don’t have a P and L they loosely found 50 billion and then be rescued. So therefore they’re fragile. There are a lot of situation in the same condition and, but I think States are the ones that also have to worry about, okay, because States have this, they’re run by bureaucrats who don’t be for what happened when you raise debt they’re no skin in the game and, and sure enough the population has to pay the price and it’s going to, if you’re going back out there. Okay. So with some States that mentioned it, which they’ve been particularly.
Gillian Tett – Editor at Large, Financial Times: 29:54
You mean state as in US?
Nassim Taleb – Distinguished Scientific Advisor, Universa Investments: 29:56
Yes. US States.
Gillian Tett – Editor at Large, Financial Times: 29:59
Well the one we’re sitting in right now is special.
Nassim Taleb – Distinguished Scientific Advisor, Universa Investments: 30:01
Yeah, exactly. I mean this is a class situation. If someone was gold, you know, ending up having junk. All right, so you have a so without number of bids or situation have.
Gillian Tett – Editor at Large, Financial Times: 30:15
Do you own it? You own it? Any muni bonds?
Nassim Taleb – Distinguished Scientific Advisor, Universa Investments: 30:18
No, I don’t want anybody with more skin in the game. Also forces me to only talk about things I have an investment then. Okay. So which is contrary to say, Oh, you know, novel practices. You only talk about things we don’t own. In fact don’t tell me what you think, tell me what you have in your portfolio because that way if you’re harmed, you know there’s, it’s ethical. You cannot harm others without being armed yourself. So if you recommend the stock, tell me what you heard as I’m not recommending. Tell me what you have. Right. I mean, what you own, what you don’t know. For example, this is one of the rules that six I have in here, but I noticed one thing that’s positive and particularly for people who, I’m not known for someone who give compliments, I gave one to the hedge fund industry inadvertently, the Obama administration created skin in the game and finance, they buy or regulating banks. Okay. A lot of the risk taking was the hedge fund. And it’s much better as thinking why because hedge funds fall without making a lot of unfolding’s that making the front page of New York times just like California technology companies.
Nassim Taleb – Distinguished Scientific Advisor, Universa Investments: 31:32
And then the other one is that when you invest with a hedge fund manager, we were arguing about the level of the investment, I guess between 25 and 70% of their assets are in their fund. And given that the largest client would have no more than 1% of her or his assets in a fund, it’s 25 to 70 times more skin in the game that any of their clients, okay. Now that is something that is making this industry healthy. You see the fact that people have, so this is why they don’t blow up, they don’t use, you know, fancy systems that don’t work. They have and then so they have an incentive for not, you know, using that method.
Gillian Tett – Editor at Large, Financial Times: 32:14
Well I think your audience is quite receptive to that message given what the demographic. Well we have a lot of questions waiting right now. We’ve got one over there and then one over there and then come over there.
Speaker 2: 32:27
You asked us to identify ourselves. I’m a person who spent time with no skin in the game. I’m Charles Miller and I ran the pension benefit guarantee corporation and oversaw a lot of failure without any skin in the game on my own part. And I think what you’ve said is very, very true. How many bureaucrats make decisions and move mountains without actually any risk to themselves. So that’s a very insightful point. I wanted to ask you on the public pension front, you mentioned that States face many problems. Who do you think has skin in the game? I would assert of course the pension recipients do, but who has skin in the game who can actually affect the outcome? And what would you do to try to solve that problem?
Nassim Taleb – Distinguished Scientific Advisor, Universa Investments: 33:09
I’m not very knowledgeable about the structure of the pension. So I don’t want to make a mistake and it usually takes me 20 years before forming an opinion. So I mean, I’m slow. I mean the Black Swan took like, I don’t know, fooled by randomness to 15 years of writing. So it takes me a while to form an opinion. So I didn’t think about it before, so I can’t ask her now on the spot.
Gillian Tett – Editor at Large, Financial Times: 33:34
But I would say we’ll see the book in 20 year’s time.
Nassim Taleb – Distinguished Scientific Advisor, Universa Investments: 33:39
But I would say that if you’re correct, you should know all right. Correct. Okay. Then the business is in trouble if none of the recipients is managing it. I see you have a good business. Like a good business is when the person managing it is a prime customer. That’s why hedge fund worth, because if the number one customer.
Speaker 3: 34:03
So, sure. So my name’s Jack Melnikov, I’m actually a founder of a hedge fund. So back to your previous point about a hedge fund. You know, I understand skin in the game, but how about the flip side where you say a manager has 25 to 75% of his net worth in the fund. How about if that manager is not acting accordingly because he’s preserving capital, he’s not taking the risk that someone wants him to take in that hedge fund may not blow up to your point, yes, but not if somebody designated to start amount of capital for a certain risk profile.
Nassim Taleb – Distinguished Scientific Advisor, Universa Investments: 34:32
Is there such a thing as too much skin in the game? Okay. Where you no longer align with your clients. Okay. A utility function because you have so much skin in the game. It’s sort of like in medicine you have a lot of cases like that. When people treat their own patients and stuff it’s not optimal policy anymore. The point is that you’ve got to communicate to clients and your track record, recent track record will reflect your risk aversion. You see clients, if you have too much skin in the game and your fun, someone very conservative would come to you. See if you’re a risk averse and if your risks in the risk loving, it will show in your in your the positions and the trading strategy. Okay. If you have 50% of your money in your fund, you’re not going to flip overnight from hyper aggressive to hyper conservative, your style. Would it be, you know would change, you know, your mood, but not too much. That’s the point. But you’re obligated to your clients that, you know what, I have a different utility is a profit. I’m going to take them. Okay. Maybe for you it’s small for me. It’s big. You’re obligated to tell them if you so long as he’s transparent.
Speaker 4: 35:52
Dr. Taleb, thank you so much. Harry. Sue doc from grid infrastructure. My question for you is what institutions out there are you betting against and what instruments are you using to bet against them?
Gillian Tett – Editor at Large, Financial Times: 36:03
Okay. A short time, but tell us your trading portfolio now.
Nassim Taleb – Distinguished Scientific Advisor, Universa Investments: 36:07
Okay. I’m bending for, okay. The first thing is you’ve got to understand that I’m an a business. They risk catching. All right? So we’re in business with Taylor’s country. The first comment I will make that people don’t understand how important their risk is because people think it’s an expense. What I view it that allows you to, without it, you shouldn’t take risks. So if you have any, and it’s misunderstood with people doing cost benefit analysis, you cannot do cost benefit analysis on a roulette. Okay? On Russian roulette. You see, so most people don’t understand the dynamics. You blow up, you, you know, all your benefits are gone. So you have to make sure to stay above water. That’s a necessity. So that’s the first comment I would make. So there’s the Taylorist visibly hedging. But I would, I would say the bets I’m making now, it’s I hit gold, but I have convex bet on gold via all these small instruments. If you have a compact bet on gold why do I hate gold? I don’t want to spend it, but why do I have golds and set some goals? I don’t know. It’s just like, if I don’t have golds, I feel bad. If I have gold, I feel bad, but not as bad. Right? So it’s not like you have all these gold bugs. So this is, I have golden GDX and stuff like that. The thing is I wore Bitcoin stocks. Okay. Because I haven’t been able yet to because regulartory reasons to to invest in the right platform. So I have the stocks now. None of it, I’m getting into it, but I also, so I have the Bitcoin sock. I don’t have Bitcoin investment. Okay. I’m French bank and it’s sort of like also like I bought euros. I hate the Euro. Do I own it? I feel obligated. I don’t know why. So, so there’s a lot of things when you, when you have skin in the game, you don’t have to explain things. Okay. You’re just telling what you’re doing and say it with a vague impression of it. Look, I had gotten the game so I could never rationalize why I own gold, but I cannot not own it. There’s something about the environment is price action and stuff like that. And of course you got to be, I also have short thing that blow, you know, make money if there’s a rise in interest rates and is it from rational reason?
Nassim Taleb – Distinguished Scientific Advisor, Universa Investments: 38:30
Yes. Interest rates, low levels can rise but cannot, you know, go very nice. Very off the targetable another one, maybe there’s this, maybe there’s something else, but at least there’s this, I feel comfortable having a hedge against infantry. And then also I started to see inflation. You know, they don’t have too much of, maybe the, they don’t have measured inflation because you get, I don’t know if the size of you, you’ve had a staycation. Unless you go to the places that just sell steaks and declares at 16 hours, the prize of the stakes has been, you know, and burrata portions shrinking. So you have inflation that’s not measured by the things. Every time I’ve got a smaller stake. I buy gold on the spot. Right. So, that’s what I’ve been doing.
Speaker 5: 39:21
Rick Ross, I work with family office and also I’m the Connecticut pension fund oversight committee. It sounds like a great book. If I’m correct, you’re talking about asymmetry and optionality in daily life. Can you give some examples? I’ve been looking for this.
Nassim Taleb – Distinguished Scientific Advisor, Universa Investments: 39:41
Mostly about reducing negative optionality. Like for example, you’re CEO of a company, they say, well, you know, look, you transfer your risk to the pension fund to transfer it to shareholder and the lunch with the taxpayer, for example. Or if you were the big, the veteran wire in here. To me, the, the really person I focused on is the think tank person or bureaucrats in Washington causing Wars. And of course not being accountable for it towards, in the past Roman emperors, of course we’re at the front of that. And not just Roman emperors, Hannibal, Napoleon, they were that an appointment, maybe less, but you take a cannibal traditionally the person wages or the Byzantine emperors and battle. I mean for them it’s, they have to be more exposed than otherwise they’re not.
Nassim Taleb – Distinguished Scientific Advisor, Universa Investments: 40:39
So, and now we have the reverse. So it was first generation in history. George Bush, the father, remember was, was a prisoner of war. Okay. So something happened in that January was in a generation who removed that skin in the game with Wars. Now the led like computer games. So this is what I worry about morally. And of course risk-wise so, so this is my bet more the person I hit the most is let’s say someone like, what’s his name? I mentioned every time, I shouldn’t name, I get angry, but it’s good for weightlifting because when you want to lift that thing, you know, you get angry that the better. The Thomas Friedman for me, he used to meet a horror society. He causes Wars and then he’s an air conditioning office. So every time I mentioned his name, I got angry would, I’ve seen him. So like for example, so the personal closing wards, yeah, go ahead.
Gillian Tett – Editor at Large, Financial Times: 41:43
Is there any more questions? Well, cause the other question I had we’ve only got a few more minutes, but unless anyone’s got any more questions, what next you’ve laid out this five part series on how to rethink risk, as you say, in addition to the five-part sellers and the books, there’s also a series of academic papers and some quite beautifully illustrated essays that you’ve done with your own illustrations that you can find on lines for free. But what next do you think you now understand risk?
Nassim Taleb – Distinguished Scientific Advisor, Universa Investments: 42:17
No, I, I, it was basically the whole idea of the inserta though I understand one thing, it took me 25 years to get that point. See, I’m slow as slow as I understood the Inserta. Who’s traveling here today? Brian. Okay. Are fine. If someone tells you that there’s uncertainty about the skills of the pilot, what do you do when you do? Very good. All right, so the more uncertainty there is an assistant these years, the decision. If Warren buffet is uncertain about a company, what does he do there? A part, the annual report. So it took me a long time to figure out that you don’t have to take risk. So that solves a lot of problems that the climate, there’s a lot of uncertainty in the models and that things are horrible. So I wrote a paper and I was attacked by both sides, which is great, right? That the more uncertainty you have about the climate the less we should pollute simply because we don’t know whether the effect is because these models are wrong.
Nassim Taleb – Distinguished Scientific Advisor, Universa Investments: 43:17
Which is the opposite. So that’s the measurement of the circle. If you don’t know what’s going on, it’s much easier to make a decision then if you know what’s going on. So I started with the, in a way how to handle it. It’s about, that’s the message. Now, the next step from this is I have some technical stuff that will may affect some people may not like it here, but no, no. Yeah. Technically they won’t like the showing exactly. Why the Euro finance is nonsense. Why nudge is nonsense and why a pretty much risk parity messes are nonsense. And then the people who really got it right from the beginning are people who made sure you’re, you’re know, to optimize in certain way like Kelly criteria and all that group of people, they had it right and everything was done in economics because you know, no skin in the game, you know, they need to publish papers judged by people who publish papers. So what do you guys in UK called? A self-licking lollipop. All right. So that academia Marco with all these models, mother and they don’t work. Okay, but there’s others at work and, and I’m doing something tech, not technical, I’m done. You know inflammatory piece on that.
Gillian Tett – Editor at Large, Financial Times: 44:41
So the anti-risk parity.
Nassim Taleb – Distinguished Scientific Advisor, Universa Investments: 44:43
No risk parity makes absolutely no sense mathematically. All right? So why do people use it? You know, if you do this, if so, what is fraud should be, you know, it’s fraud and you’re not going to change it. Marco, which is nonsense because you say outside the gushing world, it doesn’t work. And then there are a lot of things that are very robust. Okay. Like all the gambling literature, all the stuff on information theory, all the stuff from Kelly criteria and they work a lot better. So the whole idea comes from the fact that you can, you have to optimize on as if you’re going to redo the same thing tomorrow and the day after the day after and this is how they approach things, right. And then therefore you need room to blow up because once it can’t continue. So, and that’s the last chapter is because the logic of speaking it takes me, I mean I’ve traded for, I mean about something like 30 some year, 37 years after starting to trade, I finally understood stuff that wasn’t my guts. So it makes, it takes a while for things to go from your gut to your brain.
Nassim Taleb – Distinguished Scientific Advisor, Universa Investments: 45:52
So, finally I explained it, the never crossed the river on average four feet deep and stuff like that was very elementary stuff. But let me tell you, I’m going to ask you a question. You’re an archaeologist. There are a lot of stuff that the difference between archeologists and those psychologists is as follows, the psychologist, if you were doing something wrong, archeologists know and they try to find a survival reason for it. So if someone has weird beliefs that you never sleep on the coast, you should go up because your ancestors you know, ghost may come haunt you, right? For example, it’s psychologists, it’s irrational, right? The sort of irrational as an anthropologist would say, well, maybe that’s a way they survive by having these weird beliefs because it’s easier to market. Right? Okay. And then therefore they survived tsunamis because they never sleep on low ground, for example. So I think that you can detect if you in the world from that standpoint, instead of summarizing, weird things you can detect that what’s happening with the beliefs of people in the street that people are sort of fed up with the system that makes no sense to them. That IYI psychologists and economist and macro economist and all of that. Okay. So do you agree with me?
Gillian Tett – Editor at Large, Financial Times: 47:16
I would strongly agree that anyone who says populism has just, you know, exploded by chance or as a futile gesture because of irrationality is wrong. Yes. So populism as said yesterday reflects something quite under quite fundamental in the current system. Political volatility does too. And that’s going to be a very interesting question, but we are very sadly out of time. You’ve given us an amazing set of ideas for 25 years. All I’d say is here’s for the next 25 and I have no doubt that your next 25 year’s worth of ideas that are currently moving from your gut to your head are going to be just as influential. So thank you.