Taleb: Why Can't Homeowners Mark Houses to Whatever They Want?

Nassim Taleb has been hammering this point home for weeks now, but it's worth repeating: increasing opacity in our financial markets and institutions will only delay recovery. Investors will, justifiably, not trust financial statements, and keep their money away. Taleb also asks a great question - why do we allow banks to not mark to market, but not homeowners. If homeowners had a fancy formula some quant invented that has little relation to reality and no one understands, would we allow them to mark their homes to whatever they want? Of course, there's a very simple explanation. Bankers contribute huge sums to politicians, and most normal citizens do not, so bankers get to live according to their own fantasy rules. The sense of entitlement manifested in bankers not having to acknowledge the full reality of this crisis, while everyone else suffers never fails to astonish.

Black Swan Makes Sense

Here's Nassim Taleb making sense, as usual. On mark-to-market:

mark-to-market makes banks look more dangerous, exactly like a thermometer makes a patient look more sick. Eliminating the mark-to-market is exactly like putting your head in the sand.

On retirement investing:

Have a dual strategy. The first one is hyperconservative. As much as you can - whatever you don't want to lose, don't lose. Don't trust the market with what you cannot afford to lose. Whether 80%, 90%, 20%, whatever it is that you need for your retirement, and the rest is play money....We're going to de-financialize the economy, to what we had in the '50s, '60s, and '70s. People will be fed up with the stock market, and will realize that they cannot rely on financial assets, neither as a reservoir of value, nor as a means to earn a living.

If Taleb is right, and the public does sour on stocks for the long run, putting their money into ultrasafe Treasuries instead, then we could face a secular shift in market activity and salaries. The retirement of the Baby Boomers will certainly exacerbate this problem for stock brokers, as a generation cashes out whatever they have left. It could be a long time before we get back to the October 2007 highs.

Math Can Do Anything?

Can math better predict financial markets? IBM seems to think so. Maybe they've missed this whole global financial meltdown thing. Or haven't had time to read Nassim Taleb's Black Swan. If they had, maybe they would have noticed that an over-reliance on financial models that turned out to have little predictive value played a key role in helping traders justify the insane bets they were making both to themselves and to their shockingly negligent risk managers. Floyd Norris nails it: this commerical makes IBM look really stupid.

Black Swan Bait

This piece in the New York Times on the rise of quants on Wall Street seems a bit too kind. Of course, it contains the now obligatory Nassim Taleb quote - he never misses an opportunity to herald the dangers of financial models - but this sentence misses the point:

Another consequence is that when you need financial models the most - on days like Black Monday in 1987 when the Dow dropped 20 percent - they might break down.

No - they will break down. This is Taleb's point. Models only work when you don't need them. And, as we have seen, in the hands of unsophisticated traders, these models become the intellectual justification for taking on unknown risks. So to recap: financial models do not help traders anticipate future shocks, but they do give traders a false sense of confidence. Why exactly is Wall Street in a rush to hire ever more quants now?

Buffet Channels Taleb

In another segment of his never-ending interview on CNBC, Warren Buffet gave advice Nassim Taleb would be proud of: don't stress about the day-to-day changes in the markets.

Who would have guessed - the key to investing for the long term is identifying well-performing businesses. Forget the quotes; look at the business. Or, in other words, look at companies that create real wealth, not those that merely seem like good speculative bets. Or, to rephrase once again, invest in companies Paul Graham of Y Combinator would endorse - companies that make something people want.