So says Nassim Nicholas Talem of Black Swan fame, referring to the Nobel committee for “legitimizing” economists, inducing reliance on their ideas, and thereby causing the financial crisis. According to the article, Taleb identified Harry Markowitz, Merton Miller and William Sharpe for their work on portfolio theory. Talem goes on to announce that he wants “to make the Nobel accountable” and “citizens should sue if they lost their job or business owing to the breakdown in the financial system.” Absurd. Apparently, book sales are slow. What is most disappointing is that the reporter was actually able to get Sharpe to respond and take the claim much more seriously than it deserved.
“If no one else sues them, I will”
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Professor Taleb has a point but also misses the point. He has a legitimate point that the financial models using the academic work of several unnamed Nobel prize winners ignores the fat tail, and therefore are prone to underestimating the real risk involved in a financial firm’s investments or business models. For purposes of managing the financial sector’s systemic risk, this is a real problem. However, what alternative do we really have? We cannot really expect the financial sector to internalize the huge amount of systemic risk they create or allow our financial regulators to radically lower the level of systemic risk that exists. If we take either approach, my guess is that the financial sector will simply freeze up, leading to a very bad economic outcome for all. So, the best we can do is accept the fact that the financial sector will always be creating unsustainable business models that may become critical nodes of systemic risk. This approach means putting the focus on trying to figure out whether the financial sector is over-investing in unsustainable business models and thus creating unnecessary nodes of systemic risk. That is the approach I am now taking as described in a presentation I recently gave at the MLEA annual meeting last week, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1688668.
Reminds me of Stigler’s “Truth in Teaching” article.
What do you suppose the odds are that Mr. Taleb (sp?) is willing to be held liable for the returns missed during every run of a bull market session by those who eagerly read his books/columns and listen to his cable TV pronouncements?