Nassim Nicholas Taleb, author of The Black Swan and a harsh critic of quant strategies, told the CFA Institutes annual conference in Vancouver, British Columbia, not to confuse volatility with risk. A black swan is a highly improbable event that is unpredictable, has a massive impact and that people try to describe in hindsight to make it seem less random and more predictable, according to Mr. Talebs best-selling book.
For example, Mr. Taleb noted in his speech that Italy has had more than 60 governments since World War II, making the country more volatile, but Saudi Arabia ruled by the same family for more than 130 years is a far riskier regime.
He also warned of growing systemic risks in the world financial system. The shrinking number of banks seems to limit the number of blowups and makes the financial system appear more stable. The problem is that when a blowup occurs, it has bigger ramifications than in the past, he said.
The probability of an event happening drops but the consequence is higher, he said.
Mr. Taleb also had harsh words for other conventional quant wisdom. The Law of Large Numbers which says that one or two large events wont throw off averages doesnt apply in all situations. For example, five drugs out of 267,000 on the market account for the vast majority of profits, he said. The same is true for best-selling books, where five account for about half of all book sales, he said.
Recognizing the preponderance of portfolio managers and analysts in his audience, Mr. Taleb was apologetic in his criticism of quants. After all, he was one himself before he joined academia. Still, he warned the conference of the dangers of attending conference sessions. If theres an equation, close your eyes, he said, evoking laughter from the audience.