Nassim taleb & daniel kahneman february 5, 2013

(applause)
NASSIM TALEB: Thanks.
PAUL HOLDENGRÄBER: The rule is here that you come up to the mike and you look at the two distinguished speakers and ask a question which is less than a minute long. Go ahead.
Q: One of the things Mr. Taleb said can be conveyed in the way of an aphorism. The best risk management is management’s own risk. And recently a great scholar surprised me telling scholars resist aphorisms. So in aphorisms often can be wisdom. So my question is: Does it mean that modern scholarship is against wisdom, what is the relation between modern scholarship and wisdom and you write aphorism and Mr. Kahneman studies mind, so it might be you both might contribute to the answer.
NASSIM TALEB: There’s a long line, so let me answer quickly. You have—it’s just like this imbalance that Nietzsche was talking about. We need scholarship, but not too much. We need wisdom a lot more—I mean, we need street smarts, a lot more than we got. We got here from street smarts, and now what we’re shooting for is to preserve the system by transforming it into an academic thing. It doesn’t work that way. You need a balance between Dionysian Fat Tony and Nero Tulip, between the Dionysian and the Apollonian. Can we take another because we don’t have a lot of minutes.
Q: Thank you. This is primarily for Professor Kahneman, but both of you. Why do humans have such a hard time computing probability? It’s very for a child to learn to add, to subtract, to divide, and then the easiest probability—is there an evolutionary advantage to not being able to predict or compute probability?
DANIEL KAHNEMAN: Well, you know, there is a qualitative difficulty in thinking about probability, that you have to maintain several possibilities in the mind at once. And this is really something that turns out to be quite difficult for people. So normally, we have a story, it’s a single story, it’s a single story with a theme and thinking probabilistically in a proper way is extremely difficult for people. People do have a sense of propensity; that is, that a system has a tendency to do something or other, but that’s quite different from thinking about probability, where you do have to think of two possibilities and weigh their relative changes of happening.
Q: You had mentioned Alan Greenspan. What is your opinion of what the current Chairman of our Reserve is doing in expanding—
NASSIM TALEB: This is my nightmare. The one of my ideas of expanding—it’s my nightmare, because debt, we’re living off debt, government debt, centralization more than ever, top-down, government debt, my nightmare, Bernanke, my nightmare, I can’t see his—don’t tell me he looks like me, I can’t see his face. (laughter) My nightmare. He’s my nightmare. I think it’s a big problem. Paul Krugman and this guy are my two nightmares. (laughter)
Q: So there’s no way to resolve what they’re doing, any resolve—
NASSIM TALEB: The point is that you’re creating—you’re not even creating growth, if you print money, it should translate into growth, all right, so the GDP coming from printing money and GDP otherwise, what is it doing? The middle class—the middle class, the standard of living is dropping because income for middle class is dropping, they’re fragilizing the economy. The thing we should have done in 2008. We actually had a similar conversation where I was massively angry, and now look how polite and nice I am. In 2008—we were—2009, early 2009, I was shouting, I was angry, all right. We should have turned debt into equity because for the system, we should not have debt, we should have equity, and equity makes a system antifragile. Look at California, they don’t use debt, they use equity. So instead of doing that, we moved into turning private debt into government debt, and there’s nothing worse than government debt, they’re going to create inflation that they can’t control later, pay the price by—horrible stories. Can we have another question? No Greenspan.
Q: I want to thank you both for having us in your living room this evening. Despite the presence of diabetes and Walmarts, humans persevere, and we’ve been doing antifragility to some level successfully. Could you talk about the heuristics that has made antifragility sexy and let us continue to exist for so many years and also, I mean, you succeeded in correlating Black Swan to a very sexy movie, but antifragility doesn’t roll off the tongue and when I convinced my friends to live in an antifragile way, they’re like, “Oh, could we rebrand this in some way?” And we could use heuristics to do so. Could you speak to that?
NASSIM TALEB: The heuristics of course to achieve antifragility, that is the first one I call the barbell heuristic, is walking and sprinting is better than just jogging, having a very risky portion of your portfolio and very, very, very, very minimal risk on the other side is a lot better than having medium risk. Having in the UK government Conservative plus Liberal Democrats is a lot better than having Labour. Things—there’s some rules, I have about forty-nine explicit heuristics and about a hundred implicit ones of how you can inject antifragility in a system, okay, for example one instead of being an academic all the time be a lensmaker, you know, like a famous lensmaker and then writing treatises on logic at night you do better than being an academic 100 percent. That kind of stuff, so there are some heuristics and then also fasting, try to fast as much as you can, okay, to compensate. If you’re religious it may come automatically, if not, then all right, the problem is the environment that sustains us is harming us somewhere, making us live longer but sicker. You see?
Q: Thank you. In my way of thinking you had focused upon too big to fail. At least in my thinking and I’m an economist, I think too big to fail by definition is too big to exist and once you take a good look at that, I’m wondering what you think about the pension liability debt which I think will be far greater coming down the road and it’s really not being focused upon.
NASSIM TALEB: It’s a nightmare. Let me not be negative, let me propose something positive, all right. There’s one way to mitigate too big to fail that I propose is a very simple heuristic for governments. You take the list of companies. You say, if that company fails, is it a national emergency? Yes/no. If the answer is yes, then all employees should earn civil servant equivalent salary, all right. If it is not bailable out, they can do whatever they want, they can pay themselves whatever, it’s not our problem, taxpayers. If you have that rule, it would eliminate too big to fail, because too big to fail exists because they know you’re going to bail them out, so they take and they hijack the government as the banks did, too big, come, we’re too big, so you force them to be small by controlling their compensation.
Q: Hi, my name is [inaudible] I’m a recent high school graduate and author. My question is. I know you write a lot about in the book about autodidacts and lecturing birds how to fly. How do you think we can bring this autodidactic culture and tinkering back to our schools and our universities?
NASSIM TALEB: You have it automatically. When you see big scholars, they’re—it’s not like what they learned they learned in class, they’re autodidacts or big scholars, you can see it. The problem is at the level of—people start shooting for grades, that’s a problem, instead of using grades like driver’s licenses, you know, where you don’t try to shoot for grades beyond passing and then focusing their time on really what interests them, you see. The problem is racing for grades, make people optimize the system, exactly like we do with ratings, bank ratings, and stuff like that, people game the system, so you’re going to have the most stupid person in everywhere except for that grade, you see, eventually, just like athletic performances, so you should move scholarship away from a competitive sport, okay, into something more, you know, less measurable immediately or at least less tractable that way. But if you look at what we got, the individual scholar has always had a huge advantage over the institutionalized one in history.
DANIEL KAHNEMAN: I mean, you know, there is a theme here. Antifragility is a deeply conservative idea.
NASSIM TALEB: Burkean conservative.
DANIEL KAHNEMAN: Burkean.
NASSIM TALEB: Burkean conservative. Not conservative à la Bush, no, no, not that stuff.
(laughter)
PAUL HOLDENGRÄBER: We’re going to take now three questions.
Q: My question is actually for Daniel Kahneman. I know you poke fun at the irrational quite a bit and you sort of allude to it in your five words. I wonder if you could talk about in what ways creativity and intuition have benefited your career other than serving as a straw man for your research?
DANIEL KAHNEMAN: Creativity has never served as a straw man for my research and in fact intuition hasn’t either. I’m a firm believer in intuition. I have done a lot of researching explaining where intuition leads us astray. But intuition most of the time works extremely well for us. That book that I wrote on system one and system two, fast thinking is really how we live. System two is a commentary and system two sort of keeps us in shape but basically what keeps us moving is system one and it’s intuitive, and mostly it’s fine, occasionally it leads us into amusing errors, and I’ve spent my life studying those amusing errors, but you have to see the perspective of it and clearly the perspective is not the bumbling fools running around. You know, we are very well adapted to our world.
Q: Thank you for your presentation. We tend to look at the future as something ahead of us, before us. The ancients looked at the future as something that comes behind us and sort of carries us along. Is this really the essence behind what—Antifragility and Black Swan and Fooled by Randomness.
NASSIM TALEB: Let me mention now how to find a solution to all of these problems, try to go away from the story of narrative. Of course the Greeks had Prometheus and his brother Epimetheus and one guy was in the past, the other, the next was in the future. How was he in the future? He was in the future not through narrative but through optionality. Tinkering, trial and error, frees you from having a narrative, you see. So it’s trying to avoid not a narrative form of life, all right, opportunistically, taking advantage of things in a structured way. So we need a huge amount of reason but at the same time you don’t need a narrative. It’s much harder to live that way but it’s much more rewarding, much safer.
Q: Apologies. I’m wearing a tie, so I’m a little bit nervous. Just a brief question. In Antifragility you mention something terrible about antifragility around sort of the weak at sort of the expense of the strong. Have you been able to reconcile that?
NASSIM TALEB: Yes. With the barbell. You should protect the very weak, protect the very weak, help the risktaker take more risks and worry less about the middle, which is not very popular, but overprotect the weak. This is why the point is you have to allow people to fail. National Entrepreneur Day is part of this idea, is that to encourage people to become risktakers. What does the government do? They bail out the corporations, bail out the strong. No. You should bail out individuals not corporations, by giving them a backup to take more risks in life, because we got here thanks to risk taking, complex risk taking, optionality and stuff.
DANIEL KAHNEMAN: We should limit it I think to the next two questions.
Q: At any rate, it seems to me, though I’ve read neither of your books, that this was billed as a discussion of making decisions. I have—I think I have been able to understand about half of what you’ve said, and on that half, I would like to ask a question that is not a financial question and not an economic question ad not a business question but a real-life question at least to me and I suspect to many here. How does your—how do your philosophies help somebody who is trying to think about gun control?
(laughter)
DANIEL KAHNEMAN: You know, you can have intellectuals writing books, they don’t have answers to all questions, and I don’t think that either Nassim or I have answers to the gun control questions. We have opinions but I don’t think that anything we’ve said has a direct line to—we don’t have solutions to all decisions.
Q: Change the people’s consciousness first. Yeah, quick question, gentlemen, can you please tell me what do you think what the philosophical mind is, the true philosophical mind is?
DANIEL KAHNEMAN: I didn’t hear the question.
NASSIM TALEB: What the true philosophical mind is.
Q: It doesn’t necessarily have to be a scholar or something, just as a human being, how would you describe a philosopher?
NASSIM TALEB: I don’t know. I personally don’t answer these.
DANIEL KAHNEMAN: I would say that you’re closer to being a philosopher than I am—too hard a question.
NASSIM TALEB: I have something related I may, it’s the last question—something related. There’s two forms of knowledge. My idea of antifragile, a lot of people mistook it as coming from some narrative based on past historical data. No. I use history for examples, but there’s something called an a priori link that you can figure out in your armchair. From necessary relationships, necessary mathematical relationships. If this is fragile, it has to hate volatility. Okay, necessary relationships. It has to be more harmed by, you know, increasingly more harmed as deviation gets larger, so this is how—
DANIEL KAHNEMAN: A philosophical mind is someone who looks at life and looks for patterns and sees them and see large patterns, you know, we’ve been exposed to a fair amount of that this evening. This is a philosophical mind. And you are the last one.
NASSIM TALEB: Practical.
Q: Nassim, this is a question for you. During Hurricane Sandy, New York City basically ran out of gasoline and it appears that the gasoline distribution system is fragile. I can imagine what a robust system would look like for gasoline distribution, you know, the gas stations would not have run out of gasoline.
NASSIM TALEB: Let me answer up to this point.
Q: You see where it’s going, right? So my question is, I can imagine what a more robust system would look like you know with more stockpiles or something. Does it even make sense to talk about an antifragile system for say gasoline distribution, and are there other systems or industries where it just doesn’t make sense to talk about antifragility?
NASSIM TALEB: Okay, an antifragile system improves from stressors. So visibly if they improve from stressors, they have a structure that probably has some amount of antifragility, but you need to be robust, so the problem you moved toward robustness, and robustness requires some kind of redundancy to have inventory. People think it’s silly to have cash in the bank, you’re more robust if you have cash in the bank, see, and actually even antifragile, because you can capture opportunities that way, so you see the idea of having more—I wrote in the book, actually. I wrote in this book, about if you have excess inventory, people think there are costs, okay, if you have excess hummus in your basement, okay, the kind of inventory I have in my basement, being Lebanese, you know, people think it’s a cost. It’s not a cost, to have extra stockpile for companies, because if there’s a crisis, there’s a squeeze and other people don’t have what you need, the price of the commodity shoots up massively and you can sell it, so having inventory is antifragile.
DANIEL KAHNEMAN: I would add by, I would have answered, if I were you, I was expecting you to give a different answer. The antifragile, antifragile would not be at the level of gasoline distribution, it would be at the level of transportation. I mean, gasoline is for a purpose and the more various, the more varied the means of transportation are, the more antifragile you’re going to be.
NASSIM TALEB: You give a better answer—we should have horses and bicycles! Thanks.

(applause)

LIVETalebKahneman_2.5Transcript