by Tyler Cowen
on November 24, 2012 at 6:52 am
1. There is no great stagnation, cereal edition.
2. 72-year-old man models teen girl clothes.
3. How high should the marginal tax rate be? Criticism of the 70%-plus proposals.
4. States and counties are not persons.
5. How to make Taleb stronger, and stronger yet. I have canceled my pre-order.
6. Scott Sumner on Singapore.
A biting review of Taleb. Makes me think of a question: why do some authors get considerably and consistently better as they progress, while others get worse? Are people whose books rely on novel arguments more likely to fit in the second, with some reversion to the mean and fame/status giving them a platform to spread weaker ideas?
When Black Swan came out in 2007 I was a big Taleb fan. Since then I’ve totally reversed my opinion of him. His primary theses (related to financial markets) is that the belief that options are systematically overpriced is an illusion. He believes the historical tendency of realized vol to fall below implied vol is due to the lack of tail events from the historical records. That in fact if you traded the strategy of selling vol for long enough eventually your expected value would be zero or negative as you captured tail events.
Luckily we had a test of this not too long after. The 2008 financial crisis was the most volatile time for markets since the great depression. And predictably at the start of the crisis those who sold vol did take big losses. But as long as you Kelly-sized appropriately and survived the first two months you made a fortune over the next two years as implied vol stayed at a huge premium to realized vol. (Just flip this chart upside down http://finance.yahoo.com/echarts?s=VXX+Interactive#symbol=VXX;range=5y).
Why Taleb is still such a darling of the media and pop. finance is simply beyond me. The man has been wrong wrong wrong, yet no one appears to have noticed or care.
So you are happy that essentially all that happened was the Fed bought (using money they created out of thin air) enough bad assets, pumped enough into the financial sector to create this wonderful situation we have today? Are you happy that some gnomes somewhere are setting prices?
All we learned is that the Fed going into the crisis had deep pockets. Nothing more nothing less. Nothing has been solved. None of the assumptions have changed. The question has become only how deep their pockets are.
We are learning with Japan that the pockets have limits. They are in the final throes, throwing the water caskets overboard to stay afloat. When will the US hit that point? There is still quite a bit of seed corn to eat.
I thought this was a strange criticism of Taleb, but I also find it strange that people think the 2008 crisis had anything to do with Taleb’s views. I suspect people confuse him with Nouriel Roubini.
Large, well-connected financial institutions engaged in highly speculative ventures, confident that the government would bail them out if the ventures went bad, and the ventures went bad and the government then bailed them out. The sort of philosophical musings Taleb goes in for just doesn’t touch this type of thing.
Taleb was running a hedge fund based on his thesis 1999-2004. Despite 9/11, he lost money in 2001 and 2002. That’s so bizarre, it sounds like poor execution, but I am confused.
He would expect small losses which would be overshadowed by large gains. Something similar to venture capital.
I had heard his Empirica Capital fund shut down because it wasn’t making money, but according to Taleb it was so he could focus full time on being a writer & scholar. His former partner Mark Spitznagel stayed in the game and made a lot of money during the crash, then like John Paulson bet there would be a lot of inflation. More relevant to Doug’s argument, Eric Falkenstein pointed out that the insurance industry practices precisely the opposite of what Taleb preaches: it bets against infrequent high cost events. He doesn’t think insurance companies are more prone to bankruptcy than average, but it’s something I’d like to see quantified (he cites some papers arguing that extranormal profits are found selling rather than buying out-of-the-money puts and that selling them has been historically the best performer among option strategies).
The only Taleb book I’ve read is “Fooled by Randomness”, which is enjoyable. I’d recommend reading Robyn Dawes (“House of Cards” or “Rational Choice in an Uncertain World”) instead though.
“Reading this book is the intellectual equivalent of having to sit patiently while someone shows you their holiday snaps.”
– Runciman, The Guardian.
Don’t people love looking at other people’s holiday snaps? Why else does Facebook have a billion users?
So they can look at what other people have for lunch.
Seriously, I can’t even bear to look at my own holiday snaps…
That old guy… actually looks kind of good in those. (Like John Waters, a bit.) I’m horrified.
I agree. One should probably be horrified…
He looks great! It’s his perk of being old – he can do what he wants, without having to care what other people think.
Yeah, he looks great in those clothes. If he was standing there nude he probably wouldn’t look so hot.
Proof that it’s not the clothes, it’s the attitude?
Taleb has always been self referential.
I think his current subject is somewhat different in that he appears to be focusing on a solution (anti-fragility) rathet than pointing out problems (disguised randomness, black swans, etc.). That is a much more difficult issue, becuase when you look at survival issues, there always seems to be a lot of randomness, or maybe better called unpredictable situationality, involved. The avise “be in the right place at the right time” is not easy to follow.
It is easier to mock mistakes than to devise solutions.
Consider the election predictors, before statistical polling and etc. arrived. Some pundit might have said “hey, you can’t criticize us until you can do better,” but no, in fact it would have been a great service to point out how worthless the predictions were. That would be true whether or not a better method ever arrived. See also active mutual funds, their managers, and their sensitivity to criticism.
In retrospect, I agree completely.
The Taleb reviewer had an interesting quote: “Eschewing debt makes states just as fragile as having too much of it. ”
Does eschewing debt make individuals fragile too? If not, at what point during the scale-up to a nation does “a little debt” start getting virtuous?
I’m not sure where the point occurs. However, consider this math result: the total (net) non-governmental savings precisely equals the governmental deficit. If we thing of money as a constant quantity, the total net savings must be zero. If two of us begin with 50 marbles each, and I manage to save 5 marbles (so that I end up with 55 marbles) the other person must necessarily have exactly 45 marbles. The only way we can have net positive savings is if a currency creator actually creates money. In the US, that’s the government (including the Federal Reserve).
Possibly the banks also create money in making loans, in the form of accounts where the bank promises to pay to someone’s order. If the order to pay gets back to the bank, it has to pay itself — do nothing. It doesn’t have to have the actual money it loans out. The banking system is set up to do this not only with single banks but with the banking system as a whole — orders to pay get cycled around so in 90+ percent of the cases, no actual payment of money is required.
Sneaking a little MMT proselytizing into the discussion.
somebody’s debt is anther’s asset but that doesn’t mean that all assets are somebody elses debt. savings (assets) can increase without increase in liabilities.
Not sure if I’d say debt is virtuous so much as, in some cases, it’s a good idea. Young people usually go in to debt on the strength of future earning potential. Don’t over do it, but remember the words of George Bailey:
“You… you said… what’d you say a minute ago? They had to wait and save their money before they even ought to think of a decent home. Wait? Wait for what? Until their children grow up and leave them? Until they’re so old and broken down that they… Do you know how long it takes a working man to save $5,000?”
Great idea, but show me an example. I suggest it is more an indication of the prejudices of the reviewer; either he makes a living handling government debt, or is a beneficiary when government borrows and gives him some. There are multiple ideologies of debt from socialist visions of building a great society to monetarists to those who want to wage war. They all want, need, desire, have wet dreams about unlimited borrowing ability. Those that want governments not to borrow are in the minority, cranks and misfits, obviously not part of the mainstream. From the point of view of the majority, the issues of 2008 were that people or entities had trouble borrowing more money. Europe’s issues are that Greece can’t borrow more money. The attempted solutions to date have been to lend them more, mostly to make payments. Haven’t worked very well.
Debt is extremely time sensitive. 3 months can change you from solvent with more assets than your debts to insolvent, if you can’t for some reason out of your control turn your assets liquid to make payments. In those situations the value of your assets are what you get in a fire sale. You have to have cash. Any small business can attest to the dangers of debt. For example, a good friend in business, thriving growing, hit a spot where the market just slowed down by about half. Lasted 4 months. He doesn’t have debt and was able to tide over the rough spot without too much difficulty. Debt obligations that need to be paid could have put him under. Note that his year will probably be better than last in total, but the bump in cash flow over that time could have been a killer.
OTOH, are there any large businesses which function at a zero debt operating point?
Not sure if it fulfills your zero-debt criteria, but Apple is famously, notoriously awash in cash on hand from its run of insanely profitable years. If they have any debt, it is surely short term, and they could almost literally wipe it out by writing a cheque tomorrow.
I believe several other major tech companies sit on substantial cash reserves. At least at one time, MS for sure, and possibly Google, albeit more modestly.
I instinctively find favor for Taleb’s idea about debt for most going concerns. Notable exceptions are a family dwelling (but leveraged conservatively, with a substantial down payment) or as a resort when, business or personal, fortune has temporarily turned against you.
(An interesting exception: some years ago my father was offered 0% financing on the purchase of a new vehicle, at a time when he was still paying down a (by then low-leveraged) mortgage. When asked what down payment he wanted to make on the vehicle, he naturally answered “zero.”
Red Hat (red had actually has ~34% of their assets in cash).
T Rowe Price Group
Bed Bath and Beyond
There are more, but there you go. They have zero debt.
With households, I agree that the complete lack of debt (and more importantly no access to credit) can make a household more fragile. Debt can cushion some of the many life shocks (temporary job loss, uninsured health costs, unexpected car repairs) and enable large, forward-looking investments (education, homeownership). A households can meet the former with saving (or a reduction in spending) ahead of the shocks, but the latter is quite difficult to do without debt. Debt is not bad, but it can be out of line with the household’s ability to repay. And the big reminder from the last cycle is that debt amplifies shocks…positive and negative. Debt helps households smooth through some of life’s shocks and lumpy investments, but it also exposes them to more extreme outcomes. Done poorly, debt makes a household more fragile than no debt. I find current discussions of debt (and de-leveraging) troubling. It would seem that some households now have ‘too much’ debt now, but why is that? And is the answer really to write off the debt or teach people debt is bad? I doubt that’s very helpful.
I think the distinction is access to credit, right? Then the point becomes trivial, does it not. Sure, if someone will lend you money you are more stable. If you borrow too much and they bring the knee-knockers then you are less stable.
Okay, Taleb is a self-important pompous ass. But that’s one of the most endearing things about him. You have to ignore the nasty remarks about other people. He’s not trying to have a conversation – so don’t bother. Take what you like and ignore the rest.
My thoughts exactly. I follow Taleb on Facebook. Sometimes his posts are uncomfortably true and sometimes they are just uncomfortable. It’s too bad if someone uses his uncomfortable posts to discount his uncomfortably true posts.
Yes, but with this principle lies madness, or worse, being respectful towards Paul Krugman on the same terms!
Small steps toward a better academic feud!
Libertarians were meant to argue amongst themselves anyway.
Some Sumner Wisdom: “My theory is that leftists don’t really mind a place where income is unequal, they don’t like places where income looks unequal. [emphasis added] In my town liberal millionaires typically drive Camrys.”
Mickey Kaus is another proponent of this idea, phrasing it as “social equality” (meaning a society where money does not improve your social class).
It’s hardly a joke to say the Scandinavian countries have this concept down pat, with the famous example of Ingvar “IKEA” Kamprad driving a well-worn Volvo most of his life.
I am no leftist, but I totally approve of that attitude. It is one of my favorite aspects
….my favorite aspects of living in the interior west. The appearance of economic equality is a very important aspect to social equality. Maybe it is my Swedish family, but honestly the Inland Northwest and High Plains (of both the US and Canada)do this a lot better than Scandinavia.
But some people want a Porsche simply because it is the best.
The critic of the 70% argues that the engineer might not work nearly as hard, if he has to face the 70% tax rate. The problem is that scientists and engineers can’t reasonably hope to reach that level. The income levels that would be taxed at 70% are those of the banksters, the financial gambliers, the Bain-type companies, etc. If someone making $100,000,000 a year decides not to work because most of it would be taxed away, someone else would be perfectly willing to work for a lot less — say $1,000,000 a year.
Even if the 70% level did deter some engineers from working — that means more work is available for the rest of us.
Two huzzahs for the lump of labor fallacy!
The engineer who would make this type of money would be creating something new. If they feel they that the government would confiscate the gains, they may very well go elsewhere.
Hasn’t anyone in the great US mind trust figured out that this is what has been happening for more than a decade? A few years ago someone wrote a book describing ascendant nations as those who attract great minds from the rest of the world. The US has been successful as a result. Isn’t the trend now for smart folks to come to the US to take advantage of the top notch educational institutions, then leave and go elsewhere to make their fortune? I’m certain that high marginal rates on the successful will not change that trend.
You obviously did not read the paper then, because that is not the argument at all.
“Even if the 70% level did deter some engineers from working — that means more work is available for the rest of us.”
Wow, you ARE an idiot. Work is not a scarce resource, everything else is, including labour.
Or hiring people to implement something they designed or identified.
At punitive rates, then they have to incorporate (I’m not a tax expert) which militates towards corporateness, which at least puts the lie to the liberals who say “hey, you can just make a partnership.”
The formidable Gillian Tett does however have a new, positive review of NNT: http://www.ft.com/intl/cms/s/2/a49f8514-3329-11e2-8e44-00144feabdc0.html
What will make you cancel the cancellation?
With what he doesn’t cull, I find this situation interesting.
This is a meta-post by Tyler. Both of this links are negative reviews of NNT, and so he ads another neg to demonstrate Taleb’s theory of anti-fragility. Cute, I’d say. Not sure any other MR readers actually caught onto this.
Nope- it was just you.
Perhaps this? Taleb has replied to the Guardian (HT Brad DeLong on Twitter just now): http://fooledbyrandomness.com/totheeditor.html
Any idea what Taleb means when he says “heuristics need to be convex” in that letter? Apparently it’s the central idea of his book.
PS. Does anyone else think it’s bad form for an author to respond to a book review and defend his book? Or is this normal practice?
Simply that when things go unexpectedly, the whole thing doesn’t collapse. Pretty basic.
Financial risk estimation through it’s various iterations has been used not to avoid risk, or to keep things secure and safe. It has been used to calculate how close to the fine line of disaster we can go. The utter stupidity illustrated by the Basel rules that allowed almost unlimited lending against sovereign debt assets because they were considered to be risk free by some model. Inevitably it creates what Taleb would call a concave situation where the slightest perturbation creates a disaster.
Again pretty basic. We are led by stupid people.
Near as I can tell, heuristic convexity is the idea that decision making heuristics need to take into account the fact that the effect of rare events scales non-linearly. The most clear example I could glean was that getting hit by a 1 kg rock would hurt way more than getting hit with a hundred 10 g pebbles. It looks to be an extension of his idea about how problematic it is to ignore tail risk.
Heuristics are necessarily a model based on some sort of attempt to fit your observational experience. Convexity means that the model does not have local, isolated, optimum points. If something is convex, it will have a single optimum point and if you always go in a direction that gets you some improvement and you go long enough “eventually” you get to that one optimal point. There are fields of mathematics dedicated to picking the direction to travel to seek optimality.
Back when I was doing computational mathematics we always got to the point where we had no theory and had to really on what seemed reasonable (heuristics) to complete the algorithm. We found that there were orders of magnitude improvements in performance to be gotten from pushing the theory as far as we could before resorting to heuristics.
Having lived in Singapore for 10+ years, I agree with Sumner’s characterization of Sg as a “paternalistic” country. Despite high immigration though, many young Singaporeans are itching to get out of the country precisely because of the “soft authoritarianism” that we see there. Cost of living (cars, housing, food, etc.) in Sg has also increased dramatically over the years.
Despite? Calling Steven Sailor; calling Steven Sailor; Steven Sailor, you are wanted on the Red Telephone.
Anyone who buys a car in SG is quite frankly an idiot who cannot do math, it was true in 2005, it’s even more true now. I’ll definitely give you food and housing though.
I am not so sure how many young Singaporeans really want to leave (or whether it matters, at all, considering how many highly skilled expats want to go there) – in my experience they want to get foreign exposure (for me as a Swiss that is quite understandable considering how small SG really is) but not necessarily leave. Not the truly good ones, anyway – they know that it would be hard to get a similarly sweet deal elsewhere. Tax rates are among the lowest world wide, infrastructure is second to none (again, I am used to Swiss infrastructure) and the place just WORKS.
The main reason I did not stay in Singapore after graduating INSEAD was that I had a well-paid job to return to and a slight competitive advantage as a Swiss in Switzerland whereas in Singapore I would be just one of 500k expats.
Even as a Swiss, the soft authoritarianism did not truly bother me – if one thing appalled me there its how immigrant labor is treated – both by the businesses AND the state/judicial system (and I am about as classical liberal as an European could potentially be).
Bottom line: Singapore is one of the very few places in the world I could reasonably see myself living on an extended basis – if the Swiss Financial industry continuous it’s current path of boneheaded move after boneheaded move I may yet do – and perhabps sooner than anticipated…
Th FT website is annoying
The article describes Sim’s ‘fascinating’ response to the question of how to create jobs and support the economy. Excerpt:
“…make good long-run plans for resolving our budget difficulties without imposing severe fiscal stringency in the short-run…”
Yawn. This mantra has been commonplace, banal even, over the past four years. This is seriously starting to sound like Bugs’ promise to Daffy that he can host the show “next week”. This seems like an excellent rhetorical device for kicking the can indefinitely.
Fiscal cliff now, please.
This idea of “anti-fragility” isn’t even original. It’s already a big part of Tainter’s argument in ‘The Collapse of Complex Societies’ as well as in Elinor Ostrom’s work on socio-ecological resilience, and it’s at the core of the whole literature on polycentricity. Furthermore, the idea of treating uncertainty as a resource rather than just a cost is a big part of Sarasvathy’s work on how real-world entrepreneurs think.
Singapore reminds me somewhat of the wealthy suburb that has done so well to preserve property values and single use of real estate as to completely price-out its children.
Update: The Observer has an interview with Taleb: http://www.guardian.co.uk/books/2012/nov/24/nassim-taleb-antifragile-finance-interview
The AEI criticism of Diamond-Saez is borderline disingenuous. (There are no email addresses in the Tax Notes piece, so I don’t bother writing the authors.) The critics strike a friendly tone, but they have a selective and imperfect review of relevant elasticity estimates — missing the two biggest beasts: Saez’s own review (proving he very much knows many estimates) and Chetty (2012 Econometrica) reconciliation of many of these estimates, which end up with the consensus of 0.3.
Also, Diamond and Saez themselves say that taking some of the higher estimates at face value (not disavowing Gruber-Saez, e.g.), top federal income MTR could be 48%. Would the AEI be happy with that? If not, why not?
Yes, the higher recommendations follow from more indirect evidence about real, value-creating responses being lower than simple short-run swings in the taxable income might apply. This is still a cogent story, and it is not immediate that this force pushing optimal top MTR up should be cancelled by the long-term career-choice responses nobody could ever identify and measure.
Also, the unease with the no *marginal* weight on top consumption is even relaxed by Diamond and Saez themselves. And Saez does even more his handbook chapter on income taxation, and in another recent paper:
I am not sure I see the argument what is wrong robust policy-relevant economic research and their recommendations. Surely the authors would be very cautious in applying a Friedman, Stigler, Becker argument to the real world?
In any case, nobody is actually proposing federal income MTRs above 40%. Wait a second. The smart, serious and responsible Republicans did just propose MTRs higher than 100%. Go wonder.
Totally canceled my preorder toooooo
“Human beings proceeding by plan wish to reach a specific goal. They are most severely hit by accident when through it they reach the opposite of their goal: the very thing they feared, they sought to avoid (i.e. Oedipus).”
Funny, how ideas seem to be floating in the air, and every once in a while someboday catches them. But when the Greeks are quoted…..someone has won the argument “this guy said if first”.
The point I’d make about debt to Mr. Taleb is that nations that eschew debt entirely can be outcompeted by other nations as much as if they embrace debt crazily. I’m not wild about national debt, myself, and especially if it’s used by politicians to solve their own problems, like CEOs loading up a company with debt to pay a bigger dividend to boost the stock price to put their stock options “in the money.” But if we don’t borrow at all, our infrastructure, for example, may decline to the point where we lose business to countries that do borrow the money.
That’s a tougher argument to make about redistributive spending, of course, or about a significant percentage of defense spending, but still, forbidding debt at all makes us fragile. Without one of the most significant options, we’re less flexible.
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