Taoyuan Nights

The Financial Times today published an article by Nassim Taleb which points out the sheer stupidity of the bulk of modern financial ‘theory’.

NNT is one of the few authors in Finance I take seriously; the others being Warren Buffett, and Benjamin Graham. His books, ‘Fooled by Randomness’ and ‘The Black Swan’, are must-haves for any serious finance nut. Besides his theoretical savvy, NNT is a damned funny read, as you’ll see in this article.

I admire his guts. Remember, he is up against the entirety of financial academia as well as the bulk of the finance industry – stating out loud that the most basic theories in Finance are flat out wrong. Fortunately for him, he happens to be right.

Furthermore, he is in very good company. Anyone who has read ‘the superinvestors of Graham and Doddsville‘ will have become well aware that the core theories of finance are based on utterly absurd premises.

Here’s a sneak preview… enough to whet your appetite.

Last August, The Wall Street Journal published a statement by one Matthew Rothman, financial economist, expressing his surprise that financial markets experienced a string of events that “would happen once in 10,000 years”.

A portrait of Mr Rothman accompanying the article reveals that he is considerably younger than 10,000 years; it is therefore fair to assume he is not drawing his inference from his own empirical experience but from some theoretical model that produces the risk of rare events, or what he perceives to be rare events. (NNT, FT.com)

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