Taleb is not a good modern thinker. He takes existing, well-known mathematical principles, rewrites them without citation or reference for the layman, and then disparages the people whose work he took and other financial professionals who also understand the mathematics quite well, as if he knows something they don't.

He would be a lot less irritating if he (1) didn't claim credit for ideas that aren't his and (2) stopped falsely disparaging people.

Buffett, on the other hand, is quite a bit more humble and grounded and provides stable, sage advice. He also credits people a lot more for the work they've done.

First what well-known mathematical principles are you talking about? Second have you read any of his academic papers? All can be found on SSRN. Two of the big ones are "Errors, Robustness, and the Fourth Quadrant" and "Finiteness of Variance is Irrelevant in the Practice of Quantitative Finance."

Taleb states "My central idea in The Black Swan is that: rare events cannot be estimated from empirical observation since they are rare. We need an a priori model representation for that; the rarer the event, the more the dependence on aprorism. Further, we do not care about probability (if an event happens or does not happen); we worry about consequences (how much total wealth or total destruction will come from it). Given that the less frequent the event, the more severe the consequence (just consider that the 100 year flood is more severe, and less frequent, than the 10 year flood), our estimation of the CONTRIBUTION of the rare event is going to be massively faulty (contribution is probability times effect; multiply that by estimation error) ; and nothing can remedy it. So the rarer the event, the less we know about its role --and the more we need to make it up with an extrapolative, generalizing theory. Hence model error is more consequential in the tails and some representations ARE MORE FRAGILE than others..... Nobody before has examined my problem in the history of thought, let alone systematize the idea of decision-making under certain classes of ignorance."

I am sure he would be excited if someone could show him that his idea is not original.

Um, I had this idea sometime around middle school, when we learned fractions, and probability was an example the teacher used. I still remember his response, which was rather satisfying - that in many systems, things break down at edge cases, and that's to be expected.

It was a great class - a similar insight Mr. Hawks helped me have is that there's much less of a difference between how people reason about $6 billion and $7 billion than between $5 and $500, even though the former is a much larger gap.

This stuff is common sense, and the con is probably older than modern civilization - the author tells you a neat tidbit of somewhat counter-intuitive reasoning, then pretends like he's endowed you with a secret which makes you smarter than most trained economists. You eat it up because you love the idea that you're smarter than economic experts. Bullshit.

The excerpt you provide from his paper is mathematically expressed as a leptokurtotic probability curve and data with high heteroskedasticity.

Do you think he's the first guy to figure out that insufficient sample data in the tails of a leptokurtotic probability curve leads to a higher overall error term? Rather than some groundbreaking new theory of math, this is material covered in freshman econometrics. I'm just asking that he admit this when he boils it down to an enjoyable read.

EDIT: the concept of kurtosis was apparently at least named in 1905, over a century ago, by German mathematician Karl Pearson.

Actually, I believe his point is that the probability distribution is from the Cauchy Distribution, where the mean, the variance, and the kurtosis are all undefined. In fact, you're providing an example of exactly what he writes about in believing that the tools being taught in "freshman econometrics" apply to the sort of randomness you encounter in the real world. Certainly Mandelbrot has had some things to say about this topic as well.

When basic financial tools and theories are based on assumptions that are Just Plain Wrong, it makes you question the gigantic stack that has been built on top of them.

It's easy enough to dismiss this stuff as worrying about edge cases, but these edge cases occur more often than the theory dictates, and unfortunately, people underestimate their impact.

You're right about him preferring a Cauchy distribution vs. a leptokurtotic distribution, I was mistaken.

Taleb argues that these tools aren't being used in the real world, but all the evidence in places like the options market seems to indicate otherwise: options get way more expensive (from a lognormal perspective) the deeper in/out of the money they are, primarily because there are fat tails already being modeled into the price. And given that options market data, it's tough to see how going long on Black Swans will fetch a good Sharpe ratio--which wouldn't be the case if it were true that everyone were slaves to normal distributions.

Yeah what you described is called the volatility smile.

I would say going long on Black Swans is more of an insurance policy unless you are a VC. As the Taleb advised Universa Investments L.P. sells itself as "an investment management firm that specializes in hedging tail risks for its clients. Universa has a focused investment approach employing positively-skewed payoffs, empirical and fundamental-based option valuation, and order flow trading."

One of the things I love about Taleb is he doesn't cite lots of thinkers and have lots of quotes and references.

He writes from his head. He doesn't go digging through books looking for choice quotes to sprinkle throughout the text and make it appear more intelligent. I don't care if his ideas come from a lot of different sources. He synthesizes them very well.

The alternative way of writing really irritates me now. For instance, I was just reading "Poverty in America". The book literally starts by saying something like:

-In 1979 the government official in charge of fighting poverty in America stated, "Poverty will be extinct in 10 years." But it hasn't happened...blah blah

The whole book starts with some quote that is so shaky. Who is this guy who said it? Was he sober or drunk when he said it? What was the context? What did he mean by "extinct" and "poverty".

I love Taleb because he doesn't just snatch things out of context to help bolster his arguments. He thinks up his own stuff. He puts everything in his words. If you don't understand something enough that you can't fluidly describe it in your own words, you shouldn't be writing about it. I think PG's essays also are almost entirely in his own words, which is one of the reasons why they are generally so logical and clear.

Also, the disparaging is well deserved IMO. I think it's more than warranted to disparage people who don't understand statistics who are supposed to. At the very least, people who understand stat/prob should take themselves much less seriously than they do. I know it is very hard to always speak with correct probabilistic language, humans are programmed to speak in stories and not probability, but there should be a greater acknowledgement of this by financial, media, and other professionals. Until that happens disparage all you want.

Taleb acts as though the finance community doesn't know what a fat tail is, or how to model it. Yes, there are idiotic statistical practices used in the business world (VAR comes to mind) but the best hedge funds employ the types of top mathematics PhDs that understand the concepts and implementation quite well. I've worked with them in the past and it would be a mistake to discard their thinking as trivial or amateurish.

Mediaman is right that there are people in finance that understand fat tails. I would say that Taleb along with Espen Haug, and Pablo Triana would agree. The issue is the theory. Actual practitioners do not have the luxury of believing in things that don't work.

What fascinates me about Warren Buffett... actually it's not him it's everyone else.

He takes 0 and 25 and the 25 only if he makes a profit beyond what a conservative investment would. Something like 8% per anum, not sure, the exact number is not important anyway.

But your typical hedge fund takes 2 and 20, that's even if they do nothing or lose money.

Now here's where it gets interesting. There are literally hundreds of those funds. Doesn't that suggest a massive pent up demand for investment?

It's a quarter of everything over six percent.

Source: How to Pick Stocks Like Warren Buffett, pg. 11.

Yeah that was his performance fee when he was managing money through the Buffet partnerships. Now he takes 0 and 0 as Chairman and CEO of Berkshire Hathaway. His compensation is primordially in the appreciation of his (substantial) share of the company.

Considering the amount shares he owns, I'd rather be the Chairman and CEO of Berkshire than running a hedge fund. In addition, the float from the insurance companies under his umbrella is more than most hedge fund managers will ever manage.