Nassim Nicholas Taleb and the Fallacy of Truth

September 17, 2013

The jeremiad is a uniquely American literary form of self-admonishment, originating with the Puritans, extended by Jonathan Edwards, and realized in perhaps its purest conventional form – as a reminder of how far we have fallen as a people – in the second inaugural address of Abraham Lincoln. As a traditional sermonic genre, the jeremiad served to reconnect the people to God and to each other by reminding them of their weakness as individuals and their dependence upon each other and upon God for survival. The jeremiad also served to restore awareness of the providential mechanics of our lives – that we do not hold our destiny in our hands. From this perspective, Lincoln purified the jeremiad as an incredibly powerful source of national identity and instrument of national salvation.

Modern Jeremiahs

In this post, I want to lift this argument from the caverns of our past into the harsh light of the present day. My goal is to extend and apply this argument to our current – quite serious – plight as a nation and as a civilization.

What is this plight of our nation, this blight of our souls? Why it is the same as it has ever been – pride masking as wisdom and certainty. What is its modern form? Let’s call it technology run amok, dating from the dawn of the nuclear age to the ascent of digital technology.

It is of the utmost importance that we also recognize that technology has displaced God as the pivot point of our theodicy. Technology, in other words, drives events. To the degree we reify it and view it as distinct and independent of our own choices and actions as humans, we assign to it divine powers and significance.

Who are our modern Jeremiahs? Let’s consider a cast of candidates since the end of World War II. With his penetrating and comprehensive grasp of Puritan ideas as the essential, defining antipode to the dominant Amrerican cultural narrative, let’s understand Perry Miller to be our post-WWII meta-Jeremiah. Other post-war Jeremiahs who grappled with the problem of human evil in a world overtaken by (nuclear) technology included Reinhold Niebuhr and Martin Luther King, Jr.

Niebuhr and King, contemporaries of Perry Miller’s (more or less), were ministers and theologians who achieved the peak of their influence in the 1950s and 1960s. As conventions disintegrated in the 1960s, traditional ministerial invocations against evil began to lose their influence. Serious intellectualized theology no longer mirrored and reflected back truths about the American experience and American identity.

Instead, in the era of televised elections and televised war, disaffected writers such as Hunter Thompson stretched and twisted the boundaries of journalism by exploding the concept of “objective reporting” itself. Thompson’s frenzied, first-person foray into the 1972 presidential election campaign gave him license to display with relentless intensity the corruption at the heart of the electoral process. Gonzo journalism sprung from the roots of jeremiadic sermonizing.

Disavowing objectivity may be the key to modern jeremiadic truth-telling. The Internet, which has opened the gates of public discourse to the rabble, has only quickened the race to the bottom initiated by television. One need not adhere to the wacky nostrums of post-modern cultural theory to appreciate that the nation no longer shares any common, or even pseudo-common and hegemonized, concept of truth or even of fact. As for method, well when it comes to communication and truth-seeking and truth-telling this is a term of art foreign to almost everyone.

Without a stable, universal foundation for establishing what is true, real, and meaningful, we are left with only political and religious extremism on the one hand, and comedy and humor on the other. Increasingly, comedy and humor serve as the vehicle for jeremiadic sermonizing, which is to say it is the only legitimate, implicitly understood way to force us to acknowledge our fall from grace into ignorance, ineptitude, anger, and evil. We are God’s fools. We are God’s tools. We are God’s santorum.

Humor has become the medium for addressing the surreality and absurdity of modern politics in the era of hyper-saturated media. Like 17th-century jeremiads, modern humor exists to illuminate our shit and remind us that it stinks. Jon Stewart is only a comedian using technology as a tool to expose the stupidity and hypocrisy of our public figures. But for this reason, Americans trust Jon Stewart more than any other “journalist” in the nation. Similarly, young people love 8-year old Eric Cartman of South Park because he profanely and lustily inhabits, gives voice to, and exposes the hypocritical, dishonest, and evil behavior of adults in American society.

Comedians are fearless. They use laughter to create ironic distance which reveals that our emperors wear no clothes and that we ourselves wear no clothes. In our day, however, without denying the brilliance of these other messengers of truth and doom, the modern Jeremiah who speaks most pointedly to our condition is Nassim Nicholas Taleb.

Taleb is the Lebanese flaneur (one who strolls, lounges, saunters, loafs), the Wall Street god of uncertainty and improbability. Taleb is the impossibly smug (and self-consciously, almost shyly humorous) truth-teller who reports that we live, not in a world of determinism, but a world of probabilities. His message is that we can only express the truth in ranges of possibilities, forests of outcomes.

In his bestselling books Fooled by Randomness and The Black Swan and Antifragile, Taleb exposed the fallacy of certainty, the idea that scientifically based models or anecdotally driven, “back-tested” narratives can predict the future and drive decision-making in just about any important environment that matters. In other words, when it comes to just about everything that is important, there are no absolutes, no foundations of truth.

We know the tree will fall in the forest. We just don’t which tree will fall, or when, or what it will crush, or if it will make a sound.

Fooled by Randomness and The Black Swan and Anti-Fragility are modern jeremiads, laced and fueled by Taleb’s scorn for epistemic arrogance, the fake knowledge of “mathematical” economists, Wall Street trolls, and media pundits. Taleb does not write much about politics and politicians. I will (in another post).

Taleb’s Jeremiadic Skepticism

There are many ways to approach the ideas of Taleb. In his non-technical publications, he is not a systematic thinker. His mind is like a capacious castle with many doorways, passages, moats, blind alleys, garrets, tunnels, and turrets. There is always more to explore, but no matter how much we do explore, no concise, clear design will reveal itself. That is the point.

In general, we can say this. Taleb, schooled in the classics, and even less a believing Christian than Lincoln, stakes out a position regarding skepticism that aligns him with the Puritans in their need to find failure in success, regress in progress. That is the nature of the jeremiad. Because those who benefit from progress assume that they are the agents of progress. The Puritan Jeremiahs, Lincoln, and Taleb can all agree those harboring that belief are the greater fools, and their fall from grace will be all the more steep, sudden, precipitous, and dreadful as a result.

What the Puritans and Lincoln assigned to the designs of Providence, Taleb assigns to randomness, or to what he more colloquially terms “black swans” (a broad class of rare, unpredictable, enormously impactful events such as plagues, floods, financial collapses, terrorist attacks on tall buildings, military coups, climate change, Facebook (!), Goupon (!!)). For Taleb, friend of Benoit Mandelbrot, instead of the determinism of God we have the physics of fractals and chaos. Via the trope of the black swan, Taleb inverts the common belief that science and technology are tools that humans understand, control, manipulate, and “own”. For Taleb, the progress of mathematics, science, and technology makes us smaller as humans, puts us in our place, increases the scope of uncertainty, and diminishes that which we can truly say we know.

Taleb’s ideas are a rich and complex stew of:

  • Personal origins, as an ironically positioned, worldly Levantine, at home neither here nor there;

  • Adult biography, as a Wharton MBA, University of Paris PhD in applied mathematics, and successful Wall Street trader;

  • Intellectual curiosity, leading to the incorporation into his mental model the research of Israeli empirical (and Bank of Sweden Nobel Memorial Prize winning) psychologists Daniel Kahneman and Amos Tversky; and

  • Brilliant originality, exhibited by his application of the polymathic ideas of Benoit Mandelbrot to the Black Swan model of uncertainty in scalable decision environments.

Most people assume and require a world populated by truths about how things work – with corollary truths about where to locate both risk and safety. Taleb disagrees, and has staked his professional decisions and reputation on the idea that information misleads us and that people therefore make decisions based on psychological biases (anchoring) and the illusion of patterns, of predictability, of truth, that do not exist. Taleb made his fortune in trading on this conviction, in 1987 and then again in the current financial collapse, which The Black Swan largely anticipated, and which largely accounts for Taleb’s stature as a modern day prophet.

Of course this popular adoration infuriates Taleb, because it confuses the ancient meaning of prophet – as one who delivers unpopular but necessary and corrective truths to a fallen and incapacitated people – with cheap fortune-telling. Taleb populates his books with stories about dim-witted journalists of the cable business news variety whose interviews with him invariably devolve into asking him to make market predictions. The whole point of Taleb’s public life – if there is one – is the message that no one can predict the future, and hence make decisions about the future, in any way that matters. All we can do is hedge against risk (by insuring against black swans) and exploit the mistakes of others who do not hedge against risk.

Taleb brings fractals to his understanding of decision-making, and his explanation for why we are so bad at it. As Benoit Mandelbrot demonstrates, mathematical physics tells us that nature cannot be modeled with conventional laws. Nature cannot be simplified, which is to say its properties do not fall into those of the bell curve. Instead, the properties of nature are fractal- governed by “power laws” in which variables reinforce and drive extreme outcomes. So too with financial markets.

Decision-making dependent on filtering information and making predictions requires models that can frame (and tame) risk. The problem we face in the real world, however, is that risk scales. Risk can neither be framed nor tamed. In many important dimensions of our reality – particularly those that involve information risk such as financial markets (versus physical risk, such as skiing on a mountain or driving while drunk or taking a gun into a bar) – uncertainty about where there is opportunity and where there is danger explodes the bell curve. Risk, in other words, is fractal.

Most prediction dilemmas (we have to make choices based on imperfect information) refer to situations concerning the known unknown (knowing a tree will fall in the forest, but not knowing which tree will fall, nor when, where, and how it will fall). But that epistemological template doesn't even take into account the invisible universe of the unknown unknown about which we cannot predict or plan for at all – the virus we never knew existed (AIDS), the unanticipated impact of an improbable discovery (penicillin – some black swans are opportunities).

For Taleb, viewing human decision-making in high-risk environments, the central problem is not the risk but the human evaluating the risk. We masquerade opinion as fact – we hide our frailty as decision-makers behind pride and arrogance. We employ bad methods because our standing in the world depends upon creating epistemic methods and frameworks of knowledge that advantage us (and disadvantage others). This makes Taleb angry, because people with power and influence – experts, practitioners, and pundits – do more than anyone to perpetuate encourage fraudulent and dishonest beliefs about fractal risk that harm millions of innocent people.

The Circle of Fools

A simple way to understand Taleb is to consider how what passes for truth in the United States (and elsewhere) is conveyed through what we might call an influential “Circle of Fools”: experts, practitioners, and story-tellers (or pundits).

Experts. Let’s start with “experts”, who for Taleb are largely social “scientists”, particularly economists, but also statisticians. These are “epistemic assholes” (Taleb doesn't use the term, but he might as well) who parade insular, self-validating knowledge as iron laws for understanding volatile and complex social and economic environments. The interesting thing about the economics profession is the widespread belief, particularly among mathematically inclined micro-economists fond of model-building, that their models apply to almost any realm of human behavior, not just economics. Consider, for instance, the law and economics crowd. Consider the game theory crowd.

As Taleb points out, economists are the least intellectually curious of any academic discipline, the least inclined to cite papers from other disciplines. Because their models are self-validating, they tend to assume risk distributions along bell curves that may be entirely inappropriate for the true risk map, and entirely ignorant of (or indifferent to) the problem of scaling risk (which can lead to models that tell you to pick up nickels in front of bulldozers).

Taleb’s favorite intellectual (after Benoit Mandelbrot) is Daniel Kahneman, who won the Bank of Sweden’s Nobel Memorial Prize in Economic Sciences in 2002. However, the Bank of Sweden’s Nobel Prize infuriates Taleb, because it confuses a fake Nobel Prize with the real Nobel Prizes, and validates in the popular imagination the idea that economics is a true science alongside physics and chemistry. And Taleb reserves his most vitriolic prose for another Nobel Memorial Prize in Economic Sciences winner,

Myron Scholes, famed for his contribution to the Black-Scholes model of options pricing and famed, as well (along with fellow Nobel Prize winner, Robert C. Merton), for his contribution to the supposedly fail-safe (but highly leveraged) trading and tax avoidance method of John Meriwether’s Long-Term Capital Management hedge fund, which blew up in 1998, and almost brought the global economy down with it.

Practitioners. Experts are the theorists of risk who tell us it is safe to throw matches at gasoline so long as we don’t light the matches. Practitioners who follow the advice of these experts represent the next gang of miscreants in the Circle of Fools. The practitioners are those who forget not to light the match before they throw it into the gasoline. For Taleb, who has worked most of his life in the financial industry, Wall Street epitomizes the destructive game-playing (mostly with other people’s money) of risk-ignorant practitioners who get so drunk with swagger that they instantly forget whether they are throwing dry matches or lit matches.

Myron Scholes and Robert C. Merton are favored targets because they are both experts and practitioners. But the bigger problem is systemic, and once again it seems to result from the privileged insularity of Wall Street – that practitioners of risk with other people’s money gain enormously from behavior they don’t truly even understand, while remaining shielded from the consequences. There are the institutional problems of being “too big too fail” and of “moral hazard”, but Taleb views the individual leaders of the largest financial institutions as being little more than gangsters and bank robbers, acting with impunity because they know the government will bail them out. Hence Taleb’s reference to the “bankster” Robert Rubin.

Story Tellers. The Circle of Fools closes with the “story tellers” or media pundits. Again, we can find some pundits, such as Jim Cramer and Henry Blodgett, who were once practitioners, or commentators such as Lawrence Kudlow who were once experts. Story tellers are the media celebrities who are paid to burnish the image of experts and practitioners and to erupt with excitement when the lit matches ignite the gasoline, confusing a conflagration for a cozy bonfire or, at worst, a minor prank gone awry.

Some pundits like Jim Cramer appear literally insane, and perhaps cannot be held responsible for their shenanigans, making for great comedy on The Daily Show. Blodgett shills for the financial industry while pretending not to, just as he used to shill for the companies he was analyzing while pretending not to. The pundits who concern Taleb the most, however, are the “serious thinkers”, erudite intellectuals such as George Will who command respect they don’t deserve because they wear (or used to wear) bow ties and are smug (Taleb is smug, but endearingly self-deprecating and he doesn't wear ties).

The danger of the “serious thinker” who commands airtime and an audience is that he (it always a he) produces post-hoc (after-the-fact) narratives of major events that purport to offer explanatory value, but that in reality only represent random sifting of facts or the imposition of a master narrative (or ideology) that reinforces the embedded biases of the story teller.

An Indifferent God

Taleb clearly views the Circle of Fools as “the enemy” because their self-serving relationships, biases, and interests are corrupt. In a democracy, self-reinforcing closed systems are incredibly dangerous. And the Circle of Fools is a closed system. What Taleb preaches – truly with enormous bravery, because he is doing this alone and at some personal risk (if you don’t believe me, investigate the threats upon his person by former Lehman Brothers employees in 2007, which flattered and amused him enormously) – is not simply that our financial institutions are stunningly corrupt (at one point in The Black Swan, he suggests we could reduce 90 percent of Black Swan risks in our economic system by eliminating speculative debt).

Taleb’s greater contribution is the awareness – grounded in decades of thought, research, experience (with war and finance), and cosmopolitan freedom from national identity – of the frailty of our social fabric. If you take Taleb seriously (and I do), experiencing his understanding of risk is not unlike the experience of identification one has with the spider hanging over the flame that Jonathan Edwards writes about in Sinners in the Hands of an Angry God. We live in a confused and deluded state of complacency. We know not the perils that await us.

But where Edwards spoke of a terribly angry God, the mechanics of fate in our day are technological, and the very anchoring technologies that reinforce our propensities to understate and mischaracterize risk (Excel spreadsheets!) are entirely indifferent to what happens to us. For this reason, Taleb’s somewhat anti-technological use of technology – in his own playful and iterative investment methods of “stochastic tinkering” – reminds me of Lincoln’s approach to managing the nation during the Civil War (a Black Swan if there ever was one), which was to state that “my policy is to have no policy.” However, for this reason, Taleb’s jeremiad is also particularly poignant, because, like Henry Adams, he understands we are on our own if anyone is to save us, and we probably are not up to the task.