Sunday, 14 December 2008

The Best of the Rest: The Black Swan

If you are a regular of this blog, you will have noticed that nowadays I don’t write about Catalan/Spanish politics very often. It is too depressing and there is plenty to write about with the worst financial crisis since The Great Crash happening before us. Anyway, there are plenty of good sources out there (check out the links section) out there that explain what the problems are and how to move forward. I find the Diàleg section of the Avui newspaper a breadth of fresh air and practically the only mainstream media which offers a platform to the pro-independence movement. For example, this article on Sunday’s Avui. If you require a translation to English or another language, use this online translation tool.

Anyhow, back to the topic. I have been reading a few books recently. Even if you are not interested in financial markets and economics, I suggest you read these three books. It is probably one of the best investment decisions you will make in 2008.

First, I read the latest book from George Soros. [Wiki]

This is the second book I have read from Soros, I first read The Alchemy of Finance in 2003 and that was the first time I heard of his concept of “reflexivity”. I had only been in financial market for over a year, doing a crappy back office job, but this book made a lot of sense to me. This was a successful market participant, reviled by the British press for his involvement in Black Wednesday, that was telling us that the system is not as good as everyone think it is.

In his latest book, he delves further in the concept of reflexivity and how it induces vicious and virtuous cycles. One thing that strikes me about this man is how despite all his wealth and success, he still has massive hang-ups about not being accepted by the academic community and not being taken seriously as a philosopher. At a different level, it reminds me of the hang-ups I have about my own education and not having attended a proper university in Barcelona when I should have done all those years ago. If even one of the most successful people in the world has a hang-up about academic achievement, then how am I supposed not to have one about my own mediocre academic background?

So reading Soros again was good. The book is easy, there are no technicalities, and his own admission of fallibility makes him quite endearing. A book that anybody can read and understand.

Then, after years of delay and making up excuses, I found the courage and time to read ‘Fooled by Randomness’, by Nassim Nicholas Taleb. [Wiki]

And just now I am reading ‘The Black Swan’, his latest book.
Sometimes I wish I had read these two books many years ago, before working in financial markets. Now it is rather late to seek a new career…

These two books contain a bit more of mathematics and certainly more philosophy than Soros’ digestible book.

Before you go and read the reader reviews in Amazon, I would advise you not to do that until you have read the books yourself. When the main criticism of a book is that its style is “irritating” and that the author is “full of himself”, you know there is something going on. I don’t know of any published author that is not full of himself!

The books can be summarised as follows:
+ Trying to apply the Gaussian curve to social sciences (say economics) as if it were a natural science (say physics) is a huge mistake. The use of the Gaussian curve in economics and financial markets is an intellectual fraud.

+ The use of statistical methods in economics is killing off any arguments about logic.

+ Economists, fund managers and consultants that appear in Bloomberg TV, etc, forecasting or giving their “expert” advice are not more than entertainers.

+ The narrative fallacy, how we retrofit explanations to events we never predicted.

+ Because of the above, globalisation of finance, and many other small things, the complexity of our world is ignored in favour of simplification and this leaves us more exposed to risk than we realise. We should learn to live with uncertainty, and accept that not everything can be optimised, rationalised and modelled. Sometimes, it is just down to luck.

Taleb knows his stuff and he is probably the most well read person ever to walk in a trading floor. You don’t need to be an expert on the mathematics of finance or even philosophical movements to read this book, but it helps if you are interested in the basics. Ignore his personal anecdotes, the punctuation, his style, and just focus on the concepts.

These books are demanding but not impossible. As someone who has ended up in this industry (financial markets) by accident, I find his views appealing. Having heard and watched so many charlatans, having read so many “research reports” on economics and markets, having seen how the industry is driven by nothing but self-interest and unimaginable greed, I am hugely sceptical about how the financial markets operate. I have been for a long time but could explain how or why. From a personal point of view, these books have been a great injection of intellectual self-esteem. I knew the dogmas of finance are bogus (equilibrium, rational expectations, Gaussian curve, Value at Risk, historical volatility, retrofit explanations by 'experts', etc), but I did not know how to back up my own views with some intellectual rigour. I always knew it was not right but could not explain it properly or confidently. Now I can. If you read these books, so will you.

Sometimes, I wish I had read his books many years ago, before entering the industry. I should now be something else: a teacher, a bus driver, a tiler, or even a sound engineer. It is hard to read these books and still go to the office everyday knowing full well, as I always did but now with the theoretical back up of Taleb and others, that it is all a big con.

If you are thinking about starting a career in financial markets you should read his books as soon as possible.

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