Fannie Mae and The Black Swan

In response to the trouble at Fannie Mae — its stock plunged — we have this:

“There is a sort of a panic going on and that’s not what ought to be,” said Senator Christopher J. Dodd, the Connecticut Democrat who heads the Senate banking committee. “The facts don’t warrant that reaction, in my view.”

Mr. Dodd said that he was persuaded by conversations with Mr. Paulson and Mr. Bernanke that the two companies “are fundamentally sound and strong.”

Nassim Taleb begs to differ — a year ago:

The government-sponsored institution Fanny Mae, when I look at their risks, seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup. But not to worry: their large staff of scientists deemed these events “unlikely.”

A footnote on p. 226 of The Black Swan, published April 2007. Asked to comment on the Fannie Mae situation, Taleb replied, “I discuss events before, not after. I despise postdicters.”

15 thoughts on “Fannie Mae and The Black Swan

  1. Taleb “despises” most everyone and in his opinion most everyone is stupid, except for himself of course. That’s one thing that makes him so insufferable and his books so unreadable. In his first book, “Fooled by Randomness”, he bragged that he resisted his editor’s efforts at correcting his English, which is his third language. It showed on every page.

  2. @Dennis Mangan

    NNT is certainly arrogant — but why take personal offense? (Personally, I enjoy opinionated arrogant persons as what else is there to talk about politics and religion?)

    As far as his dismissal of the prediction pundits, he certainly includes himself in that lot — that is what The Black Swan is all about. That WE fool ourselves all the time by fitting a narrative to a certain set of data and ultimately being fooled by randomness.

    I though his book quite readable and enjoyable. In fact, I have re-read multiple times for sheer enjoyment. IMHO he demonstrated a command of the English language better than 95% of native speakers. BTW how many languages do you speak, and morever, can you write in? :)

    @seth

    Unfortunately, your argumentum ad populum has to be rejected — why is unbearably unreadable PoMo so popular among the college crowd? :)

  3. I haven’t read “Swan”, simply because, even absent the self-congratulation, “Randomness” was low in substantive content. Taleb constantly boasts about his investment prowess, but to my knowledge has never released any performance data, nor has he given any details of his trades, other than that they are deep OTM puts and calls. I could stand the arrogance if he was actually saying something beyond what would fit into a short article.

    My own fluency or lack thereof in a 2nd language is irrelevant to criticism of Taleb’s writing. That’s the fallacy in criticism Johnson addressed 250 years ago. (“Sir, I may not know how to make a table. It is not my business to make a table.”) That being said, if I ever wrote for publication in Spanish I’d be more than happy to have an editor go over it.

  4. Dennis –

    Taleb is arrogant and insufferable at times. And you can argue that this is off-putting. Or that if he had used an editor or made an attempt to be more approachable (in language and tone), then he would have had a larger reading audience. But that’s hardly an argument against the content of his books, especially with regard to the specific that Seth pointed out.

    I admit I suffer from this when the content is politics. I find I have to issue a mental override when an insufferable politician or partisan/ideological think-tanker says something smart or reasonable. It’s difficult though and I don’t always succeed.

    Seth –

    It’s not clear to me that everyone who bought his books actually read them. Not unlike the Stephen Hawking fare back whenever. Popularity has a way of snowballing especially when the book is declared smart, innovative or some such. It makes for a good coffe table or bookshelf item. It works for fiction too. One of these days I’ll finish my copy of Pynchon’s Rainbow.

  5. I agree wholeheartedly with Dennis. The substantive content in “Fooled by Randomness” would fit on a matchbook cover, with room left over.

    Having been fooled once, I decided to skip “The Black Swan”. Is it anything more than a rehash of his first book?

  6. “Matchbook cover”? Here’s something that fits on half a matchbook cover: Faces in the morning push an oscillator that controls mood. Little things can have big implications.

  7. William James, in Lecture I of Pragmatism (1907) wrote:

    Whatever universe a professor believes in must at any rate be a universe that lends itself to lengthy discourse. A universe definable in two sentences is something for which the professorial intellect has no use. No faith in anything of that cheap kind!

  8. Generally agree with Dennis, here. Don’t know that I would call Fooled or Black Swan “unreadable” — they read relatively easily and the writing style (if not the tone) is compelling. They’re “unreadable” in the same way that cheez whiz in “inedible.” It’s technically edible, but lacks nutritional value, tastes bad, and hurts your stomach later. While I agree w/ Seth’s point that little things have big implications, I see a real difference between Seth’s example, which suggests a concrete relationship or effect, and suggests actions to test or exploit it. Taleb’s thesis in Fooled and Black Swan, are, as near as I can tell: “Shit happens. If you can manage to bet on it (or insure against it), you might make money.” And while Taleb had two books to spell out the concrete implications of his thesis and test them, he didn’t. Instead he spent a lot of words railing against percieved lesser intelligences and making up loopy new buzzwords.

  9. I read both books and enjoyed them. NNT’s message is I think, simple. Do not take the “experts” at face value; the best laid plans often fail due to unpredictable outside circumstances. As you pointed out Seth NNT is right when it comes to Fannie Mae, full stop!

  10. I was just witnessing congressional spending at its finest when it bailed out Fannie Mae and Freddie Mac as well as all those folks who were dumb enough to get in over their heads on mortgages when I realized what was happening. We are now losing our ability to hold ourselves individually accountable for our actions. Collateral damage is the ability to hold others accountable as well. Individual bankruptcy, stomach staples, misbehaved children at restaurants, public profanity, credit card debt and other excesses that are largely caused by the lack of individual self control are entry points for collective controls over everyone’s’ lives.

    Those of use who are responsible are left exposed to unnecessary controls, laws, and limits on our freedom.

    Now on to the collateral damage — we can no longer hold companies (unless you are an oil company), government, or groups accountable for their terrible lack of control either. When are we going to hold the US Congress and members of either party responsible for ANYTHING? Last I checked they made the laws that allowed the current banking and real estate crisis possible (besides the dumb individuals). They are also the same group who thinks that those of us who have behaved responsibly should be taxed on some of our hard earned 401K savings — no kidding. How about the companies who thought sourcing everything to China was a great idea for costs, now we have lost numerous jobs — where is the outcry about China’s human rights violations. Lastly, where is the press? Where is the in depth analysis of the cost of oil and the real reason for the supply side issues, or the pollution caused by third world countries. I see so much written negative about the United States it amazes me how we gloss over far more significant violators on this planet and give them a free pass. Did you know that China is shutting down factories up wind of Beijing prior to the Olympics so it does not appear too polluted?

    When are we as Americans going to say enough and hold individuals and the groups to which they belong accountable?

  11. With regard to Fannie Mae, I would say NNT turned out to be a prophet. Whether he is a polite prophet, I am not sure. I found the first hundred pages of Black Swan rather uninspiring, but liked it as I gained momentum. The digressions in his book are heavier than the main story. And he deliberately used polemics, which I don’t believe is his true nature, but more of a marketing ploy. That he was rather concerned about sales is evident from the many references to book sales in Black Swan. But in the end we must appreciate him for the counter-intuitive insights presented in his book.

  12. Gaussian distribution talks only about the probability of occurrence of events. Nicholas Nassim Taleb talks about the impact of the occurrence of improbable events. Probability of occurrence and impact of occurrence are different. It seems Taleb inadvertently or deliberately wrote his book as if they are the same.

  13. Seth’s blog » Blog Archive » Fannie Mae and The Black Swan was very interesting while I was researching fannie mae for our next generation game. We wanted to created an up to the minute version of Bailout! The Game.

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