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#691: Nassim N. Taleb & Scott Patterson — How Traders Make Billions in The New Age of Crisis, Defending Against Silent Risks, Personal Independence, Skepticism Where It (Really) Counts, The Bishop and The Economist, and Much More

The Tim Ferriss Show

Thu Sep 07 2023



Background of Nassim Nicholas Taleb:

  • Nassim spent 21 years as a quantitative trader before transitioning into research
  • He is the author of a series of books called Incerto that cover uncertainty and risk
  • His work has been published in multiple languages and covers various fields such as statistics, finance, medicine, philosophy, etc.

Background of Scott Patterson:

  • Scott is an investigative reporter for The Wall Street Journal focusing on climate and energy policy
  • He has written several books including "Chaos Kings" which profiles traders like Nassim Taleb
  • His previous book "The Quants" discusses the rise of mathematical finance

Betting on Tail Events:

  • Universa's strategy involves buying far out-of-the-money put options to protect against extreme market downturns
  • Other hedge funds make the mistake of trying to mitigate the strategy by diversifying or selecting other correlated assets instead of focusing solely on tail events

Tempered Reputation Concerns:

  • Nassim emphasizes that reputation should be valued in certain circles with people who understand your ideas rather than seeking approval from everyone
  • Having skin in the game is important for decision-making because it aligns incentives and reduces potential conflicts of interest

Influences on Thinking:

  • Nassim draws inspiration from historical figures such as philosophers and theologians who were skeptical about big ideas and challenges conventional thinking
  • He explores these influences to develop a more independent mindset rather than blindly accepting established norms or beliefs

Polycrisis in the New Age:

  • The term "polycrisis" refers to a magnification of extreme events that interact with each other, making them worse collectively
  • Scott's book examines the polycrisis concept and proposes ways to manage risks associated with multiple crises happening simultaneously. One example is climate change.

Convexity:

  • Convexity is a central concept discussed by Nassim Taleb, referring to non-linearity in risk-taking or investment strategies
  • It allows for greater potential returns during tail events or extreme market movements

Precautionary Principle:

  • The precautionary principle suggests taking preventative measures when there is uncertainty about potential risks.
  • It emphasizes being cautious rather than waiting for complete scientific proof before implementing protective measures

Interconnectedness in Financial Markets:

  • Do to globalization and electronic trading, financial markets have become increasingly interconnected
  • This has led to faster transmission of market movements and potential contagion effects during crises

Impact of Propaganda on Risk Perception:

  • Propaganda influences people's perceptions of risks and decision-making
  • Disinformation campaigns can lead to inadequate precautions being taken in certain areas. An example mentioned was the campaign against nuclear power after Fukushima.

Migration of Risk-Taking from Banks to Hedge Funds:

  • Risk-taking has shifted from banks to hedge funds in recent years
  • Hedge funds generally have more aligned incentives due to "skin in the game" but still involve risks

Focus on Convexity in Various Fields:

  • Convexity is not limited to finance; it can be applied in other fields like medicine, nutrition, oncology.
  • Understanding convexity can lead to improvements in risk assessment and decision-making processes

Misuse of Books:

  • People tend to misuse Nassim's book AntiFragile by applying it incorrectly
  • Antifragility requires eliminating fragilities first before something becomes stronger

Current Projects of Nassim:

Current projects of Nassim:

  • Working on a technical insert to a second volume consisting of scientific papers related to his previous works
  • Writing a new book structured like an ancient Roman language treatise with questions and exploration around various topics

Rigidity of meaning:

  • Non-Bullshit (non-BS) writings have rigidity of meaning where words used always refer precisely the same thing
  • Learned importance from arbitrage trading which follows the law of one price principle

Challenges Regarding Judging Ancient Texts:

  • Exploring how different values were judged at different times using examples from Talmud and other texts
  • Highlighting unfairness in retrospectively judging past individuals based on present day values

Engagement with Semitic Languages:

  • Interested in Aramaic because it's similar to his native Levantine dialect
  • Challenges encountered when studying Greek and Latin

Productive Conversations on Climate Change:

  • Scott shares his experiences engaging hydrocarbon businesses through avoiding certain types of language such as climate change
  • Focuses more on financial incentives outside their current areas when discussing energy options

Importance Of Studying Incentives And Behaviors:

  • Studying incumbent interests helps understand certain behaviors and provides opportunities for productive conversations