When I was fourteen I went to the Gaeltacht, a summer school to learn and speak Irish in a native setting (1). There were some evenings during. Mandelbrot Makes Sense: A Book Review Essay. A discussion of Benoit Mandelbrot’s The. (Mis)Behavior of Markets by Nassim. Nicholas Taleb classroom, may. not cones and bark is not smooth, nor does lightning travel in a straight line,” wrote Benoît. Mandelbrot, contradicting more than 2, years of misconceptions .
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Have a question about your personal investments?
No matter how simple or complex, you can ask it here. I am convinced that the Gaussian distribution does not adequately describe the behavior of real markets and that crashes and severe declines occur with far greater frequency than is predicted by assuming returns are distributed normally you may disagree and I respect your right to do so, I’ve read some of the posts in that regard.
I also think Taleb is correct when he says that the increasing complexity and consolidation in the financial world further increase the probability of negative black Swan events.
That said, the question I pose to the brotherhood is what, if anything, I, and everyone else, should do about it?
What changes to investment strategy are indicated by a recognition of wild randomness in the financial markets and increased, mandelbort increasing, likleihood of negative Black Swans? One alternative would be to simply cash out. However, I can’t and I suspect most are in a similar situation. Unless I earn a reasonable return on my capital, there isn’t enough there to keep me and Significant Other in pot stickers and beer until we go Tango Uniform.
Benoit Mandelbrot – Nassim Taleb
Even if I had that kind of money today, if I live another 40 years or so, inflation would silently steal away my purchasing power and she and I might end up eating dog food on the porch of our rented single wide, all because I was afraid to hear the Black Swan honking in the night, mandelbrkt though the honk never came. She wouldn’t like that. I would pay, its a non-starter. Taleb suggests that a strategy that allows one to make a series of small gains, but which “blows up” in a scenario where one can suffer unlimited loss mandekbrot fail given sufficient time.
He also states that a strategy that allows for numerous small losses, but generates a huge return when the Black Swan comes home to roost is preferable. Seems plausible to me, but I admit I lack his stellar background in both math and derivatives trading and don’t know how to implement such a strategy. Additionally, assuming and this is a pretty big assumption that I could figure out how to implement the strategy, I do not not have unlimited funds to devote to the strategy, and so I might spend all my money before the Black Swan alit.
In which case I would be in as bad a state as the poor saps he describes in his books. Taldb, I think Mqndelbrot pretty much stuck where I am, investing in equities. That said, it seems to me tlaeb in markets ruled by wildly randomness, much of the advice advocated in this forum would apply to an even greater degree. If diversification is a good thing in Mediocristan, then in Extremistan, one should be much, much more diversified.
If stocks are mandelhrot in Mstan, then in Estan one should have as many as one can get- thousand perhaps.
If short term treasuries and TIPS are used on the mandwlbrot side, then perhaps one should consider owning those plus many other classes of debt, international anyone? If low correlation is good in Mstan, then in Estan maybe we should all really become low correlation hawks, calculate those matrices, ruthlessly get rid of those highly correlated etfs and funds, sleuth out low correlation assets and incorporate them into the portfolio.
We denizens of Manvelbrot spit on your crummy 4 asset portfolio, we want 20 asset classes represented, more if we can get them! Why waste money paying for active mangement skill when Taleb points out that almost no one he dealt with and he was apparently at the Acme of the investment world showed any skill? Get rid of all load funds, index for the minimum possible cost and nandelbrot done with it.
Learning from Benoit Mandelbrot — Investment Masters Class
Or, maybe I’m just overreacting and just need someone to knock some sense into me? Can I have your thoughts? So I recommend everyone own them. Also I recommend that investors tilt perhaps heavily to S and V and at same time reduce overall equity exposure leaving you with perhaps similar expected returns to the market but far less fat tail risk. Of course one then must have strong stomach and ability to ignore tracking error That is exactly what my portfolio looks like Hope that helps.
That is exactly what my portfolio looks mandflbrot. I am convinced that the Gaussian distribution does not adequately describe the behavior of real markets and that crashes and severe declines occur with far greater frequency than is predicted by assuming returns are distributed normally I take it you view Black Swans as just one of mzndelbrot many risks one must bear when investing in equities.
Do you believe Taleb is correct in stating risks are increasing, and, if so, what adjustments should one make to account for those risks, and why should one make them? More bonds, more international exposure? Since by definition the threat is unknowable maybe it is best to allocate equally among ttaleb the portfolio elements? Better would be to take risk when the expected return is positive, and make a deal with your kids, that if the stock market does well and you live short they inherit.
If it does badly and you live long they support you.
I once read an article that argues that social security causes child abuse. If the government is willing to take care of us oldsters through social security than we have less of an incentive to be nice to our kids. Feeling that we might lose all is a great incentive to be nice to all around us in hopes that our rational altruism will pay dividends if we need it.
Maybe if you really want some insurance in case of extreme events, you should diversify even further into real assets: Taylor- Thanks for the link.
If I understand correctly, what Taleb and Mandelbrot are saying is that this underlying math is inadequate for describing real financial markets. So the implication is that all the probability models used in modern portfolio theory, mean variance optimizers, Monte Carlo simulators, anything with probability functions, means, standard deviation, etc, are all going to give the wrong answer.
In other words all the modern financial tools, while wonderful and elegant, will give bogus answers because the models are no good. So the answer is don’t rely on any of the modern tools because they will fail you.
Last edited by grayfox on Mon Nov 05, When life give you Black Swans If Taleb is right riskiness is increasing it would appear rational to do so invest in munis and also to look very hard for other negatively correlated asset classes having reasonable rates of return. That is where I have been spending the bulk of my research time recently. But that is something I should be doing anyway and doesn’t address my core concern which is what other adjustments, if any, one should make to reduce the impact of Black Swans on portfolio value, particularly Black Swans associated with increases in the type and complexity of financial instruments offered and those asociated with the reduction in the number of banks and the changes in the nature of the banking business.
I don’t have an answer beyond what I put in my original post but I’d sure like to hear from anyone who does. Thanks again for sharing your perspective. Taleb often seems to be writing for an audience of hedge fund managers, rather than mere sub-decimillionaire investors. BTW, his “use leverage to bet on the Black Swan” approach was a failure, by the time volatility got high enough for him to make money, his backers had got tired of losing a little bit every day and had pulled the plug.
If you really want to avoid becoming a victim of Black Swans. I am not recommending eveyone do these things, just providing an alternative for anyone whose fear of the black swan has paralyzed them into inactivity. Decrease your income requirements i. Tune out the noise: See his discussion in Fooled by Randomness. I think it is also part of his emphasis on empiricism, which he values far above theory.
But thanks for your input. I take it you view Black Swans as just one of the many risks one must bear when investing in equities? Most people expect all swans to be white because that’s what their experience tells them; a black swan is by definition a surprise. Here’s what I’ve done: Those guys are arguing against is the hedge fundies and financial engineering crowd. Well, since I don’t do any VAR analysis or stochastic thingamabobs it doesn’t really apply to me.
I’m a software engineer and have a degree in econ, so I can admire all that stuff in a way, but as you now know it’s built on a pile of wobbly assumptions, and as such is completely pointless.
It’s like astrology software — it doesn’t matter how cool the algorithms are, it’s still a fraud. I am not putting all my money in T bills. That may be right for Taleb, but it’s not for me. I realize that a big old fat black swan could come along and wipe me out. I could also get hit by a bus too.
I worry about my portfolio the least. In the big scheme of things the safety net of last resort is your family and friends. If you worry about the future, invest in them now! I’ve read all those books too, and greatly enjoyed each, especially the Mandelbrot book. His approach is very different from the Diehards’ allocation, and it would be difficult to implement for a non-professional. And, of course, it is easier to do when one has significant assets.
Buy a membership in Costco. Weekly, buy a large bag each of rice and beans. Supplement as desired with quantities of spaghetti noddles reference any number of graduate students for details on how to survive on a spaghetti diet. Stockpile in a place not likely to provide nutritional supplement to ‘critters’ or, alternatively, where it’s a location where it’s possible to harvest ‘critters’.
Or, you can even reference some of the geriatric types here; my father is unable to discuss his experiences in the Depression even now, but I know he has considerable experience in living off a small family orchard. You might want to supplement with Colt since his scenario included large amounts of social unrest.
I do not advise trying to harvest critters with the Colt. First, ask yourself exactly how did you set your equity-fixed split.
When you do set your e-f split, you will need to evaluate the underlying risk of equities relative to fixed. So fat left tails or black swans add another element of risk to equities when setting your e-f split that must be taken into account.
Grayfox- Taleb states he makes extensive use of Monte Carlo methods, I think because they incorporate the actual underlying distribution into the answer if one uses the real world data as the input rather than an assumed probability distribution.
But the historical record certainly does not contain “the actual underlying distribution”, it only contains what has happened to date, and often a rather short record to boot.
If the historical record contained everything we need to know, we would not need warnings that past results do not guarantee future results. The stock market crash of would have to be classed as Black Swan event if there every was one! In fact, the 90s were a black swan flying in the other direction.
Looking over the range of possible black swans, how many mabdelbrot be in the class of Japan’s stock market? Maybe it would be worthwhile to list the past black swans and see how many actually would have resulted in any kind of serious failure of your financial plans.
What I am doing is to keep a few years’ expenses in cash and then replenishing those “buckets” as I taaleb them as part of my yearly rebalancing.