The Tim Ferriss Show - #691: Nassim N. Taleb & Scott Patterson — How Traders Make Billions in The New Age of Crisis, Defending Against Silent Risks, Personal Independence, Skepticism Where It (Really) Counts, The Bishop and The Economist, and Much More

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Starting point is 00:05:27 I'm a cybernetic organism, living tissue over metal endoskeleton. The Tim Ferriss Show. Hello boys and girls, ladies and germs. This is Tim Ferriss. Welcome to another episode of The Tim Ferriss Show, where it is my job to deconstruct world-class performers to tease out the lessons, mental models, and so on that you can apply to your own lives. This podcast episode is a rare treat, a rare appearance by at least one of two guests. And in combination, I think the conversation

Starting point is 00:06:00 provides a lot of insight related to uncertainty, related to markets, related to how to think about risk, how to think about tail risk, how to think about silent risk, and also how to take advantage of some of these things in how you plan your life, your finances, and so on. There's a lot to it, a lot of concepts that you can apply in many domains in life. And let's move on to the bios, shall we? The first guest is Nassim Nicholas Taleb, who spent 21 years as a risk taker, that is quantitative trader, before becoming a researcher in philosophical, mathematical, and in his words, mostly practical problems with probability. Taleb is the author of a multi-volume essay, The Inserto, and within that you find The Black Swan, Fooled by Randomness, Anti-Fragile,

Starting point is 00:06:45 The Bed of Procrustes, and Skin in the Game. Thanks to Matt Mullenweg for first introducing me to The Black Swan. These all cover broad facets of uncertainty. His work has been published into 49 languages. In addition to his trader life, Taleb has also written as a backup of The Inserto more than 70 technical and scholarly papers in mathematical statistics, genetics, quantitative finance, statistical physics, medicine, philosophy, ethics, economics, and international affairs around the notion of risk and probability. These are grouped in the technical inserto. Inserto is spelled I-N-C-E-R-T-O. Taleb is currently Distinguished Professor of Risk Engineering at NYU's Tandon School of Engineering. I believe he's retired. His current focus is on the properties of systems that can

Starting point is 00:07:29 handle disorder. In other words, the properties of systems that are, in his phrasing, anti-fragile. You can find him on Twitter at NNTaleb, and that's N-N-T-A-L-E-B, also fooledbyrandomness.com. The second guest is Scott Patterson. Scott Patterson is an investigative reporter for The Wall Street Journal, currently based in Washington, D.C., working on climate and energy policy. His new book is Chaos Kings, subtitled How Wall Street Traders Make Billions in the New Age of Crisis, a profile of the rise of black swan traders such as Nassim Taleb and Mark Spitznagel, as well as a survey of the many perils the world

Starting point is 00:08:05 faces today and how we might fix them. Scott has covered a lot. He's covered everything from Berkshire Hathaway to stock exchanges to high-speed traders to financial regulators. His first book, The Quants, describes the rise of mathematical finance and delves into its role in the 2008 financial blowup. Dark Bulls, his second book, tells how computer traders took control of the U.S. stock market starting from the birth of computer trading in the 1980s to the explosion of high-frequency trading in the late 2000s. And you can find him on Twitter, at Patterson Scott, and on his website, scottpattersonbooks.com. And lest you think this conversation is only about finance, I want to emphasize that very refined thinking in the world of markets and investing really reflects clarity of analysis and concepts that then lend themselves is a fascinating arena within which you can refine your thinking toolkit for many, many, many other things. And we talk about many of these other areas where these things can be cross-applied.

Starting point is 00:09:13 And now without further ado, please enjoy a very wide-ranging conversation with Nassim Nicholas Taleb and Scott Patterson. Well, I'm thrilled to have both of you here. Scott, thanks for making the journey. I can't believe we have the shared history of Hoagie Haven. We might provide that context to people later. An iconic landmark of a spot in Princeton, New Jersey. Nassim, nice to see you. Nice finally to be on that side of the microphone.

Starting point is 00:09:44 Yeah, definitely, man. And I thought we would start with just providing a bit of context for listeners as to how the two of you connected. So, Scott, how did the two of you end up meeting? So this was the mid-2000s. I was a reporter at the Wall Street Journal. I still am a reporter at the Wall Street Journal. At the time, I was covering hedge funds. And among the hedge fund community, there was this book that a lot of hedge fund managers like to talk about, the secret book that they were passed around that they said was really great.

Starting point is 00:10:16 It was called Fooled by Randomness. So I read that book. I thought it was amazing. But a rumor among these hedge funds managers was that the hedge fund that the author of that book, Nassim Taleb, had run a hedge fund, but it had shut down. But nobody really knew the truth of whether it shut down or not. So as a reporter, that intrigued me. I think it was actually Neil Chris, a very well-known quant hedge fund manager, who put us in touch. I talked to Nassim. I got him on the phone, and he said, yeah, we shut down a couple years ago. But there's a new hedge fund that's starting up by my former colleague, Mark Spitznagel.

Starting point is 00:10:58 Maybe you want to write about that. So I had a story that came out in the summer of 2007 that broke the news that Empirica had shut down, at least for the broader public. Also broke the news that a new hedge fund was launching called Universa. Similar strategy. And also that the author, Fulby Ramis, had a new book coming out called The Black Swan. Which explained the transition from the author was trying to transit i kept begging him i tell him no i don't want to be known as a hedge fund manager yeah i don't want

Starting point is 00:11:30 to be a reframed for years i'm done and i reframe it so i don't want to talk to you except if you talk about my ideas he said okay we're going to talk about your ideas this is why i mean i was i said okay on my grave i don't want to be known as a traitor, but as a scholar. And I remember he was, so he's bringing back a portion of life, but it was at the right time because he contacted us right before the explosion of 2007. And there's a weird connection right there that I'll mention later to you, right?

Starting point is 00:12:02 There is a very weird connection to me. And let me ask you nasim what prompted you to make the transition maybe it was a long time in coming but to decide ultimately to step out of trading or being active as sort of a player on the field? Because I knew I would never stop. And I still, in my late 30s, early 40s, I had time to really do something else. And I realized the following, that when I had a position, I could be involved in trading, but I didn't want to be the one flying the plane.

Starting point is 00:12:38 As a passenger or as a co-pilot, maybe. At a time, I said, okay, Mark is much more capable of running this because he loves doing it. Okay. And I liked the concepts and the ideas, but didn't like to follow positions. And because it was the minute I would be involved in a trade, it would inhabit me. So I felt like it was, there's something in my brain that was slowed down by the fact that I had to worry about something else out of a sense of responsibility.

Starting point is 00:13:07 So Mark didn't have that. So Mark had- He could compartmentalize. He's not, he could compartmentalize. He did nothing else. He, and he was an interest. I mean, he did other things, of course, on the side of the distraction. So he was a benefit.

Starting point is 00:13:18 So I wanted to transit out. So I said, okay, I'll take some time off to finish the Black Swan, which I couldn't finish when I was training, which actually I started before Fooled by Randomness, incidentally. I started the Black Swan, and then I said, okay, I'm going to talk about randomness. So I got diverted to Fooled by Randomness, and then I finished the Black Swan. It was almost a 20-year thing. And I realized that I'd like to be a scholar who eats well, who trades once in a while with a sense of, it was like a military person who has an honorary discharge to do other things. And of course, leaves the battleship to those who live for the battle. Okay. So that was what happened.

Starting point is 00:13:58 And of course, the rest is history, as you know. But let me mention one thing that probably your listeners and viewers don't know, that of all the people that have been on his podcast, I bet you I'm the first one you've met. It's quite possible. Okay, so you're the first one. I met you before I met him

Starting point is 00:14:18 in probably 2001, 2002. Around that time. And the first time we met, we corresponded and said, oh, this guy has very interesting ideas about hacking things. And then we went to a restaurant, I think on Madison Avenue, and we ate every single egg they had in the store. That was a good deal larger at the time. I was in growth mode.

Starting point is 00:14:41 Yeah, so we ate all the eggs. And for some reason, I mean, they were worried about us. How could people, two human beings, eat so many eggs? So that was my first physical encounter. We were corresponding before and became friends. And there's an interesting scene that I have in my mind when Lehman Brothers went bust. Basically after our, you know, we connected

Starting point is 00:15:00 and then you followed our trade. And he wrote about it, actually, about the quality of the trade and the promise of the trade that we're betting on tail events before the Lehman crisis. And on that day, when the day Lehman went bust, I was on a plane in Comunicado. I land, and the first thing I got was an SMS from him

Starting point is 00:15:21 because I was meeting you for dinner. And the second thing I got is news that Lehman went bust. So from news from Mark, Lehman went bust. It was the two messages. And that night, I think they ran out of pink champagne in the house. We were with Cez Roberts, the late Cez Roberts, a very interesting person who also was studying hacks. Fascinating guy. Yeah, really genuine, lovely human being.

Starting point is 00:15:45 And we did consume vast quantities of alcohol. And then last time, in the time before Romania, we met, it was at his funeral, when he came in and paid for the bill surreptitiously, and I want to retaliate tonight. So you'll have the comeback opportunity with the bill this evening. And you're right.

Starting point is 00:16:04 I mean, there are very few, maybe no other guests who've been on the podcast to predate us meeting in 2001, which is wild. And I was probably 30 to 40 pounds heavier in terms of muscle mass. I was all that hoagie haven. I was a lot bigger at that time. I have many questions about Black Swan and also about the trading career, but actually a letter, which I'll come back to. I think you'll get the reference. But first I want to ask just for a backdrop for people who may have no familiarity with quants, with betting on tail events. And you have this book, which covers a lot of these topics in depth. You have multiple books,

Starting point is 00:16:46 but in the case of betting on tail events, what is a tail event, broadly speaking, and then what are the different ways one can bet on tail events? And you guys can, of course, pass the mic back and forth, but what are the different styles or approaches to betting on tail events? The thing I would say before he launches that the point is approaches to betting on tail events? The thing I would say before he launches that, the point is not to bet on tail events. The whole idea of the black swan, everything. I've been telling everyone, every person I meet. To bet on disruption, on unforeseen.

Starting point is 00:17:16 To not be harmed by silent risk. That's the idea. The first thing is don't be harmed by it. But of course, you know, given that when you study tail events, you say these people are ignoring these risks, so therefore they're risking the system that people generate and don't see. Hence, you can trade on it. Yeah, I mean, there's all sorts of different approaches.

Starting point is 00:17:38 And I think it's when you talk about betting on a tail event, I would say that what Universa does and Empirica before that is, I wouldn't call that a bet. I would call that a risk management strategy. And that, in a way, is what differentiates them from other hedge funds and traders who do what I would call betting or taking positions based on a belief that something's going to happen. What Universa does is they are constantly taking on positions that will pay off massively in a tail event. So their clients are constantly protected. They don't need to make

Starting point is 00:18:21 predictions. They never make predictions. It's something that Mark Spitznagel constantly says is that he is shit at forecasting. He's been forecasting a gigantic bear market for decades. He's been right a couple of times, but he will admit, I can't predict the timing of it. It's going to happen one of these days. And that's what they provide for their clients is that constant protection. And they do it by buying far out of the money put options. It's pretty simple. Not easy to implement, I think, which is why you don't see a lot of hedge funds doing this. They do, actually, they do it. And then they go bust. Or they, you know, what happened in ASEAN, it's stressful. Because you can go years without making money in that strategy. Because it's waiting for an extreme event, a very extreme event. Their strategy is betting on a 20% decline in the S&P 500 in one month.

Starting point is 00:19:19 Which I think may have happened once or twice. It happened on Black Monday in 1987 in one day. But they don't actually need to have that happen to monetize the strategy. They just need to have a very big decline very rapidly. So that happened in 2008, happened a couple times in the 2010s, and 2020, it happened big time. So I imagine, I mean, it's for somebody who's running a fund like this for you or mark that there's the watching the numbers and maybe that form of bleeding chips stress over time but there's also you have investors who probably in theory are very

Starting point is 00:19:59 comfortable with the strategy but who also panic or have other issues. The genius of Universa is that they managed to package a product as insurance that allows the investors to increase their exposure to the market. So think about it. The strategy in and of itself is positive, huge return. But what's more interesting is that it was hedging something that went up, what did the stock market do since then? I mean, it went up like

Starting point is 00:20:32 twofold. No, no, no. In total, since say, 2007. Oh, since 2007, yeah. Went up, say, twofold, maybe. And it allowed people to have a larger position, larger exposure to the market than they would otherwise.

Starting point is 00:20:51 And also, there's a cocktail of other strategies that definitely didn't fare well because they entail diversification away from stocks. So this one allows you to have stocks. So it's very weird because Mark is always bearish on the market, but he provides people a product that couples very well with a very long stock position. That was what was the secret. So given that it's packaged that way, investors tolerated some drawdown, not too much, on the insurance. You see, what looking at it, you got to look at the insurance versus the insured.

Starting point is 00:21:26 It's an insurance premium. Exactly, versus the insured. I mean, hey, this is my differential P&L. And it's the same thing when I started trading options, you have an option hedged by stock. And sometimes people only look at the stock performance, and some people only have the option performance. Tell them, no, it's inseparable.

Starting point is 00:21:42 You see, this is called the delta. So that was how they manage you have to understand that we are one trick or me intellectually i'm a one trick pony i think of nothing else but the tail risk everything's packaged around tail risk that i do intellectually but universal is a one trick pony only does one trade. So if you do only one trade, and for a couple of decades, believe me, you know the tricks. Right? You know how much to put on,

Starting point is 00:22:12 not too much, not too much. You see the idea. If you do just one trade, and then people come to the universe and say, no, that's what we do. Why don't you do this for us? No. It's like you're making Maseratis, right?

Starting point is 00:22:21 And someone comes to you and says, hey, why don't you make trucks? We don't do trucks. Why don't we make bicycles? We don't do bicycles bicycle all we make is one single item that's it one single size and that is the main criticism one trick ponies and that's what we're proud about that's the selling point is that we are one trick ponies and whether in my work intellectually was worried about tail risk or whether the implementation of universa of their ideas of mark's ideas and one thing just one single thing so when you do one thing professionally you develop some edge yeah well it makes me think of

Starting point is 00:22:57 i'm going to butcher it but there's a bruce lee quote which says fear not the man who's practiced 10 000 kicks but the man who's practiced one kick 10,000 times. There you go. And let me come back to something that you said, Nassim, which was that a lot of these other shops who maybe attempted something they thought was similar went bust. What were some of the fatal flaws or mistakes that other fund managers made? And this I noticed in our days, a lot of clients that had initially, when we started Empirica, were diverted into other funds who were actually mitigating the strategy by instead of, say, you can't buy puts on the S&P 500, you buy puts that are cheaper in some other commodity, you see, and hope that they would correlate. So there was a dependence on correlation. So I know someone who actually went bust. He said, quote, overriding the strategy, buying puts on the S&P 500 and selling puts on the German index to collect more cash out of the trade. So that way, he said, oh, we have more staying power. And his investors were proud. Then guess what happened?

Starting point is 00:24:01 The German market went down, the US market, the thing exploded, and they were out of business in insurance. Okay, so a lot of our competitors tried to mitigate the strategy. We were absolutely first. The other thing is that you notice with players in reverse life,

Starting point is 00:24:16 you see, if you met Mark, you'd understand it. There's no question. That's what we're going to do. We're not going to mitigate. No correlation, nothing. Just all we do is artichokes. That's it. We don't do nothing else. That's it. We're not going to mitigate. No correlation, nothing. Just all we do is artichokes. That's it.

Starting point is 00:24:26 We don't do nothing else. That's it. We don't cook anything else. We don't. No, we don't add mayonnaise to the artichoke. We will not add mayonnaise to the artichoke. And in a way, I told you the long road, not the hack. We didn't hack the trade.

Starting point is 00:24:39 The long road is the best. So in a way, I started liking your idea of hacking. And until I discovered over time that basically all the things I've enjoyed doing were the things

Starting point is 00:24:49 I reversed hacked. So in other words, take the long road. Like right now, last week, I did 17 hours of cycling. So that's the long road. That's not a short road.

Starting point is 00:24:59 Whereas when we met, I was looking for shortcuts. The university had no shortcuts. And he takes no shortcuts. So I've known you now for 15 years. I met you for 15, 16 years.

Starting point is 00:25:12 And I think that shortcuts. And it was very good that he wrote that book for one reason, to put some story and narrative around the idea of precaution and tailor risk for society in general. And also because of fact-checking. A lot of these stories are legends of this has happened, this hasn't happened. and tail risk for society in general. And also because of fact-checking that document, because a lot of these stories are legends of this has happened, this has not happened.

Starting point is 00:25:28 It was a perfect fair fact because it's fact-checking, reflecting audited results and stuff like that. It was fact-checked. So it's sort of fact-checking the importance of tail hedging for society. And that, to me, is greater than that detail. So it's like having finally a document of someone who bothered to look at the details and went through a rigorous uh many hours of interviews documents and

Starting point is 00:25:53 double checking the facts versus anecdote so what what compelled you to write this book of all the things that you could write on why did did you choose to write this one? The birth of the idea of the book was in early 2020. And we all remember what was happening in early 2020. The world seemed to be unraveling. We had COVID. We had protests in the streets. We had extreme political uncertainty in this country, lots of things going on. So the first thing that happened was in April of 2020, it came out that Universa had posted a three-month return of more than 4,000% on their positions, which was quite eye-catching and got a lot of news. I reached out to Mark and was like, holy crap, how do you guys do that? So that happened. And then I came across a paper that Nassim had co-written in January of 2020 about COVID. It was

Starting point is 00:27:00 a glaring warning to the world that this virus was very deadly and people needed to take extreme precautions against what was coming, you know, by social distancing, other things, advice to. And I thought, we're in a period of extreme duress where lots of people are just kind of looking really bad. They're collapsing. They're losing money. They're making really bad decisions about COVID. Everybody is confused. These two guys seem to be coming out of this insane period looking very smart. So I thought, what is it about their worldview that allows them to go into a period that makes a lot of people look dumb, look very smart? There's something about that that can map from what Universa does to what Nassim does,

Starting point is 00:27:59 and it's this view of the world of, you know, of black swans, of extreme events, of being prepared for them. And know what class of events you should be prepared against. In other words, know where they're going to be coming from. And pandemics, for me, was something I was working on since 2007. I even discussed it on The Black Swan. What you have to worry about is a pandemic before financial

Starting point is 00:28:25 meltdown because of connectivity we're no longer like in the 1800s where you know you can have a crisis here and not there everything's so connected you know it's exponential in the financial world and the same thing in the physical world you see the the plague the great plague took something like 300 some years to go from Constantinople to Northern England. 300-some years. Today, it's just a weekend for the whole thing, to spread it through the entire planet. Flying all over Tanzania.

Starting point is 00:28:54 And Justinian's plague could not come to the Americas. There were no Air France or no ships at the time. And now, visibly, it can't. So what I'm saying is that we are in a different environment. Just like culturally, things can spread. You have the Google effect. The same thing should apply to pandemics. So this is why we were working on, Yanir and I and other people, on pandemics.

Starting point is 00:29:18 And particularly a fellow who is probably one of the smartest people I've ever met, who was a head of civil service in Singapore at a time, and then retired later. And we were all obsessed with a great pandemic that would come. And we thought it was going to be Ebola. So, I mean, you had to worry about pandemics. And later on, I wrote a scientific paper, a scholarly paper on pandemics that I didn't really finish.

Starting point is 00:29:46 And when a pandemic struck, we put it in Nature Physics, and it went counter. Nature Physics is a very prestigious, as you can guess, scholarly publication. And it silenced a lot of the epidemiologists who were like nitpicking, similar to economists, like nitpicking when you have what I call extreme properties. And at the time in early 2020, you had a lot of epidemiologists, even the WHO, saying, we don't understand the nature of this pathogen. We need to wait and figure it out. The advice was kind of like the, what's the movie about climate change, Don't Look Up,

Starting point is 00:30:23 where the president is saying, let's sit tight and assess. That's what the message was that we were getting from our health authorities in early 2020 was sit tight and assess. And that's a recipe for disaster. Nassim and his group were saying, take action now. If you wait around to sit tight and assess, you're screwed. Exactly. If you must panic, panic early. Panic screwed. Exactly. Because it's too late.

Starting point is 00:30:45 If you must panic, panic early. Panic early. If you must panic, panic now. Black and finance and everything. You get out now. When it was easy, for example, to limit the flights out of Wuhan, you didn't have to do lockdowns. You could do lockouts.

Starting point is 00:31:01 I mean, there were methods used by the Ottomans. By the Ottomans? Yeah, to install the Ottomans. By the Ottomans? Yeah, to install the Ottomans and the Austrians had, you know, the world was separate, but they had a lot of traffic, and it went through what they call quarantine spots. So you would go into a sort of hospital that has quarantine, and it's seven days one way and nine days the other day. And they would implement that the minute they smelled anything, right?

Starting point is 00:31:26 And they had rules. If you come from India, it's more days. The Ottomans had these rules. It didn't come from the Ottomans. It's a long experience dealing with pandemics and how you stem them by stopping them at the border. These things were called lazarettos. And towns that did not have lazarettos,

Starting point is 00:31:41 Venice, of course, their maritime power, they had lazarettos. They did very well. But Marseille, France, was decimated because they didn't have lazarettos venice of course their maritime power they had lazarettos they did very well but marseille france was decimated because they didn't have lazarettos so the lessons we need to learn repeatedly we have to learn from history how people handle that they cut it in the egg that's it yeah and it's easier to check people at the border and you don't need to have quarantine you can just test at the border we didn't test the United States at the border until a year and one month into the pandemic. I don't understand. You have lockdowns, but you don't have lockouts. I mean, just test at the border. Just test people at the border. That would probably reduce... The fellow from Singapore was testing at the border. He said

Starting point is 00:32:20 the only way to control it is by knowing, especially testing people with that, they're being aware of it. And they started the first thing where you detect temperature before anybody knew about these temperature things secretly at Singapore. I guess they had a warm-up with SARS, so they had the thermic cameras. Exactly. He's the one who started it. And they were doing it secretly before it became public, so people wouldn't take antipyretic drugs before landing. So the whole idea is that you have to find fixes, and they're not complicated. And one analogy I'm going to give to the banking system

Starting point is 00:32:52 is that the banking system banks monstrously profitable enterprises. They make money off of the float, the money you have left there, the check you didn't cash, right, or stuff like that. They make tons of money. And guess what?

Starting point is 00:33:06 They blow up on the risk that bring them a tiny amount of money. You see, it's selling that option that explodes every 10 years by saying, oh, no, we're in different environments. It'll never happen. So sitting on dynamite. So that tiny, tiny, tiny tail option is what cost the banking system. They lost more money than ever made in the history of banking in 1982, Money Center Bank, that is, and did the same 2007.

Starting point is 00:33:28 Okay. And a business that's usually profitable except for that tail event. So I'm saying that if you just remove that, banks would do well. It's the same thing in society. If you figure out how to remove that tail risk, sometimes not complicated. Well, let me ask, I'll stand in for the audience and also for myself and not to throw my audience under the bus, but what are the incentives or the circumstances that prevent them from taking a certain percentage of their assets and allocating it to something like a universe so that they are less at risk in that way? They just don't have to do that. They could just avoid some trade. But let me explain to you the dynamics of the bonus system.

Starting point is 00:34:06 This led to my book, Skin in a Game, later on. If you have skin in a game, you're going to worry about blow up because it's your money. If you don't have skin in a game, you're CEO of a company or you're a fund manager, any kind of financial venture, what is your incentive? It's to print good numbers because you don't pay for the downside. So you print good numbers, you collect money on the profits. Annual bonus. And annual bonus. So this I call the generalized Bob Rubin trade, generalized Robert Rubin trade. He made a hundred million dollars at Citibank or Citicorp, Citi something. Over 10 years,

Starting point is 00:34:41 about 10 years, he collected a hundred million million in compensation. The bank was insolvent in 2008, near insolvent, if it weren't for the taxpayer, and it was the last minute. All he had to do was write an apology letter. We didn't see these events. It was a black swan named after a book by a very, very stubborn man. So something like that. So that's all he had to do is say, I'm sorry, right? You keep your bonus. You don't show up to work.

Starting point is 00:35:06 So this you can generalize. It's the same thing with supply chain. With the supply chain, a lot of firms concentrated everything on one supplier instead of being diversified. What did that lead to, right? Okay, better bottom line, but what I call pseudo efficiency because they're short that option and it so happens that if their supplier is in Wuhan,

Starting point is 00:35:28 guess what? You got a problem, all right? But that problem was not, doesn't show in the numbers. It shows after it happens. It's the dark side of optimization. Exactly, what I call pseudo-optimization. Like if you drive a Ferrari

Starting point is 00:35:40 500 kilometers per hour, you're not going to get there faster than if you ride a bicycle because all of a sudden you're not going to get there faster than if you ride a bicycle because all of a sudden you're never going to get there. Just a quick thanks to one of our sponsors and we'll be right back to the show. This episode is brought to you by LinkedIn Jobs. These days, every new potential hire can feel like a high-stakes gamble for your small business. So you want to be 100% certain that you have access to the most qualified candidates. That's why you should check out LinkedIn Jobs.

Starting point is 00:36:09 LinkedIn Jobs helps you find the right people for your team faster and for free. Add your job and the purple hashtag hiring frame to your LinkedIn profile to spread the word that you're hiring. Simple tools like screening questions make it easy to focus on candidates with just the right skills and experience so you can quickly prioritize who you'd like to interview and hire. It's why small businesses rate LinkedIn Jobs number one in delivering quality hires versus leading competitors. LinkedIn Jobs helps you find the qualified candidates you want to talk to faster. So post your job for free at linkedin.com slash tim. That's linkedin.com slash Tim to post your job for free. Terms and conditions apply. Nassim, I have a question for you about a letter and then I have a question for you about

Starting point is 00:36:52 personalities, Scott. So temperament may be another way to put it. So is it true that you wrote a resignation letter your first day at a trading job and put it in your desk drawer i read this on the internet i don't know if it's true you can't believe everything you read but it was from the guardian so i thought it might be credible one thing is actually as i said i recommend people do that i wrote that but not on the day i started but i recommended that people because you feel relief when you do it because then you can continue on your job without feeling like someone's controlling you. You've got the gun loaded.

Starting point is 00:37:30 The whole idea of Plan B, how you thought about that problem. So you write the resignation letter, and you don't date it, right? Yeah. I'm very fascinated by your ways of thinking, the way that you've embraced different philosophies. And you emailed me an aphorism in 2010. And you can correct me if I get any of the wording

Starting point is 00:37:53 wrong, but it stuck with me. This is in 2010. Here's the aphorism or the quote. Robustness is when you care more about the few who like your work than the multitude who hates it. And then in parentheses, artists. Fragility is when you care more about the few who like your work than the multitude who hates it and then in parentheses artists fragility is when you care more about the few who hate your work than the multitude who loves it and then quotation marks politicians have you always had that type of robustness or resilience against criticism is that something that is inborn? Maybe because I was never really someone who took, you know, established ideas at face value. So you necessarily have, you know, violate some norms, some thinking norms. And often people protect those norms by, you know, attacking your reputation. And I realized that while writing

Starting point is 00:38:44 Fool by Randomness, I say, hey, you're saying that while writing food by randomness, I say, hey, you're saying that what I'm doing is random, we're using wrong models, these don't work. So they attack your reputation. So I realized quickly it was time that my reputation was going to be under some kind of fire. And I decided that no, my reputation is how a few important people or people who know

Starting point is 00:39:03 something about the subject view me. And it's not like I don't care about my reputation. I only care about my reputation in some circles and it was people I can talk to to try to explain what it's about. And it has worked out.

Starting point is 00:39:20 So if you have to go defend your reputation and you're doing the right thing, it's too much energy wasted and it's not going to help. Haters are going to hate. This resembles another aphorism inspired by Charlie Munger's, by Charlie Munger's,

Starting point is 00:39:35 is that you want to be the most ethical person when people think that you're corrupt or you want to be the most corrupt person when people think that you're ethical. Make your're the most corrupt person, or people think that you're ethical. Make your choice and use it as guideline. It's the same thing. So, except that there's something in between, is that there's some people I care about,

Starting point is 00:39:56 and I want them to not lose respect for me. Of course, you start with your mother, you have your children, or whatever, your family members, but there are also, there's a lot of people on the planet. And I care about my reputation, but in these circles, not with the general public. So it allows you to take much, much more aggressive positions, which I've done over a long life. And Mark, for example, has a lot of enemies. And they're going to pick on something.

Starting point is 00:40:22 And you don't care. You're doing the right things. And how do you know you're doing the right thing if people you respect approve of your action not if the general public does so that segues to my question for you scott which is in the process of doing all these interviews and interacting with these various players on the field, these sort of practitioners, these investors, and so on. Have you identified any patterns that you think, whether nature or nurture, that seem to recur in people who are good at what you describe in the book? I would say, I mean, across all three books that I've written, which are generally focused on Wall Street trading hedge fund managers.

Starting point is 00:41:10 I've met a lot of hedge fund managers over the years. None like this guy, I have to say. We'll probably come back to that. I'm telling you, I don't want to be identified as a hedge fund manager. Yeah, that's true. It's an identity thing many are very focused on making a lot of money that's a very common trade i mean mark he talked to me about how you know he grew up in the 80s he identified with the reagan era it was a time you know wall

Starting point is 00:41:42 street agreed is good he told told me, he's like, did I have a little greed in me? Yeah, I did. It was the 80s. And he grew up in a family that was, his father was a, he was a minister in a church. He was sort of a hippie, didn't believe in pursuit of wealth. Mark took the exact opposite view of that. That was constantly something driving him was the desire to make money. A lot of other hedge fund managers I've met over the years, just they have that drive. And it's something that many people look at these guys and think, you're worth a billion dollars, you're worth $2 billion, and yet you're a maniac. You go into work every day and just go crazy. You drive all your employees crazy

Starting point is 00:42:27 because you want to be richer than the next guy. I don't think Mark has quite that sort of insane level of greed as some do. I've met Ken Griffin, founder of Citadel, disciple of Ed Thorpe, who we talked about, we might talk about later. Cliff Asness, who is a stark enemy of... A friend, initially. Initially a friend. Yeah, and I have to say Cliff is a nice guy when you meet him. Not a nice guy, but I've had friends who are not nice guys. He's also got a dark side. Also somebody extremely focused on being wealthy. Very smart. They're all extremely smart. And I think that's, in personalities, that's, I think, one of the things that has helped drive my books is these are interesting people.

Starting point is 00:43:11 You know, a lot of them are mathematicians, scientists. They come out of university with a different expertise in making money, but then they apply that on Wall Street to making money. So it's a combination of they have to be leaders. They are extremely driven. It baffles me because I'm not like that. I have a degree in English. And I think that's actually why I sympathize with Nassim's writing so much is I came out of a tradition, I love the works of Dostoevsky and existentialism. And, you know, one of my favorite books is The Irrational Man. And I came into Wall Street and started reading about how there's this belief that people are irrational and the markets are rational and they are predictable because of this. And I thought that is is just crazy. To me, I look at financial markets

Starting point is 00:44:06 and I see black swans. I see fear and greed. That to me is what drives markets, not rational behavior, rational expectations. What are some of the things that make Nassim different or unique in those you've interacted with? I have some of my own questions and thoughts on this, but I would love to hear yours. He mentioned his contrarian nature. It's not a contrarian nature, it's independent. I'll let him answer this. I mean, people think I'm contrarian.

Starting point is 00:44:33 I'm with the conspiracy theorists on many things. I'm against them on many other things. Some are just contrarian because they have a father problem. So to me, contrarian is an explicit rather than an attribute. But the other thing is, I thought it was going to be about me. It should be about the idea, the precaution. He's a lot more

Starting point is 00:44:54 interested in literature and philosophy and not financial markets. That's just the thing that drives him. He doesn't look at the stock market page every day like some people do he's you have to figure out who are people envious of so you know if you're in a hedge fund business and and you have 500 million dollars in a bank and someone else has 600 million dollars gonna

Starting point is 00:45:18 be envious of that person i was always envious of people had more erudition than me. Okay, so more erudite. And you realize that that's what makes me tick. Being envious is not good, you see. But at the same time, if you figure out who you tend to envy, I don't believe in this, say, oh, people having enough. There's someone here from East Hampton, the fellow who wrote Caps 22. A lot of interesting folks out there. Yeah, he met a financier at the time, four hedge funds.

Starting point is 00:45:48 And the financier said, what is it about you, because he was an author, a very successful one, what is it that distinguishes you from me? You know, look, he told him, I know the meaning of enough. So in other words, he know you're upper bound. And effectively, I don't play that game. I say, there's a meaning. I am literally, and I say envious of people who are erudite.

Starting point is 00:46:15 Like if someone knows Latin very well, I'm envious. If someone knows Sanskrit, I'm envious. And I discovered that early on. So I made money on Wall Street because I wanted to make money on Wall Street, but I didn't think it was worth the effort. And luckily, with a combination of the universe, I had so much leverage, you know, I was marked on all this stuff, so the spillover on me was more than satisfactory. So I have knock on wood a lot more than I wished.

Starting point is 00:46:44 So part of the reason i'm asking we're talking about the ideas but the person who's acting as the vessel or communicator of these ideas the developer of these ideas is integrally related to i think the sort of totality that i want to explore so part of what interests me about your story and your thinking is how various inputs have impacted your thinking around not just markets, but other things. So for instance, like the Stoics and the Seneca the Younger and so on, or other philosophical inputs, did those come early and then aid you, you think, in your career when you were active in the markets? Or

Starting point is 00:47:24 did those come later and you sort of always had a deep interest but were able to explore them at a later point? No, actually, I started liking the Stoics. And those people I've talked about, I liked them much earlier on in my life. But I went overboard. For every idea I've had, I did the exact opposite of what one should do. If you had an idea, say, oh, I had this idea, right? Is go look, because I don't consider myself so different from others.

Starting point is 00:47:52 And then particularly when you look at history, you know, so many tens of thousands of scholars surviving works. So I went back and figured out of the scholars, of these scholars, who had similar ideas or who preceded the ideas. So, and who started to think like that. So, I went into the empirics, the Eastern Mediterranean, Greco-Levantine, Greco-Roman, mostly using Greek language thinkers, and then of course, into others about this fundamental skepticism. Because I noticed a lot of people are skeptical, particularly conspiracy theorists. They're skeptical of small things, but not about big ones. All right? They get taken for a ride.

Starting point is 00:48:34 Find me a conspiracy theorist, or find me someone who's naturally skeptic of all things, and I'll show you a turkey. So, I wanted to find people who are fundamentally skeptic, being skeptic and being skeptic about important things, not about small things. Because it's- What would be an example of a big thing? A big thing, like, let me give you an example. I wrote a paper, a paper, it never ended up in a book,

Starting point is 00:48:57 on the stock market and religion, all right? It's called The Bishop and The Economist. And I said that those who are skeptical about the existence of God and non-existence of God, skeptical about religious matters, typically tend to be complete suckers when it comes to stocks. They believe in a stock market or believe in some kind of pseudo-scientific theory on whatever it is, okay? But they don't believe in religion.

Starting point is 00:49:24 And the reverse, all right? And people who are religious, typically, they're harder, and there's some, I don't know, research on that. There's a guy called Bar-Lahmi, Bar-Ha-Lahmi, I think, who did some studies about skepticism. People go to religion about affairs,

Starting point is 00:49:39 skepticism where it matters. And I wrote about it, I think, in the Black Swan, so skepticism where it matters. And I noticed that a lot of these big skeptics were not skeptical of God and things you can't do anything about. They were skeptical of the charlatan. They're skeptical of things, of someone trying to take advantage of you. That's where you exercise your skepticism. Among the great skeptics, there is a Bishop Yue.

Starting point is 00:50:03 He was probably one of the second most erudite person of his time. Second most, there's a guy called Scaliger. The guy is phenomenal. He could translate into Arabic. He was a Roman author, Latin author, and vice versa. Okay, Scaliger. There are a lot of, there's Pierre Bale.

Starting point is 00:50:22 Pierre Bale has a lot of works. He's one of those skeptics. Hume was one of those skeptics, but these people preceded Hume. Hume is known because he wrote in a language of a country that had a lot of ships and a lot of trade across the world. came from groups of people in France or among Protestants in France, and was called the Fideists. It originates, of course, in the Levant, and of course you have the great Al-Ghazal, the Islamic theologian, Iranian origin, who definitely was showing you how all these arguments are weak, you know, could dismantle arguments. By showing you to be skeptical about human arguments about God, okay, a lot more than that. I think Spinoza is coming out of that same tradition.

Starting point is 00:51:11 Very skeptical. He was skeptical about the text that was, these people say, okay, transcend these texts, okay, and be skeptical about things that really matter. And there was actually a skeptical school of medicine, practicing medicine. So what? I went back through history.

Starting point is 00:51:25 Every time I had an idea, I would go back and see in history who preceded me. And sure enough, I haven't done enough because every year or so, I get a letter from someone. Hey, how come you missed so-and-so? Okay. And sure enough, I go back to the inserto, and I add that person. And this is why it has survived, the five books, the inserto. But we're not here to talk about these five books, but this book. Well, we're going to talk about whatever comes up, but I do want to hop over to you, Scott,

Starting point is 00:51:58 and maybe discuss something that you had shared with me as a possible bullet in the prep stages for this conversation, which is related to polycrisis and the new age of crisis. What does this refer to? It's the subtitle of my book. Most people have focused on the first part of the subtitle is how Wall Street traders make billions. Second part is In the New Age of Crisis. I feel like that hasn't gotten that much attention, but part of what I'm trying to argue is that we are seeing a magnification of extreme events accelerating and overlapping. There's an economist, Adam Tooze, who's coined a phrase called the polycrisis, which he says these crises that are happening on a global focus of mine in my daily job at the journal, which I think is sort of the big one in terms of the ever magnification of crises that we're

Starting point is 00:53:14 seeing. We're seeing it in the news every day. And what I wanted to do in the book is look at several of these crises and think about how we should be approaching them in a sort of a risk mitigation standpoint using ideas from people like Nassim. I think that the central idea was, as I was talking about the germ of the idea of the book, was can you take ideas that were created on Wall Street for risk mitigation and borrow those and apply those to other forms of risk management? And what Nassim and Mark do is they think about the extreme events and how to protect against them. Nassim co-wrote a paper about this exact issue called the precautionary principle.

Starting point is 00:54:07 It delineates specific categories of risk that you should take the precautionary principle and apply it to. He has some specific ideas, and he can talk about it way better than I can. But these are things that can be global, that represent systemic risk to humanity, things that can be exponential must be fat tail or exponential things that have these properties that you need to take extreme precaution and not take that risk basically don't play russian roulette with these risks and that's kind of how the book was structured was first looking at the the growth of the strategy with Mark and Seam, and then moving on to these other things that the world is facing and seeing if we could think about ways to

Starting point is 00:54:53 protect against these risks. Something like climate change, you don't really want to mess with that. It's a bit too late, but there's still lots of things that we can do and that's i think the book in a nutshell i was going to mention earlier when you asked me about the birth of the idea of the book when i first suggested it to nassim and mark nassim said no way i'm not i have no interest in in doing that with you it took a while and then you were like i have these black and white photos you might want to take a look at so i had you convinced me to do it it was uh it warmed down i think it was more mark put the screws on no no let me tell you what happened i actually don't know i know that i extracted the promise from him to not be portrayed to mention that i don't self-identify as a finance person.

Starting point is 00:55:46 And once he made that promise, okay, I said, okay, now we can talk because finance represents a significant part of my life. But this has been a theme with Nassim ever since I've known him. So to me, it was like… The identity piece. Yeah, that he's not a trader. And I thought I agreed because it's true. He's not been a trader for a long, long time.

Starting point is 00:56:11 And it's obvious where his interests are. What would it, I have to ask, so what would it mean or feel like for you to be broadly identified as a finance person, but to think of yourself more as a scholar? I wrote about it in Full Bar Enderness. George Soros, and I met George Soros, one of the persons on the planet who impressed me the most, one of those. And I realized that George Soros missed his career. He wanted to be a philosopher and a thinker. Okay, he ended up

Starting point is 00:56:44 making money and spending too much time in it and wrote drunk articles and books, one book. So yeah, it was not what he wanted out of life. He's a middle European intellectual who would have liked to be remembered as someone for ideas. And he had, of course, Karl Popper, who he claims was his professor, but it was beyond. So I wrote about it full-blown randomness. I said,

Starting point is 00:57:12 here's this fellow who is, say, okay, but he also does, to distinguish himself from other financiers, he is also, or has intellectual aims. I said, I don't want to be that. I want to be someone who produces intellectual work and who happens to have had contact with reality thanks to trading and thanks to Mark and the guys. I still have some contact with reality. But I'm not cut for that.

Starting point is 00:57:39 When I was writing Fool by Random, it was 2019 that I realized I was not, I don't want to be like Soros. Because unlike Buffett and the other people, Soros had an identity crisis. He wants to be known as a philosopher. Okay. That's not, you know, and life, it's a life to control of him. He didn't control life. Buffett told me he wanted to write a book. But I used to cover him, and I was leaving the journal at the time to write my second book,

Starting point is 00:58:09 and he was like, oh, I really always wanted to write a book. I never got around to it. So there you go with the Oracle of Omaha. He wants to be thought of as an intellectual, too. Well, I mean, it's not the same. But the Sage of Omaha has something that I didn't put in a precautionary principle, but that's probably very inspiring because he understood the asymmetry. If you say no a thousand times, he says no if he doubts.

Starting point is 00:58:36 And that's the precautionary principle. Could you give people the precautionary principle one-on-one just to back up? Okay, let me ask you. You're Tim Ferriss flying to goon-one, just to back up. Okay, let me ask you. You're, Tim Ferris, flying to go to Mexico. You go to JFK. And they tell you they have uncertainty about the skills

Starting point is 00:58:53 of the pilot. But we think he's good, but there's uncertainty. What do you do? You're not going to get on that plane and say, okay, life is too important for me. You'll take a train, you'll walk, maybe you'll ride a bicycle, take a few months, but you're not going to get on that plane. You change your plans and say, okay, there are other plans

Starting point is 00:59:12 or other countries too, and other planes. That's Warren Buffett and his investments. That's my precautionary principle, the idea that there's an asymmetry, that there's uncertainty about certain things. It's not good. So the climate, for example, if you have uncertainty about the climate, stop these models. Alright? Just don't pollute.

Starting point is 00:59:34 Or try to use something else. Try to mitigate. So that's the first part of it. And people get it right away when I give them a story of a plane or I take water. I say, this is a glass of water on the table. There's no evidence that it's poisonous. Would you drink it? No, there's no evidence. The wording would spook me.

Starting point is 00:59:52 There's no evidence that. But when you tell them, hey, you know, you should worry about GMOs, they say, there's no evidence they're harmful. Yeah, but there's no evidence that they're not harmful. Okay. So, the asymmetry, where you put the burden of the asymmetry on, that's the precautionary principle. But then what we did is we noticed a lot of people, in fact, it was a counter precautionary principle

Starting point is 01:00:12 because a lot of people were invoking it for nothing to say we're going to have a non-naive precautionary principle by delineating the areas where you should exercise such precaution systematically as a planet or as a communal group.

Starting point is 01:00:27 And what I'll say, number one, you need fat tails. Now what does fat tail mean? Let me explain to you. Let's say you go to planet Mars, okay? Elon would help you get in there. You have connection. And you have no news from Earth. And then on the way back, you hear that a

Starting point is 01:00:47 billion people died. Okay? Which one is more likely to be the cause? Ebola or car accidents? Ebola. Now, on a given day, if you hear Joe Smith died today, what's more likely, Ebola or a car accident? Car accident. Car accident. That's fat tails. Fat tails. You have to identify things backwards. If you hear the big thing, where did it come from? And you have to guess these, okay? So they have different dynamics because they scale differently. So in The Black Swan, I show the difference with the following metaphor. There are environments where you may have a large

Starting point is 01:01:32 deviation, but it's not going to be consequential because it can't be very big. So if I take a thousand people and put them on a scale and add to that sample the largest human being confined on the planet, how much of the total will he or she represent? Say it's 30 basis point, nothing, okay? And then if you go from 1,000 to 10,000, it dilutes completely. So you can have a tail event that's not going to be consequential. Extremistan is different. Extremistan, if you gather 1,000 people and add to that sample the wealthiest

Starting point is 01:02:06 person on the planet, how much of the total will he or she represent? There'd be a running error. I mean, there'd be on average the planet Earth, right? There'd be in total, maybe they have two or three million in total, and then you

Starting point is 01:02:22 have a hundred and some billion right next to it. So this is where you have to focus on an environment that produces fat tails. And this is what marketed it as Inversa. Inversa is named after the universal mechanism that generates fat tails. That was the name of the company. So everything we're in it, basically, intellectually, everything, all the details. So we have to identify what produces fat tails. In the financial markets,

Starting point is 01:02:46 and why it's getting thicker, fat tails means that you have the greatest contribution comes from smallest number of events. So concentration, like for example, you have a lot of people, all the wealth comes from one person. It so happened that under fat tails, the models that we use for risk management on Wall Street are BS. This is why I have a lot of enemies. This is why I have to protect myself against reputational damage, all right? So because all the economists hate me, all their models are based on that. So what is fat dales?

Starting point is 01:03:16 Practically everything in socioeconomic life is fat daled. What is not fat daled? The number of calories we're going to eat tonight. How many calories can we have in one day? Tonight. We can only go for the gold, I'd say. I'd say we could each down a few thousand calories apiece. Two thousand. Say I go three thousand

Starting point is 01:03:34 for me, alright? I can play with fat and stuff. Three thousand. That's nothing. How many calories do I consume a year? Yeah. Not a single day is going to make a difference. Can you lose all your money in a single day? Yes. There we go. So you you have two environments and they're separable so this is why the universal approach that makes things separable right the fact that you can identify what is fat tailed you identify where models don't work and identify where you have to understand and we have to use

Starting point is 01:04:01 more refined tools to figure out stuff. And then also, in fatness of tails, number one, pandemics. Number two, wars. I've got a close second. Wars and pandemics, okay? And so you can use that to prioritize application of the precautionary principle? Bingo. And let me tell you how. For example, if cancer is thin tails, nuclear thin tail. If you can diversify it, it's thin tails. If you can have a thousand nuclear reactors, all right, if you can insure it rather than one, it is thin tail.

Starting point is 01:04:36 If you can insure it, thin tail. If you can't insure it, non-insurable, fat tails. So a lot of things that are believed to be very risky, but they're not like nuclear for me. I mean not for my one of my co-authors but i'll settle it with them with a beer or uh what's the english uh rupert reed is a co-author of and also a major character in the book yeah he's very environmentally focused uh person he's a leader in climate these days. And yeah, he told me that's one thing that he disputed. The precautionary principle paper was Nassim.

Starting point is 01:05:12 Which was written with him first, drinking, you know, in English pub in somewhere in northern England. Where the portions are like smaller than what they give you for espresso in Italy. You know, the espresso that you sip. So we had to have like, again, it's like with you and the eggs, all right? So to go back to the insurable, we don't have to worry about it. And a very simple example I give that when Ebola started, or later on when COVID started, people were using the arguments, yeah, you know, 3,000 Americans die every year drowning in a swimming pool.

Starting point is 01:05:49 That was something by a guy called Dr. Phil. Should we shut down pools? At a time, less than 1,000 Americans had died of COVID. And then I presented the following argument. I said, if I die drowning in a swimming pool, my neighbor drowning in her or his swimming pool has not changed. If I die of COVID, the odds of my neighbor dying of COVID has increased. So you have that transmission that makes it fat-tailed, that mechanism of transmission. So this is why you cannot compare, as basically the press in the beginning, the so-called established press, was against our

Starting point is 01:06:26 ideas. Because it was racist against China, they could not distinguish between risks of car accidents and heart attacks and risks of things spreading. This is why, for example, I am in favor of vaccines, the risk is entailed, and I'm against GMOs because they spread in the environment. Let me ask you a question so I better understand. So with the precautionary principle, with the example that you gave of the water, there's no evidence to suggest this water is poisonous. In my mind, I was wondering if somebody could use a similar argument against a new vaccine. Let me tell you what. The problem is we're not, with a vaccine, there are two things.

Starting point is 01:07:07 Number one, if someone takes a vaccine and you have part of the population that doesn't have the vaccine, it's not affected. But there's something more central here. You're comparing two risks. We have COVID versus a vaccine. So you have to compare.

Starting point is 01:07:21 And we know a lot more about genetic stuff in an individual than we know about how genes spread in a population. And that vaccine story, basically, in the beginning, I say, why don't you exercise the precautionary principle? I say, I have to worry about a pandemic a lot more. Yeah, in comparison to what? In comparison to that. Plus, very quickly, after about a billion people had jabs. I was initially skeptical about a vaccine in the sense that let's wait and see. The story is, are there other ways?

Starting point is 01:07:50 Because I'm really worried about COVID and people don't understand that the argument they use exposed COVID is much more dangerous than you think. And the vaccine is what made it tolerable. So when they had a billion jabs, I showed the following thing, that everything that's genetic, the number of mutations to take place to cause a problem, they have a variance. And if they have a variance, it's as follows. You

Starting point is 01:08:19 would see already in a billion people, because it's so much from a scrutiny, you would see that tail risk. To give you an example, Hiroshima, okay, they say on average took 10 years or eight years, whatever, to get cancer. No, we saw it in three months, four months. If you focus on the tail, same as Kuru. Kuru takes about 10 years on average, the median, to get Kuru from exposure. But you have… What is Kudu? I don't know. Kudu is a bad cow disease. Things for which we have data of early exposure and then early

Starting point is 01:08:52 disease, only onset of disease. So I looked at vaccines with all these conspiracy theorists and everything, and said, the focus is enormous and you can see anything. But it follows that class of risks where, you risks where you have to have mistakes going to take place in a genetic or DNA. This is where, after a billion jabs, I said, okay, I'm going to go for it. And visibly, the risk is much smaller. The risk may exist, but it's much smaller than the risk of COVID. And plus, there are a lot of numbers about COVID people weren't aware of. Number one, something that people didn't think about immediately,

Starting point is 01:09:27 is that COVID raised the risk of death, your multiple deaths, beyond the age of 30, because we don't have much of an effect for younger people, or we don't think so. The force of mortality...

Starting point is 01:09:43 Like all-cause mortality? No, it went up from COVID across the board in the same way. Say, for example, you're exposed to COVID, you have 10% chance of mortality. At 1.1%, 10% increase in all-cause mortality. It's the same for young people. So past the age of 30, it's about the same number. So it could be 20% more depending on your exposure. So saying it's an old people problem,

Starting point is 01:10:09 they were dying as a multiple of their mortality rate. So I took the social security numbers just to say, okay, it's not my numbers. Social security number, look at it. If you're a female, 30-year-old, you have 1 in 700 chance of dying. Male, 1 in 400 chance of dying. That goes up by 10%. Okay, with COVID. If you're 80 years old, you have 1 in whatever, it goes up by 10%. I mean, the 10% depends on the exposure period, but it was almost flat across the

Starting point is 01:10:37 population. So I said, okay, do you want to increase your children's chance or young people's chance of death by X percent? Plus the effect it has on years lost and life expectancy is much more dramatic for a 40-year-old than it is for a 90-year-old. So this is how I looked at it. And of course, by then we had 8 billion traps. So we had the answer. How do you think about, say, GMOs? This is something I actually don't know much about, but in terms of the precautionary principle and risk assessment,

Starting point is 01:11:11 how do you think of... I mean, a vaccine is to counter a disease. GMO is just like manipulation, that people said, oh, we've always manipulated animals, all right? But that's not true. It's sort of like there's a difference between flying and walking, and the risk you can encounter. You see, the GMO, the way the gene would spread through the environment, uncontrolled spread is fat-tailed, whereas selective breeding is very slow. As Rupert Reed said, he cited, I don't know who said, that if your horse is blind, make sure you ride it slowly.

Starting point is 01:11:48 So there are two classes, like Mediocristan and Extremistan. Mediocristan, like calories, or Extremistan, stock market, selective breeding, versus GMOs. I mean, you're jumping so many steps with GMOs. So it's a different class of risk. Right, because of the risk of uncontrolled spread. Exactly. And then you have a blight that spreads like COVID did, the whole planet. And we're much more connected than before. Plus, they have never done a proper risk study on GMOs, on the environment. Not one. They're saying there's no evidence, they're harmful, look,

Starting point is 01:12:22 people are eating it. I mean, I'm a scientist. I like to see randomized controlled studies. I like to see things. I like to see something a little more formal than claims. And then you don't realize what happened. No matter what you say about Monsanto, I think it would be an underestimation of their evil attribute. Because they really wrecked science. Because they had groups of people who would go and intimidate scientists. And people on salary.

Starting point is 01:12:46 Scientists are so afraid of losing their job, losing their postdoc position. They would contact your boss. They would contact practically everyone. They did that to me, but visibly it was like water on a duck's back, right? Why'd they do it to you? Hundreds of letters to the university. Because of your commentary on GMO because of that paper

Starting point is 01:13:06 and then somehow I used the R word in the past in French it says it's like you're a slow thinking person the R word and then they would have 15 letters

Starting point is 01:13:22 from mothers of children with special needs who don't like that a professor at NYU would use such language that's insulting. The point is, when they showed me the letters, they're different names, but it was written almost on the same... Letterhead. Exactly. And the language was the same.

Starting point is 01:13:41 So I realized that it was a smear campaign. Plus, there were a lot of other things they did. Petitions, all kinds of things. And online harassment. But with me it didn't work. But the people they select for these things are usually dumb. Think about it. Who would engage in smear campaigning?

Starting point is 01:13:58 The brightest person you know? No. Okay, so you can play with them. So what Monsanto did is to cover up for whatever they're doing via intimidation. They disrupted science. And they made people believe that, hey, no evidence

Starting point is 01:14:14 I'm doing science, this person is confabulated or whatever it's called, the luddite. Okay, yeah, you would have been against the fire. No, it's not the same thing. Anti-science. Anti-science. Because science. Anti-science. Anti-science. Because science, anti-science. And usually they're never used by scientists.

Starting point is 01:14:29 And they had a few scientists who knew nothing about risk and probability. So that was... But anyway, we had fun fighting. It was a long fight. But then what happened, they were bought by Bayer, and Bayer was more civilized than Monsanto,

Starting point is 01:14:43 and all that disappeared. So if we zoom out and look at the precautionary principle, how could that be applied on a policy or regulatory level? Like if someone's listening to this and they agree with the premise and they say this makes a lot of sense, how could we implement this on a larger scale level such that we are less vulnerable to say possible risks well actually in europe the precautionary principle is widely adapted among international agencies and regulatory

Starting point is 01:15:20 agencies i think that the advance that nassim and his co-writers made on the principle is that it can be kind of fuzzy. So it can seem to be subjective about how you are applying the principle. I think what they did was create a category grouping, which can be used to designate things. And, you know, you could have, I don't know And you could have panels that would look at it using these categories. But I think if it were adapted more widely among regulatory agencies in the United States, just as a principle, as a way to think about certain kinds of risks, then it could be more generally applied and useful.

Starting point is 01:16:08 Like I said, in Europe, they do use it. GMOs are not widely adapted in Europe, and primarily because of the precautionary principle. And they have lobbyists in Europe. I know because they all attack me. So I see them online all the time, coming from Europe. Italy, for example. Italy of all places, you know, that place, damaged big times reputationally.

Starting point is 01:16:29 If you had GMOs in Italian food in Italy, there's no tourism. But they still have people there trying to sell, particularly that when you sell GMOs, you also can use more Roundup, which has a secondary effect on the soil. And it's the same people who are producing both, right? So one could be an excuse to sell the other. To me, one of the really interesting aspects of the precautionary principle is the notion of uncertainty.

Starting point is 01:16:58 So when you look at climate change, the uncertainty of models has been used as a cudgel by the deniers and by the fossil fuel industry for decades. That there is a level of uncertainty in these predictions. We don't really know how bad it's going to get. We need to sit tight and assess the risks that we're facing. And what they showed is that uncertainty is a reason for taking precaution. Because if you are uncertain about the potential future destruction or massive degradation of the biosphere because of polluting it with carbon dioxide and methane and other greenhouse gases, maybe you should stop doing that or realize that you're actually taking a risk. You don't know what the risk is. So uncertainty is actually a reason for precaution rather than just throwing caution to the wind

Starting point is 01:17:52 and just saying, well, we don't know. So, you know, what the hell. But let me tell you ironically what happened to me the first time I formulated the argument. It's actually in the Black Swan, second edition, and I was with David Cameron on stage. And I said, we have uncertainty about these models. So avoid these models and just don't pollute.

Starting point is 01:18:11 In a paper I later rewrote with my friend Yanir and others by saying, the more uncertainty there is in a model, the more you have to be. It's just like the more uncertainty you have about the skills of the pilot, the more you're- Cautious you should be. Exactly. You should take another plane. So what happened the next day, 20 newspaper articles in the UK calling Black Swan author is a climate denier, okay, trying to convince Cameron, probably has a cautious industry of modelers, it would be out of business if you follow these principles. So it's not like we got heat, a lot more heat from the left than from the right.

Starting point is 01:18:46 But why were they calling you a denier if you said... They used me verbatim without following the whole argument. And they say, well, he said that. And I basically named them by names. And I went after everyone. There were 20 journalists. I wrote to every journal, explaining to them what I said. And I say they signed me out of context.

Starting point is 01:19:04 And I wrote a chapter in Skin in the Game about how once a debate, an honorable debate, is where you represent the person's opinion, like what Karl Popper would always very faithfully represent the person's position, and then attack it, whereas they were taking selected… Cherry-picking and creating a straw man argument. Exactly. And that's for you would say, give me a letter written by an honest

Starting point is 01:19:27 man and I'll get him hung. So the problem that you have with the climate is that a lot of people have an interest

Starting point is 01:19:37 in complicating the story. In fact, you just say, okay, let's forget about fossil fuel. Let's pollute

Starting point is 01:19:43 with other things. Just like I say, if a drug is dangerous… You say the danger is in the dose. Sorry? The danger is in the dose. The danger is in the dose. It's non-linearity. We put that in the precautionary principle.

Starting point is 01:19:53 The non-linearity, the convexity, that's the theme of antifragile, the convexity. Because you're dosing the atmosphere with carbon dioxide, you're going to end up with a very bad outcome eventually. Exactly. So let me give you an example to go back to before when we were talking about when I used GMO versus selective breathing to tell you about speed and fragility. An example I use in an antifragile.

Starting point is 01:20:19 If I bang a car against a wall at one mile per hour, a hundred times, okay, it's not going to be the risk of your bike at once at a hundred miles per hour. Okay, so this is where if you have acceleration of harm, like if I jump ten feet, I'm harmed more than twice than if I jump five feet. So we showed where in the presence of acceleration what to do. And that part of the paper was never understood because people don't understand convexity.

Starting point is 01:20:49 Although Anti-Fragile is currently my most successful book. It's read more in 2023 than it was in 2013, the second year publication. So same with Black Swan. I know Black Swan is read more now than it was a year after publication. So, the same with Black Swan. I know Black Swan is read more now than it was a year after publication. But in spite of all of these arguments being presented, people couldn't grasp our paper.

Starting point is 01:21:13 And I discovered why. Something I figured out only recently. When I talk to young people, 23 to 24, they know exactly what I'm talking about. Their parents are the problem. So, what is convexity? Just to refresh.

Starting point is 01:21:29 Okay, so again, we're going to talk about Universa or something embedded in the Universa story, but the convexity is if the market goes down 10%, you make a million dollars. If it goes down 20%, you make $10 million, you have convexity. And this is what everything is based on. Well, the general idea, sorry, yeah, then we'll call it convex

Starting point is 01:21:50 and concave. And probably the best illustration is how we fared in 2007. And I explained it in a black swan right before it happened. I looked at the risk of Fannie Mae by a deserter who, you know, left Fannie Mae and distributed the risk reports, okay? We looked at the risk of Fannie Mae and noticed that if the market, say, an interest rate or mortgage premium or something like that is increased by 100

Starting point is 01:22:18 basis points, they lost X. 200 basis points, 20 times X. 300 basis points, I said, they're sitting on a barrel of dynamite in the Black Swan. 2007, five months later, okay, this started going on, and eventually they lost, they booked $600 billion losses. Why they said, oh, they reacted to me by saying, oh, we monitor our risk, we have 15 PhDs,

Starting point is 01:22:44 okay, 15 PhDs, 15 trillion PhDs. It's not going to help you with this. So this is convexity on the losses. And we're doing the reverse on the profit side. And there have been some, a lot of people got upset the way Mark presents the numbers that he writes to his investors. You know, you're fired with the SEC. All the numbers are available.

Starting point is 01:23:04 They tell them, listen, we made 4,000% on your maximum loss, okay? Whereas if you invest in the S&P, you can lose 100% of what you have. So the return that you have on that maximum possible potential loss. In other words, when you go to bed in the evening, all you could lose is that much, and how much these options were explosive on our maximum loss, right? Yeah, yeah. So that was...

Starting point is 01:23:25 Asymmetry. Sorry? The asymmetrical loss. That was the asymmetry, the 4,000-some percent. But that's not the first time it happened. Nobody noticed. When I was trading, and I discovered it before the crisis in 1987, there was a Plaza Accord where a bunch of people got together secretly on a Sunday

Starting point is 01:23:44 and made an announcement. We're going to support the currencies against the dollars. The dollar is too expensive. We had a huge move. I was at work. We had a tiny risk. There was an explosion in my P&L. They brought detectives or inspectors to figure out why the P&L is so large for so little risk.

Starting point is 01:24:04 Because you had your maximum risk. All you could lose is, say, X thousand dollars, and the P&L is so large for that so little risk. Because you had your maximum risk. All you could lose is, say, X thousand dollars, and the P&L exploded. That's how it works. They couldn't believe it, right? So I decided, okay, I'm going to make a living out of that. Now, when you say exploded, this is in a bad way or a good way? Good.

Starting point is 01:24:21 Good way, I see. The P&L. Yeah, so the P&L was too large for the risk. They were supposed to only take... You said your computers couldn't handle the numbers. Yeah, no. So for them, it's like it's high risk, high reward. How are you getting low risk, high reward?

Starting point is 01:24:36 No, no. They said, you made too much money. You've got to be taking risk. You're hiding something from us. That's what I mean. And the computers would take something like 10 hours at a time to compute the pnl at the end of the pnl you see so every time they said go redo it and stuff like that and and i was frustrated because they couldn't understand it they couldn't understand it but this is the same thing happened to me did for you know that's the beginning of the trade that became empirica

Starting point is 01:25:05 universa something like i remember uh when i was talking to mark back in 2008 i think you back he would never tell me this now but i was trying to figure out how they had such incredible returns and he gave me an example of a trade that they made and i forget the timing but it was like a july 2008 s&p 500 put option betting on a 20 decline in the s&p 500 bought for two bucks after the crash he sold it for 60 bucks that's the kind of convex exponential return that you do not get in any other kind of trading. And you take that $2 option, you magnify it over millions and millions of dollars, you get 4,000% return. Yeah, but they're even more dramatic than $2 becoming $60. Because there was, you always look at how people have lost money.

Starting point is 01:26:03 Because when you read, you know, reports and stories, they hide the losses. Because nobody's going to write a book on how they lost all this money. And it's always invariably the same. There was a story of volume investors, I think. They're selling out-of-the-money options on gold. And they're selling for five cents and end up having to buy them for $40. And then there's a Niederhofer story, same story, where he liquidated and

Starting point is 01:26:27 he blew up. I mean, he blew up many times, but one time, you can see the prices. He sold them for $0.05, $0.10. And then he had to buy them back, and I was buying them back to $40. That's what I noticed. It's called selling volatility. Selling out of the money. Tales, selling rare events.

Starting point is 01:26:44 You know, and you don't need large deviations. If people panic, they pay anything, or sometimes they're forced to, because the clearinghouses or counterparties cannot handle the risk. They close you out, sorry, and you close out. Hey, there's no liquidity. It's like the famous saying, sell everything. And then the clerk, I told you to sell everything. Why are you not moving? He said, please tell me, to whom, sir?

Starting point is 01:27:11 Let's see. Let me ask a question that's been sort of percolating in my mind, and it may not be a good question, but I'm curious. You mentioned Soros, and I don't know that much about Soros. I've never met him, but I want to say Soros is also known as the man who broke the Bank of England, right? Or the British pound. So one of my questions is in this increasingly interconnected world where the equivalent of the Black Plague, whatever that might be, and it could be in pandemic form or otherwise, instead of taking 300 years is over a weekend in terms of spread and things are so interdependent. Is there the temptation and the risk of investors catalyzing more crises or different types of crises? Not just, I don't want to say being spectators, but there's one thing to have an investment methodology that has certain

Starting point is 01:28:03 premises and so on that then results in a windfall return at a certain point in time with tail events. But I'm wondering if, I mean, it seems like there are hedge fund managers, I'm not saying this is what you are, there are investors out there and hedge fund managers who take very active roles in companies, let's just say that they want to take a position, and activist investors and so on. And I'm wondering if investors will be able to do more damage as the world becomes more interconnected. I think that it's possible. I see the damage coming from negligence and bad risk-taking

Starting point is 01:28:39 that ends up creating a contagion effect. Just the same thing that we saw in- Not among investors, but like in the banking. Yeah, banking or hedge funds or crypto. I think that financial markets over the past 20 years and increasingly with electronic trading are more and more interconnected than ever. You know, this is something I got in my second book

Starting point is 01:29:02 about high frequency trading is how you could see the potential risk of some giant move in, say, a derivative contract or an index, something overseas, because trading machines are correlating all these assets globally, electronically, at hyperspeeds, microsecond speeds, that you could see something move very rapidly into all sorts of asset classes in a way that is impossible to stop because it's so fast. That could be triggered by a trader or it could be triggered by a computer just going bananas. We have noticed very early on in the 90s, a phenomenon that international

Starting point is 01:29:46 diversification was no longer diversification. Why? Because of that integration. Globalization, a lot of good things, pulled people out of poverty. But a lot of things happened with it. Number one, you can't diversify anymore because the stocks collapsed here, as we saw in 87, collapsed everywhere for large deviation, and now for mild deviation starting in the 1990s. And also, I mean, the funding disappears everywhere, or it comes everywhere. So this property of globalization is similar to the one that came with it,

Starting point is 01:30:20 which is that we're going to have shortages and then gluts. Now we're in a phase of in between shortage and glut. But shortages can be very deep, where containers go up 10 times in a shipping container, and you're going to have a lot of the reverse happening, because I've never seen shortages without gluts. I've seen gluts without shortages, but never shortages without gluts. But they're very deep.

Starting point is 01:30:49 We didn't have that before. We all depend on the world's getting bigger and bigger and bigger, but it's like a large movie theater with the same door. You see, it's the size of the door that matters when you want to get out, not the size of the theater. So the supply chain is narrow and getting narrower, and it's gotten narrower. Now probably it will expand and branch out

Starting point is 01:31:09 and we'll have better networks. But people would not understand that. This is why people like to sell tail events, because it costs money to diversify your sources of, you know, whatever, and your supply. And it also costs money to hedge tail risk or you think it costs money you have the illusion and sure enough you realize that if a hedge is expensive you know think of absence of hedge how much more expensive it is so what's your perspective on the capacity of investors to catalyze greater risk not necessarily the systemic

Starting point is 01:31:49 risk taking although this is certainly a factor of say the banking sector or fill in the blank but very well-funded investors who are looking for black swan or black swan like opportunities their ability to create a self-fulfilling prophecy in a sense. As they say, predictions are self-fulfilling and they're also self-cancelling. You see, early on, the self-fulfilling, people get on a bandwagon, and then sure enough, that's how sort of the glut takes place after the shortage. But one thing, you know, that's quite, one should realize with the structure of the world in which we live, that although history is not an indicator

Starting point is 01:32:31 for many things, because we live in times of different connectivity and stuff like that, the rules of what can go wrong are very simple. It's like as with pandemics, the Ottomans and the Austrians figured it out, or the Lazaretto's, okay, simple, right? The Venetians were experts at it. The rules are very simple. There are not that many of them. When we talk about precautionary principle, a lot of people have the illusion that it multiplies into zillions of regulations.

Starting point is 01:32:58 No. One comment I'd like to make about the regulators, like European regulators, they're great at being regulators. They regulate for pleasure. And if you put 200,000 people in Brussels, you know, of course they have great fresh fries and beef tallow and whatever, duck fat, whatever. But at the same time, what comes with it is these people are going to regulate you out of existence on things that are trivial. They like to do the trivial because it's easier to sell. So they regulate vacuum cleaners, all right, how much energy should be, or the speed of your windshield wiper on a farm tractor if it has a windshield, that kind of thing.

Starting point is 01:33:39 But they can't control the borders. And they didn't think of COVID. Of all the people we spoke to, because a lot of people try to talk to me about risk, thinking that, you know, we should talk to someone like me about risk. Okay. And usually I get upset because, hey, where's the next black swan? You're not getting it. The Singaporean government, they didn't fare very well with COVID as much as they did before. I think maybe because my friend was gone or something, but they knew, they said, okay, what can go wrong? And let's reverse engineer our hedge, the reverse of what you think, and build things

Starting point is 01:34:11 in a way to stand that kind of shock. Are there other examples outside of Singapore? I'm very interested in Singapore, and I guess, who is it, Lee Kuan Yew, and the entire story of Singapore is pretty wild. Any models or leadership outside of Singapore, not necessarily related to COVID, although it could be that you think does a good job of applying precautionary principle

Starting point is 01:34:33 or working backwards in the way you described? All traditional societies or traditional communities, like Italy, would resist GMOs. And also people online may say, oh, this is anti-scientific, they know science is not about that, for example. So it depends on which domain. There's some domains, some people are good at some domain, not others.

Starting point is 01:34:52 Like Russia was very good at some classes of risk, but not visibly at others. It depends on countries. Like Italy got paranoid about nuclear. There's one attribute of our environment that we should realize is the non-trivial effects of propaganda on the mind of people, particularly when it's well organized. The KGB was not very good at spying, we discovered, but was very good at disinformation. So everybody panicked about the nuclear because they didn't want Reagan to put ballistic missiles in Germany. And they infiltrated, Putin knows something about it when he was in Germany, they infiltrated all these green movements

Starting point is 01:35:39 by directing the greens against nuclear, for example. So, I truly think that we're suffering a lot from this disinformation up to today, when people worry about some risks, not others. Another example of that is Germany with Fukushima, that freaked out over something that actually didn't kill people,

Starting point is 01:36:00 shut down their entire nuclear program, and in its place, opened up a bunch of coal-fired power plants. Which is, you know, obviously much more direct risk to humanity than nuclear power plants that don't kill people. The radiation in Chernobyl, I knew that when I was running the Black Swan, didn't talk about it because I know it was dicey, was lower than that in Utah. But that's not the point, Chernobyl is I knew that when I was writing The Black Swan, I didn't talk about it because I know it was dicey, was lower than that in Utah. But that's not the point.

Starting point is 01:36:28 Chernobyl is too big. If you make small reactors, let them blow up. So what happens, because of convexity, you see, one reactor is vastly more dangerous than 10 small ones, and the 10 small ones are not likely to blow up at the same time. I don't know if one reactor, what's the factor, what's the multiplier, but they are nonlinearities. But definitely when you have a lot of small ones, it can blow up at different times. One thing about our previous conversation, when you say the banking sector is very safe for one reason. It's a utility.

Starting point is 01:37:01 With high-paid bankers living around here, you see, have big Soho lofts, $10 million Soho lofts, basically, it's a utility. Because they don't let it go under. It's not the one you got to worry about. It's the saving it, again, that you have to worry about. The effect of saving it. We saved it in 2008, with what? The government debt.

Starting point is 01:37:24 And it exploded. it like we saved it in 2008 was what the government debt and we exploded and then again in 2020 they were so much commercial paper and so many things again all these things aimed at saving the financial system bank wise have spillover effects but we're going to save them in this bank system because you cannot operate without it plus another thing has happened is that banks used to take a lot of risk since Since 2008, risk has migrated from banks to hedge funds. Now, it's less concentrated but it still can be concentrated. In what way can that be concentrated?

Starting point is 01:37:56 In other words, he has a friend who has a big fund that's larger than a lot of banks. I'm not mentioning names, all right? So you have a lot of big hedge funds, but I guess they can be diversified. Hedge funds have skin in the game. In other words, the owner of the hedge fund has money in it, unlike a bank where you just have the upside, not the downside. Of course, long-term capital management

Starting point is 01:38:20 is the counterexample. No, no, it is. The skin in the game is a disincentive, of course, but also skin in the game is a filter. So where are the people from? Is anybody from locked-up capital management still around? Last I heard, John Merriweather was, 10 years ago, trying to start a hedge fund.

Starting point is 01:38:39 Well, there you go. So if you can't recover, the skin in the game is falling in effect. The reason you don't see too many crazy drivers is because they're dead. Because you inflict risk on others, but you experience the same risk. So you tend to exit the pool.

Starting point is 01:38:54 So it seems then, maybe I'm misunderstanding, but that the migration of risk-taking to the hedge funds, assuming that the GPs or the people running the fund have sufficient skin in the game, would seem to be a net positive. The hedge funds are okay, but we have had the risky part, the ones that are most fragile, the private equity, and of course, by far, people who need funding. Because, I don't know if you realize, but since we had our three bottles of pink champagne, or like four bottles, whatever,

Starting point is 01:39:30 a lot of pink champagne to celebrate Lehman's departure right from his town. Since then, we put the interest rate that close to zero. So when I was a student and everything, for me an investment was something that generates cash flow. So you build something that generates cash flow. So you build something that generates cash flow. So you value cash flow

Starting point is 01:39:48 and or residual value at the end. Okay? And so you can tolerate negative cash flow if you're going to get some later on. So it's like us, if you discover gold later on. So the business model was cash flow based with a short-term or long-term cash flow.

Starting point is 01:40:02 The world has changed, all right, in the funding world. What is the game now is who you're going to sell your company to. I see. So you're talking about startups in this case? Exactly. Startups or a lot of investments. You buy an apartment, you buy a house, you buy a building, you buy something, or you invest in some crazy idea.

Starting point is 01:40:22 And someone was contacting me about LLM models, you know, Shadtree PT, by saying, oh, we have this startup, I'm investing in this startup. And looked at the rationale, and then he said, yeah, I'd be able to sell it

Starting point is 01:40:33 in within two years. I said, listen, this is a trap, okay? So companies, so even Twitter was operating on a following modus. We go to the market, okay, as a cash machine. So you don't even have to generate

Starting point is 01:40:45 cash. So basically everything came from, it has Ponzi characteristics. Someone else will buy our company or we're packaging a company to sell it to someone else. Okay, now that started before the great financial crisis, but it was very moderate. Of course, it took place during the crazy period of the internet bubble and then died. So we had had episodes of that effect. But now it's ingrained in people who now for 15 years have low interest rates. You have people in their 40s who have never seen interest rates. And they don't know how to behave. They don't know how to invest. So I think the most fragile part today is not the banks, of course, as we said, and it's not hedge funds because they're sort of like mature adults,

Starting point is 01:41:30 typically. It is those startups and the VCs and the venture capitalists. Venture capitalists actually played quite a nasty game because they cashed out. All of them are rich on companies that never made a penny. You see, I know a lot, take how many billionaires you have from Silicon Valley, right, who ever made a penny. It's valuation, maybe, as they say.

Starting point is 01:41:56 Yeah, yeah, there's a lot to that game. I will say also, I think there are going to be tremendous fatalities in the next probably three quarters in the startup world because there's been a lot of contraction of funding, which I think is ultimately probably a good thing. But a lot of these companies are raised. It's not a good thing. It's a necessary thing.

Starting point is 01:42:17 Yeah, no. Right. I mean, it's the calling of the herd. So I think we're going to see a lot of it. But think about it. This will finally get waiters because we have shortage of waiters. Okay, we finally will get waiters.

Starting point is 01:42:28 I mean, you go to restaurants and they can't, you know, they have one waiter for the whole room and they said, we'll get more waiters,

Starting point is 01:42:35 we'll get more people who, you know, will help you, you know, mow the grass and stuff. I mean, we've got a lot of supply of...

Starting point is 01:42:44 Former startup founders serving you, your Negroni. We'll see how it shakes out. I'm curious to see. Nassim, are there any ideas, concepts you would like to discuss? Is there anything that we've missed? Ed Thorpe. We could always talk about Ed Thorpe.

Starting point is 01:43:01 Convexity is at the center of things. So I started writing on convexity, or studying convexity. You know, between the time we had the eggs and the champagne. No, no, the eggs. The eggs was 2002, 2001, 2002. And since then, I had some 80 scientific papers. So my enemies, they don't know how to handle it because they can't say it's not science. So anyway, so I think the central thing for me is convexity, and it led me into

Starting point is 01:43:32 papers in oncology, in medicine, because again, oncologists knew stuff, doctors knew stuff, but the language they used did not accommodate this notion of convexity, 10 times 1, the non-linearity. They sort of suspected it but it was not formalized. So I just published something in oncology. We did a lot of stuff

Starting point is 01:43:51 in epidemiology on tails, so convexity on tails. And convexity is the most important. For example, people don't realize that convexity means you like volatility. Concavity, you don't. On the zone where you're convex. And people missed the point that was already mentioned in a paper I wrote before COVID on citing sources for lung ventilators. If you give someone a dose of 100%, the person may die. But if you give that person 80%, 120%, they have a much higher survival rate. Why? Because they like volatility. Like heart rate variability.

Starting point is 01:44:28 Like heart rate, when I wrote Antifragile, I was writing between 2009 and 2012, nobody believed in heart rate variability. You see, they thought you need a steady heart rate, it's a predictor of death. So it's the same thing for a lot of things where you have, that's a convexity effect. So that's sort of what I'm focusing on now, is these convex responses, convex stuff,

Starting point is 01:44:49 applied to fields where, you know, they need to be applied, like medicine. And the same thing with nutrition. Nutrition figured out early on intermittent fasting. Well, it's a convexity thing. Instead of having a dose throughout the day, you have it, and it's a different response. But there's a limit. You'd rather have your calories, a concentration limit. You'd rather have your calories, you know, once a day is okay, once a week, not so sure, you see? So there is an optimum thing. It's the same thing can be generalized to other things. This is what I'm working on, and it's taken me a while. All that

Starting point is 01:45:23 comes from optionality, option trading. Does it make sense for people to become familiar, even if they never engage with options, in some basic education in options trading? Or would you say skip that and study? Skip that because they're going to sell options. But I would say, they used to say, nine-tenths of option players will be sellers. I think it's 99 out of 100.

Starting point is 01:45:44 It's so appealing. Someone's gonna give them the story. You sell option, you have steady income. There's nothing people like more than steady income. And the reason Mark is in business, because he's the only person I know who doesn't care about the psychological prop up of having steady income.

Starting point is 01:46:01 Because everybody else will have steady income. They would debase the trade to have a steady income. And sure enough, you get steady income by selling the tails. And that is generalized. To give you an idea, companies that have steady income are short an option somewhere. Say that one more time.

Starting point is 01:46:17 Companies that have steady income are short an option somewhere. So it's not trading option that will help you. It's looking at optionality in business and in places that will short that optionality. You can have two funds. They all have the same return. One fund can have a lot of short options, and one fund can be robust. You won't be able from the outside and security analysts have no idea weapons of mass destruction ordinary people should stay away from these derivative contracts and it's one of the things

Starting point is 01:46:55 that i had to deal with this book was with my editor and people who i've who've interviewed me since then is everybody wants to know how to do the universal trade, you know, mom and pop, how, how, how do you, how does mom and pop protect themselves against these things? Cause you know, I, in the book, I warn these downturns are very bad for your portfolio. This, these are the things that kill you. You know, if you go down 40, 50%, you know, this is something that mark talks a lot about you lose 50 to get back to where you were before it happened you have to make 100 so these are the things that you really want to protect yourself against and my editor was like well he wanted to know for his because he was getting scared how does an ordinary person do this how do they

Starting point is 01:47:41 protect themselves against these big events my answer is an ordinary person should focus on her or his business. A dentist should focus on dentistry, not trading gold. You see, I mean, my experience, you see people whose business is not finance. And they think that they've got to make money out of their checking account. So what happens is they have so much scrutiny by their own business. Say they're on a bakery, they know the suppliers, this guy pays, this guy, they know all the risks.

Starting point is 01:48:11 And then they blindly put their money into something they have no idea what's going on. So this is where the sucker, you know what I'm saying, is domain dependent, that some people are skeptical in one area but don't transfer to the stock market. It's the same thing. So there's something about the stock market, it's the same thing. So there's something about the stock market, particularly with the weakness of religion, that makes people believe in stories of returns but not believe in theological arguments that we've had for 2,000 years. So it's the same thing. I tell people, listen, what do you do? I have a bakery. Focus on baking and use your money to preserve.

Starting point is 01:48:46 That's not your business. So this is what you tell a pop and mom. You don't tell them how to do universal trade. You tell them. They can't do it. That's the problem. Well, I mean, I get that after being in Silicon Valley for 17 years and having some pretty good luck with startups,

Starting point is 01:49:01 I get the question, like, how can I invest in early stage startups i'm like don't yeah do not under any circumstances do that it's like unless you're living in the middle of the switch box and you're dedicating your time to that do not do it unless you're a trader don't trade yeah unless you're a baker don't bake unless you're a dynamite maker okay don't make dynamite and stuff like that. It's elementary. This is Scott, the new book, Chaos Kings, How Wall Street Traders Make Billions in the New Age of Crisis, is available where all fine books can be found.

Starting point is 01:49:36 You can find me online, scottpattersonbooks.com, on Twitter, at Patterson Scott. And Nassim, where would you like people to engage with you, if they engage with you, or with your books, understanding that you have begun work on these various, I suppose, parts of your multi-part essay at different points in time. Is there a place where you would suggest people engage with your work first?

Starting point is 01:50:00 I suppose it depends on their orientation. I think Fooled by Randomness is the one that people like the most. The blacks want what they slight the most. And anti-fragile is the one they misuse the most. Misuse? Misuse, yeah. Because they say, oh yeah, the virus, you get stronger. What doesn't kill you makes you stronger.

Starting point is 01:50:19 I know, but what kills you doesn't make you stronger. I mean, they're not getting it right. Like the first thing to be fragile, to be anti-fragile, is first you have to eliminate fragilities. You see? That's the first rule. You tell a risk. You don't open it up.

Starting point is 01:50:33 So I don't know. But I would say fool by randomness is a good start, or if you're a lawyer, skin in the game. I have no idea because I'm not thinking in terms of my past books. I'm thinking about the book I'm writing now. Yeah, what are you working on now? Two things. There's a technical insert to a second volume, which is all the scientific papers

Starting point is 01:50:49 around these points. And I'm working now on a book that is pretty much structured like an ancient Roman Latin treatise, a language treatise, okay, with questions and stuff like that. And it's liberating to be able to write

Starting point is 01:51:06 without having the narrative. Just point blank. And in it, I cover all these points. Question, what is convexity? And I've decided to do all of that in one book. And it's gonna be called Principia. For example, why the risk of an individual getting this doesn't translate into a collective risk in the same way.

Starting point is 01:51:27 Right, the swimming pool versus COVID. The swimming pool, stuff like that. And also why, if you generalize, a lot of it has to do with scalability. People have the idea that we should have virtuous individuals to have a virtuous society. Typically, if you force, no. A lot of greedy individuals can build a virtual society. That's the Adam Smith argument, or as one might have brought. So the idea of scalability, for example, is the most misunderstood thing.

Starting point is 01:51:53 Like a town is not a small village. I started the topic in antifragile, but how things scale differently. So a town is not a large village. A country is not the same as a municipality, and why, for example, you can be libertarian at the national level and autocratic at the municipal level. You see, or communist in the kibbutz, but libertarian at the state level. You can have a lot of these gradations, so things are more complicated. Among these things, I debunked in it. And then finally, one idea that also would be exposed but structured in it,

Starting point is 01:52:27 on the main difference between BS and non-BS, what I call verbalism. BS as in bullshit? Yeah. Okay, I was just making sure I'm understanding. Verbalism and non-verbalism. Because a lot of scientific papers have BS, and a lot of casual things don't have BS. So I'm exploring all of these in a volume. I may call it Summa or Principia,

Starting point is 01:52:51 to give it an arrogant title. Yeah, I like it. Or Summa, or Principia incertorum, or something. So what characterizes non-BS, I have to ask? I have rigidity of meaning have rigidity of meaning. Rigidity of meaning. I learned that from arbitrage trading. I learned a lot of things from trading.

Starting point is 01:53:13 Arbitrage trading is the law of one price. If you combine things, they should have the same price here, Singapore, or downtown, uptown combination. You should have no arbitrage. I can't really buy. I used to do arbitrage. I started doing arbitrage as like I'd buy an option with this, this converted to a cross,

Starting point is 01:53:29 and end up with something cheaper than some other one I would short, and then you get it. So it should not have a lot of price. It's a rigidity of meaning. Whatever words you use always refers to the same thing. That's what my criteria rigidity.

Starting point is 01:53:42 By the way, I cite you in my new book. Well, hopefully it's a good citation. What you call retrospective, what you call bigoteering. Oh, yeah. Okay, so in other words, I have a so-called retrospective bigoteering. I have one section is on scalability, and one section is on the passage of time, how we don't get time right. And in it, I explain why, for example, it is improper to blame someone, past individual, retrospectively, for values we have today what we didn't have then. You see, it's like, for example, Aristotle did not

Starting point is 01:54:13 like, he was, you know, male chauvinist. I'd say, okay, is it, was it, it is wrong. Yeah, we know now, but he didn't know. You see, he didn't know. It's just like saying, okay, why don't we blame him for not using a computer? Okay, there's no computer at the time. So you've got to look at these terms. It should not flow back values backwards. But effectively, the Talmud, which I've been studying for a while, has a lot of things on it. And I'm going to tell you what it has on it.

Starting point is 01:54:42 So, for example, they say Noah was virtuous for his day. Someone pointed that to me in the Talmud. Twitter is very helpful, but I like these ancient texts to see how they would judge their own. Effectively, in the 18th century, they had different values than the 15th century. And how did they judge them? And at the same time, the wise people know that, hey, they did not. It was not part of the customs at the time. How did you decide specifically on the Talmud? Because that's not your upbringing. No, it's because I like Aramaic, which is closer to my native language, the Levantine dialect,

Starting point is 01:55:17 Aramaic, and then started having interaction on Twitter with people who are Talmudic scholars. Based on the interest in the language? No, I put something in scholars. Based on the interest in the language. No, I put something in there. No, my interest in language, I have interest in ancient languages, more than interest in ideas. But I'm poor with languages. So it's not taking me anywhere except exploring texts. And I'm enjoying stuff.

Starting point is 01:55:39 So you have a collection of ancient wisdom embedded in the Talmud that is very interesting because it's monumental work. I'm just wondering, I guess, in addition to or amongst the different sacred texts or scriptures that you could study, why that stands out?

Starting point is 01:55:59 No, what stands out really is more like someone like Aquinas, the Summa Theologiae, because it's written by one person, whereas the Talmud is a concoction of opinion on opinion, so right? But I like the Talmud only because I had the privilege of understanding Semitic languages, so I'm enjoying it more for linguistic stuff, just for the fun of it. And it's fun to read something and you understand. This is why I—plus, it is effectively a body of work that's quite monumental, you know, that took centuries to build,

Starting point is 01:56:28 a collection of scholars talking about scholars and discussing one another over time. This is why I like what Aquinas is. He took a topic and, boom, put everything in it. All the questions and answers you can have in it. He questioned himself. So this is why I'm much more impressed with Aquinas as an individual.

Starting point is 01:56:48 I can never imitate Aquinas. So all I could be is a scholar like one of those who contributed to that Talmud, or one of the small contributors to that Talmud, that collective piece of work. I'm jealous of your ability to engage with the Semitic languages

Starting point is 01:57:03 and just be able to access some of the text in its original form. I'm jealous of your ability to engage with the Semitic languages, and just be able to access some of the text in its original form. I'm very jealous of that. No, I enjoy that. I don't do as well with Greek as I should. Ancient Greek I can do better with modern, but Latin is easier than the Semitic languages. But the grammar is more complicated than Aramaic and Latin. Well, we could go down that rabbit hole. Maybe save that for the next round. I know we have food and booze to get to. But Scott, is there anything else you'd like to mention before we wrap up? Anything that maybe we didn't get to or anywhere you'd like to point people that I didn't mention? Or the next book that you'd like to give a teaser for? Anything at all that you'd like to mention before we wrap up? No, we covered a lot.

Starting point is 01:57:43 Really appreciate you taking the time. Appreciate Nassim taking the time. I don't know about my next book. I mean, I'm right now just completely immersed in this climate world. And last year, the Biden administration passed the Inflation Reduction Act, which has nothing to do with inflation but yeah that thing is sending shock waves through the climate technology world in ways that's just it's kind of mind-blowing and it's changed the game for america at least and and its attempt to catch up with what china started more than 10 years ago to develop these technologies, but it's going to take a while. But in my opinion, it's pretty necessary to start doing that.

Starting point is 01:58:29 Yeah, I find the entire space super fascinating. And I know we were talking about the ideas in the current books. We didn't allocate a lot of real estate to that particular topic, but I was thinking about what you were mentioning about climate change and some of the challenges in engaging different parties. and what i've found i live in texas right a lot of people engaged in the hydrocarbon businesses and so on and i've spent time with a lot of these people who are not stupid there's some very smart people but there are you study the incentives and you see certain behaviors you looked at the sort of incumbent interests and where i have found productive conversations to be had is if i avoid certain types of language so for instance if i don't mention climate change but i say let's put

Starting point is 01:59:11 aside the question of whether humans are causing this or not which is very painful for a lot of people to do but it's a great way to fight you know but if i'm like look let's put that aside and just look at extreme weather events and look at some of the upside potential with some of these technologies and like where they could find incentives like financial incentives outside of some of their current sandboxes i've had pretty good luck engaging people with that i don't always have the most compelling uh opportunities to immediately present them necessarily although there are i, quite a few out there. I've been working on some stories about climate technology in Appalachia.

Starting point is 01:59:52 So I've had a lot of conversations with Republican lawmakers in states like West Virginia about efforts to bring in renewable energy into the state. And you can have perfectly rational conversations with them and they love it and you don't talk about global warming or you know climate change you talk about energy and you talk about how you know why would we not use this new form of energy that's actually cheaper than everything else wind and solar and they get that they're like we're energy people we understand it and they're embracing it yeah i think energy independence is sort of a competition with china in competition well i guess we can we

Starting point is 02:00:40 save that for a round two but uh really appreciate the time from both of you. Took a ton of notes. For people listening, also, we'll have show notes linking to everything that we mentioned, as usual, at Tim.blogs.com. You'll be able to find references and links to certainly everything I have in my notes and a lot more that came up in conversation. Any last parting words, gentlemen?

Starting point is 02:01:03 You're not going to play with dinner this time. I'm paying. Okay, agreed. Last time he went and paid. No games. I won't skulk off and surreptitiously pay for anything. So on that note, off to dinner we go. And thank you very much, guys.

Starting point is 02:01:20 And to everybody listening, thanks for tuning in. Hey, guys, this is Tim listening, thanks for tuning in. short newsletter called Five Bullet Friday. Easy to sign up, easy to cancel. It is basically a half page that I send out every Friday to share the coolest things I've found or discovered or have started exploring over that week. It's kind of like my diary of cool things. It often includes articles I'm reading, books I'm reading, albums perhaps, gadgets, gizmos, all sorts of tech tricks and so on that get sent to me by my friends including a lot of podcast guests and these strange esoteric things end up in my field and then i test them and then i share them with you so if that sounds fun again it's very short a little tiny bite of

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The Tim Ferriss Show - #691: Nassim N. Taleb & Scott Patterson — How Traders Make Billions in The New Age of Crisis, Defending Against Silent Risks, Personal Independence, Skepticism Where It (Really) Counts, The Bishop and The Economist, and Much More

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