Much of the natural world sorts itself into a bell curve (see also the 80/20 “rule,”) but if we expect everything to fall within a Gaussian framework, we will be continually surprised by real life. Consider my previous discussion of casino risk management. The games are all statistically reliable and predictable, but the biggest risk to its business come from non-gaming threats.
The desire to fit nature into a probabilistic straight-jacket has infected the Nobel Prize in Economics, much to Taleb’s chagrin:
…True, the prize has gone to some valuable thinkers, such as the empirical psychologist Daniel Kahneman and the thinking economist Friedrich Hayek. But the committee has gotten into the habit of handing out Nobel Prizes to those who “bring rigor” to the process with pseudoscience and phony mathematics. After the stock market crash, they rewarded two theoreticians, Harry Markowitz and William Sharpe, who built beautifully Platonic models on a Gaussian base, contributing to what is called Modern Portfolio Theory. Simply, if you remove their Gaussian assumptions and treat prices as scalable, you are left with hot air. The Nobel Committee could have tested the Sharpe and Markowitz models—they work like quack remedies sold on the Internet—but nobody in Stockholm seems to have thought of it. Nor did the committee come to us practitioners to ask us our opinions; instead it relied on an academic vetting process that, in some disciplines, can be corrupt all the way to the marrow. After that award I made a prediction: “In a world in which these two get the Nobel, anything can happen. Anyone can become president.”1
I think maybe he was on to something…
Taleb, Nassim Nicholas. The Black Swan: Second Edition: The Impact of the Highly Improbable (Incerto). New York: Random House, 2012. Kindle link. ↩︎