WEBVTT 00:00:00.000 --> 00:00:02.140 OK, let's unpack this. I want you to imagine 00:00:02.140 --> 00:00:05.019 a character for a second. And if you saw this 00:00:05.019 --> 00:00:06.660 guy in a movie, you'd probably think, you know, 00:00:06.740 --> 00:00:08.779 the screenwriters were trying a little too hard. 00:00:08.800 --> 00:00:11.859 A bit over the top. Yeah, exactly. He is at the 00:00:11.859 --> 00:00:14.439 same time considered one of the hottest thinkers 00:00:14.439 --> 00:00:17.160 in the world by the mainstream press. And that's 00:00:17.160 --> 00:00:19.539 a direct quote from The Times. And yet this is 00:00:19.539 --> 00:00:23.859 the very same guy who explicitly and loudly calls 00:00:23.859 --> 00:00:27.379 for the the discontinuation of the Nobel Prize 00:00:27.379 --> 00:00:29.870 in economics. It's a contradiction right out 00:00:29.870 --> 00:00:31.690 of the gate, isn't it? It gets so much better. 00:00:31.750 --> 00:00:34.189 He's a trader who made what he technically calls 00:00:34.189 --> 00:00:37.090 fuck you money. And you have to excuse the language, 00:00:37.149 --> 00:00:40.130 but we're quoting the man himself by betting 00:00:40.130 --> 00:00:42.170 on the world falling apart. So he gets rich when 00:00:42.170 --> 00:00:44.729 everyone else is, well, panicking. Panicking, 00:00:44.729 --> 00:00:47.609 crying, losing their homes. But he's not just 00:00:47.609 --> 00:00:50.750 some greedy Gordon Gekko type. He's also a scholar 00:00:50.750 --> 00:00:53.960 who, you know. reads Aramaic and Canaanite script 00:00:53.960 --> 00:00:56.520 for fun. He lifts heavy weights, he refuses to 00:00:56.520 --> 00:00:58.939 eat sugar, and he gets into these epic Twitter 00:00:58.939 --> 00:01:01.840 fights with Nobel laureates. It is quite the 00:01:01.840 --> 00:01:04.159 juxtaposition. We are talking, of course, about 00:01:04.159 --> 00:01:07.900 Nassim Nicholas Taleb. And you're right. He occupies 00:01:07.900 --> 00:01:11.640 this very strange, almost unclaimed space in 00:01:11.640 --> 00:01:13.420 the intellectual world. I mean, he isn't just 00:01:13.420 --> 00:01:16.180 an academic. In fact, he sort of despises the 00:01:16.180 --> 00:01:18.599 academic establishment. Well, he hates it. And 00:01:18.599 --> 00:01:20.920 he certainly isn't just a Wall Street guy, even 00:01:20.920 --> 00:01:22.939 though he completely beat Wall Street at its 00:01:22.939 --> 00:01:25.079 own game. If you look at how he describes himself, 00:01:25.280 --> 00:01:29.120 he uses these interesting terms, mathematical 00:01:29.120 --> 00:01:33.859 statistician. aphorist and my personal favorite 00:01:33.859 --> 00:01:36.939 epistemologist of randomness epistemologist of 00:01:36.939 --> 00:01:39.219 randomness yeah that really sounds like a job 00:01:39.219 --> 00:01:41.060 title you make up to stop people from asking 00:01:41.060 --> 00:01:43.769 what you do at a party You know, oh, me, I'm 00:01:43.769 --> 00:01:45.810 just an epistemologist of randomness. Could you 00:01:45.810 --> 00:01:47.730 pass the shrimp? Right. But in his case, it's 00:01:47.730 --> 00:01:49.829 actually incredibly accurate, isn't it? It is. 00:01:49.870 --> 00:01:52.549 It's technically precise. Epistemology is the 00:01:52.549 --> 00:01:54.609 study of knowledge. It's how we know what we 00:01:54.609 --> 00:01:57.030 know. So he studies how we know things or maybe 00:01:57.030 --> 00:01:59.310 more importantly, how we don't know things, specifically 00:01:59.310 --> 00:02:02.890 when it comes to luck and uncertainty and, you 00:02:02.890 --> 00:02:04.849 know, chaos. And the reason we're doing the deep 00:02:04.849 --> 00:02:06.730 dive on him today isn't just because he has a 00:02:06.730 --> 00:02:09.550 fancy title or wrote some massive bestsellers. 00:02:09.889 --> 00:02:12.669 It's because the stakes of his idea. are, well, 00:02:12.750 --> 00:02:15.930 they're incredibly high. This is the man credited 00:02:15.930 --> 00:02:19.219 with predicting the 2008 financial crisis. And 00:02:19.219 --> 00:02:21.159 we really have to be clear about that. It wasn't 00:02:21.159 --> 00:02:23.379 just predicting it in the way a pundit on TV 00:02:23.379 --> 00:02:25.699 says, oh, the market looks a little frothy. Right, 00:02:25.780 --> 00:02:27.840 like a weatherman saying it might rain next week. 00:02:27.860 --> 00:02:31.280 No, this is different. He actually put his money 00:02:31.280 --> 00:02:33.479 where his mouth was and made a literal fortune 00:02:33.479 --> 00:02:35.599 from it while everyone else was losing their 00:02:35.599 --> 00:02:37.599 shirts. Exactly. And that is the hook, really. 00:02:37.699 --> 00:02:39.960 We live in a world that feels increasingly chaotic. 00:02:40.120 --> 00:02:42.840 We have pandemics, market crashes, political 00:02:42.840 --> 00:02:46.159 upheavals, supply chain collapses. It just goes 00:02:46.159 --> 00:02:49.360 on. Cullib's entire philosophy, which he calls 00:02:49.360 --> 00:02:52.520 the inserto, is essentially a roadmap for navigating 00:02:52.520 --> 00:02:56.379 that very chaos. But, and we have to be honest 00:02:56.379 --> 00:02:59.560 here, he is also a deeply polarizing figure. 00:02:59.699 --> 00:03:01.759 This is the guy who called famous economists 00:03:01.759 --> 00:03:06.020 idiots and suggested bankers need, quote, punishment. 00:03:06.479 --> 00:03:09.199 He does not mince words. Oh, absolutely not. 00:03:09.319 --> 00:03:10.900 And we are definitely going to get into the beefs. 00:03:10.960 --> 00:03:14.000 I have to say the section on his feuds is my 00:03:14.000 --> 00:03:15.879 favorite part of our research stack. It's like 00:03:15.879 --> 00:03:18.039 intellectual pro wrestling. It really is. But 00:03:18.039 --> 00:03:20.159 before we get to the name calling, we need to 00:03:20.159 --> 00:03:22.120 sort of frame the mission of this deep dive. 00:03:22.219 --> 00:03:24.520 If you're listening to this, you've. almost certainly 00:03:24.520 --> 00:03:28.080 heard the term black swan. Oh, yeah. It's everywhere. 00:03:28.280 --> 00:03:31.580 It's become such a buzzword that corporate managers 00:03:31.580 --> 00:03:34.400 use it to excuse missing their quarterly targets. 00:03:34.580 --> 00:03:36.800 You know, oh, we missed our sales numbers. It 00:03:36.800 --> 00:03:39.340 was a black swan event. Which is, more often 00:03:39.340 --> 00:03:42.340 than not, a complete misuse of the concept. And 00:03:42.340 --> 00:03:45.120 it drives Taleb absolutely crazy. But we'll get 00:03:45.120 --> 00:03:48.060 to that. The goal today is to move beyond the 00:03:48.060 --> 00:03:50.629 buzzwords. We want to help you, the learner, 00:03:50.830 --> 00:03:54.250 understand the underlying philosophy of the inserto. 00:03:54.389 --> 00:03:56.949 We're going to look at how to build robustness, 00:03:56.990 --> 00:03:58.990 as he calls it, in your own life. We're going 00:03:58.990 --> 00:04:01.449 to talk about why, according to Taleb, you might 00:04:01.449 --> 00:04:04.090 be exercising all wrong or investing all wrong. 00:04:04.370 --> 00:04:06.189 And we're going to try to answer the big question. 00:04:06.650 --> 00:04:09.469 How do you live in a world you don't and really 00:04:09.469 --> 00:04:12.919 can't understand? And to do that, we have a massive 00:04:12.919 --> 00:04:15.539 stack of sources. We're pulling from his biography. 00:04:15.620 --> 00:04:18.100 We're looking at the entire inserto book series 00:04:18.100 --> 00:04:20.939 that's Fooled by Randomness, The Black Swan, 00:04:21.279 --> 00:04:24.579 Anti -Fragile, Skin in the Game, and his book 00:04:24.579 --> 00:04:27.019 of aphorisms, The Bed of Procrustes. Plus we've 00:04:27.019 --> 00:04:29.220 got his technical papers, you know, the ones 00:04:29.220 --> 00:04:31.279 with all the heavy math and the public records 00:04:31.279 --> 00:04:34.500 of his many, many arguments. It's a pretty comprehensive 00:04:34.500 --> 00:04:37.720 look at a very complex man. And to really understand 00:04:37.720 --> 00:04:39.519 the philosophy, you have to understand where 00:04:39.519 --> 00:04:42.680 it came from. Because Taleb's obsession with 00:04:42.680 --> 00:04:46.019 the unexpected, with randomness, it didn't start 00:04:46.019 --> 00:04:48.199 on a trading floor in New York. No, it started 00:04:48.199 --> 00:04:50.660 in the Levant. Exactly. OK, so let's rewind. 00:04:50.800 --> 00:04:53.639 Segment one, the origin story. Nassim Nicholas 00:04:53.639 --> 00:04:56.560 Taleb was born in 1960 in a town called Amayoun 00:04:56.560 --> 00:04:59.060 in Lebanon. And looking at his family background, 00:04:59.259 --> 00:05:01.180 we aren't talking about a humble beginning here. 00:05:01.279 --> 00:05:04.180 This is, for all intents and purposes, aristocracy. 00:05:04.699 --> 00:05:07.079 Very much so. His family was wealthy, they were 00:05:07.079 --> 00:05:09.160 influential, and they were part of the Greek 00:05:09.160 --> 00:05:11.540 Orthodox Christian community. And if you look 00:05:11.540 --> 00:05:14.720 at the lineage, it's pretty impressive. His maternal 00:05:14.720 --> 00:05:17.879 grandfather, Fuad Nicholas Ghosn, and his great 00:05:17.879 --> 00:05:20.160 -grandfather, Nicholas Ghosn, were both deputy 00:05:20.160 --> 00:05:22.899 prime ministers of Lebanon. Deputy prime ministers. 00:05:23.079 --> 00:05:25.199 I mean, that's serious power. That's the kind 00:05:25.199 --> 00:05:27.160 of family where you grow up assuming the world 00:05:27.160 --> 00:05:29.600 is basically yours to shape and that the structures 00:05:29.600 --> 00:05:32.160 all around you are rock solid. And it goes even 00:05:32.160 --> 00:05:35.180 deeper. His paternal grandfather was a Supreme 00:05:35.180 --> 00:05:37.939 Court judge. His great, great, great, great grandfather, 00:05:38.160 --> 00:05:40.259 I think I got that right, four greats, was on 00:05:40.259 --> 00:05:42.399 the board of directors to the administrator of 00:05:42.399 --> 00:05:45.079 Mount Lebanon. So, you know, young Nassim grows 00:05:45.079 --> 00:05:47.279 up in this environment of immense stability, 00:05:47.579 --> 00:05:50.379 prestige, and a French education. He went to 00:05:50.379 --> 00:05:52.860 the Grand Lycée, Franco -Libanais, and Beirut. 00:05:52.959 --> 00:05:55.009 So just picture this for a moment. You're this 00:05:55.009 --> 00:05:57.889 kid in a hugely prominent family. Everything 00:05:57.889 --> 00:06:00.350 seems permanent. You have the status. You have 00:06:00.350 --> 00:06:02.370 the money. You have the history. You're living 00:06:02.370 --> 00:06:04.589 in Beirut, which at the time was literally called 00:06:04.589 --> 00:06:07.230 the Paris of the Middle East. It was cosmopolitan, 00:06:07.230 --> 00:06:11.629 cultured, safe. And then 1975 happens. The Lebanese 00:06:11.629 --> 00:06:15.449 Civil War. This is the first black swan in Taleb's 00:06:15.449 --> 00:06:17.509 life, even if he didn't have that term for it 00:06:17.509 --> 00:06:21.550 yet. The war begins, and it essentially reduces 00:06:21.550 --> 00:06:24.310 his family's political prominence and their wealth 00:06:24.310 --> 00:06:28.209 to, well, to rubble. It's really hard to overstate 00:06:28.209 --> 00:06:30.230 how shocking that must have been, to go from 00:06:30.230 --> 00:06:32.189 being part of the reeling class, living in a 00:06:32.189 --> 00:06:35.639 mansion, to a war zone almost overnight. And 00:06:35.639 --> 00:06:37.579 this is absolutely crucial for understanding 00:06:37.579 --> 00:06:40.259 his entire worldview. Most of us in the West, 00:06:40.379 --> 00:06:42.819 especially in the late 20th century, we grew 00:06:42.819 --> 00:06:44.519 up with a sense of gradualism. You know, the 00:06:44.519 --> 00:06:47.079 idea that things change slowly, that the future 00:06:47.079 --> 00:06:49.079 will look pretty much like the past just with 00:06:49.079 --> 00:06:51.779 better phones. Taleb's formative experience was 00:06:51.779 --> 00:06:54.259 the exact opposite. It was that the established 00:06:54.259 --> 00:06:56.860 order can be dismantled overnight by a sudden 00:06:56.860 --> 00:07:00.360 unexpected event. The entire structure of society 00:07:00.360 --> 00:07:03.560 was, in his eyes, incredibly fragile. So the 00:07:03.560 --> 00:07:05.879 lesson he learned at 15 wasn't from a textbook. 00:07:06.079 --> 00:07:08.720 It was that stability is often just an illusion. 00:07:09.100 --> 00:07:11.899 Precisely. And he realized that the people in 00:07:11.899 --> 00:07:14.300 charge, the politicians, the experts, the people 00:07:14.300 --> 00:07:16.639 just like his grandfather, they didn't see it 00:07:16.639 --> 00:07:18.259 coming. They were all very confident, but they 00:07:18.259 --> 00:07:20.970 were all wrong. That seems to be the seed of 00:07:20.970 --> 00:07:23.050 everything that comes later. But despite the 00:07:23.050 --> 00:07:26.170 war, he clearly kept up with his studies. I mean, 00:07:26.230 --> 00:07:29.850 the man is a walking encyclopedia. He is a polyglot 00:07:29.850 --> 00:07:32.089 scholar in the truest sense of the word. He has 00:07:32.089 --> 00:07:34.089 a bachelor and master of science from the University 00:07:34.089 --> 00:07:36.730 of Paris. He gets an MBA from Wharton, which 00:07:36.730 --> 00:07:39.910 he got in 1983. And then much later, he goes 00:07:39.910 --> 00:07:41.829 back and gets a PhD in management science from 00:07:41.829 --> 00:07:43.949 the University of Paris Dauphine. But beyond 00:07:43.949 --> 00:07:46.350 all the degrees, it's the languages that really 00:07:46.350 --> 00:07:48.399 stand out to me. Yeah, the list is intimidating. 00:07:48.680 --> 00:07:50.839 He's fluent in French, English, and classical 00:07:50.839 --> 00:07:53.339 Arabic. But then the source material says he 00:07:53.339 --> 00:07:55.879 also speaks Italian and Spanish. And he reads, 00:07:55.899 --> 00:07:58.879 get this Greek, Latin, Aramaic, ancient Hebrew, 00:07:59.000 --> 00:08:02.519 and Canaanite script. Why? I mean, why the obsession 00:08:02.519 --> 00:08:04.199 with dead languages? Is he just showing off, 00:08:04.279 --> 00:08:06.560 look at me, I can read the Rosetta Stone. I don't 00:08:06.560 --> 00:08:08.660 think it's just a parlor trick. That linguistic 00:08:08.660 --> 00:08:12.069 depth that really informs his philosophy. Taleb 00:08:12.069 --> 00:08:14.990 has a deep preference for classical wisdom, you 00:08:14.990 --> 00:08:16.889 know, the stuff that has survived for thousands 00:08:16.889 --> 00:08:20.129 of years over modern theory. Okay, that makes 00:08:20.129 --> 00:08:23.250 sense. When you can read the original texts of 00:08:23.250 --> 00:08:25.569 the ancients in their own scripts, you get a 00:08:25.569 --> 00:08:27.750 very different perspective on risk and human 00:08:27.750 --> 00:08:30.709 nature than if you're just, say, reading a modern 00:08:30.709 --> 00:08:33.600 summary in a business book. He sees the continuity 00:08:33.600 --> 00:08:36.340 of human folly. He believes that the ancients, 00:08:36.360 --> 00:08:38.679 like the Stoics or even Babylonian merchants, 00:08:39.000 --> 00:08:42.240 understood how to deal with randomness far better 00:08:42.240 --> 00:08:44.720 than modern economists do. Because they lived 00:08:44.720 --> 00:08:46.779 in a world where, I don't know, death was around 00:08:46.779 --> 00:08:49.139 every corner. Exactly. They didn't have insurance 00:08:49.139 --> 00:08:51.039 companies or central banks to bail them out. 00:08:51.080 --> 00:08:54.000 They had to be robust. If a storm hit your ship, 00:08:54.100 --> 00:08:57.299 you lost everything, period. So they structured 00:08:57.299 --> 00:08:58.940 their lives and their businesses differently. 00:08:59.699 --> 00:09:02.279 Taleb connects more with a Roman senator than 00:09:02.279 --> 00:09:04.360 he does with a modern day trader. So he's got 00:09:04.360 --> 00:09:07.200 this classical education. He's got this war -torn 00:09:07.200 --> 00:09:09.279 background. And then he heads to Wall Street. 00:09:10.019 --> 00:09:12.159 This is where the rubber really meets the road. 00:09:12.399 --> 00:09:14.809 He starts working as a trader. Right. And he 00:09:14.809 --> 00:09:17.110 wasn't at some small firm. He worked at major 00:09:17.110 --> 00:09:20.669 institutions. Credit Suisse, First Boston, BNP 00:09:20.669 --> 00:09:23.690 Paribas, the Chicago Mercantile Exchange. He 00:09:23.690 --> 00:09:26.269 was a pit trader, an options trader. He was in 00:09:26.269 --> 00:09:28.649 the trenches. And this is where he started to 00:09:28.649 --> 00:09:30.929 see that the math that everyone was using to 00:09:30.929 --> 00:09:33.610 predict the markets was, in his view, fundamentally 00:09:33.610 --> 00:09:37.149 broken. And he proved it in a big way in 1987. 00:09:38.000 --> 00:09:40.519 Black Monday. This was his breakout moment. While 00:09:40.519 --> 00:09:42.580 everyone else was likely following the sophisticated 00:09:42.580 --> 00:09:45.100 models that said a crash of that magnitude was 00:09:45.100 --> 00:09:47.320 statistically impossible. I mean, literally something 00:09:47.320 --> 00:09:49.879 that shouldn't happen in a billion years. Taleb 00:09:49.879 --> 00:09:52.720 was holding a hedged short euro dollar position. 00:09:52.960 --> 00:09:56.799 OK, in plain English, because hedged short euro 00:09:56.799 --> 00:09:59.440 dollar position. Right. Sounds like complete 00:09:59.440 --> 00:10:02.460 gibberish to most of us. Yeah, fair enough. Basically, 00:10:02.519 --> 00:10:04.659 he was betting that things would go very, very 00:10:04.659 --> 00:10:07.059 wrong. He bought options that were incredibly 00:10:07.059 --> 00:10:09.720 cheap because the consensus was the market is 00:10:09.720 --> 00:10:12.340 stable, nothing bad will happen. So he bought 00:10:12.340 --> 00:10:15.039 these dirt cheap options, pennies on the dollar, 00:10:15.120 --> 00:10:18.740 that would pay out massively if and only if the 00:10:18.740 --> 00:10:21.759 market crashed. He was betting on chaos. And 00:10:21.759 --> 00:10:24.320 then chaos arrived. It did. When the market crashed, 00:10:24.559 --> 00:10:26.240 he reportedly became financially independent 00:10:26.240 --> 00:10:28.980 from that one event. That trade gave him what 00:10:28.980 --> 00:10:31.600 he calls freedom from authority. He never had 00:10:31.600 --> 00:10:33.759 to answer to a boss again. That is the absolute 00:10:33.759 --> 00:10:35.700 dream, isn't it? To have enough money that you 00:10:35.700 --> 00:10:38.019 can say whatever you really think without ever 00:10:38.019 --> 00:10:40.120 worrying about being fired. But he didn't just 00:10:40.120 --> 00:10:42.299 stop there. He started his own fund, Empirica 00:10:42.299 --> 00:10:45.799 Capital, in 1999. And then, of course, we hit 00:10:45.799 --> 00:10:48.559 the dot -com bubble. And again, the same pattern 00:10:48.559 --> 00:10:51.779 repeats itself. In 2000, when the bubble finally 00:10:51.779 --> 00:10:54.820 burst and the Nasdaq just took a nosedive, his 00:10:54.820 --> 00:10:59.940 fund, Empirica Kratosis LLC, made a 56 .86 % 00:10:59.940 --> 00:11:02.919 return. While everyone else was losing their 00:11:02.919 --> 00:11:04.759 shirts because they thought tech stocks could 00:11:04.759 --> 00:11:08.360 only go up, remember Pets .com, Ebb was positioned 00:11:08.360 --> 00:11:11.360 for the crash. Kratosis? It's a statistical term, 00:11:11.399 --> 00:11:13.590 right? It's not just a cool name. It is. It refers 00:11:13.590 --> 00:11:16.690 to the tails of a distribution curve. We'll get 00:11:16.690 --> 00:11:18.950 into fat tails later on. But basically, he named 00:11:18.950 --> 00:11:21.850 his fund after the very statistical concept that 00:11:21.850 --> 00:11:23.870 everyone else was ignoring. This idea that extreme 00:11:23.870 --> 00:11:26.029 events happen way more often than we think. And 00:11:26.029 --> 00:11:28.149 then, of course, the big one, the 2008 financial 00:11:28.149 --> 00:11:30.480 crisis. By this time, he's not running his own 00:11:30.480 --> 00:11:33.000 fund, but he's an advisor to a fund called Universa 00:11:33.000 --> 00:11:35.279 Investment. Correct. And he advised them on a 00:11:35.279 --> 00:11:37.659 strategy that was explicitly based on his black 00:11:37.659 --> 00:11:40.720 swan idea. In October of 2008, when the entire 00:11:40.720 --> 00:11:43.179 global financial system was melting down, some 00:11:43.179 --> 00:11:46.320 of Universa's funds returned between 65 % and 00:11:46.320 --> 00:11:50.399 115%. In one month. That is astronomical. While 00:11:50.399 --> 00:11:52.480 the S &P is tanking, they're literally doubling 00:11:52.480 --> 00:11:55.200 their money. It's incredible. And it totally 00:11:55.200 --> 00:11:57.740 cemented his reputation. But what's so fascinating 00:11:57.740 --> 00:12:00.879 is Taleb's attitude about it. He didn't just 00:12:00.879 --> 00:12:03.720 want to be some rich hedge fund guy. He claimed 00:12:03.720 --> 00:12:05.980 back in 2007 that he was retiring from trading 00:12:05.980 --> 00:12:08.679 to be a full -time author. He considers himself 00:12:08.679 --> 00:12:12.460 an epistemologist, not a businessman. He just 00:12:12.460 --> 00:12:14.879 used trading to buy his freedom so he could sit 00:12:14.879 --> 00:12:17.200 around and think about randomness without having 00:12:17.200 --> 00:12:20.240 to sell anything to anyone. Which brings us perfectly 00:12:20.240 --> 00:12:24.259 to segment two, the inserto. This is the body 00:12:24.259 --> 00:12:26.700 of work that he created with that freedom. And 00:12:26.700 --> 00:12:28.639 the source material is very specific. This isn't 00:12:28.639 --> 00:12:30.460 just five separate books that happen to be by 00:12:30.460 --> 00:12:32.500 the same author. No, not at all. You have to 00:12:32.500 --> 00:12:35.480 view them as chapters in a single giant book. 00:12:35.559 --> 00:12:38.159 It's a five volume philosophical essay on uncertainty. 00:12:38.480 --> 00:12:40.899 The central theme connecting all of them is how 00:12:40.899 --> 00:12:42.799 do we live in a world that we don't understand? 00:12:43.080 --> 00:12:45.139 So let's break down the core concepts. The most 00:12:45.139 --> 00:12:47.500 famous one, obviously, is the black swan. What 00:12:47.500 --> 00:12:49.639 is the actual technical definition here? Because 00:12:49.639 --> 00:12:51.320 like we said, people use it for everything. My 00:12:51.320 --> 00:12:53.340 coffee spilled this morning is a black swan. 00:12:53.340 --> 00:12:55.100 Right. That's not a black swan. That's just you 00:12:55.100 --> 00:12:58.179 being clumsy. A black swan is an event that has 00:12:58.179 --> 00:13:01.759 three very specific attributes. First, it is 00:13:01.759 --> 00:13:04.279 an outlier. It lies way outside the realm of 00:13:04.279 --> 00:13:07.100 regular expectations because nothing in the past 00:13:07.100 --> 00:13:10.419 can convincingly point to its possibility. So 00:13:10.419 --> 00:13:12.360 you can't predict it just by looking at a chart 00:13:12.360 --> 00:13:14.419 of what happened last year. Exactly. I mean, 00:13:14.419 --> 00:13:16.159 if you look at a chart of the stock market from 00:13:16.159 --> 00:13:19.379 2000 to 2007, you just see the steady growth. 00:13:19.559 --> 00:13:21.639 There is nothing in that chart that predicts 00:13:21.639 --> 00:13:24.549 what happens in 2008. The second attribute is 00:13:24.549 --> 00:13:27.750 that the event carries an extreme impact, massive 00:13:27.750 --> 00:13:30.450 consequences. It changes the game entirely. And 00:13:30.450 --> 00:13:32.690 the third. The third, and this is the really 00:13:32.690 --> 00:13:35.570 psychological part, is that despite its outlier 00:13:35.570 --> 00:13:38.610 status, our human nature makes us concoct explanations 00:13:38.610 --> 00:13:41.470 for its occurrence after the fact, which makes 00:13:41.470 --> 00:13:44.090 it seem explainable and predictable in hindsight. 00:13:44.370 --> 00:13:46.149 That third one is the real kicker, isn't it? 00:13:46.230 --> 00:13:48.669 We look back at 2008 or the dot -com bubble and 00:13:48.669 --> 00:13:50.830 we say, oh, well, obviously housing prices were 00:13:50.830 --> 00:13:52.769 too high or, of course, that startup. with no 00:13:52.769 --> 00:13:55.090 revenue was going to fail. But we didn't see 00:13:55.090 --> 00:13:58.250 it coming. We rationalize the chaos. We suffer 00:13:58.250 --> 00:14:00.929 from what he calls the narrative fallacy. We 00:14:00.929 --> 00:14:03.190 just love stories. We want the world to make 00:14:03.190 --> 00:14:05.529 sense. So we write a history that makes the crash 00:14:05.529 --> 00:14:08.909 look inevitable. Taleb's big argument is that 00:14:08.909 --> 00:14:11.429 the standard risk models used in finance and 00:14:11.429 --> 00:14:13.990 really in all parts of life, they completely 00:14:13.990 --> 00:14:17.129 ignore these events. They use Belker's or Gaussian 00:14:17.129 --> 00:14:19.389 distributions that assume extreme events are 00:14:19.389 --> 00:14:22.389 virtually impossible. Taleb says, no, the extreme 00:14:22.389 --> 00:14:24.210 events are the only ones that really matter. 00:14:24.330 --> 00:14:26.250 And this leads. another one of his great terms 00:14:26.250 --> 00:14:30.129 the ludic fallacy yes ludic comes from the latin 00:14:30.129 --> 00:14:32.750 word for games paleb argues that we constantly 00:14:32.750 --> 00:14:35.669 mistake structured randomness like what you find 00:14:35.669 --> 00:14:38.789 in a casino for real world randomness in a casino 00:14:38.789 --> 00:14:41.149 you know the odds you know there are 52 cards 00:14:41.149 --> 00:14:43.549 in a deck you know the rules of roulette it's 00:14:43.549 --> 00:14:46.990 risky sure but it's computable risk but the real 00:14:46.990 --> 00:14:50.080 world is not a casino Not even close. In the 00:14:50.080 --> 00:14:51.820 real world, you don't know the rules. You don't 00:14:51.820 --> 00:14:53.259 know how many cards are in the deck. You don't 00:14:53.259 --> 00:14:54.759 even know if you're playing cards or some other 00:14:54.759 --> 00:14:57.340 game. The dark side of the moon is harder to 00:14:57.340 --> 00:15:00.840 see. Taleb has this fantastic quote. The dark 00:15:00.840 --> 00:15:03.120 side of the moon is harder to see. Beaming light 00:15:03.120 --> 00:15:06.659 on it costs energy. We prefer the well -lit room 00:15:06.659 --> 00:15:08.820 of the casino because the math is easy and clean, 00:15:09.039 --> 00:15:11.519 but reality is what's happening in the dark alley 00:15:11.519 --> 00:15:13.539 outside. I love that. We're all sitting here 00:15:13.539 --> 00:15:16.779 playing poker, but the universe is playing, I 00:15:16.779 --> 00:15:19.320 don't know, Calvin Ball. Or it's just about to 00:15:19.320 --> 00:15:22.299 drop a piano on the table. Okay, let's move to 00:15:22.299 --> 00:15:24.080 the next big concept, which I think is actually 00:15:24.080 --> 00:15:27.320 his most profound, anti -fragile. This is such 00:15:27.320 --> 00:15:29.440 a critical distinction, and it's probably the 00:15:29.440 --> 00:15:32.440 most useful one for our listeners. Most people 00:15:32.440 --> 00:15:35.259 think the opposite of fragile is robust or maybe 00:15:35.259 --> 00:15:39.879 resilient. But Taleb says no. If you drop a glass 00:15:39.879 --> 00:15:42.679 package, it shatters. That's fragile. If you 00:15:42.679 --> 00:15:44.759 drop a plastic package, it doesn't break. That's 00:15:44.759 --> 00:15:46.889 robust. But it doesn't get better from being 00:15:46.889 --> 00:15:48.970 dropped. Right. It just survives. It stays the 00:15:48.970 --> 00:15:51.330 same. Anti -fragile is something that actively 00:15:51.330 --> 00:15:53.970 benefits from volatility, disorder, and stress. 00:15:54.409 --> 00:15:57.289 It's the package that if you drop it, it somehow 00:15:57.289 --> 00:16:00.110 turns into a better, stronger package. Which 00:16:00.110 --> 00:16:02.549 on the surface sounds like magic or maybe science 00:16:02.549 --> 00:16:05.230 fiction. How can something get better from being 00:16:05.230 --> 00:16:07.690 damaged? Well, he uses biological systems as 00:16:07.690 --> 00:16:09.570 the prime example. Think about your muscles. 00:16:10.059 --> 00:16:11.799 If you go to the gym and you stress your muscles, 00:16:11.960 --> 00:16:14.059 you're literally damaging the fibers, creating 00:16:14.059 --> 00:16:16.639 micro tears. They don't just heal back to where 00:16:16.639 --> 00:16:19.720 they were before. They grow stronger. They overcompensate. 00:16:19.740 --> 00:16:22.179 That is a fundamentally anti -fragile system. 00:16:22.340 --> 00:16:24.299 Okay, that makes perfect sense. Evolution itself 00:16:24.299 --> 00:16:27.039 is anti -fragile. Individual animals die. That's 00:16:27.039 --> 00:16:29.980 fragility. But the species as a whole gets better 00:16:29.980 --> 00:16:32.299 because the weak are weeded out. So anti -fragility 00:16:32.299 --> 00:16:35.379 requires some level of pain or stress or failure 00:16:35.379 --> 00:16:37.879 to work. It does. And he applies this to economics, 00:16:38.019 --> 00:16:40.740 too. He argues that we keep trying to smooth 00:16:40.740 --> 00:16:43.559 out the economy. We bail out the banks. We try 00:16:43.559 --> 00:16:45.759 to stop every recession. We keep interest rates 00:16:45.759 --> 00:16:48.399 at zero. But in doing so, we're actually making 00:16:48.399 --> 00:16:51.919 the entire system more fragile. We're stopping 00:16:51.919 --> 00:16:54.519 the muscle tearing that needs to happen for the 00:16:54.519 --> 00:16:56.480 system to get stronger. It's like stopping a 00:16:56.480 --> 00:16:58.679 forest fire. Yeah. If you put out every single 00:16:58.679 --> 00:17:01.919 small fire, you eventually build up so much dry 00:17:01.919 --> 00:17:04.920 wood that when a fire finally does happen, it 00:17:04.920 --> 00:17:07.630 burns. continent down. That is a perfect analogy. 00:17:07.990 --> 00:17:10.690 By suppressing volatility we prevent the system 00:17:10.690 --> 00:17:12.950 from learning. We create this powder keg situation 00:17:12.950 --> 00:17:15.670 where instead of having a lot of small manageable 00:17:15.670 --> 00:17:19.109 corrections we eventually get one massive catastrophic 00:17:19.109 --> 00:17:22.309 explosion. Next concept up. Skin in the game. 00:17:22.730 --> 00:17:26.390 This one feels almost political or ethical. Oh 00:17:26.390 --> 00:17:28.529 it's deeply ethical. The central rule is that 00:17:28.529 --> 00:17:30.230 decision makers must bear the risks of their 00:17:30.230 --> 00:17:32.799 own decisions. It's that simple. In the past, 00:17:32.859 --> 00:17:34.920 a general who wanted to start a war had to lead 00:17:34.920 --> 00:17:36.680 his troops into battle. If he made a bad decision, 00:17:36.920 --> 00:17:40.160 he might die. That is skin in the game. An architect 00:17:40.160 --> 00:17:43.480 in ancient Babylon, under Hammurabi's code, if 00:17:43.480 --> 00:17:45.599 he built a house and it collapsed and killed 00:17:45.599 --> 00:17:47.559 the owner, the architect was put to death. Talk 00:17:47.559 --> 00:17:49.579 about accountability. I mean, that would certainly 00:17:49.579 --> 00:17:52.000 change how condos are built today. Wouldn't it? 00:17:52.099 --> 00:17:56.700 But today, we have a huge problem. We have bureaucrats 00:17:56.700 --> 00:17:59.019 and bankers who can crash the entire economy 00:17:59.019 --> 00:18:02.109 or start a war. And if it goes wrong... They 00:18:02.109 --> 00:18:04.089 still get their bonus. They still get their pension. 00:18:04.250 --> 00:18:06.150 They might even get a lucrative speaking tour 00:18:06.150 --> 00:18:08.269 out of it. It's the Bob Rubin trade, right? The 00:18:08.269 --> 00:18:11.529 old joke, heads I win, tails you lose. Exactly. 00:18:12.109 --> 00:18:15.329 Taleb argues that this asymmetry. Keeping the 00:18:15.329 --> 00:18:17.329 upside for yourself but transferring the downside 00:18:17.329 --> 00:18:20.210 to other people, to taxpayers, is what creates 00:18:20.210 --> 00:18:22.750 these incredibly fragile systems. If you don't 00:18:22.750 --> 00:18:24.789 pay a penalty for your errors, you never learn, 00:18:24.910 --> 00:18:26.950 and you just keep taking more and more dangerous 00:18:26.950 --> 00:18:30.130 risks. He despises that class of people, the 00:18:30.130 --> 00:18:32.789 interventionistas, who mess with complex systems 00:18:32.789 --> 00:18:34.930 without suffering the consequences of their own 00:18:34.930 --> 00:18:37.250 mistakes. Then we have Fool by Randomness, which 00:18:37.250 --> 00:18:40.250 was his first non -technical book. This is really 00:18:40.250 --> 00:18:42.730 the foundation of the whole thing. The core error 00:18:42.730 --> 00:18:45.150 he's pointing out is that we consistently underestimate 00:18:45.150 --> 00:18:48.309 the role of luck. We see a successful trader 00:18:48.309 --> 00:18:52.349 or a CEO and our first instinct is to think genius. 00:18:52.630 --> 00:18:55.779 We think visionary. But in a random environment, 00:18:56.140 --> 00:18:58.420 someone is bound to get lucky. If you have 10 00:18:58.420 --> 00:19:01.400 ,000 monkeys flipping coins, one of them is eventually 00:19:01.400 --> 00:19:03.940 going to flip heads 20 times in a row. And then 00:19:03.940 --> 00:19:05.839 the media will rush to interview that monkey 00:19:05.839 --> 00:19:08.019 and ask him about his coin flipping technique. 00:19:08.359 --> 00:19:10.420 Precisely. And the monkey will write a book called 00:19:10.420 --> 00:19:13.339 The 20 Principles of Heads. Taleb says we need 00:19:13.339 --> 00:19:15.759 to have a bit more humility. We attribute success 00:19:15.759 --> 00:19:18.259 to skill when it might just be survivorship bias. 00:19:18.700 --> 00:19:21.579 And finally, from the inserto, we have The Bed 00:19:21.579 --> 00:19:24.819 of Procrustes. and this is his book of aphorisms 00:19:24.819 --> 00:19:28.299 the metaphor comes from greek mythology procrestes 00:19:28.299 --> 00:19:30.839 was this innkeeper who had a special bed He wanted 00:19:30.839 --> 00:19:32.960 every single guest to fit that bed perfectly. 00:19:33.319 --> 00:19:35.559 So if a guest was too short, he'd stretch them 00:19:35.559 --> 00:19:37.759 on a rack. If they were too tall, he'd chop off 00:19:37.759 --> 00:19:40.900 their legs. Ouch. That's vivid. It is. And Taleb 00:19:40.900 --> 00:19:44.059 says we do this with ideas. We squeeze the messy, 00:19:44.220 --> 00:19:47.920 complex reality of life into our crisp, commoditized 00:19:47.920 --> 00:19:51.380 ideas and our neat little models. We try to change 00:19:51.380 --> 00:19:53.900 the territory to fit the map rather than changing 00:19:53.900 --> 00:19:56.779 the map to fit the territory. We want the world 00:19:56.779 --> 00:19:58.900 to fit into our Excel spreadsheets. And when 00:19:58.900 --> 00:20:01.279 it doesn't, we try to force it. It's such a powerful 00:20:01.279 --> 00:20:03.799 image. We're chopping off the legs of reality 00:20:03.799 --> 00:20:05.960 to make it fit into our preconceived notions. 00:20:06.420 --> 00:20:09.299 Okay, so that's the philosophy. But Taleb is 00:20:09.299 --> 00:20:11.900 also a guy who talks about how to live your life. 00:20:12.119 --> 00:20:14.819 This isn't just abstract theory for him. Segment 00:20:14.819 --> 00:20:17.839 three, practical applications. He has this concept 00:20:17.839 --> 00:20:20.599 he called the barbell strategy. And this is really 00:20:20.599 --> 00:20:22.720 how you apply the inserto to your actual life. 00:20:22.900 --> 00:20:25.440 The premise is that medium risk is a trap. We're 00:20:25.440 --> 00:20:28.160 always taught to be balanced, to diversify into 00:20:28.160 --> 00:20:31.180 moderate investments. Taleb says this is incredibly 00:20:31.180 --> 00:20:33.400 dangerous because the risk of those medium investments 00:20:33.400 --> 00:20:36.720 is fundamentally uncomputable. A safe blue chip 00:20:36.720 --> 00:20:39.279 stock can still go to zero in a black swan event. 00:20:39.519 --> 00:20:42.420 Think Enlon or Lehman Brothers or Kodak. So what's 00:20:42.420 --> 00:20:44.599 the barbell then? How does that work? You avoid 00:20:44.599 --> 00:20:46.940 the middle entirely. You are hyper conservative 00:20:46.940 --> 00:20:49.160 and hyper aggressive at the exact same time. 00:20:49.230 --> 00:20:51.549 So in finance, he suggests putting something 00:20:51.549 --> 00:20:54.890 like 80 to 90 percent of your assets in extremely 00:20:54.890 --> 00:20:57.970 safe instruments like treasury bills, stuff that 00:20:57.970 --> 00:21:00.910 simply cannot lose money unless the entire government 00:21:00.910 --> 00:21:03.609 collapses. That sounds incredibly boring. And 00:21:03.609 --> 00:21:05.210 with inflation, aren't you technically losing 00:21:05.210 --> 00:21:07.910 money? It is boring. And yes, you might lose 00:21:07.910 --> 00:21:09.869 a little bit to inflation, but the key is you 00:21:09.869 --> 00:21:12.789 are safe. You cannot be ruined. Then you take 00:21:12.789 --> 00:21:15.009 the remaining 10 to 20 percent and you put it 00:21:15.009 --> 00:21:18.069 into highly risky diversified speculative bets. 00:21:18.579 --> 00:21:20.779 Things with a limited downside. The most you 00:21:20.779 --> 00:21:23.740 can lose is that 10%, but an unlimited upside, 00:21:23.940 --> 00:21:26.319 like venture capital or buying out of the money 00:21:26.319 --> 00:21:28.859 options. So if a market crashes, your big 90 00:21:28.859 --> 00:21:31.000 % chunk is safe. Yeah. And if the market explodes 00:21:31.000 --> 00:21:33.039 upward or you happen to catch a positive black 00:21:33.039 --> 00:21:35.720 swan, your little 10 % chunk makes you a fortune. 00:21:35.940 --> 00:21:38.359 Exactly. You cap your losses, but you expose 00:21:38.359 --> 00:21:40.900 yourself to positive black swans. You completely 00:21:40.900 --> 00:21:43.839 remove the risk of ruin. The middle, putting 00:21:43.839 --> 00:21:46.900 everything into, say, the S &P 500, leaves you 00:21:46.900 --> 00:21:49.279 exposed to a... 50 % ROP if the market crashes. 00:21:49.539 --> 00:21:52.380 The barbell protects you from that. And he applies 00:21:52.380 --> 00:21:54.319 this to health and fitness too, which I find 00:21:54.319 --> 00:21:57.380 completely fascinating. He thinks most of us 00:21:57.380 --> 00:21:59.779 are exercising wrong. He does. He absolutely 00:21:59.779 --> 00:22:04.599 hates steady and moderate exercise. So no jogging 00:22:04.599 --> 00:22:07.099 on a treadmill for 45 minutes at a medium pace. 00:22:07.319 --> 00:22:10.240 He says humans evolved for random environments. 00:22:10.599 --> 00:22:13.460 We spent most of our time walking slowly, gathering 00:22:13.460 --> 00:22:16.640 food. That's a low effort activity. And then 00:22:16.640 --> 00:22:19.119 occasionally a lion jumps out of the bushes and 00:22:19.119 --> 00:22:21.519 we have to sprint for our lives. That's an extreme 00:22:21.519 --> 00:22:24.559 effort. So the barbell for fitness is walk a 00:22:24.559 --> 00:22:26.740 lot and then occasionally lift something incredibly 00:22:26.740 --> 00:22:28.720 heavy or sprint. until you feel like you're going 00:22:28.720 --> 00:22:31.220 to die. Pretty much, yeah. Low effort most of 00:22:31.220 --> 00:22:33.960 the time, punctuated by very intense stress, 00:22:34.059 --> 00:22:36.940 no chronic cardio in the middle. He argues that 00:22:36.940 --> 00:22:39.279 that kind of chronic moderate stress, like jogging 00:22:39.279 --> 00:22:41.299 every day, actually wears the body down without 00:22:41.299 --> 00:22:43.839 giving it the powerful anti -fragile signal it 00:22:43.839 --> 00:22:46.019 needs to build muscle. And he applies the same 00:22:46.019 --> 00:22:48.960 logic to diet, right? He does. He argues that 00:22:48.960 --> 00:22:51.559 modern humans have the steady, constant supply 00:22:51.559 --> 00:22:54.859 of food, three meals a day plus snacks. But our 00:22:54.859 --> 00:22:57.809 ancestors had a very random supply. So he looks 00:22:57.809 --> 00:23:00.670 at the frequency of eating. Intermittent fasting 00:23:00.670 --> 00:23:03.150 fits his model perfectly. You have periods of 00:23:03.150 --> 00:23:06.170 feast and periods of famine. Not a steady drip 00:23:06.170 --> 00:23:09.230 of snacking all day. It's also consistent. Avoid 00:23:09.230 --> 00:23:12.740 the steady state. Embrace the extremes. And this 00:23:12.740 --> 00:23:15.279 leads right into his view on innovation, which 00:23:15.279 --> 00:23:18.099 he calls convex tinkering. He believes that, 00:23:18.160 --> 00:23:21.420 quote, decentralized experimentation outperforms 00:23:21.420 --> 00:23:23.460 directed research. He has a great line about 00:23:23.460 --> 00:23:26.359 birds, something like models are like lecturing 00:23:26.359 --> 00:23:29.160 birds on how to fly. That's the one. Birds flew 00:23:29.160 --> 00:23:31.140 for millions of years before anyone understood 00:23:31.140 --> 00:23:34.000 the principles of aerodynamics. We solve problems 00:23:34.000 --> 00:23:36.799 by doing, by tinkering, by trial and error, not 00:23:36.799 --> 00:23:39.319 by theorizing in a classroom. The theory usually 00:23:39.319 --> 00:23:41.579 comes after the invention to explain why it worked. 00:23:41.799 --> 00:23:43.799 The steam engine wasn't invented by a physicist 00:23:43.799 --> 00:23:46.220 using the laws of thermodynamics. It was invented 00:23:46.220 --> 00:23:48.980 by tinkerers. The laws of thermodynamics came 00:23:48.980 --> 00:23:50.920 later to explain the engine. So if you want to 00:23:50.920 --> 00:23:52.779 invent something, don't write a 50 -page business 00:23:52.779 --> 00:23:55.960 plan. Just start tinkering. Exactly. Be the tinkerer, 00:23:56.019 --> 00:23:58.039 not the lecturer. Okay, so we've established 00:23:58.039 --> 00:24:00.200 the brilliance. Now we need to talk about the 00:24:00.200 --> 00:24:03.700 brawler. Segment four, style, criticism, and 00:24:03.700 --> 00:24:06.900 controversy. Taleb is not a polite academic who 00:24:06.900 --> 00:24:10.299 sips tea and nods thoughtfully. He is, well, 00:24:10.380 --> 00:24:13.130 he's aggressive. That is putting it mildly. He 00:24:13.130 --> 00:24:15.750 describes his own writing style as mixing semi 00:24:15.750 --> 00:24:17.950 -autobiographical narrative with philosophical 00:24:17.950 --> 00:24:21.420 tales. But his public persona is known for these 00:24:21.420 --> 00:24:24.440 incredibly harsh personal attacks. He doesn't 00:24:24.440 --> 00:24:27.579 suffer fools gladly, and he defines fool very, 00:24:27.680 --> 00:24:29.559 very broadly. Let's just look at the list of 00:24:29.559 --> 00:24:31.359 targets. Bankers are obviously high on that list. 00:24:31.400 --> 00:24:33.599 Oh, absolutely. At the World Economic Forum in 00:24:33.599 --> 00:24:36.579 Davos in 2009, which he derisively calls the 00:24:36.579 --> 00:24:39.519 International Association of Name Droppers, he 00:24:39.519 --> 00:24:41.700 stood up on stage and said he was happy that 00:24:41.700 --> 00:24:43.940 Lehman Brothers had collapsed. I mean, can you 00:24:43.940 --> 00:24:45.819 imagine saying that in a room full of bankers? 00:24:45.920 --> 00:24:47.759 That's like walking into a funeral and saying 00:24:47.759 --> 00:24:50.440 you're glad the guy is dead. He suggested bankers 00:24:50.440 --> 00:24:52.720 need punishment to prevent recklessness in the 00:24:52.720 --> 00:24:55.660 future. He believes the whole bailout culture 00:24:55.660 --> 00:24:58.619 is fundamentally immoral because it removes skin 00:24:58.619 --> 00:25:01.160 in the game. He basically looked them in the 00:25:01.160 --> 00:25:02.900 eye and told them they were parasites on the 00:25:02.900 --> 00:25:05.380 economy. And he hates economists. With an absolute 00:25:05.380 --> 00:25:08.359 passion. He has called them idiots and said They 00:25:08.359 --> 00:25:11.720 cause more crises than they solve. He specifically 00:25:11.720 --> 00:25:14.579 goes after the big names. Larry Summers, Paul 00:25:14.579 --> 00:25:17.539 Krugman, Joseph Stiglitz. He thinks their models 00:25:17.539 --> 00:25:19.700 give a false sense of security that directly 00:25:19.700 --> 00:25:22.339 leads to disaster. He has this term for them. 00:25:23.140 --> 00:25:27.079 IYI. Intellectual yet idiot. People who are brilliant 00:25:27.079 --> 00:25:29.119 in books but have absolutely no common sense 00:25:29.119 --> 00:25:31.440 in the real world. But the biggest feud, the 00:25:31.440 --> 00:25:33.579 real heavyweight title fight, has to be with 00:25:33.579 --> 00:25:36.599 Myron Scholes. Oh, yes. Myron Scholes is a Nobel 00:25:36.599 --> 00:25:38.920 laureate. He co -developed the Black -Scholes 00:25:38.920 --> 00:25:41.319 formula, which is the standard model for pricing 00:25:41.319 --> 00:25:44.339 financial options. It is like the Bible of modern 00:25:44.339 --> 00:25:47.140 finance. Every single trader learns it. And Taleb 00:25:47.140 --> 00:25:49.099 attacked the Bible. He didn't just attack it. 00:25:49.140 --> 00:25:51.220 He basically said Scholes was personally responsible 00:25:51.220 --> 00:25:54.019 for the financial crisis. He said Scholes should 00:25:54.019 --> 00:25:57.079 be in a retirement home doing Sudoku rather than 00:25:57.079 --> 00:26:00.099 lecturing anyone on risk. Doing Sudoku? That 00:26:00.099 --> 00:26:03.460 is so specific. Yeah. So devastating. Taleb and 00:26:03.460 --> 00:26:06.019 his collaborator Espen Hogg wrote this paper 00:26:06.019 --> 00:26:08.519 where they argued that nobody actually uses the 00:26:08.519 --> 00:26:11.119 black skulls formula in the real world of trading. 00:26:11.559 --> 00:26:15.160 They use heuristics, simple rules of thumb. He 00:26:15.160 --> 00:26:17.140 basically told a Nobel Prize winner that his 00:26:17.140 --> 00:26:20.019 entire life's work was irrelevant and dangerous. 00:26:20.440 --> 00:26:22.599 And what was Skoll's response? Yeah. I mean, 00:26:22.660 --> 00:26:24.220 he couldn't have just taken that lying down. 00:26:24.359 --> 00:26:27.299 No. Skoll's retorted that Taleb just. popularizes 00:26:27.299 --> 00:26:30.140 ideas and is making money selling books. He claimed 00:26:30.140 --> 00:26:32.259 that Taleb doesn't cite previous literature and 00:26:32.259 --> 00:26:35.480 isn't taken seriously in academia. But then Taleb 00:26:35.480 --> 00:26:37.799 fired back with a paper listing hundreds of documents 00:26:37.799 --> 00:26:40.339 showing the formula wasn't even derived by schools 00:26:40.339 --> 00:26:42.960 originally. It was just a messy, very public 00:26:42.960 --> 00:26:45.619 intellectual brawl. It really is like watching 00:26:45.619 --> 00:26:48.259 two grandmasters get into a boxing match. He 00:26:48.259 --> 00:26:50.920 also waded into the IQ debate, which is always 00:26:50.920 --> 00:26:53.970 a complete minefield. He did. He published an 00:26:53.970 --> 00:26:57.269 article calling iClue largely a pseudoscientific 00:26:57.269 --> 00:26:59.670 swindle. What's his argument there? Because IQ 00:26:59.670 --> 00:27:01.910 is a pretty well -established concept in psychology. 00:27:02.460 --> 00:27:05.220 His argument is that IQ tests don't really measure 00:27:05.220 --> 00:27:07.980 intelligence. He says they measure absence of 00:27:07.980 --> 00:27:11.299 stupidity or unintelligence. So it can help you 00:27:11.299 --> 00:27:13.359 find people who can't do the job. If you have 00:27:13.359 --> 00:27:15.579 an IQ of 70, you probably can't be a physicist. 00:27:15.859 --> 00:27:18.960 But it doesn't predict high performance. He argues 00:27:18.960 --> 00:27:21.279 that once you get past a certain threshold, a 00:27:21.279 --> 00:27:23.359 higher IQ doesn't really correlate with success 00:27:23.359 --> 00:27:25.559 in the real world. He considers the rankings 00:27:25.559 --> 00:27:27.779 a fraud and has even called them immoral and 00:27:27.779 --> 00:27:30.920 racist. That's a very Taleb take on it. The metric 00:27:30.920 --> 00:27:34.029 you are all using. is a lie. And then there's 00:27:34.029 --> 00:27:36.230 his politics. He seems to be all over the map. 00:27:36.430 --> 00:27:38.730 He is. He dedicated his book Skin in the Game 00:27:38.730 --> 00:27:41.950 to both Ron Paul and Ralph Nader. A libertarian 00:27:41.950 --> 00:27:44.890 and a consumer advocate. That's a very odd couple. 00:27:45.069 --> 00:27:47.089 It makes a certain kind of sense in his framework, 00:27:47.190 --> 00:27:49.789 though. Both of them are anti -establishment 00:27:49.789 --> 00:27:52.829 and both focus on accountability. Nader wants 00:27:52.829 --> 00:27:55.289 corporations to be accountable. Paul wants the 00:27:55.289 --> 00:27:57.769 Federal Reserve to be accountable. But he's not 00:27:57.769 --> 00:28:01.569 a pure libertarian by any means. After the 2022 00:28:01.569 --> 00:28:05.049 invasion of Ukraine, he denounced naive libertarians 00:28:05.049 --> 00:28:08.089 who were soft on Russia. He supported an aggressive 00:28:08.089 --> 00:28:11.049 military response. He just doesn't fit in a neat 00:28:11.049 --> 00:28:13.769 left wing or right wing box. He fits in the insurto 00:28:13.769 --> 00:28:15.869 box. It's clear he doesn't care about being popular. 00:28:16.089 --> 00:28:18.750 He only cares about being robust. But we should 00:28:18.750 --> 00:28:20.269 acknowledge that he isn't just a guy throwing 00:28:20.269 --> 00:28:23.710 insults. He has serious technical chops. Segment 00:28:23.710 --> 00:28:26.660 five, technical contributions. This is really 00:28:26.660 --> 00:28:28.420 important. It's easy to get distracted by the 00:28:28.420 --> 00:28:30.579 Twitter fights and the, you know, the clever 00:28:30.579 --> 00:28:34.460 aphorisms. But Taleb is a mathematical statistician 00:28:34.460 --> 00:28:36.740 at his core. He wrote a technical version of 00:28:36.740 --> 00:28:39.059 the inserto called Statistical Consequences of 00:28:39.059 --> 00:28:41.180 Fat Tales. OK, so let's go back to those fat 00:28:41.180 --> 00:28:43.420 tales. What does that actually mean in a statistical 00:28:43.420 --> 00:28:46.079 sense? So in a normal distribution of bell curve. 00:28:46.680 --> 00:28:48.559 Most of the data points are clustered in the 00:28:48.559 --> 00:28:50.599 middle, in the hump, and the tails, which are 00:28:50.599 --> 00:28:53.599 the extremes, they taper off very quickly. It 00:28:53.599 --> 00:28:56.279 assumes that extreme events are incredibly rare, 00:28:56.420 --> 00:28:58.299 like you will never meet a man who is 10 feet 00:28:58.299 --> 00:29:01.319 tall. Right. Human heights follow a pretty clean 00:29:01.319 --> 00:29:04.339 bell curve. Exactly. But financial markets don't. 00:29:04.339 --> 00:29:07.319 Wealth doesn't. In a fat tail distribution, the 00:29:07.319 --> 00:29:09.880 tails don't taper off. They stay thick. Extreme 00:29:09.880 --> 00:29:12.680 events are much, much more likely than the bell 00:29:12.680 --> 00:29:15.079 curve suggests. You can meet a man who has a 00:29:15.079 --> 00:29:17.200 billion times more money than you do. And he 00:29:17.200 --> 00:29:19.460 has this one data point about the stock market 00:29:19.460 --> 00:29:23.019 that just blew my mind. The 1987 crash. Right. 00:29:23.259 --> 00:29:25.700 He points out that in the real world, a single 00:29:25.700 --> 00:29:28.059 observation can completely determine the properties 00:29:28.059 --> 00:29:31.029 of the whole data set. So he noted that the 1987 00:29:31.029 --> 00:29:34.609 crash, just one single day, determined 80 % of 00:29:34.609 --> 00:29:36.490 the kurtosis, which is a volatility profile, 00:29:36.869 --> 00:29:39.670 for the entire U .S. stock market over a 40 -year 00:29:39.670 --> 00:29:41.789 period. Just think about that for a second. 40 00:29:41.789 --> 00:29:44.089 years of trading data, thousands and thousands 00:29:44.089 --> 00:29:47.069 of days, and 80 % of the entire risk profile 00:29:47.069 --> 00:29:49.730 comes from one single day. That is the essence 00:29:49.730 --> 00:29:52.299 of fat tails. If you ignore that one day, your 00:29:52.299 --> 00:29:55.420 model is absolute garbage. But most models treat 00:29:55.420 --> 00:29:57.700 that day as an outlier, and they just throw it 00:29:57.700 --> 00:29:59.420 out. They say, oh, that was a freak event. Let's 00:29:59.420 --> 00:30:01.480 remove it from the data set so our curve looks 00:30:01.480 --> 00:30:05.180 pretty. Taleb says that day is the model. If 00:30:05.180 --> 00:30:07.539 you remove the crash, you aren't measuring risk 00:30:07.539 --> 00:30:10.400 at all. It's like saying, I'm a great driver 00:30:10.400 --> 00:30:13.019 if you just ignore that one time I drove off 00:30:13.019 --> 00:30:15.519 a cliff. That's a perfect way to put it. And 00:30:15.519 --> 00:30:17.640 he worked with another mathematician, Rafael 00:30:17.640 --> 00:30:20.559 Duarte, on something they called statistical 00:30:20.559 --> 00:30:24.059 undecidability. which sounds very complicated. 00:30:24.339 --> 00:30:27.200 It is, but the core concept is pretty simple. 00:30:27.359 --> 00:30:30.099 They argued that statistics as a field is fundamentally 00:30:30.099 --> 00:30:33.119 incomplete because it cannot predict the risk 00:30:33.119 --> 00:30:35.940 of rare events. If an event is rare enough, you 00:30:35.940 --> 00:30:38.059 simply don't have enough data to know the probability. 00:30:38.440 --> 00:30:40.880 You are flying completely blind and the math 00:30:40.880 --> 00:30:43.759 can't save you. You cannot use the past to predict 00:30:43.759 --> 00:30:46.900 the future when the tails are fat. He also applied 00:30:46.900 --> 00:30:48.910 this thinking to the pandemic, didn't he? He 00:30:48.910 --> 00:30:53.410 did very early on. On January 26th, 2020, when 00:30:53.410 --> 00:30:55.789 most of the world was still saying it's just 00:30:55.789 --> 00:30:58.809 the flu or it won't leave China, Taleb, along 00:30:58.809 --> 00:31:01.670 with Yanir Bar -Yam and Joseph Norman, published 00:31:01.670 --> 00:31:05.029 a note called Systemic Risk of Pandemic via Novel 00:31:05.029 --> 00:31:08.509 Pathogens. January 26th. That is incredibly early. 00:31:08.890 --> 00:31:11.349 It's remarkably prescient. They argued that SARS 00:31:11.349 --> 00:31:13.609 -CoV -2 was not being taken nearly seriously 00:31:13.609 --> 00:31:16.150 enough. And their logic wasn't about the specific 00:31:16.150 --> 00:31:18.470 biology of the virus, but about the math of the 00:31:18.470 --> 00:31:21.250 network. They argued that in a globally connected 00:31:21.250 --> 00:31:24.230 world, pathogens spread much, much faster than 00:31:24.230 --> 00:31:26.470 standard models predict. Global connectivity 00:31:26.470 --> 00:31:29.869 increases systemic risk. They called for an immediate 00:31:29.869 --> 00:31:32.250 aggressive clampdown because the downside risk 00:31:32.250 --> 00:31:35.190 was infinite total ruin. It goes right back to 00:31:35.190 --> 00:31:37.650 his asymmetry idea. If you overreact and you 00:31:37.650 --> 00:31:39.329 turn out to be be wrong. You lose a little bit 00:31:39.329 --> 00:31:41.630 of money. There's some panic. But if you underreact 00:31:41.630 --> 00:31:43.329 and you're wrong, you lose everything. Exactly. 00:31:43.410 --> 00:31:45.349 It's the precautionary principle. When the risk 00:31:45.349 --> 00:31:47.170 is total ruin, you don't sit around and wait 00:31:47.170 --> 00:31:50.910 for more evidence. You act immediately. And finally, 00:31:50.970 --> 00:31:53.269 let's talk about his professional legacy in finance. 00:31:53.910 --> 00:31:57.029 Tail risk hedging. This is the business model 00:31:57.029 --> 00:31:59.809 of universe investments. It's basically insurance 00:31:59.809 --> 00:32:03.230 against the apocalypse. The strategy is to accept 00:32:03.230 --> 00:32:06.410 small, constant losses. just like paying insurance 00:32:06.410 --> 00:32:09.210 premiums. You bleed a little bit of money every 00:32:09.210 --> 00:32:11.390 single month buying these put options that are 00:32:11.390 --> 00:32:14.109 way, way out of the money. Which has to be psychologically 00:32:14.109 --> 00:32:16.589 very difficult. Nobody likes losing money every 00:32:16.589 --> 00:32:18.690 month, even a little bit. It's incredibly hard. 00:32:18.829 --> 00:32:20.930 You look like a loser for years on end. You have 00:32:20.930 --> 00:32:23.390 these lengthy dry spells. Your neighbors are 00:32:23.390 --> 00:32:25.829 making 10 % a year in the stock market, and you 00:32:25.829 --> 00:32:29.410 are consistently losing 2%. But then the market 00:32:29.410 --> 00:32:32.109 crashes. And while everyone else is jumping out 00:32:32.109 --> 00:32:35.430 of windows, your fund pays out a massive, life 00:32:35.430 --> 00:32:38.230 -changing jackpot. It's the bar bill again. You 00:32:38.230 --> 00:32:39.970 pay small amounts to protect against the black 00:32:39.970 --> 00:32:42.269 swan, and when it finally arrives, you profit 00:32:42.269 --> 00:32:44.910 immensely. And that really is the summary of 00:32:44.910 --> 00:32:48.509 the man. He has built an entire life and an entire 00:32:48.509 --> 00:32:50.710 philosophy completely designed around the central 00:32:50.710 --> 00:32:52.589 idea that we just don't know what's coming next. 00:32:52.930 --> 00:32:56.500 Okay, let's wrap this up. We've covered the aristocrat 00:32:56.500 --> 00:32:58.700 -turned -trader, the philosopher of uncertainty, 00:32:59.119 --> 00:33:02.559 the public brawler, and the mathematician. When 00:33:02.559 --> 00:33:05.359 you step back from all of it, what is the single 00:33:05.359 --> 00:33:07.720 biggest takeaway here? I think it's a fundamental 00:33:07.720 --> 00:33:10.740 shift in worldview. Most of us go through life 00:33:10.740 --> 00:33:12.900 trying to predict the future. We try to guess 00:33:12.900 --> 00:33:14.759 what the stock market is going to do or what 00:33:14.759 --> 00:33:16.660 the weather will be next week or how our career 00:33:16.660 --> 00:33:19.539 is going to turn out. Taleb's message is stop. 00:33:20.109 --> 00:33:22.670 You can't predict the future. The world is far 00:33:22.670 --> 00:33:25.549 too complex. So instead of prediction, what? 00:33:25.730 --> 00:33:28.950 Focus on preparation. Focus on robustness. Build 00:33:28.950 --> 00:33:31.789 a life and a portfolio and a body that can handle 00:33:31.789 --> 00:33:33.950 whatever the future throws at you. Don't try 00:33:33.950 --> 00:33:35.529 to see the black swan coming. Just make sure 00:33:35.529 --> 00:33:37.529 you're the kind of person who survives it or, 00:33:37.630 --> 00:33:41.069 even better, benefits from it. Be the anti -fragile 00:33:41.069 --> 00:33:42.869 package. And I want to leave our listener with 00:33:42.869 --> 00:33:46.069 one final provocative thought. Taleb talks about 00:33:46.069 --> 00:33:48.670 this idea he calls the fourth quadrant. Yes. 00:33:49.160 --> 00:33:52.420 This is the domain of complex, real -world problems 00:33:52.420 --> 00:33:54.759 where we don't know the rules and the impact 00:33:54.759 --> 00:33:57.920 of being wrong is incredibly high. And Taleb 00:33:57.920 --> 00:33:59.920 suggests that in this quadrant, we should probably 00:33:59.920 --> 00:34:03.259 stop using models entirely. No maps are better 00:34:03.259 --> 00:34:05.400 than bad maps. If you're in a strange city and 00:34:05.400 --> 00:34:07.039 you're using a map of a completely different 00:34:07.039 --> 00:34:09.699 city, you are guaranteed to get lost. So here 00:34:09.699 --> 00:34:12.039 is the question for you, the learner. Look at 00:34:12.039 --> 00:34:14.119 your own life. Where are you exposing yourself 00:34:14.119 --> 00:34:17.489 to that medium risk, that dangerous middle? Where 00:34:17.489 --> 00:34:20.150 are you relying on a steady paycheck from a company 00:34:20.150 --> 00:34:22.550 that could vanish tomorrow? Where are you relying 00:34:22.550 --> 00:34:24.989 on moderate exercise that isn't actually preparing 00:34:24.989 --> 00:34:27.250 you for real -world stress? Where are you being 00:34:27.250 --> 00:34:29.409 fragile while thinking that you're safe? And 00:34:29.409 --> 00:34:31.710 as Taleb would say, referencing his most famous 00:34:31.710 --> 00:34:34.369 metaphor about the turkey, the turkey is fed 00:34:34.369 --> 00:34:38.090 every single day for 1 ,000 days. Every day, 00:34:38.230 --> 00:34:40.789 the turkey's statistical model confirms the hypothesis 00:34:40.789 --> 00:34:43.550 that the humans love me, they feed me, life is 00:34:43.550 --> 00:34:46.650 good and stable. The turkey's confidence is at 00:34:46.650 --> 00:34:50.369 its absolute peak on day 1001. And day 1001 is 00:34:50.369 --> 00:34:53.469 the Wednesday before Thanksgiving. Exactly. What 00:34:53.469 --> 00:34:55.969 the turkey sees as a black swan, the butcher 00:34:55.969 --> 00:34:58.409 sees as just another Wednesday. It's all about 00:34:58.409 --> 00:35:00.809 perspective. So the final advice from Nassim 00:35:00.809 --> 00:35:02.949 Nicholas Taleb. Don't be a turkey. Thanks for 00:35:02.949 --> 00:35:05.070 listening to The Deep Dive. We'll see you next 00:35:05.070 --> 00:35:05.269 time.