Profile of Malcolm Gladwell and *Outliers*

Ever the optimist, Gladwell’s theories assume the good intentions of
everyone involved. Today, as he watches the world’s financial systems
collapse and people’s life savings go kaput, he radiates calm. Rather
than joining the mobs seeking to hang villainous CEOs from the nearest
lamppost, Gladwell counsels his followers to step back, take a deep
breath, and find the procedural flaw in the system that can be fixed.
“I don’t think anybody was being venal or corrupt. It’s not a scandal
as we normally understand scandals,” he says. “It’s a case of the
system being, the risk models being broken, the system not functioning
as it should, regulation not being appropriate to what people were
doing.” Tinker with the risk models, increase the regulatory structure,
Gladwell says, and the problem is solved. That may not be as
emotionally satisfying as punching out a CEO on a treadmill, but it’s a
lot more comforting.

Here is the whole piece, interesting throughout.  Thomas Schelling and Megan McArdle are among those making cameos.  Hat tip goes to Andrew Sullivan.

Comments

Heady days. I remember McCardle putting a whipping on him that should have drove him from the Internet and Steve Sailer's hectoring, which actually did.

"It’s a case of the system being, the risk models being broken"

How long has Nassim Taleb been screaming this? They won't put him on TV because he does not play the cheerleading games of the charlatans. Black-scholes only works in theory. The people that need to be locked up are the academic charlatans that support all of these theories that require unrealistic assumptions (mainly The Great Intellectual Fraud, the normal curve).

Hmmm, maybe I could write a blurb for the book.

"An excellent book for those interested in the ideas of Nassim Taleb's "The Black Swan," but put off by math, theory with real implications, and/or Nassim Taleb."

Tyler,
I don't see why you think this article was interesting. This is just another naive person who thinks that there are simple solutions to complex problems. Let's have a show of hands of everyone who accepts that the biggest problem in inner city schools is that the kids get a few weeks off in the summer.

I'm becoming increasingly fascinated by the tendency of the population to treat celebrity philosophers as some sort of all-knowing sage.

Its even more fascinating to see supposedly educated, self-directed people promote these celebrity philosophers.

Many of these pop philosophers find that great idea and overextend it. Example: Taleb called 9/11 a black swan, yet the use of civilian aircraft as missiles was explicitly contemplated in at least one work of fiction, so it wasn't completely unimaginable with existing knowledge and is a human action.

Oh course, many are the same people who deride people who search for meaning in religion as lacking in intellectual independence and vigor. Gladwell's idea to take a chill pill is nothing new, theologians and classic philosophers have been counseling "this too shall pass" for millennia. Then again, Taleb would say searching for the cause is elusive due to the "narrative fallacy".

As for more regulation:

These are just 20 of the big signature laws that apply directly or indirectly to Securities and Banking-not the reams of regulations
issued by the SEC, OCC, FDIC, Federal Reserve, Dept of Labor etc†¦

(I gathered this in five minutes, wonder else I’d have thought of in a hour)

1. The Securities Act of 1933
2. The Securities Exchange Act of 1934
3. The Public Utility Holding Company Act of 1935
4. The Trust Indenture Act of 1939
5. The Investment Company Act of 1940
6. The Investment Advisers Act of 1940
7. The Securities Investor Protection Act of 1970
8. Fair Credit Reporting Act (FCRA) 1970
9. Currency and Foreign Transactions Reporting Act 1970
10. Employee Retirement Income Security Act (ERISA) 1974
11. Home Mortgage Disclosure Act (HMDA) of 1975
12. Community Reinvestment Act (CRA) 1977
13. Foreign Corrupt Practices Act of 1977
14. Depository Institutions Deregulation and Monetary Control Act 1980
(despite the name, it increased Federal Control over Banks)
15. Expedited Funds Availability Act (EFA or EFAA) 1987
16. Federal Deposit Insurance Corporation Improvement Act (FDICIA) 1991
17. Truth in Savings Act 1991
18. National Securities Markets Improvement Act 1996
19. Regulation FD 2000
20. The Sarbanes-Oxley Act 2002

More regulation? Why haven't we been able to prevent booms and busts after sharpening the regulatory pencils for 75 years? Its not like the laws aren't being vigorously enforced- here’s the SEC’s press release on its record-breaking
enforcement activity for 2008.

http://www.sec.gov/news/press/2008/2008-254.htm

Yes, this list is recycled. Its my green initiative for the day.

Ugh, clearly I meant "thought that hijacking a plane and flying it into a building made for good fiction does not mean that it was ___NOT___ a black swan" and so forth...

Also, while I'm here, I would be curious to know how people are treating Taleb as an all-knowing safe (as implied by the post).

It's surely possible some people are, but it's been my impression that people have praised him for recognizing the frailty of pretentious (even compared to Taleb!) complex models that are dangerous if their fragility is not understood.

The phenomena makes sense, especially for 'pop' books like Gladwell, and could be true for Taleb as well. I just think it's fascinating when generalizations are made to indict an undefined group of thinkers and enthusiastic readers as superficial and ill-informed.

"I'm becoming increasingly fascinated by the tendency of the population to treat celebrity philosophers as some sort of all-knowing sage."

I'm not interested in Taleb as the man I'm interested in Taleb's ideas and my own extension of his ideas (read Black Swan and Fooled by Randomness).

Taleb -

"I wake up every morning knowing that I don't understand what is going on, and that is the way we are going to have to operate. Our understanding of the world has proven to be extermely weak. So lets learn to be more robust to human error."

Case in point, think about all those scientists that "claimed" they knew that DDT was harmful to birds.

How about instead of more regulation of business, we think about restricting what government is allowed to do?

The government needs the discipline of setting the value of the dollar to something concrete. It needs to be forced to stop interfering in the economy and stop favoring some kinds of investment of others.

A lot of talk about how business is greedy, but very little about how politicians have been using and abusing the treasury for the benefit of their contributors.

Greed is a constant. Every organism on the planet acts in its own self interest. What changes is how much you let your government get away with.

What, are we supposed to be surprised that banks, whose main function is to provide liquidity through leverage, could be spectacularly profitable one day and horribly unprofitable the next?

It may even be fundamentally true that in the long run banks as an aggregate institution will lose money. Maybe the same for insurance companies. Say that's true. What would you change?

A lot of talk about how business is greedy, but very little about how politicians have been using and abusing the treasury for the benefit of their contributors.

A lot of talk about how business is greedy, but very little about how politicians have been using and abusing the treasury for the benefit of pleasing supporters so they remain the toast of parties and get reelected. And not be seen as doing nothing and being uncaring, hard-hearted sobs.

If all Taleb said was that we should be more robust to human error, then who can disagree. But he doesn't. Instead he spends a lot of his time arguing against bell curve strawmen. Anyone who has worked with VAR models should know that models are models, not reality. Our regulators with formulas for capital based on those models probably know it too. But once they have rules, they need to follow them---although the market innovates its way around the existing rules. Not sure how you could stop that; what would the regulators do without rules? And if you have too many rules, perhaps you might stop some sensible innovation. Like everything, there is some kind of trade-off here.

As for saying Black-Scholes is wrong. I never get that. Black-Scholes does not work in the market---we have volatility surfaces in options prices. The last 20-30 years of derivatives research is about adding stochastic volatility and jumps to the models. Things that make returns non-Gaussian at some level. Maybe not non-Gaussian enough, but it is not like people don't think about the issue.

Is Taleb complaining about no-arbitrage? Hard to say, because the writing is so confusing. His preferred way to price options seems to be to assume that puts and calls with the same strike have the same expected return in real data. God knows what the rationale for that assumption is. It seems little better than no-arbitrage to me. But his arguments are confusing and he cannot be pinned down, so who really knows.

If the argument is that many options are not spanned and that we need to use risk adjustments rather than no-arbitrage pricing, then just say that. It seems sensible to me. But that doesn't sound grand enough for Taleb.

Does using risk models means that you don't have risk? And why would you believe that? My feeling is that many of the people blaming the models don't want to blame themselves.

Taleb's preferred investing strategy is to buy treasuries and tail insurance. If everyone really did that, exactly what kind of real investments would our society follow? What would the capital stock look like?

Jay,

Sorry, it wasn't DDT, it was the DDT metabolite DDE- I guess science doesn't work! http://www.reason.com/news/show/34742.html

Didn't Gladwell say the same thing about Enron? How they didn't really do anything morally wrong?

What I find interesting is this line: "regulation not being appropriate to what people were doing."
Of course it is not, best regulation or rather laws are those that are general and only try to find the smallest bulletpoint all can agree on(Thou shall not kill f.e.).

The problem with massive regulation is that it can deal with a set problem that happened but seldom with problems that are to come and often create new sets of possible problems. So, I feel that this sentence shows that more regulation is not the way to go, except one wants a new set of problems that stem from the new set of regulations, because the new set of regulations will be much more detailed and micro-managing as the one before...

And if we learned anything from recent disolutions like the Soviet Bloc and from observing the economy for decades, it should be that micro-managing economies is never a good idea.

Malcolm Gladwell's strength is that he's very, very open to new ideas. He genuinely admires scholars who come up with new theories. He doesn't see himself as a genius, just as a journalist who has a bully pulpit that he can use to promote the work of more original thinkers than himself.

His weakness is that, due to temperament and intellect, he doesn't perform reality checks on the new ideas he falls in love with. So, he pushes a lot of bad ideas into circulation (along with a few good ones).


I don’t think anybody was being venal or corrupt

Please, let this man out of his basement.
He was under lock far too long.

You contend that Congress overregulated (and will continue to regulate whenever possible) the financial services industry because it bestowed some unseen power to each of its members? Try again.

You seriously underestimate how much many (most?) politicians enjoy seeing CEOs and other "powerful" people treat them like royalty. Or see them squirm when they are sitting in a witness chair - below the dais - at a hearing.

It isn't money (in the US it's only green paper) by itself that corrupts. Power corrupts.

I think Dan Seligman's book "A Question of Intelligence" does a better job explaining the performance of East Asians on math/science subjects. Essentially, if you look at the group average, they do particularly well on the non-verbal component of psychometric tests.

This is consistent with their performance on math/science subjects. Seligman also notes possible explanations of this including:

"Severely compressed, his explanation goes about like this: Some sixty thousand years ago, when the lee Age descended on the Northern Hemisphere, the Mongoloid populations faced uniquely hostile "selection pressure" for greater intelligence. Northeast Asia during the Ice Age was the coldest part of the world inhabited by man. Survival required major advances in hunting skills. Lynn's 1987 paper refers to "the ability to isolate slight variations in visual stimulation from a relatively featureless landscape, such as the movement of a white Arctic hare against a background of snow and ice; to recall visual landmarks on long hunting expeditions away from home and to develop a good spatial map of an extensive terrain." These, Lynn believes, were the pressures that ultimately produced the world's best visuospatial abilities."

Also, Gladwell's explanation for Jewish legal success on working in the garment industry in NYC isn't convincing. Seligman notes jewish performance on the verbal component of psychometric tests is above average. The Cochran/Harpending paper on Ashkenazi Jewish intelligence suggests this is partly genetic. See Charles Murray's commentary on the paper:

"Assessing the events of the 1st century C.E. thus poses a chicken-and-egg problem. By way of an analogy, consider written Chinese with its thousands of unique characters. On cognitive tests, today’s Chinese do especially well on visuo-spatial skills. It is possible, I suppose, that their high visuo-spatial skills have been fostered by having to learn written Chinese; but I find it much more plausible that only people who already possessed high visuo-spatial skills would ever devise such a ferociously difficult written language. Similarly, I suppose it is possible that the Jews’ high verbal skills were fostered, through secondary and tertiary effects, by the requirement that they be able to read and understand complicated texts after the 1st century C.E.; but I find it much more plausible that only people who already possessed high verbal skills would dream of installing such a demanding requirement."

www.commentarymagazine.com/.../jewish-genius-10855

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