Nassim Taleb: Skeptical Empricist

Author of two very interesting books on randomness, luck, and philosophy: The Black Swan, and Fooled by Randomness, Nassim Taleb talks about interesting issues that affect investor behaviour.

The first and most famous concept he coined is the Black Swan which are phenomena that had never been been experienced before, or described before in historical records–but which actually exist, and do occur with disturbing frequency. Furthermore, once a black swan is experienced, everyone seems to realize it in hindsight, but this does not in any way make future black swans more predictable.

This insight has very dramatic implications on investors and traders who base a lot of their decisions on historical data. While data is important in establishing probabilities and frequencies, all historical data suffers from the same flaw: it is only reflective of history–and more specifically one path of history (i.e. what actually happened) and does not adequately describe all possible paths history might have taken.

Another concept Taleb describes has to do with skepticism and critical thinking. One thing that remains odd in people’s thinking is that generally people are selective in their skepticism and treat different topics with varying levels of critical thinking. An investor can be critical for instance of news and information he receives about his favorite stocks, but every Sunday listens to a religious sermon without question. On the flip side, you can have Atheists who are skeptical of the idea of a God but are taken hook-line-and-sinker by CNBC and Bloomberg analysts on the direction of the economy.

Taleb asserts that on some level, beliefs take over where critical thinking should, and this is where luck and randomness can play big tricks on people if they are not careful.