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

00:00:00 - 00:30:00

In this episode of The Tim Ferriss Show, Nassim Nicholas Taleb and Scott Patterson discuss topics related to uncertainty, markets, risk, and how to apply these concepts in various domains of life. Taleb, a former quantitative trader and author, shares insights into his transition from being a hedge fund manager to a scholar. The conversation also explores the concept of betting on tail events and the strategies employed by Universal and Empirica. Additionally, the motivation behind writing a book on precaution and tail risk, particularly in the context of the COVID-19 pandemic, is discussed.

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00:30:00 - 01:00:00

The podcast discusses the importance of taking early action in response to crises, such as the COVID-19 pandemic. It emphasizes the effectiveness of implementing measures like testing at the border and quarantine spots to control the spread of diseases. The guest also talks about the risks of relying on a single supplier in a supply chain and the concept of diversification. They mention the idea of writing a resignation letter for a sense of control in a job and the importance of not caring about the opinions of those who don't understand your work. The podcast also explores the influence of philosophers and theologians on the ideas presented in the book, as well as the concept of skepticism and the need for risk mitigation strategies in the face of global crises like climate change.

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01:00:00 - 01:30:00

The podcast discusses the concept of fat tails and their relevance to risk management in financial markets. It explains that fat tails represent low probability events with high impact and emphasizes the importance of identifying and understanding these events. The podcast also explores the precautionary principle and its application to scenarios like COVID-19 and vaccines. It highlights the guest's support for vaccines and concerns about GMOs. The conversation touches on mortality rates from COVID-19, genetic variance, and the impact of genetically modified organisms on the environment.

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01:30:00 - 02:00:00

The podcast discusses the impact of globalization on supply chains, shortages, and gluts. It explores the capacity of investors to create self-fulfilling prophecies and the importance of applying the precautionary principle. The conversation touches on the role of regulators and provides examples of effective risk management. It also discusses the effects of propaganda, the safety of the banking sector, and the changing landscape of funding and investment in startups. The guest emphasizes the importance of understanding convexity and optionality, and mentions their interest in the Talmud and ancient languages.

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02:00:00 - 02:07:49

The podcast discusses the topic of energy independence and its competition with China. It emphasizes the importance of framing the conversation around energy rather than global warming or climate change. The hosts express appreciation for the guests' insights and mention that show notes will be available for further references. The conversation concludes with a light-hearted exchange about dinner plans.

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starts now. Hello boys and girls, ladies and germs. This is Tim Ferris. Welcome to another

episode of The Tim Ferris 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 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 Naseem

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, 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 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 Marc Spitznegel,

as well as a survey of the many perils the world 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 blow-up.

Darkpool's 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. You can find him on Twitter, at Patterson Scott, and on his website,

scottpattersonbooks.com. 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 to a very clear

scoreboard. And for that reason, it 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. And now with our further ado, please enjoy a very

wide-ranging conversation with Nassim Nikolas 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 Hogy 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.

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. 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 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 of years ago. But there's a new hedge fund that's starting up by

my former colleague, Mark Spitznagle. 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 swatching called Universal,

similar strategy, and also that the author of Fooled by Randomness had a new book coming out

called Black Swan. Which explained, you know, 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.

I don't want to be known as a financier. I'm done. 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 was, I said, okay, on my grave, I don't want to be known as a trader, 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?

There is a very weird connection to me. And let me ask you, Nassim, 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?

I knew I'd 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 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 the trade, it would inhabit me. So I felt that 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. So Mark didn't have that. So Mark had-

He could compartmentalize.

He could compartmentalize. He did nothing else. And he was interested. I mean, he did other things,

of course, on the side of the destruction. So he was a benefit. 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 trading, which actually I started before Fool by Randomness, incidentally. I started Black

Swan. And then I said, okay, I'm going to talk about randomness. So I got diverted to Fool 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 wild, 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 a battleship to those who live for the battle. So that was what happened. 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 is that of all the people that have been on his podcast,

I bet you are the first one you've met. It's quite possible.

Okay. So you're the first one. I met you before I met him in probably 2001, 2002.

Around that. 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.

I was a good deal larger at the time. And I was in growth mode.

Yeah. So we ate all the eggs. For some reason, I mean, they were worried about how could people

do 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 we had that happened in

my mind when Lehman Brothers went bust, which basically after our, you know, we connected.

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 because I was meeting you for dinner.

And the second thing I got is news that Lehman went bust. So from the 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 Cess Roberts, a late Cess Roberts, a very interesting person who also

was studying hacks. Fascinating guy. Yeah, really genuine, lovely human being. And we did consume

vast quantities of alcohol. And then last time in the time before Romania, we met, it was as 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. I mean,

there are very few, maybe no other guests who've been on the podcast to pre-date

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. We have multiple books, 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 is 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 foreseen. To not be harmed by silent risk. That's the idea. The

first thing is don't be harmed by it. But of course, given that when you study tail events,

these people are ignoring these risks. 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. And I think it's when you talk about

betting on a tail event, I would say that what Universal 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 Universal 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

predictions. They never make predictions. It's something that Mark Spitsnagle 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 you 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 do it. And then they go bust.

Or what happened in a seam, it's very 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, which I think may have

happened once or twice. It happened on Black Monday in 1987 and 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 of times in the 2010s and 2020.

So I imagine 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 chip stress over time. But there's also

you have investors who probably in theory are very comfortable with the strategy,

but who also panic or have other issues. The genius of Universal 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. Is the strategy in and of itself positive, a huge return?

But it's more interesting is that it was a hedging something that went up. What does the stock

market do since then? I mean, it went up like 30%. No, no, no, total since, say, 2007.

Oh, it says 2007. Yeah, triple.

It went up, say, two-fold, maybe, and allowed people to have a larger position,

larger exposure to the market than they would otherwise. And also, there's a cocktail of

other strategies that definitely didn't fare well because they entailed the

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, well, look at that. You got to look at the insurance.

It's an insurance premium.

Exactly. Versus the insurance. I mean, hey, this is my differential P&L. And it's the same thing

when 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. 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, not too much, not too much. You see the idea,

if you do just one trade, and then people come to Universal and say, no, that's what we do.

Won't you do this for us? No. It's like you're making Maserati's, right? And someone comes to

you and say, hey, won't you make trucks? We don't do trucks. We don't do bicycles.

All we make is one single item. That's it. One single size. And that is the main criticism.

One trick pony. And that's what we're proud about.

That's the selling point. And that we are one trick ponies. And whether in my work,

intellectually, was worried about tail risk or whether the implementation of Universal,

of their ideas, of Mark's ideas, one thing, just one single thing. So when you do one thing

professionally, you develop some edge. Yeah. Well, it makes me think of,

I'm going to butcher it, but there's a Bruce Lee quote, which says,

fear not, the man who has practiced 10,000 kicks, but the man who has practiced one kick

10,000 times. Oh, 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?

The first flaw, and this I noticed in our days, a lot of clients that had initially,

when it started in Perica, were diverted into other funds who were actually mitigating the

strategy. 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 dependence on

correlation. So I know someone who actually went bust. He said, 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.

They'll guess what happened. The German market went down, the U.S. market, the thing exploded,

and they were out of business in insurance. So a lot of our competitors tried to mitigate the

strategy. We were absolutely fierce. The other thing is that you notice with players in the

U.S., 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 don't cook anything else. No, we don't

administer. We don't administer artichokes. And in a way, I told you, the long road,

not the hack, we don't hack the trade. 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 I reversed hacked. So in other words, take the long road,

like right now, last week, at the 17 hours of cycling. So that's the long road. That's not a

short road. Whereas when we met, I was looking for shortcuts. The university had no shortcuts.

Then he takes no shortcuts. So I've known you now for 15 years. I know I've met you for 15,

16 years, and I've seen that shortcut. 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 tail risk for society in

general. And also because of fact checking, that document, because a lot of these stories,

legends of this has happened, this doesn't happen. It was a perfect fact because he's

fact checking, reflecting audited results and stuff like that was fact checked. So sort of fact

checking the importance of tail hedging for society. And that to me is greater than that

details. It's like having finally a document to someone who bothered to look at the details

and went through a rigorous... Many hours of interviews.

Double checking the facts versus anecdote. So what compelled you to write this book?

Of all the things that you could write on, why 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 protest 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 Universal 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 Naseem had co-written in January of 2020

about COVID. It was a glaring warning to the world that this virus was very deadly

and people needed to take extreme precautions against what was coming by social distancing,

other things, advice to politicians that they needed to be very aggressive about this.

And it kind of occurred to me, I'd known Naseem and Mark for a long time 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 can map from what university does to what Naseem does and it's this view of the world,

of black swans, of extreme events, of being prepared for them.

And know what class of events you should be prepared against. So in other words,

know where they're coming from. Which he had been thinking about for years.

So and pandemics, for me, was something I was working on since 2007. I even discussed it

in a black swan. What you have to worry about is a pandemic before financial med down because

of connectivity. We're no longer like in the 1800s where you can have a crisis here and not there.

Everything's so connected. It's exponential. In the financial world and the same thing in

the physical world. You see, the plague, the great plague took something like 300 some years to go from

Constantinople to the northern England, 300 some years. Today is just a weekend for the whole thing

to spread through the entire planet. Flying on Lufthansa. And Justinian's plague could not come

to the Americas. There were no air France or no ships at the time. And now, visibly,

so we're saying 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. And particularly a fellow who is

probably one of the smartest people I've ever met, who's ahead 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. And when a pandemic struck, we put it in nature physics.

And it went counter, nature physics is a very prestigious, I 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, where the president is saying,

let's sit tight and assess. That's what the message was 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. Because it's too late. Exactly. If you must panic, panic early.

Panic early. If you must panic, panic now. Like in finance and anything. You get out now.

When it was easy, for example, to limit the flights out of Wuhan or it was, you didn't have

to do lockdowns. You could do lockouts. I mean, and there were methods used by 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, nine days the other day.

And they would implement that the minute they smelled anything, right? And they had rules. If

you come from India, more days, the Ottomans had these rules. 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. Venice,

closer maritime power, they had lazarettos. They did very well. But Marseille, France,

was decimated because they didn't have lazarettos. 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.

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 the way to control it is by knowing, especially

testing people with that, they've been aware of it. And they started the first thing where

they 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 thermal 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. But the whole idea is that you have to

find fixes and they're not complicated. And one analogy I'm going to give is the banking system.

That the banking system banks monstrously profitable enterprises. They make money of if you're the

float, the money you have left there, the trek you didn't cash or stuff like that. They make tons

of money. And guess what? 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 history of banking in 1982,

money center banks that is, and did the same 2007. 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 into 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 universal

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. This led to my book

Skin and a Game later on. If you have Skin and a Game, you got to worry about blow up because

it's your money. If you don't have Skin and a Game, you're CEO of a company or your fund manager

and any kind of financial venture. What is your incentive is 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 Rubin trade. He made $100 million at Citibank or Citicorp or Citibank or Citibank

something. Over 10 years, about 10 years, he collected $100 million in compensation. The bank

was insolvent in 2008, near insolvent. It was for taxpayer. And it was the last minute. All you

had to do is 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 you have to do is say,

I'm sorry, right? You keep your bonus. Yeah, I'm in the wrong business. You don't show up to work. So

this you can generalize. It's the same thing supply chain. With a supply chain, a lot of firms

concentrated everything on one supplier. Instead of being diversified. What did that lead to?

All right. Okay, better bottom line. But what I call pseudo efficiency. Because it's short that

option. And it's so happened that if their supplier is in Wuhan, guess what? You got a problem. All

right. 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 500 kilometers per hour, you're not going to get there faster than

if you ride a bicycle. Because outside, you're not going to get there.

Just a quick thanks to one of our sponsors and we'll be right back to the show.

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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. Nussim, I have a question for you about a letter and

then I have a question for you about 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. The whole idea that you thought of that problem. So you write the resignation letter and

you don't date it. 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 wrong, but it stuck with me. This is in 2010. Here's the aphorism of the

quote. Robustness is when you care more about the few who like your work than the multitude who hates

it. And then 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 and 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 food by randomness,

I say, hey, you're saying that what I'm doing is random or using wrong models, it doesn'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 few important people

or people who know 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. 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 not going to hate. This resembles another aphorism inspired by Charlie Munger's,

one of Charlie Munger's, is that you want to be the most ethical person,

what people think that you're corrupt, who is the most corrupt person, what people think that

you're ethical, make your choice, and use that as a guideline. That's the same thing. So except

there's something in between is that there's some people I care about, and I want them, you know,

to not lose respect for me. Of course, you start with your mother, your children, or whatever,

your family members. But there are also 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, and you don't care. So you don't do 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, 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.

But I'll tell you, I don't want to be identified as a 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 he grew up in the 80s. He identified with the Reagan era. It was a time

Wall Street agreed is good. He told me he's like, did I have a little degree to me? Yeah,

I did. It was the 80s. He grew up in a family that was, his father 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 over the years, they have that drive. It's something that

many people look at these guys and think, you're worth a billion dollars, you're worth two billion

dollars, and yet you're a maniac. You go into work every day and just go crazy. You drive all your

employees crazy because you want to be richer than the next guy. I don't think Mark has that

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 might talk about later, Cliff Asnes, who is a stark enemy of...

You're a friend, initially. Initially a friend. Yeah. I have to say, Cliff is a nice guy when

you meet him. Not a nice guy, but friends, what not? He's also got a dark side. Also,

somebody extremely focused on being wealthy, very smart. They're all extremely smart. I think that's

in personalities. I think one of the things that has helped drive my books is these are

interesting people. 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.

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. I think that's actually why

sympathize with Nassim's writing so much is I came out of a tradition that I love the works of

Dostoevsky and existentialism. One of my favorite books is The Rational Man.

I came into Wall Street and started reading about how there's this belief that people are

rational and the markets are rational. They are predictable because of this. I thought that is

just crazy. To me, I look at financial markets 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 independence.

People think I'm contrarian. I'm with a conspiracy theorist on many other things.

Some are just contrarian because they have a father problem.

To me, a contrarian is an expression 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 interested in literature and philosophy and not financial markets. It's

just this thing that drives him. He doesn't look at the stock market page every day like some people

do. You had to figure out who are people envious of. If you're in a hedge fund business and you

have $500 million in a bank and someone else has $600 million, you're going to be envious of that

person. I was always envious that people had more erudition than me. More erudites. You realize

that's what makes me tick. Being envious is not good. But at the same time, if you figure out

who you're going to envy, I don't believe in this. They say, oh, people having enough. There's

someone here from East Hampton, the fellow who wrote Gash 22. A lot of interesting folks out

there. Yeah, he met a financier at the time for hedge funds. The financier said, what is it about

you? He was an author, a very successful one. What is it that distinguishes you from me? Look,

he told him, I know the meaning of enough. In other words, you know you're upper bound.

Effectively, I don't play that game. I say, there's a meaning. I'm literally envious of

people who are erudites. If someone knows Latin very well, I'm envious. If someone knows Sanskrit,

I'm envious. I discovered that early on. 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. Luckily, it was a combination of the

universe. I had so much leverage. It was marketing and all that stuff. The spillover on me was more

than satisfactory. I have knocked on wood a lot more than I wished. Part of the reason I'm asking,

and 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 totality

that I want to explore. 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. 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

did those come later and you always had a deep interest, but were able to explore them at a

later point? No. Actually, I started liking the Stoics and all those people I've talked about,

I liked them much earlier 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, I'd say, oh, I had this idea.

I don't consider myself so different from others. And particularly when you look at history,

so many tens and thousands of scholars surviving works. So I went back and figured out all the

scholars of these scholars who had similar ideas or who preceded the ideas. 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, and to 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.

It's find me a conspiracy theorist or find me someone who's naturally skeptical of all things,

and I'll show you a turkey. So I wanted to find people who are fundamentally skeptic,

being skeptical, being skeptical about important things, not about small things.

Because it would be an example of a big thing. A big thing. Let me give you an example. I wrote a

paper, a paper that never ended up in a book on the stock market and religion. It's called The

Bishop and the Economist. And I said that those who are skeptical about the 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. But they don't believe in religion and the reverse. And people who are

religious, typically, they're harder. And there's some, I don't know the research on that. There's

a guy called Bar-Lahmi Har-Lahmi, Bar-Hal-Lahmi, I think, who did some studies about skepticism.

People go to religion about affairs, skepticism, where it matters. And I wrote about it, I think,

in the Black Swan. 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, the 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 UA. He was

probably one of the second most erudite person of his time. Second was there's a guy called

Skeleger. The guy's phenomenal. He could translate into Arabic. He was Roman authors, Latin authors,

and vice versa. Skeleger. There's Pierre Bale. Pierre Bale has a lot of works. He's one of those

skeptics. Hume was one of the 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.

But a lot of these ideas came from groups of people in France or among Protestants in France.

And what's called the Fideists originates, of course, in Levant. And of course, you have the

great Al-Ghazel, 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 if Spinoza is coming out of that

same tradition, very skeptical. He was skeptical about the text that was, these people say,

okay, trust Sandy's text. Okay, 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.

Every time I've 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 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. 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

poly crisis 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 Tewes,

who's coined a phrase called the poly crisis, which he says these crises that are happening on a

global scale are interacting in ways that the whole becomes greater and worse than the sum of

the parts. So you've got pandemics, you've got economic instability, financial crises,

climate change, which is a big 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 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 Nasim. 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 Nasim and Mark do is they think about the extreme events

and how to protect against them. Nasim co-wrote a paper about this exact issue called the

precautionary principle. 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. And must be fat-tailed. Must be fat-tailed or exponential.

Yeah, 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 growth of the strategy

with Mark and Nasim and then moving on to these other things that the world is facing

and seeing if we could think about ways to protect against these risks. Something like climate change,

you don't really want to mess with that. It's a bit too late. We still have,

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 Nasim and Mark, Nasim said, no way. I have no interest 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 it. So you can do it. It warmed down. I think it was more Mark

put the screws on. No, 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. 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 Nasim ever since

I've known him. So to me, it was like the identity piece. Yeah, that he's an identifier. And I thought,

I agreed because it's true. He's not been a trader for a long, long time. And it's obvious

where his interests are. I have to ask, 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 by randomness. 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 making money and spending too much time in it

and wrote drunk articles and books worth one book. So yeah, it was not, you know, it was not

what he wanted out of life. Okay, he's a middle European intellectual who would have liked to

be remembered as someone who had ideas. And he had, of course, Carl Popper, who he claims was

his professor, but it was beyond. So I wrote about it in full by randomness. I said, here's this fellow

who was, 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, guys, I'm still have some contact with reality. But I'm not cut for that. When I was

writing full by random, so 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 is a life to control of him.

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. And he was like, Oh, I really always wanted to write a book.

I never got around to it. So there you go with, you know, the Oracle of Omaha.

He wants to be thought of as an intellectual too.

Well, I mean, this is 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 you doubt. 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 the first flying to go to Mexico, you go to JFK,

and they tell you they have uncertainty about the skills 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 take a you walk, maybe you'll ride a bicycle,

take a few months. But you're not going to get on that plane. Okay, you change your plans and say,

okay, there are other plans or other countries too, and other planes. So that's Warren Buffett

with his investments. And that's my precautionary principle. The idea that there's an asymmetry

is that there's uncertainty about certain things is not good. So the climate, for example, if you

have uncertainty about the climate, stop these models. All right, just don't pollute 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 plane, or I take water. So this is the last one on the table.

There's no evidence that it's poisonous. Would you drink it?

The wording would spook me. There's no evidence that so but when you tell them, Hey, you know,

you should worry about GMOs, this is 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 precaution principle. But then what we did is we've noticed a lot of people,

in fact, it was a counter precaution principle, because a lot of people were invoking it for

nothing to say we're going to have a non naive precaution principle by delineating the areas

where you should exercise precaution systematically as a planet or as a communal group. And what

are the 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 there. You have connection.

And you have no news from Earth. And then on the way back, you hear that a 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 had to identify

things backwards. If you hear the big thing, where did it come from? And you had against these.

Okay, so they have different dynamics, because they scale differently. So in the Black Swan,

I showed the difference with the following metaphor. There are environments where you may

have a large deviation, it's not going to be consequential, because it can't be very big.

So if I take 1000 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

tapes 30 basis point nothing. Okay. And then if you go from 1000 to 10,000,

they lose completely. So you can have a tail event that's not going to be consequential.

Extremistan is different. Extremistan, if you gather 1000 people and add to that sample,

the wealthiest person on the planet, how much of the total will he or she represent?

All of it. There'd be a running error. There'd be 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 have 100 and some billion right next to it. So this is where you have to focus

on environment that produces fat tails. And this is what Mark did with Universal.

Universal is named after the universal mechanism that generates fat tails. Okay. That was that was

the name. So everything we're in it, basically, intellectually, everything of details. So you

have to identify what produces fat tails in the financial markets 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 wealths come from one person.

It's so happened that under fat tails, the models that we use for risk management on

Wall Street, RBS, this is why I have a lot of enemies. This is why I have to protect myself

against reputational damage, right? So because all the economy saved me, all their models are

based on that. So what is fat tail? Practically, everything in socioeconomic life is fat tailed.

What is not fat tailed? Number of calories we're going to eat tonight. How many calories are

going to you 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 a piece. 2000. Say I go 3000 for me, all right. I can play with fat and

stuff. 3000. That's nothing. How many calories do I consume a year? Yeah, it's 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 have two environments and they're separable. So this is why the universal approach, it makes

things separable, right? The fact that you can identify what is fat tailed. You identify where

models don't work. You can identify where you have to understand and we have to use more refined

tools to figure out stuff. And then also in fatness of tails, number one, pandemics.

Number two, wars. Close, close second, wars and pandemics. Okay. And so you can use that to

prioritize application of the precautionary principle or... 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 ensure it, rather than one,

it is thin tail. If you can ensure it, it's thin tail. If you can ensure it, not insurable,

fat tails. So there are a lot of things that are believed to be very risky, but they're not

like nuclear for me. I mean, not for one of my co-authors, but I'll settle it with a beer or

what's in English? Rupert Reed is a co-author of... And also a major character in the book.

He's a very environmentally-focused 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 of business.

Which was written with him first, drinking, you know, an 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 up. 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 the swimming pool. That

was something by a guy called Dr. Phil. Should we shut down pools? At a time, less than a thousand

Americans had died of COVID. And then I follow this, present the following argument. I said, if

I die drowning in the 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 we had 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 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 of sin-tailed, 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.

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, 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, say, why don't you exercise the precaution

principle? I say, I have to worry about a pandemic a lot more than 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 what the story is. Are there other ways? 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 would see already in a billion people, because it's so much scrutiny,

you would see that tail risk. To give you an example, Hiroshima, 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 Kuru? I don't know.

Kuru is a bad cow disease. Things for which we have data of early exposure and then early

disease, only onset of disease. So I looked at vaccines with all these conspiracy

theories and everything, and said the focus is enormous, and you can see anything.

But it followed that class of risks where you have to have mistakes, go and take a place in a

genetic or DNA, or 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's a lot of numbers about COVID people who aren't aware of.

Number one, something that people don't think about immediately, is that COVID raised the risk

of deaths, your multiple deaths beyond the age of 30, because we don't have much of an effect

for younger people. We always don't think so. The force of mortality of the pro-

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,

the 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, they were dying as a multiple of their mortality rate. So it 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 1,700 chance of dying, male, 1,400 chance

of dying, that goes up by 10%. Okay, it was COVID. If you're 80 years old, you have one and whatever,

it goes up by 10%. Or something, I mean, the 10% depends on the exposure period.

But it was almost flat across the population. So I said, okay, do you want to increase your

children's chance or young people's chance of death by X% plus the effect it has on

years lost and traffic factors, 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, 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. Okay, and the risk you can encounter, you see. The GMO,

the way the gene would spread through the environment, uncontrolled spread is a fat tail,

whereas selective reading is very slow. As Rupert Ries said, he cited, I don't know who said,

that if your horse is blind, make sure you ride it slowly. So there are two classes,

like Mediocristan and Extremistan. Mediocristan, like calories or Extremistan stock market,

selective reading 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 people

are eating them. 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

just don't realize what happened. No matter what you say about Monsanto, I think would be

an underestimation of their age, because they really wrecked science, because they had groups

of people who would go and intimidate scientists, and people on a salary, scientists, are afraid

to lose their job, lose their post-op position. They would contact your boss, they would contact

practically everyone. They did that to me, but visibly, it was like watering on a duck's back,

right? Why'd they do it to you?

Hundreds of letters to the university. Because of your commentary on GMOs?

Because of the pressure, first of all, paper.

And then somehow, I used the R word in the past, in French, it's like

it says like you're a slow thinking person, the R word, and then they would have 15 letters

of mothers of children with special needs, who don't like that a professor at NYU would use such

a language that's insulting to them. The point is, when they showed me the letters,

they had different names, but it was like written almost on the same...

Foot-letter heads.

Exactly. And the language was the same. So, they realized that it was a smear campaign,

plus there's a lot of other things they did, petitions, all kinds of things, and online

harassment. But with me, it didn't work with others, but the people they select for these things

are usually dumb. Think about it. Who would engage in a smear campaign?

Is 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, I'm doing science,

this person is confibrillator, or whatever it's called, the Luddite. Okay, yeah, you've been

against the fire. No, it's not the same thing. Anti-science. Anti-science, because science,

anti-science, and usually they're never used by scientists. And they had a few scientists who

knew nothing about risk and probability. 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, 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 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 could have, I don't know, 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. Like I said, in Europe, they do use it.

GMOs are not widely adapted in Europe, and primarily because of the precautionary principle.

They have lobbies in Europe. I know because they all attack me. I see them online all the time,

coming from Europe, Italy, for example, Italy of all places, the last place you damaged big

times reputationally. If you had GMOs in Italian food in Italy, you had no tourism, but they still

have people there trying to sell, particularly that when you sell GMOs, you also can use more Roundup,

which is their secondary effect on a soil, and it's the same people who are producing both,

so one could be excused to sell the other. To me, one of the really interesting

aspects of the precautionary principle is the notion of uncertainty. 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.

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,

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 and just saying,

well, we don't know, so 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. In the paper I later rewrote with my friend Yannir and others

by saying the more uncertainty there is in a model, the more you have to be interested,

like the more uncertainty you have about the skills of the pilot, the more you should take

another plane. So what happened the next day, 20 newspaper articles in the UK called Talab,

a Black Swan author, the climate denier, okay, trying to convince Cameron, probably had the

cottage industry of modelers, it would be out of business if you follow these principles.

So it's not like we got a lot more heat from the left than from the right.

But why were they calling you a denier if you said that?

They used me to verbatim without following the whole argument, and they said, well,

he said that, and I basically named them by names, and I went after everyone of the 20 journalists.

I wrote to every journal, explained to them what I said, and I say they signed me out of

context. And I wrote a chapter in skin in the game about how one should debate and honorable

debate is, is where you represent the person's opinion, like what Karl Popper would always

very facefully 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 man and I'll get

him how, huh? So the problem that you have with the climate is that a lot of people have

an interest in complicating the story. In fact, you just say, okay, let's forget about fossil fuel,

let's pollute with other things. Just like I say, if a drug is dangerous,

I say the dangers in the dose, the dangers in the dose, it's non linearity. We put that

in a precautionary principle, the non linearity, the convexity, that's a theme of antifragile,

the convexity that 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're talking about when I used GMO versus selective breeding, WI speed and fragility.

And the example I use in an antifragile, 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 you're banging it once at 100 miles per

hour. Okay, so this is where if you have acceleration of harm, like if I jump 10 feet, I'm harm more

than twice as 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.

Although antifragile 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. But in spite of all of these arguments being

presented, people couldn't grasp our paper. And I discovered why. Something I figured out only

recently. When I talk to young people with 23 to 24, they know exactly what I'm talking about.

Their parents are the problem. So what is convexity just to refresh? Okay, so again,

we're going to talk about universal or something embedded in a universal story, but that the

convexity is if the market goes down 10%, you make a million dollars. If it goes down 20%,

you make 10 million dollars, you have convexity. And this is what everything is based on.

We'll call it convex and concave. And probably the best illustration is how we fared in 2007

and I explained it to Black Swan right before it happened. I looked at the risk of fanny may

by a deserter who left fanny may and distributed the risk reports. We looked at the risk of fanny may

and noticed that if the market say an interest rate or mortgage premium or something like that,

this increased by 100 basis points, they lost X 200 basis points, 20 times X 300 basis points.

I said, they're sitting on a barrel dynamite in the Black Swan. 2007, five months later,

okay, the start is going on. And eventually they lost the book, $600 billion losses.

While they said, oh, they reacted to me by saying, oh, we monitor our risk, we have 15 PhDs, okay,

we have 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 get upset

the way Mark presents the numbers that he writes to his investors, you know, you file with the SEC,

all the numbers are available. They tell them, listen, we need 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 you have on that maximum possible potential loss. And otherwise,

when you go to bed in the evening, all you could lose is that much and how much these

options were explosive on the maximum loss, all right? So that was the asymmetry is 4,000 some

percent. But that's not the first time it happened. Nobody noticed. When I was trading,

and I discovered that before the crisis of 1987, there was a Plaza Accord where a bunch of people

got together secretly on Sunday and then made an announcement, we're going to support the

currencies against the dollars, the dollars too expensive. You had a huge move. I was at work,

we had a tiny risk, there was an explosion in my PNL, okay? They brought detectives or inspectors

to figure out why the PNL is so large for that so little risk. Because you had your maximum

risk, all you could lose is say, $6,000 and the PNL exploded. So 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, what do you say exploded? This is in a bad way or a good way?

Good.

Good way, I see. The PNL.

Yeah. So the PNL 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 high risk, high reward. How are you getting low risk, high reward?

No, no. They said you made too much money, you got to be taking risk. You're hiding something

from us. 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

I was frustrated because they couldn't understand it. They couldn't understand it.

But this is the same thing happened to Mark.

This is the trade that they did for, that's the beginning of the trade that became

Empirica University. Something like, I remember when I was talking to Mark back in 2008,

I think 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 if they're even more dramatic than $2 becoming $60, because there was,

you always look at how people have lost money. Because when you read 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 they were liquidated.

And when he blew up, I mean, he blew up many times. But one time, you can see the prices,

he sold them for five, 10 cents. And then they had to buy them back, and I was buying them back

to $40. That's what I noticed with it. So selling volatility.

Selling out-of-the-money, tails, they had something rare events. And you don't need

large deviations, that people panic, they pay anything, or sometimes they're forced to.

Because the clearinghouses or counterparties cannot handle the risk. They're going to close

you out, sorry. And you close out, there's no liquidity. It's like the famous saying,

sell everything. And then the clerk, I told you sell everything, why not moving? He said,

please tell me, to whom, sir? 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, 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

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 that ends up creating a contagion

effect, just the same thing that we saw in 2017. Not among investors, but in the banking.

Yeah, banking or hedge funds or crypto, I think the financial markets over the past 20 years and

increasingly with electronic trading are more and more interconnected than ever. This is something

I got in my second book 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 hyper speeds,

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 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 stocks collapse here

as we saw in 87, collapse everywhere for large deviation and now for mild deviation starting

in the 1990s. And also, I mean, the funding disappears everywhere or comes everywhere.

So this property of globalization is similar to the one that came with it. This is that we're

going to have shortages and then glots. Now in a phase of between shortage and glut,

but shortages can be very deep where containers go up 10 times and shipping container and you're

going to have a lot of the reverse happening because I've never seen shortages without glots.

I've seen glots without shortages, but never shortages of glut. But they're very deep. 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 was the same door. You see, it's the size of the door that

matters when you want to get out, not the size of a theater. So the supply chain is narrow and

getting narrower and it's gotten narrower. Now probably it will expand and branch out and will

have a better networks, but people will not understand that. This is why people like to

sell tail events because it costs money to diversify your sources of 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, 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

risk taking, although this is certainly a factor of say the banking sector or

film 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 also self-cancelling.

You see, early on the self-fulfilling, people get on their 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 what should realize with the structure of the world in which we live, that although history

is not an indicator 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 lasaretos, okay, simple, right? Venetians were

expert at it. The rules are very simple. There are not that many of them. When we talk about

precaution principle, a lot of people have the illusion that it multiplies into zillions of

regulations. No. One comment I'd like to make about the regulators, like European regulators,

they're great at being regulators. Those are the regulators for pleasure. And if you put 200,000

people in Brussels, you know, of course, they have great french fries and beef tallow and whatever,

good 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 windshields, that kind of things, but they

can't control the waters. 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 one? 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

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 or working

backwards in the way you described. All traditional societies are traditional communities, like Italy

with resisted GMOs. And also people online may say, oh, this is anti-scientific. They know it's

science is not about that, for example. So it depends on which domain. There's some domain,

some people are good at some domain, not others. Like Russia was very good at some classes of risk,

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 a mind of people. Technically 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,

put in no sense, something about it when he was in Germany, infiltrated all these green movements

by directing the greens against nuclear, for example. So I truly think that we're suffering a

lot from this disinformation today when people worry about some risk, not others.

But another example of that is Germany with Fukushima that freaked out over something that

actually didn't kill people, shut down their entire nuclear program and in its place opened

up a bunch of coal-fired power plants, which is 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

writing The Black Swan, I didn't talk about it because I know it was dicey, was lower than that

in Utah. I mean, it's not the point. Chernobyl is too big. If you make small reactors, let them

blow up. So what happened 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

wonder what's the factor, what's the multiplier, but they are non-linearities. But definitely,

when you have a lot of small ones, they can blow up at different times. One thing about our previous

conversation when you say the banking sector, the banking sector is very safe for one reason.

It's a utility. With high-paid bankers living around here, you see, have big so-ho lofts,

$10 million so-ho lofts, basically, it's a utility because they don't let it go under.

It's not the one you've got to worry about. The saving it, again, they have to worry about,

the effect of saving it. We saved it in 2008, it was what? It was government debt and it exploded.

And then again, in 2020, they bought so much commercial paper with so many things. Again,

all these things aimed at saving the financial system, bank-wise, have spillover effects,

but they'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 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? 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 is the counter example.

No, no. The skin in the game is a disincentive, of course, but it 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 Mary Weather was 10 years ago trying to start a hedge fund.

So if you can't recover, the skin in the game is falling affected. The reason you don't see

crazy drivers, 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.

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

most fragile, the private equity, and of course, by far, people who need funding, because I don't

know if you realize, but we had, since we had our three bottles of pink champagne, it was like

four bottles, whatever, a lot of pink champagne to celebrate Lehman's departure right from his

town. Since then, we put them straight at close to zero. So when I was a student, and that was for

me an investment was something that generates cash flow. So you build something that generates cash

flow. So you value cash flow and no residual value at the end. And so you can have, you can

tolerate negative cash flow if you're going to get some later on. So it was 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.

The world has changed in the funding world. What is the game now? Is who you're going to sell

your company to? Are you 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. And someone was contacting me about LLM models, you know,

Schedule PT, by saying, oh, we have this startup, I'm investing in this startup,

and look at the rationale. And then he said, yeah, I'd be able to sell it in more than two years.

Listen, this is a trap, okay? So companies, say 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 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 and people

had now for 15 years of low interest rates, you have people in their 40s, who have never seen

interest rates. And they don't know how to behave, they 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 fund because it's

a sort of like mature adults, typically, it is those startups. And the VCs and the venture

capitalists actually played quite a nasty game because they cashed out all of them are rich,

our company never made a penny. You see, I know there's a lot of thick, how many billionaires

you have and Silicon from Silicon Valley, right, who ever made a penny. It's valuation,

maybe, as I say. Yeah, yeah, there's there's a lot to that game. The 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.

Yeah, no, that's well, right. I mean, it's calling of the herd. So I think we're going to see a lot

of this. But think about it, this will will finally we'll get waiters. Because we have

shortest waiters. We finally will get wait, I mean, you got restaurants and and and they can't,

you know, they have one waiter for the whole room. And they said, we'll get more waiters, we'll get

more people who, you know, will help you, you know, more the grass and stuff. I mean, we're a lot

of a lot of supply of former, former startup founders, serving you your negroni. We'll see

how it shakes out. I'm curious to see this team. Are there any ideas, concepts you would like to

discuss? Is there anything that we've missed? Ed Thorpe could always talk about it.

Convexity is the center of things. So I started writing on convexity or studying convexity.

You know, after between the time we had the eggs in the champagne, the eggs, no, the eggs,

the eggs was 2002, 2001, 2002. And since then, I had some some 80 scientific papers. So my enemies,

they don't handle it because they can't say it's not science. So anyway, so I think that the central

thing for me is convexity. And it led me into papers and oncology in medicine. Because again,

colleges knew stuff, doctors knew stuff. The language they use did not accommodate

this notion of convexity 10 times one, the nonlinearity, they sort of suspected it,

but it was not formalized. So I just published something in oncology. We did a lot of stuff

in epidemiology on tails. So convexity and tails and convexity is the most important.

For example, people don't realize that convexity means you like volatility.

Concavity, you don't, zone where you 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.

Like when I wrote antifragile, I was writing between 2009 and 2012, nobody believed in heart rate

variability. You see? And they thought you need study heart rate as 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 applied to fields

where they need to be applied, like medicine. And the same thing with nutrition. But nutrition

figured out early on in terms of fasting, where 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.

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 others. This is what I'm working on. And it's taken me a while.

All that 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 would be sellers. I think it's 99 out of 100. It's so appealing.

If someone's going to give them the story, you sell option to 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. Because everybody else who has a 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 sure an option somewhere. Say that one more time.

Companies that have steady income are short an option somewhere. So it's not trading option

that will help you is looking at optionality in business and in places who are short that

optionality. That you can have two funds. They all have none of 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.

Weapons of mass destruction.

Ordinary people should stay away from these derivatives contracts.

And it's one of the things that I had to deal with this book with my editor and

people who've interviewed me since then is everybody wants to know how to do the universal

trade. How does mom and pop protect themselves against these things? Because

in the book, I warn these downturns are very bad for your portfolio. These are the things that

kill you. If you go down 40, 50 percent, this is something that Mark talks a lot about. You lose

50 percent to get back to where you were before it happened. You have to make 100 percent.

So these are the things that you really want to protect yourself against. And my editor was like,

well, he wanted to know because he was getting scared. How does ordinary person do this? How

do they protect themselves against these big events? My answer is an ordinary person

should focus on her or his business. Dentist should focus on dentistry, not trading gold.

You see, I mean, my experience, you see people whose business is not the finance

and they think that they've got to make money out of the checking account.

So what happens is they have so much scrutiny by their own business. Say they run a bakery,

they know the suppliers, this guy pays, this guy, they know all the risks. And then they blindly

put their money into something they have no idea what's going on. So this is where the

sucker, you don't want to say it's domain dependent, that some people are skeptical in one area, but

don't transfer to 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 2000 years. So it's the same thing.

Tell people, listen, what do you do? Oh, I have a bakery. Focus on baking and use your money to

preserve. That's not your business. So this is where you tell the pop and mom. You don't tell

them how to do your versa trade. You tell them. They can't do it. Yeah. The problem is it's not

options. Well, I mean, after being in Silicon Valley for 17 years and having some pretty good

luck with startups, I get the question, like, how can I invest in early stage startups? I'm like,

don't do not under any circumstances do that. It's like, unless you're living in the middle

of the switchbox and you're dedicating your time to that, do not 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 dynamites and stuff like that. It's an inventory.

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. And you can find you online,

scottpattersonbooks.com on Twitter at Patterson Scott. And the same, 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? I

suppose it depends on their orientation. I think Fool by Randomness is the one that people like

the most, the blacks one, what they slight the most, and antifragile is the one they misuse the

most. Misuse? Yeah, because they say, oh, yeah, the virus, you get stronger. What doesn't kill you

makes you stronger. 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 antifragile, is first you have to

eliminate fragilities. You see? That's the first rule. You tell the risk, you don't open it up.

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 around these points. And I'm working now on a book that is pretty much like structured,

like an ancient Roman, a Latin, a Tretis, a language Tretis. Okay, it was questions and stuff

like that. And it's liberating to be able to write 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 going to be called Wikipedia. For example, why the risk

of an individual getting this doesn't translate into a collective risk in the same way.

Right, the swimming pool versus the scope.

The swimming pool, stuff like that. And also why you can generalize,

a lot of it has to do with scalability. People have the idea that we should have a virtuous

individuals to have a virtual society. Typically, if you force no, there's a lot of greedy

individuals can build a virtual society. That's the Adams misargument, or I said,

one Malbranche. So the idea of scalability, for example, is the most misunderstood thing.

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 communists in the kibbutz,

but libertarian at state level, you could have a lot of these gradations. So things are more

complicated. Among these things, I debunk in it. And then finally, one idea that also

we explode the structure in it on the main difference between BS and non BS,

what I call verbalism. A BS is in bullshit. Yeah. Yeah, I just make it sure I'm understanding.

Verbalism and non verbalism, what is not 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, to give it a narrow title, principia or summa or principia in kertorum or something.

So what characterizes non BS? I have to ask. I have rigidity of meaning.

Rigidity of meaning. I learned that from arbitration. I learned a lot of things from

training. And arbitration is a law of one price. Like if you combine things,

they should have the same price here, Singapore or downtown, uptown, combination,

that you should have no arbitrage. I can't really buy. I used to do arbitrage. I started

doing arbitrages like buy an option with this, this converted to across them 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 one price. I say rigidity of meaning. Whatever words you use always refers to the same

thing. That's what my criteria is rigidity. By the way, I cite you in my new book.

Hopefully it's a good situation. What you call retrospective, what you call bigotering.

Okay. So in other words, I have a so-called retrospective bigotering. 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, pass individual

retrospectively for values we have today, what we don't have then. You see, it's like, for example,

Aristotle did not like, he was, you know, male chauvinist. I say, okay, 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

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, had a lot of things on it. And I'm going to tell you what

it has on it. So for example, you say Noah was virtuous for his day. Someone pointed out to me

in the Talmud, Twitter is very helpful. But I like these ancient texts to see how they would judge

their own. Effectively, when in 18th century, they had different values in the 15th century.

And how did they judge them? And at the same time, people, the wise people know that, hey,

they did not. They was not part of the customs at the time.

How did you decide specifically on the Talmud? Because that's not your upbringing.

Okay, no, it's because I like RMA, which is closer to my native language, the Levantine dialect,

RMA, 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 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 taken me anywhere except exploring texts.

And I'm enjoying stuff. So you could have a collection of ancient wisdom in the Talmud,

better than 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. Now, what stands out really is more like someone like

Aquinas, the Summa Theorem, because written by one person, whereas the Talmud is a

concoction of opinion on opinions, all right. But I like the Talmud only because I have the

privilege of understanding so many 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 a collection of scholars, talking about scholars and discussing

one another over time. This is what why I like. I like about Aquinas is took a topic

and boom, put everything in it. All the questions and answers you can have in it.

We question themselves. So this is why I'm much more impressed with Aquinas as an individual.

I can never imitate Aquinas. So I could be as a scholar, like one of those who contributed to

that Talmud, you know, or one of small contributors of Talmud, that collective piece of work.

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.

Now, 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 we

sound 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?

A lot. 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 that thing is sending shock waves through

the climate technology world in ways that's just kind of mind-blowing. And it's changed the game

for America, at least, in 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. 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 found, I live in Texas. 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. They're some very smart people. But 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 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. But if I'm the thumb 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 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 compelling opportunities to immediately

present them necessarily. But although there are, I mean, quite a few out there.

I've been working on some stories about climate technology in Appalachia.

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

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

that in competition with China. In competition. Well, I guess we can, we can say that for a

round two. But 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.blog slash podcast, 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? You're not going to play with dinner this time. I'm paying.

Okay, agreed. I agree. Last time he wanted to pay. No games. I won't skulk off and

serpitiously pay for anything. So on that note, off to dinner we go. And thank you very much,

guys, and to everybody listening. Thanks for tuning in. Hey, guys, this is Tim again,

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Machine-generated transcript that may contain inaccuracies.

Keywords

Nassim Nicholas Taleb, Scott Patterson, Wall Street, crisis, chaos kings, mathematical finance, dark pools, uncertainty, risk engineering, risk management, COVID-19 pandemic

People

Nassim Nicholas Taleb, Scott Patterson

Companies

Monsanto, Bayer AG, Helix Sleep

Organizations and Institutions

NYU's Tandon School of Engineering, The Wall Street Journal

References

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Brought to you by AG1 all-in-one nutritional supplement, Helix Sleep premium mattresses, and LinkedIn Jobs recruitment platform with 900M+ users.

Nassim Nicholas Taleb (@nntaleb) spent 21 years as a risk-taker (quantitative trader) before becoming a researcher in philosophical, mathematical, and (mostly) practical problems with probability.

Taleb is the author of a multivolume essay, the Incerto (The Black Swan, Fooled by Randomness, Antifragile, The Bed of Procrustes, and Skin in the Game), covering 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 Incerto, 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 (grouped in the Technical Incerto).

Taleb is currently Distinguished Professor of Risk Engineering at NYU's Tandon School of Engineering (retired). His current focus is on the properties of systems that can handle disorder ("antifragile").

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Scott Patterson (@pattersonscott) is an investigative reporter for The Wall Street Journal, currently based in Washington DC, working on climate and energy policy. His new book is Chaos Kings: 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 faces today—and how we might fix them.

Scott has covered everything from Berkshire Hathaway to stock exchanges to high-speed traders to the financial regulators. His first book, The Quants, describes the rise of mathematical finance and delves into its role in the 2008 financial blowup. Dark Pools, 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.

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Past guests on The Tim Ferriss Show include Jerry Seinfeld, Hugh Jackman, Dr. Jane Goodall, LeBron James, Kevin Hart, Doris Kearns Goodwin, Jamie Foxx, Matthew McConaughey, Esther Perel, Elizabeth Gilbert, Terry Crews, Sia, Yuval Noah Harari, Malcolm Gladwell, Madeleine Albright, Cheryl Strayed, Jim Collins, Mary Karr, Maria Popova, Sam Harris, Michael Phelps, Bob Iger, Edward Norton, Arnold Schwarzenegger, Neil Strauss, Ken Burns, Maria Sharapova, Marc Andreessen, Neil Gaiman, Neil de Grasse Tyson, Jocko Willink, Daniel Ek, Kelly Slater, Dr. Peter Attia, Seth Godin, Howard Marks, Dr. Brené Brown, Eric Schmidt, Michael Lewis, Joe Gebbia, Michael Pollan, Dr. Jordan Peterson, Vince Vaughn, Brian Koppelman, Ramit Sethi, Dax Shepard, Tony Robbins, Jim Dethmer, Dan Harris, Ray Dalio, Naval Ravikant, Vitalik Buterin, Elizabeth Lesser, Amanda Palmer, Katie Haun, Sir Richard Branson, Chuck Palahniuk, Arianna Huffington, Reid Hoffman, Bill Burr, Whitney Cummings, Rick Rubin, Dr. Vivek Murthy, Darren Aronofsky, Margaret Atwood, Mark Zuckerberg, Peter Thiel, Dr. Gabor Maté, Anne Lamott, Sarah Silverman, Dr. Andrew Huberman, and many more.

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