Taleb - your 15 minutes is up

Finance Professor posts a couple of links about Nassim Taleb (the black swan dude) that criticize some of Taleb's recent prognostications. Although Finance Professor likes Taleb, I think Taleb has had his 15 minutes of fame. We get it! Returns have fat tails. This isn't new information. What was new was that Taleb had the notion to write a book on it. Anyhow, his rants on academic economists are childish and frankly tiresome.

Taleb "sue the nobel prize committee"

The author of "Black Swan", Nassim Taleb, says that investors should sue the Nobel Prize committee for legitimizing the work of Markowitz, Miller and Sharpe.  Taleb made his name by arguing that standard portfolio theory understates the likelihood of severe events.  He's clearly got a flair for garnering publicity, but I really think his 15 minutes are up.

I've posted on Talib before.


In other news, Taleb is planning to sue the estate of the Wright Brothers for losses incurred because of airplane crashes.

Damodaran on Taleb

Aswath Damodaran is a Prof of Finance at NYU.  He's well known for his book on equity valuation, which is excellent.  He also maintains a blog, which unfortunately he doesn't update that often, but when he does, he posts some gems.   For example, here is his take on Nassim Taleb's rant about the Nobel prize committee.

As readers will remember, I've posted on Taleb before.

Aswath also posts on QE2 with the memorable title "QE2 or Titanic"

Black Scholes - the root of all evil?

Last week, one of my MBA students handed me a copy of "Conde Naste Portfolio" which featured an article about the Black Scholes option pricing model. The article is also online and FinanceProfessor has a link to it here.

The article is pretty poor (although the magazine is very glossy!) First of all, it basically rehashes all the material in the PBS Nova TV special from a few years ago which looked at Black Scholes and the collapse of Long Term Capital Management. The Black Scholes Model was blamed for all the ills of the world back then. To make the topic more current, the author of the piece cites a Nicholas Taleb who has basically made a living trashing Black Scholes. People listen to this guy because back in 1987 he correctly bet that the market would crash. By his own admission, he hasn't been able to repeat that feat since - hmmmm. Anyhow, he has this to say about Black and Scholes:

"This is what I'm saying to Merton and Scholes," "You guys are just parasites. You're not bringing anything useful to the market. You are lecturing birds on how to fly. You're watching them fly. And then you're taking credit for it."

He also thinks that they should have the Nobel revoked.

I'm sorry Mr Taleb, but you are so far off base here, your comments barely dignify a response. The Black Scholes model is a model, and just that. It assumes that the risk input that you use is a reasonable estimation of the future risk of the security. If the security does something drastically different to what it has done in the past, then the model will misprice it. Garbage in, garbage out. If you use the model and don't recognize this, then you'll likely get burned.

Mr Taleb, don't go shooting the messengers (or in this case trashing the authors) of the model in such an unprofessional manner.

Fama and French on Taleb

Nassim Taleb (of Black Swan fame) has received a lot of press of late for his argument that returns are fatter tailed than the normal distribution assumes. He has taken his arguments one step further and consistently railed against Nobel prize winners in financial economics (and actually academics in general - although this latter piece is more of an incoherent rant).

A fair question then is whether the idea of fatter tails is new to financial economics. Turns out it isn't. As Gene Fama points out the idea is well known and well understood (at least by academics).

Furthermore, Fama's book "Foundations of Finance" which is used by many finance Ph.D. programs as a basic text discusses the issue. My edition of the book is copyrighted 1976.

Fama does point out that from a risk management point of view, the issue of whether tails are fat or not is crucial. But from a portfolio management view it doesn't really matter too much.

Round up of some other good bloggings

I've been neglecting my blog for a couple of weeks, but this morning a couple of great postings on other blogs caught my attention.

http://gregmankiw.blogspot.com/2009/02/my-preferred-fiscal-stimulus.html

http://www.portfolio.com/views/blogs/market-movers/2009/02/09/the-cnbc-cacophony-taleb-roubini-edition?tid=true