OK, let's unpack this. I want you to imagine
a character for a second. And if you saw this
guy in a movie, you'd probably think, you know,
the screenwriters were trying a little too hard.
A bit over the top. Yeah, exactly. He is at the
same time considered one of the hottest thinkers
in the world by the mainstream press. And that's
a direct quote from The Times. And yet this is
the very same guy who explicitly and loudly calls
for the the discontinuation of the Nobel Prize
in economics. It's a contradiction right out
of the gate, isn't it? It gets so much better.
He's a trader who made what he technically calls
fuck you money. And you have to excuse the language,
but we're quoting the man himself by betting
on the world falling apart. So he gets rich when
everyone else is, well, panicking. Panicking,
crying, losing their homes. But he's not just
some greedy Gordon Gekko type. He's also a scholar
who, you know. reads Aramaic and Canaanite script
for fun. He lifts heavy weights, he refuses to
eat sugar, and he gets into these epic Twitter
fights with Nobel laureates. It is quite the
juxtaposition. We are talking, of course, about
Nassim Nicholas Taleb. And you're right. He occupies
this very strange, almost unclaimed space in
the intellectual world. I mean, he isn't just
an academic. In fact, he sort of despises the
academic establishment. Well, he hates it. And
he certainly isn't just a Wall Street guy, even
though he completely beat Wall Street at its
own game. If you look at how he describes himself,
he uses these interesting terms, mathematical
statistician. aphorist and my personal favorite
epistemologist of randomness epistemologist of
randomness yeah that really sounds like a job
title you make up to stop people from asking
what you do at a party You know, oh, me, I'm
just an epistemologist of randomness. Could you
pass the shrimp? Right. But in his case, it's
actually incredibly accurate, isn't it? It is.
It's technically precise. Epistemology is the
study of knowledge. It's how we know what we
know. So he studies how we know things or maybe
more importantly, how we don't know things, specifically
when it comes to luck and uncertainty and, you
know, chaos. And the reason we're doing the deep
dive on him today isn't just because he has a
fancy title or wrote some massive bestsellers.
It's because the stakes of his idea. are, well,
they're incredibly high. This is the man credited
with predicting the 2008 financial crisis. And
we really have to be clear about that. It wasn't
just predicting it in the way a pundit on TV
says, oh, the market looks a little frothy. Right,
like a weatherman saying it might rain next week.
No, this is different. He actually put his money
where his mouth was and made a literal fortune
from it while everyone else was losing their
shirts. Exactly. And that is the hook, really.
We live in a world that feels increasingly chaotic.
We have pandemics, market crashes, political
upheavals, supply chain collapses. It just goes
on. Cullib's entire philosophy, which he calls
the inserto, is essentially a roadmap for navigating
that very chaos. But, and we have to be honest
here, he is also a deeply polarizing figure.
This is the guy who called famous economists
idiots and suggested bankers need, quote, punishment.
He does not mince words. Oh, absolutely not.
And we are definitely going to get into the beefs.
I have to say the section on his feuds is my
favorite part of our research stack. It's like
intellectual pro wrestling. It really is. But
before we get to the name calling, we need to
sort of frame the mission of this deep dive.
If you're listening to this, you've. almost certainly
heard the term black swan. Oh, yeah. It's everywhere.
It's become such a buzzword that corporate managers
use it to excuse missing their quarterly targets.
You know, oh, we missed our sales numbers. It
was a black swan event. Which is, more often
than not, a complete misuse of the concept. And
it drives Taleb absolutely crazy. But we'll get
to that. The goal today is to move beyond the
buzzwords. We want to help you, the learner,
understand the underlying philosophy of the inserto.
We're going to look at how to build robustness,
as he calls it, in your own life. We're going
to talk about why, according to Taleb, you might
be exercising all wrong or investing all wrong.
And we're going to try to answer the big question.
How do you live in a world you don't and really
can't understand? And to do that, we have a massive
stack of sources. We're pulling from his biography.
We're looking at the entire inserto book series
that's Fooled by Randomness, The Black Swan,
Anti -Fragile, Skin in the Game, and his book
of aphorisms, The Bed of Procrustes. Plus we've
got his technical papers, you know, the ones
with all the heavy math and the public records
of his many, many arguments. It's a pretty comprehensive
look at a very complex man. And to really understand
the philosophy, you have to understand where
it came from. Because Taleb's obsession with
the unexpected, with randomness, it didn't start
on a trading floor in New York. No, it started
in the Levant. Exactly. OK, so let's rewind.
Segment one, the origin story. Nassim Nicholas
Taleb was born in 1960 in a town called Amayoun
in Lebanon. And looking at his family background,
we aren't talking about a humble beginning here.
This is, for all intents and purposes, aristocracy.
Very much so. His family was wealthy, they were
influential, and they were part of the Greek
Orthodox Christian community. And if you look
at the lineage, it's pretty impressive. His maternal
grandfather, Fuad Nicholas Ghosn, and his great
-grandfather, Nicholas Ghosn, were both deputy
prime ministers of Lebanon. Deputy prime ministers.
I mean, that's serious power. That's the kind
of family where you grow up assuming the world
is basically yours to shape and that the structures
all around you are rock solid. And it goes even
deeper. His paternal grandfather was a Supreme
Court judge. His great, great, great, great grandfather,
I think I got that right, four greats, was on
the board of directors to the administrator of
Mount Lebanon. So, you know, young Nassim grows
up in this environment of immense stability,
prestige, and a French education. He went to
the Grand Lycée, Franco -Libanais, and Beirut.
So just picture this for a moment. You're this
kid in a hugely prominent family. Everything
seems permanent. You have the status. You have
the money. You have the history. You're living
in Beirut, which at the time was literally called
the Paris of the Middle East. It was cosmopolitan,
cultured, safe. And then 1975 happens. The Lebanese
Civil War. This is the first black swan in Taleb's
life, even if he didn't have that term for it
yet. The war begins, and it essentially reduces
his family's political prominence and their wealth
to, well, to rubble. It's really hard to overstate
how shocking that must have been, to go from
being part of the reeling class, living in a
mansion, to a war zone almost overnight. And
this is absolutely crucial for understanding
his entire worldview. Most of us in the West,
especially in the late 20th century, we grew
up with a sense of gradualism. You know, the
idea that things change slowly, that the future
will look pretty much like the past just with
better phones. Taleb's formative experience was
the exact opposite. It was that the established
order can be dismantled overnight by a sudden
unexpected event. The entire structure of society
was, in his eyes, incredibly fragile. So the
lesson he learned at 15 wasn't from a textbook.
It was that stability is often just an illusion.
Precisely. And he realized that the people in
charge, the politicians, the experts, the people
just like his grandfather, they didn't see it
coming. They were all very confident, but they
were all wrong. That seems to be the seed of
everything that comes later. But despite the
war, he clearly kept up with his studies. I mean,
the man is a walking encyclopedia. He is a polyglot
scholar in the truest sense of the word. He has
a bachelor and master of science from the University
of Paris. He gets an MBA from Wharton, which
he got in 1983. And then much later, he goes
back and gets a PhD in management science from
the University of Paris Dauphine. But beyond
all the degrees, it's the languages that really
stand out to me. Yeah, the list is intimidating.
He's fluent in French, English, and classical
Arabic. But then the source material says he
also speaks Italian and Spanish. And he reads,
get this Greek, Latin, Aramaic, ancient Hebrew,
and Canaanite script. Why? I mean, why the obsession
with dead languages? Is he just showing off,
look at me, I can read the Rosetta Stone. I don't
think it's just a parlor trick. That linguistic
depth that really informs his philosophy. Taleb
has a deep preference for classical wisdom, you
know, the stuff that has survived for thousands
of years over modern theory. Okay, that makes
sense. When you can read the original texts of
the ancients in their own scripts, you get a
very different perspective on risk and human
nature than if you're just, say, reading a modern
summary in a business book. He sees the continuity
of human folly. He believes that the ancients,
like the Stoics or even Babylonian merchants,
understood how to deal with randomness far better
than modern economists do. Because they lived
in a world where, I don't know, death was around
every corner. Exactly. They didn't have insurance
companies or central banks to bail them out.
They had to be robust. If a storm hit your ship,
you lost everything, period. So they structured
their lives and their businesses differently.
Taleb connects more with a Roman senator than
he does with a modern day trader. So he's got
this classical education. He's got this war -torn
background. And then he heads to Wall Street.
This is where the rubber really meets the road.
He starts working as a trader. Right. And he
wasn't at some small firm. He worked at major
institutions. Credit Suisse, First Boston, BNP
Paribas, the Chicago Mercantile Exchange. He
was a pit trader, an options trader. He was in
the trenches. And this is where he started to
see that the math that everyone was using to
predict the markets was, in his view, fundamentally
broken. And he proved it in a big way in 1987.
Black Monday. This was his breakout moment. While
everyone else was likely following the sophisticated
models that said a crash of that magnitude was
statistically impossible. I mean, literally something
that shouldn't happen in a billion years. Taleb
was holding a hedged short euro dollar position.
OK, in plain English, because hedged short euro
dollar position. Right. Sounds like complete
gibberish to most of us. Yeah, fair enough. Basically,
he was betting that things would go very, very
wrong. He bought options that were incredibly
cheap because the consensus was the market is
stable, nothing bad will happen. So he bought
these dirt cheap options, pennies on the dollar,
that would pay out massively if and only if the
market crashed. He was betting on chaos. And
then chaos arrived. It did. When the market crashed,
he reportedly became financially independent
from that one event. That trade gave him what
he calls freedom from authority. He never had
to answer to a boss again. That is the absolute
dream, isn't it? To have enough money that you
can say whatever you really think without ever
worrying about being fired. But he didn't just
stop there. He started his own fund, Empirica
Capital, in 1999. And then, of course, we hit
the dot -com bubble. And again, the same pattern
repeats itself. In 2000, when the bubble finally
burst and the Nasdaq just took a nosedive, his
fund, Empirica Kratosis LLC, made a 56 .86 %
return. While everyone else was losing their
shirts because they thought tech stocks could
only go up, remember Pets .com, Ebb was positioned
for the crash. Kratosis? It's a statistical term,
right? It's not just a cool name. It is. It refers
to the tails of a distribution curve. We'll get
into fat tails later on. But basically, he named
his fund after the very statistical concept that
everyone else was ignoring. This idea that extreme
events happen way more often than we think. And
then, of course, the big one, the 2008 financial
crisis. By this time, he's not running his own
fund, but he's an advisor to a fund called Universa
Investment. Correct. And he advised them on a
strategy that was explicitly based on his black
swan idea. In October of 2008, when the entire
global financial system was melting down, some
of Universa's funds returned between 65 % and
115%. In one month. That is astronomical. While
the S &P is tanking, they're literally doubling
their money. It's incredible. And it totally
cemented his reputation. But what's so fascinating
is Taleb's attitude about it. He didn't just
want to be some rich hedge fund guy. He claimed
back in 2007 that he was retiring from trading
to be a full -time author. He considers himself
an epistemologist, not a businessman. He just
used trading to buy his freedom so he could sit
around and think about randomness without having
to sell anything to anyone. Which brings us perfectly
to segment two, the inserto. This is the body
of work that he created with that freedom. And
the source material is very specific. This isn't
just five separate books that happen to be by
the same author. No, not at all. You have to
view them as chapters in a single giant book.
It's a five volume philosophical essay on uncertainty.
The central theme connecting all of them is how
do we live in a world that we don't understand?
So let's break down the core concepts. The most
famous one, obviously, is the black swan. What
is the actual technical definition here? Because
like we said, people use it for everything. My
coffee spilled this morning is a black swan.
Right. That's not a black swan. That's just you
being clumsy. A black swan is an event that has
three very specific attributes. First, it is
an outlier. It lies way outside the realm of
regular expectations because nothing in the past
can convincingly point to its possibility. So
you can't predict it just by looking at a chart
of what happened last year. Exactly. I mean,
if you look at a chart of the stock market from
2000 to 2007, you just see the steady growth.
There is nothing in that chart that predicts
what happens in 2008. The second attribute is
that the event carries an extreme impact, massive
consequences. It changes the game entirely. And
the third. The third, and this is the really
psychological part, is that despite its outlier
status, our human nature makes us concoct explanations
for its occurrence after the fact, which makes
it seem explainable and predictable in hindsight.
That third one is the real kicker, isn't it?
We look back at 2008 or the dot -com bubble and
we say, oh, well, obviously housing prices were
too high or, of course, that startup. with no
revenue was going to fail. But we didn't see
it coming. We rationalize the chaos. We suffer
from what he calls the narrative fallacy. We
just love stories. We want the world to make
sense. So we write a history that makes the crash
look inevitable. Taleb's big argument is that
the standard risk models used in finance and
really in all parts of life, they completely
ignore these events. They use Belker's or Gaussian
distributions that assume extreme events are
virtually impossible. Taleb says, no, the extreme
events are the only ones that really matter.
And this leads. another one of his great terms
the ludic fallacy yes ludic comes from the latin
word for games paleb argues that we constantly
mistake structured randomness like what you find
in a casino for real world randomness in a casino
you know the odds you know there are 52 cards
in a deck you know the rules of roulette it's
risky sure but it's computable risk but the real
world is not a casino Not even close. In the
real world, you don't know the rules. You don't
know how many cards are in the deck. You don't
even know if you're playing cards or some other
game. The dark side of the moon is harder to
see. Taleb has this fantastic quote. The dark
side of the moon is harder to see. Beaming light
on it costs energy. We prefer the well -lit room
of the casino because the math is easy and clean,
but reality is what's happening in the dark alley
outside. I love that. We're all sitting here
playing poker, but the universe is playing, I
don't know, Calvin Ball. Or it's just about to
drop a piano on the table. Okay, let's move to
the next big concept, which I think is actually
his most profound, anti -fragile. This is such
a critical distinction, and it's probably the
most useful one for our listeners. Most people
think the opposite of fragile is robust or maybe
resilient. But Taleb says no. If you drop a glass
package, it shatters. That's fragile. If you
drop a plastic package, it doesn't break. That's
robust. But it doesn't get better from being
dropped. Right. It just survives. It stays the
same. Anti -fragile is something that actively
benefits from volatility, disorder, and stress.
It's the package that if you drop it, it somehow
turns into a better, stronger package. Which
on the surface sounds like magic or maybe science
fiction. How can something get better from being
damaged? Well, he uses biological systems as
the prime example. Think about your muscles.
If you go to the gym and you stress your muscles,
you're literally damaging the fibers, creating
micro tears. They don't just heal back to where
they were before. They grow stronger. They overcompensate.
That is a fundamentally anti -fragile system.
Okay, that makes perfect sense. Evolution itself
is anti -fragile. Individual animals die. That's
fragility. But the species as a whole gets better
because the weak are weeded out. So anti -fragility
requires some level of pain or stress or failure
to work. It does. And he applies this to economics,
too. He argues that we keep trying to smooth
out the economy. We bail out the banks. We try
to stop every recession. We keep interest rates
at zero. But in doing so, we're actually making
the entire system more fragile. We're stopping
the muscle tearing that needs to happen for the
system to get stronger. It's like stopping a
forest fire. Yeah. If you put out every single
small fire, you eventually build up so much dry
wood that when a fire finally does happen, it
burns. continent down. That is a perfect analogy.
By suppressing volatility we prevent the system
from learning. We create this powder keg situation
where instead of having a lot of small manageable
corrections we eventually get one massive catastrophic
explosion. Next concept up. Skin in the game.
This one feels almost political or ethical. Oh
it's deeply ethical. The central rule is that
decision makers must bear the risks of their
own decisions. It's that simple. In the past,
a general who wanted to start a war had to lead
his troops into battle. If he made a bad decision,
he might die. That is skin in the game. An architect
in ancient Babylon, under Hammurabi's code, if
he built a house and it collapsed and killed
the owner, the architect was put to death. Talk
about accountability. I mean, that would certainly
change how condos are built today. Wouldn't it?
But today, we have a huge problem. We have bureaucrats
and bankers who can crash the entire economy
or start a war. And if it goes wrong... They
still get their bonus. They still get their pension.
They might even get a lucrative speaking tour
out of it. It's the Bob Rubin trade, right? The
old joke, heads I win, tails you lose. Exactly.
Taleb argues that this asymmetry. Keeping the
upside for yourself but transferring the downside
to other people, to taxpayers, is what creates
these incredibly fragile systems. If you don't
pay a penalty for your errors, you never learn,
and you just keep taking more and more dangerous
risks. He despises that class of people, the
interventionistas, who mess with complex systems
without suffering the consequences of their own
mistakes. Then we have Fool by Randomness, which
was his first non -technical book. This is really
the foundation of the whole thing. The core error
he's pointing out is that we consistently underestimate
the role of luck. We see a successful trader
or a CEO and our first instinct is to think genius.
We think visionary. But in a random environment,
someone is bound to get lucky. If you have 10
,000 monkeys flipping coins, one of them is eventually
going to flip heads 20 times in a row. And then
the media will rush to interview that monkey
and ask him about his coin flipping technique.
Precisely. And the monkey will write a book called
The 20 Principles of Heads. Taleb says we need
to have a bit more humility. We attribute success
to skill when it might just be survivorship bias.
And finally, from the inserto, we have The Bed
of Procrustes. and this is his book of aphorisms
the metaphor comes from greek mythology procrestes
was this innkeeper who had a special bed He wanted
every single guest to fit that bed perfectly.
So if a guest was too short, he'd stretch them
on a rack. If they were too tall, he'd chop off
their legs. Ouch. That's vivid. It is. And Taleb
says we do this with ideas. We squeeze the messy,
complex reality of life into our crisp, commoditized
ideas and our neat little models. We try to change
the territory to fit the map rather than changing
the map to fit the territory. We want the world
to fit into our Excel spreadsheets. And when
it doesn't, we try to force it. It's such a powerful
image. We're chopping off the legs of reality
to make it fit into our preconceived notions.
Okay, so that's the philosophy. But Taleb is
also a guy who talks about how to live your life.
This isn't just abstract theory for him. Segment
three, practical applications. He has this concept
he called the barbell strategy. And this is really
how you apply the inserto to your actual life.
The premise is that medium risk is a trap. We're
always taught to be balanced, to diversify into
moderate investments. Taleb says this is incredibly
dangerous because the risk of those medium investments
is fundamentally uncomputable. A safe blue chip
stock can still go to zero in a black swan event.
Think Enlon or Lehman Brothers or Kodak. So what's
the barbell then? How does that work? You avoid
the middle entirely. You are hyper conservative
and hyper aggressive at the exact same time.
So in finance, he suggests putting something
like 80 to 90 percent of your assets in extremely
safe instruments like treasury bills, stuff that
simply cannot lose money unless the entire government
collapses. That sounds incredibly boring. And
with inflation, aren't you technically losing
money? It is boring. And yes, you might lose
a little bit to inflation, but the key is you
are safe. You cannot be ruined. Then you take
the remaining 10 to 20 percent and you put it
into highly risky diversified speculative bets.
Things with a limited downside. The most you
can lose is that 10%, but an unlimited upside,
like venture capital or buying out of the money
options. So if a market crashes, your big 90
% chunk is safe. Yeah. And if the market explodes
upward or you happen to catch a positive black
swan, your little 10 % chunk makes you a fortune.
Exactly. You cap your losses, but you expose
yourself to positive black swans. You completely
remove the risk of ruin. The middle, putting
everything into, say, the S &P 500, leaves you
exposed to a... 50 % ROP if the market crashes.
The barbell protects you from that. And he applies
this to health and fitness too, which I find
completely fascinating. He thinks most of us
are exercising wrong. He does. He absolutely
hates steady and moderate exercise. So no jogging
on a treadmill for 45 minutes at a medium pace.
He says humans evolved for random environments.
We spent most of our time walking slowly, gathering
food. That's a low effort activity. And then
occasionally a lion jumps out of the bushes and
we have to sprint for our lives. That's an extreme
effort. So the barbell for fitness is walk a
lot and then occasionally lift something incredibly
heavy or sprint. until you feel like you're going
to die. Pretty much, yeah. Low effort most of
the time, punctuated by very intense stress,
no chronic cardio in the middle. He argues that
that kind of chronic moderate stress, like jogging
every day, actually wears the body down without
giving it the powerful anti -fragile signal it
needs to build muscle. And he applies the same
logic to diet, right? He does. He argues that
modern humans have the steady, constant supply
of food, three meals a day plus snacks. But our
ancestors had a very random supply. So he looks
at the frequency of eating. Intermittent fasting
fits his model perfectly. You have periods of
feast and periods of famine. Not a steady drip
of snacking all day. It's also consistent. Avoid
the steady state. Embrace the extremes. And this
leads right into his view on innovation, which
he calls convex tinkering. He believes that,
quote, decentralized experimentation outperforms
directed research. He has a great line about
birds, something like models are like lecturing
birds on how to fly. That's the one. Birds flew
for millions of years before anyone understood
the principles of aerodynamics. We solve problems
by doing, by tinkering, by trial and error, not
by theorizing in a classroom. The theory usually
comes after the invention to explain why it worked.
The steam engine wasn't invented by a physicist
using the laws of thermodynamics. It was invented
by tinkerers. The laws of thermodynamics came
later to explain the engine. So if you want to
invent something, don't write a 50 -page business
plan. Just start tinkering. Exactly. Be the tinkerer,
not the lecturer. Okay, so we've established
the brilliance. Now we need to talk about the
brawler. Segment four, style, criticism, and
controversy. Taleb is not a polite academic who
sips tea and nods thoughtfully. He is, well,
he's aggressive. That is putting it mildly. He
describes his own writing style as mixing semi
-autobiographical narrative with philosophical
tales. But his public persona is known for these
incredibly harsh personal attacks. He doesn't
suffer fools gladly, and he defines fool very,
very broadly. Let's just look at the list of
targets. Bankers are obviously high on that list.
Oh, absolutely. At the World Economic Forum in
Davos in 2009, which he derisively calls the
International Association of Name Droppers, he
stood up on stage and said he was happy that
Lehman Brothers had collapsed. I mean, can you
imagine saying that in a room full of bankers?
That's like walking into a funeral and saying
you're glad the guy is dead. He suggested bankers
need punishment to prevent recklessness in the
future. He believes the whole bailout culture
is fundamentally immoral because it removes skin
in the game. He basically looked them in the
eye and told them they were parasites on the
economy. And he hates economists. With an absolute
passion. He has called them idiots and said They
cause more crises than they solve. He specifically
goes after the big names. Larry Summers, Paul
Krugman, Joseph Stiglitz. He thinks their models
give a false sense of security that directly
leads to disaster. He has this term for them.
IYI. Intellectual yet idiot. People who are brilliant
in books but have absolutely no common sense
in the real world. But the biggest feud, the
real heavyweight title fight, has to be with
Myron Scholes. Oh, yes. Myron Scholes is a Nobel
laureate. He co -developed the Black -Scholes
formula, which is the standard model for pricing
financial options. It is like the Bible of modern
finance. Every single trader learns it. And Taleb
attacked the Bible. He didn't just attack it.
He basically said Scholes was personally responsible
for the financial crisis. He said Scholes should
be in a retirement home doing Sudoku rather than
lecturing anyone on risk. Doing Sudoku? That
is so specific. Yeah. So devastating. Taleb and
his collaborator Espen Hogg wrote this paper
where they argued that nobody actually uses the
black skulls formula in the real world of trading.
They use heuristics, simple rules of thumb. He
basically told a Nobel Prize winner that his
entire life's work was irrelevant and dangerous.
And what was Skoll's response? Yeah. I mean,
he couldn't have just taken that lying down.
No. Skoll's retorted that Taleb just. popularizes
ideas and is making money selling books. He claimed
that Taleb doesn't cite previous literature and
isn't taken seriously in academia. But then Taleb
fired back with a paper listing hundreds of documents
showing the formula wasn't even derived by schools
originally. It was just a messy, very public
intellectual brawl. It really is like watching
two grandmasters get into a boxing match. He
also waded into the IQ debate, which is always
a complete minefield. He did. He published an
article calling iClue largely a pseudoscientific
swindle. What's his argument there? Because IQ
is a pretty well -established concept in psychology.
His argument is that IQ tests don't really measure
intelligence. He says they measure absence of
stupidity or unintelligence. So it can help you
find people who can't do the job. If you have
an IQ of 70, you probably can't be a physicist.
But it doesn't predict high performance. He argues
that once you get past a certain threshold, a
higher IQ doesn't really correlate with success
in the real world. He considers the rankings
a fraud and has even called them immoral and
racist. That's a very Taleb take on it. The metric
you are all using. is a lie. And then there's
his politics. He seems to be all over the map.
He is. He dedicated his book Skin in the Game
to both Ron Paul and Ralph Nader. A libertarian
and a consumer advocate. That's a very odd couple.
It makes a certain kind of sense in his framework,
though. Both of them are anti -establishment
and both focus on accountability. Nader wants
corporations to be accountable. Paul wants the
Federal Reserve to be accountable. But he's not
a pure libertarian by any means. After the 2022
invasion of Ukraine, he denounced naive libertarians
who were soft on Russia. He supported an aggressive
military response. He just doesn't fit in a neat
left wing or right wing box. He fits in the insurto
box. It's clear he doesn't care about being popular.
He only cares about being robust. But we should
acknowledge that he isn't just a guy throwing
insults. He has serious technical chops. Segment
five, technical contributions. This is really
important. It's easy to get distracted by the
Twitter fights and the, you know, the clever
aphorisms. But Taleb is a mathematical statistician
at his core. He wrote a technical version of
the inserto called Statistical Consequences of
Fat Tales. OK, so let's go back to those fat
tales. What does that actually mean in a statistical
sense? So in a normal distribution of bell curve.
Most of the data points are clustered in the
middle, in the hump, and the tails, which are
the extremes, they taper off very quickly. It
assumes that extreme events are incredibly rare,
like you will never meet a man who is 10 feet
tall. Right. Human heights follow a pretty clean
bell curve. Exactly. But financial markets don't.
Wealth doesn't. In a fat tail distribution, the
tails don't taper off. They stay thick. Extreme
events are much, much more likely than the bell
curve suggests. You can meet a man who has a
billion times more money than you do. And he
has this one data point about the stock market
that just blew my mind. The 1987 crash. Right.
He points out that in the real world, a single
observation can completely determine the properties
of the whole data set. So he noted that the 1987
crash, just one single day, determined 80 % of
the kurtosis, which is a volatility profile,
for the entire U .S. stock market over a 40 -year
period. Just think about that for a second. 40
years of trading data, thousands and thousands
of days, and 80 % of the entire risk profile
comes from one single day. That is the essence
of fat tails. If you ignore that one day, your
model is absolute garbage. But most models treat
that day as an outlier, and they just throw it
out. They say, oh, that was a freak event. Let's
remove it from the data set so our curve looks
pretty. Taleb says that day is the model. If
you remove the crash, you aren't measuring risk
at all. It's like saying, I'm a great driver
if you just ignore that one time I drove off
a cliff. That's a perfect way to put it. And
he worked with another mathematician, Rafael
Duarte, on something they called statistical
undecidability. which sounds very complicated.
It is, but the core concept is pretty simple.
They argued that statistics as a field is fundamentally
incomplete because it cannot predict the risk
of rare events. If an event is rare enough, you
simply don't have enough data to know the probability.
You are flying completely blind and the math
can't save you. You cannot use the past to predict
the future when the tails are fat. He also applied
this thinking to the pandemic, didn't he? He
did very early on. On January 26th, 2020, when
most of the world was still saying it's just
the flu or it won't leave China, Taleb, along
with Yanir Bar -Yam and Joseph Norman, published
a note called Systemic Risk of Pandemic via Novel
Pathogens. January 26th. That is incredibly early.
It's remarkably prescient. They argued that SARS
-CoV -2 was not being taken nearly seriously
enough. And their logic wasn't about the specific
biology of the virus, but about the math of the
network. They argued that in a globally connected
world, pathogens spread much, much faster than
standard models predict. Global connectivity
increases systemic risk. They called for an immediate
aggressive clampdown because the downside risk
was infinite total ruin. It goes right back to
his asymmetry idea. If you overreact and you
turn out to be be wrong. You lose a little bit
of money. There's some panic. But if you underreact
and you're wrong, you lose everything. Exactly.
It's the precautionary principle. When the risk
is total ruin, you don't sit around and wait
for more evidence. You act immediately. And finally,
let's talk about his professional legacy in finance.
Tail risk hedging. This is the business model
of universe investments. It's basically insurance
against the apocalypse. The strategy is to accept
small, constant losses. just like paying insurance
premiums. You bleed a little bit of money every
single month buying these put options that are
way, way out of the money. Which has to be psychologically
very difficult. Nobody likes losing money every
month, even a little bit. It's incredibly hard.
You look like a loser for years on end. You have
these lengthy dry spells. Your neighbors are
making 10 % a year in the stock market, and you
are consistently losing 2%. But then the market
crashes. And while everyone else is jumping out
of windows, your fund pays out a massive, life
-changing jackpot. It's the bar bill again. You
pay small amounts to protect against the black
swan, and when it finally arrives, you profit
immensely. And that really is the summary of
the man. He has built an entire life and an entire
philosophy completely designed around the central
idea that we just don't know what's coming next.
Okay, let's wrap this up. We've covered the aristocrat
-turned -trader, the philosopher of uncertainty,
the public brawler, and the mathematician. When
you step back from all of it, what is the single
biggest takeaway here? I think it's a fundamental
shift in worldview. Most of us go through life
trying to predict the future. We try to guess
what the stock market is going to do or what
the weather will be next week or how our career
is going to turn out. Taleb's message is stop.
You can't predict the future. The world is far
too complex. So instead of prediction, what?
Focus on preparation. Focus on robustness. Build
a life and a portfolio and a body that can handle
whatever the future throws at you. Don't try
to see the black swan coming. Just make sure
you're the kind of person who survives it or,
even better, benefits from it. Be the anti -fragile
package. And I want to leave our listener with
one final provocative thought. Taleb talks about
this idea he calls the fourth quadrant. Yes.
This is the domain of complex, real -world problems
where we don't know the rules and the impact
of being wrong is incredibly high. And Taleb
suggests that in this quadrant, we should probably
stop using models entirely. No maps are better
than bad maps. If you're in a strange city and
you're using a map of a completely different
city, you are guaranteed to get lost. So here
is the question for you, the learner. Look at
your own life. Where are you exposing yourself
to that medium risk, that dangerous middle? Where
are you relying on a steady paycheck from a company
that could vanish tomorrow? Where are you relying
on moderate exercise that isn't actually preparing
you for real -world stress? Where are you being
fragile while thinking that you're safe? And
as Taleb would say, referencing his most famous
metaphor about the turkey, the turkey is fed
every single day for 1 ,000 days. Every day,
the turkey's statistical model confirms the hypothesis
that the humans love me, they feed me, life is
good and stable. The turkey's confidence is at
its absolute peak on day 1001. And day 1001 is
the Wednesday before Thanksgiving. Exactly. What
the turkey sees as a black swan, the butcher
sees as just another Wednesday. It's all about
perspective. So the final advice from Nassim
Nicholas Taleb. Don't be a turkey. Thanks for
listening to The Deep Dive. We'll see you next
time.