Popperian Review Corner

How uncool to admit that you just got around to reading last year's "it" book, but I read Nassim Nicholas Taleb's "Black Swan" last weekend. It is an important book, a very enjoyable read, and a glimpse into a powerful, powerful intellect. It's as if Thomas Pynchon wrote non-fiction. Anybody who has not read it should -- and if you read it before the Black-Swannish market turmoil, you'd probably dig another round of it, post-panic.

The WSJ (news pages) reports that his hedge fund did -- well let us say a little better than the S&P -- during the recent swings:

Separate funds in Universa's so-called Black Swan Protection Protocol were up by a range of 65% to 115% in October, according to a person close to the fund. "We're discovering the fragility of the financial system," said Mr. Taleb, who says he expects market volatility to continue as more hedge funds run into trouble.

A professor of mathematical finance at New York University, Mr. Taleb believes investors often ignore the risk of extreme moves in the market, especially when times are good and volatility is low, as it was for several years leading up to the current turmoil.

Looking for black swans, the fund keeps 90% in cash and buys gobs of puts that are far enough outside the expectations of the market to be cheap. Then when boomtimes go boom, they clean up.

I may do a longer review corner on the book but it will be hard to top the cold hard appreciation of the fund. We both appreciate Karl Popper, who would have applauded the predictive power of his theories. I have not quite reconciled my philosophy with Taleb's. I agree with his premises. I enjoy the trashing he metes out to economists, the Nobel prize committee, and conventional wisdom. I applaud his use of many of my heroes: Hayek, Popper, Poincare (and Yogi Berra). And nobody can deny his fundamental assertions after the stock market October we’ve just completed.

Yet like an H-bomb that seems a valuable invention -- but that you hope doesn't get into the wrong hands -- I worry that your average PoMo Sociology professor will use Taleb's arguments against the ideas of merit and evolutionary selection of better ideas that I hold so dearly. Taleb takes several digressions but never addresses those topics head on.

It may be too late to buy the fund, but buy the book ($10 on Kindle®).

Review Corner Posted by jk at November 3, 2008 4:44 PM