from Jeremy Grantham GMO Quarterly a while back
(Taleb has acknowledged the current crisis was utterly predictable, but some superficial readers of his work seem to come away with the idea that this was a pure Black Swan event).
Second, Nassim Taleb and the Black Swan logic,
which I have previously admired in public. Taleb is
completely dismissive – in a way only he can be – of any
near certainties. He implies that we have just suffered
from an outlier event crashing up against standard risk
modeling that only assumes that events will occur in an
approximately normal way. He argues that modeling the
95% or 99% normal range in Value at Risk (VaR) misses
the whole point: that the real game is played out in the fi nal
1%. It’s hard to disagree with this criticism of VaR, but is
it relevant in this case? Was the recent breaking of our
credit and asset bubbles a totally unpredictable outlier?
We believe that we live in a world where bubbles routinely
form and where there are – in complete contrast to Nassim
Taleb’s belief – some near certainties. One is that bubbles
will break. Bernanke should not have said, “U.S. house
prices have never declined,” thus implying that they never
would. He should have said, “Never before has a threesigma,
1 in 100, U.S. housing bubble occurred, and be
advised that all such analogous bubbles in other asset
classes and in housing in other countries have always
burst.” (Robert Shiller for the Fed! He would have said
almost exactly that.) The bursting of the U.S. and U.K.
housing bubbles, the profit margins, and the risk premium
in global asset prices were all “near certainties.” This was
a White Swan, a particularly White Swan. Taleb’s work
will no doubt be correct when we have a genuine Black
Swan, but this was most definitely not it. (Okay, Nassim.
I can hear you thinking: this guy Grantham is a complete
loser who has obviously missed my entire point.)
