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Wednesday, October 5, 2011

Good (Taleb) and bad (Triana) reads in economics.

Driven by my relentless, not to mention huge, defeatist streak, I have been reading up on the reason we got ourselves in the economical pickle we are in.
My original interest was sparked by this article in Wired, this one in Nova, and other similar stories, that eventually pointed me to the books of Nassim Nicholas Taleb.

Nassim Nicholas Taleb is a charming, thought-provoking, engaging author, who persuasively presents a very original point of view. So original, in fact, that its impact goes well beyond markets and economics: actually I was most impressed by the scope of what Taleb has to say and its significance with regard to (my) personal life and way of thinking.Taleb is also a poseur, which can occasionally be overbearing, and has multiple chips on his shoulders (which he will discuss only in an oblique way). That this objective faults are easily (well, almost easily) forgiven in view of what he has to say goes entirely to his credit. His best books ("Fooled By Randomness" and "The Black Swan") are very good reads, which I wholeheartedly recommend.

Pablo Triana ("Lecturing Birds on Flying") shares most of Taleb's ideas - at least on the surface - and relentlessly defers to Taleb, who wrote an introduction for his tome - that also happens to be the best part of the book, by the way. He is, however, a very different kettle of fish - and of author. He is pompous to begin with - especially when he is expounding on his accomplishments (either as a student, teacher, or trader) or on his ideas on how to reform Business school and academia in general (based on the old and worn-off paradigms of trenches vs. ivory towers and doers vs. thinkers). He is, in fact, so abstraction averse, that one wonders how he can get on with Taleb who is - for all his professions of pragmatism - a quite abstract fellow himself. With respect to his professed role models, Triana behaves as the archetypal follower (or fanboy, if you will ), with a hard to miss Uriah Heep streak (see how he defers to Steve Shreve).

Triana also comes with a gigantic chip on his shoulder, very squarely aimed at financial economics professors. This is not strange in itself, considering his book is a diatribe against the quantitative financial models that originate - mostly - within those academic circles. It is also a point of view that he shares with Taleb, whose resentment against academic circles is also quite sharp. Triana's core motivation however, are more mundane than Taleb's and eventually much less persuasive.

The biggest reason for his quibbles appears to be that he doesn't like math - which looks a lot like an Oedipus type complex: maybe he failed Calculus in his sophomore year, or was denied tenure at MIT. I did my best to forget this particular, childish reason during my perusal of his book (not easy, given he likes to flash his math loathing at the slightest provocation). For his dislike he also states other, sounder reasons, mostly mutuated from Taleb (reasons that I happen to concur with, by the way). The conclusions he draws however, though superficially similar to Taleb's are actually quite different (in my eye) and much harder to swallow.

Triana worships practitioning traders i.e. - as far as my understanding goes - himself. Because of this unrequited love, one of the hidden purposes of his book is clearly letting practitioners off the hook of the last four or five financial crises, piling all the blame on quantitative traders (quants).

Taleb's take on the recent financial mayhems is "We cannot model, because we do not understand" - at least not now, not with these tools. Tough, stark, but extremely interesting.

Triana goes more like "Short range models are a convenient, as long as they suit me". His trading floor/business school heaven goes more or less like this:

  • all quants are devoted to the menial backoffice jobs that the practitioning Trianas have difficulty with: keep computers running, write GUIs in C++ for analytical models of their own devising - after approval and under stric supervision of the practitioners.

  • when the rich practitioners retire, they sit on cracker barrels in B-school, recounting war tales to adoring and cutely young students.

How quaint. What does not compute, at least not in my book, is the fact that the people that commissioned, bought, misunderstood and wildly abused the models that Triana abhors are ... the practitioners themselves. Correct, the charming princes that would (if only the modelers let them) fix the evil of analytic finance are the money grabbing types that misused their analytic tools to the point where they blew up the entire economy, and often themselves in the process. So sorry, Pablo, but I cannot find your exculpation very convincing.

Add to this that Triana's style is extremely long winded and particularly effectiv in driving me to impatience. Uncharacteristically - for myself - I found that, by the middle of his book, I was checking the first sentence on every paragrpah to decide if it was worth reading or if it could be skipped without detriment to the general comprehension - skipping was often safe.

So my advice is, don't bother with "Lecturing Birds on Flying" - it won't add much to what you can get from Taleb's books, but it will tax your patience much more. If you need an executive summary, you can read my final impression in another post.

I'll add my .02 euros.

  • .01 - One of the irritating things about Triana's approach is that he appears to be persuaded that the situation can be fixed by giving traders more status, whereas I am convinced that the overinflated egoes of the self appointed "masters of the universe" on the Wall Street and other trading floors around the world are largely to blame for the current mess. After their rather spectacular failures, I'd rather see them cut down to the rank of the glorified pork belly merchants that they are. I also believe that, if we returned to calling 'cooks' what are now called 'chefs' and 'taylors' what are now called 'fashion designers', etc. air would be more breathable.

  • .02 - I think that both authors would agree that analytical modeling on some scale is made necessary by the speed of automatic trading: if you use computers as trading tools, you have to feed them models (even uncomplicated, minimal ones) in order to perform trades. However, at the time of their writing, both auhors fail to mention or see (Taleb probably has too much fun programming) what appears to me one of the most important factors of the recent economic gyrations. Namely, that for many years automation induced speed has been compounding demographics induced speed (the increase in number of market players), makes feedback loops unstable. Trading speed is outpacing control and decision-making cycles, and this fuels destructive market crises, quite similar to - or even coinciding with - bank runs. As a consequence, I think that heavy brakes need to be applied: not only analytical models should not be used, but - ideally - computers and even cell phones should be banned from trading floors.

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