ES -- DX/CL -- isee -- cboe put/call -- specialist/public short ratio -- trinq -- trin -- aaii bull ratio -- abx -- cmbx -- cdx -- vxo p&f -- SPX volatility curve -- VIX:VXO skew -- commodity screen -- cot -- conference board

Thursday, October 23, 2008

 

taleb and mandelbrot


via paul kedrosky, nassim taleb and benoit mandelbrot -- who i would have loved to hear unedited -- are interviewed by paul solman for the lehrer newshour in this ten-minute podcast. (transcript here.)

this may be the single scariest thing you will hear about the "overoptimized" financial system. taleb and mandelbrot understand the characteristics of markets far better than most, including most everyone who is "shocked" by what is happening; though their discussion is less about markets than systems theory, they are talking about the financial equivalent of the End Times.

We live in a world that is way too complicated for our traditional economic structure. It's not as resilient as it used to be. We don't have slack. It's over-optimized.


"optimization" is the product of evolutionary processes -- not progress, but specialization. left to run in stable conditions for long periods, evolution produces highly specialized and interdependent, tightly coupled systems which are very efficient -- "optimal". but such systems are, by their nature, fragile and very vulnerable to perturbation. highly evolved systems are houses of cards -- "overoptimized".

mandelbrot and taleb observe the financial system that has developed since the early 1980s in the western world, under the aegis of pax americana, as an example of an "overoptimized" system. and it is now facing a very serious (and autoactualized) discontinuous perturbation.

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