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Tuesday, March 03, 2009

 

kahneman and taleb


via cafe americain -- nassim taleb and daniel kahneman speak at a conference in munich.

much that's interesting, but critical is taleb's observation late in the talk -- banks are using bailout funds (ex-bonuses) to double down with risk in an effort to gamble their way out of disaster. witness JPM's last year. the very system being implemented to keep money center banks on life support following their rampant regulatory arbitrage is itself being gamed.

i wonder to what extent this sort of risk taking is responsible for the softening of credit markets that many have observed in recent months. many have presumed, i think, that such has been a consequence of sideline capital being drawn into the marketplace. and in some cases that's perhaps so. but it wouldn't at all surprise me if that "improvement" had been bought at the expense of putting the banks in an even more precarious (and, ultimately, more damaging) position -- nor would i be at all surprised if sideline capital poised to resuscitate the markets was something of a pleasant but ethereal fiction.

taleb can be criticized on originality and so forth, but much of what he says is hard to ignore -- authority has radically overestimated what it knows and leveraged its misperceptions terribly. kahneman's critique, however, of taleb's effort to reconstruct the world is poignant and carries great weight as well; indeed i might go so far as to suggest that people have a "system one", an intuitive mechanism precisely because for most of us to be deprived of some anchoring illusion of certainty is to be rendered functionally useless. it isn't hard here to draw lines to religion; perhaps the great flaw of value-at-risk is that it is, for a religion, fatally underdeveloped and amoral.

UPDATE: more on disaster myopia in today's ft.

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from perrone: yep, gm, your hypothesis ("it wouldn't surprise me at all if . . .) is thoroughly consistent with what serious researchers have invariably found when scrutinizing past financial crises. that is, the more you give to zombie banks, the more they lose. it's one of the biggest reasons why forestalling real restructuring is such a disaster. jesus, who the fuck is going to have the balls to BREAK these fuckers up.

 
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