Books: Just a sceptical empiricist

How do you cope with the unpredictable - like encountering your first non-white swan? Luke Johnson enjoys a rebel capitalist's take on the googlies life bowls us.

Last Updated: 31 Aug 2010

The author of this book is an unusual person: after a successful career as a derivatives trader, Nassim Nicholas Taleb now pursues a vocation as an acclaimed writer and philosopher. Such talented rebels are rare, and to be welcomed. Too few practitioners of capitalism actually write about business in a serious manner. In fact, The Black Swan is his second book - his first, Fooled by Randomness (2001), was a best-seller, and this looks like repeating the trick.

Both works concentrate on a field that obsesses Taleb: the intersection of decision-making, risk-taking, mathematics and finance. He calls his basic theory of existence 'sceptical empiricism'. His conclusion is that we overestimate rationality in our lives - we cannot predict as much as we think we can: black swans, for instance. Taleb has prospered in the investment world using this set of values, and believes it applies in other walks of life, such as politics and scientific research.

He (like my wife) is a Levantine Christian. Such people are exiles from their homeland, prone to be suspicious of the orthodox. Their country, Lebanon, suffered a catastrophic civil war which overturned all basic assumptions about the everyday. They question things - hence the subtitle, The impact of the highly improbable.

The author is also a 'quant', that is, someone who practises quantitative finance. As a breed, they reject the idea of stockpicking based on fundamental research of economics, industries, markets and companies. Instead, they study statistical models generated by sophisticated computer programs, designed to simulate price movements - be it equities, currencies or other financial instruments.

Despite this training, Taleb seems to dismiss the more formal quant world, which he believes is full of academic nerds who tend to get it wrong. He prefers his own universe of 'randomness'. I think this means a subtle interpretation of the laws of probability, grafting them on to the chaos and uncertainty of the natural world. Either way, the author seems to have done well, and his theories appear to have worked - for him at least.

The writer labels much of the intellectual world 'mediocristan', run by 'empty-suit' experts who suffer from 'epistemic arrogance'. His book has plenty of such terms: helpfully, it includes a solid glossary to assist the reader. Taleb knows the world is unpredictable and imperfect. He seeks to be 'approximately right across a broad range of eventualities' and has great respect for those scientists and others who say: 'I don't know.'

His arguments and beliefs are persuasive and well put, despite the fact that, according to Taleb, a lot of the book was apparently written in Heathrow Terminal 4. He writes elegantly and includes plenty of anecdotes and examples, from the accidental discovery of penicillin by Fleming, to the failure of Long Term Capital Management. But just as the author is not easy to categorise, The Black Swan is hardly a conventional business text. At 300 pages it is not a short read. It requires concentration, and ranges across many disciplines. Much of it is not actually about commerce, or even economics - it refers to the work of a host of serious thinkers, from Cicero to Wittgenstein to Hayek, as well as discussing mathematics, psychology and evolution. It also talks at length about figures not generally famous for their intellects, such as Casanova.

There is an approximately logical narrative, but the structure is broken up by diversions and occasional irrelevant ramblings. It is packed with lots of technical stuff. Yet I think many investors and managers would benefit from its advice. It challenges a lot of our prejudices, doubts the consensus and forces us to deal with the world as it is, not as we would like it to be.

We live in an age of relative comfort and safety, and so occasional calamities like 9/11 cause havoc to our regimented views. After such a catastrophic event we tend to overreact, and bizarre concepts like Homeland Security become all-pervading. Taleb believes that judging risk is a sophisticated craft, rather than a rigid science - which the authorities, pursuing their imagined war on terror, invariably attempt to apply. But he is a man of action, not of theory, who lives in the real world, not an ivory tower, and he admires practical philosophers like Karl Popper rather than boffins waffling over dry metaphysical concepts all day.

I entirely agree with his core conclusions. It would pay our political leaders and policymakers to study this work: it would help deliver a more sensible civilisation, rather than the idealised nonsense that so many politicians pursue.

Luke Johnson is chairman of Channel 4 TV. His latest book, The Maverick: Dispatches from an unrepentant capitalist, is published by Harriman House at £14.99

Odd bird out; The Black Swan: The impact of the highly improbable; Nassim Nicholas Taleb; Allen Lane £20.00.

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