#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

24:55There's no question. That's what we're going to do. We're not going to mitigate. No correlation, nothing. 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 want to add mayonnaise. We don't add mayonnaise to artichokes. We will not add mayonnaise to the artichokes. And in a way, I told you, the long road, not the hack. We didn'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 reverse hacked. So in other words, take the long road.

25:29Like right now, last week, I did 17 hours of cycling. So that's a long road. That's not a short road. Whereas when we met, I was looking for shortcuts. The university had no shortcuts. And he takes no shortcuts. So I've known you now for 15 years. I know I've met you for 15, 16 years. And I think that shortcuts. And it was very good that he wrote that book for one reason, to put some story and narrative around the idea of precaution and tail risk for society in general. And also because of fact-checking that document, because a lot of these stories are legends of this has happened, this has not happened.

26:05It was a perfect fact because he's fact-checking, reflecting audited results and stuff like that. It was fact-checked. So it's sort of fact-checking the importance of tail hedging for society. And that, to me, is greater than that detail. It's like having finally a document, someone who bothered to look at the details and went through a rigorous... Many hours of interviews. Interviewing documents. 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.

26:47and we all remember what was happening in early 2020. The world seemed to be unraveling. You know, we had COVID, we had, you know, protests in the streets. We had extreme political uncertainty in this country, lots of things going on. So the first thing that happened was in April of 2020, it came out that Universa had posted a three-month return of more than 4 ,000 % on their positions, which was quite eye-catching and got a lot of news. I reached out to Mark and was like, holy crap, how do you guys do that? So that happened. And then I came across a paper that Nassim had co-written in January of 2020 about COVID.

27:37It was a glaring warning to the world that this virus was very deadly and people needed to take extreme precautions against what was coming, you know, by social distancing, other things, advice to politicians that they needed to be very aggressive about this. And it kind of occurred to me, I'd known Nassim 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.

28:20So I thought, what is it about their world view 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 Universa does to what Nassim 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. Which he'd been thinking about for years. And pandemics, for me, was something I was working on since 2007. I even discussed it in The Black Swan. What you have to worry about is a pandemic before a financial meltdown because of connectivity.

29:05We're no longer like in the 1800s where, you know, you can have a crisis here and not there. Everything's so connected. And 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 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, it can't. So what I'm saying is that we are in a different environment.

29:42Just 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 was the head of civil service in Singapore at a time, and then retired later. And we were all obsessed with a great pandemic that would come. And we thought it was going to be Ebola. So, I mean, you had to worry about pandemics. And later on, I wrote a scientific paper, a scholarly paper on pandemics that I didn't really finish.

30:22And 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.

31:03that'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 nasim and his group were saying take action now if you wait around to sit tight and assess you're screwed exactly if you must panic panic early panic early if you must panic panic now black and finance and anything you get out now. When it was easy, for example, to limit the flights out of Wuhan, you didn't have to do lockdowns. You could do lockouts. I mean, there were methods used by the Ottomans. By the Ottomans? Yeah, to install the Ottomans and the Austrians.

31:45The world was separate, but they had a lot of traffic, and it went through what they call quarantine spots. So you would go into to a sort of hospital that has quarantine, and it's seven days one way and nine days the other day. And they would implement that the minute they smelled anything, right? And they had rules. If you come from India, it's more days. The Ottoman had these rules. It didn't come from the Ottoman. It's a long experience dealing with pandemics and how you stem them by stopping them at the border. These things were called lazaretos. And towns that did not have lazaretos, Venice, of course, their maritime power, they had lazaretos.

32:21They did very well. But Marseille, France, was decimated because they didn't have lazaretos. The lessons we need to learn repeatedly. We have to learn from history how people handle that. They cut it in the egg. That's it. Yeah. And it's easier to check people at the border. 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.

32:56He said the way to control it is by knowing, especially testing people without, they're being aware of it. And they started the first thing where they detect temperature before anybody knew about these temperature things secretly at Singapore. So it was really - I guess they had a warmup with SARS. So they had the thermic - Exactly. He's the one who started it. And they were doing it secretly before it became public. So people wouldn't take antipyretic drugs before landing. So the whole idea is that You have to find fixes, and they're not complicated. And one analogy I'm going to give is the banking system, is that the banking system banks monstrously profitable enterprises.

33:34They make money off of your float, the money you have left there, the check you didn't cash, or stuff like that. They make tons of money. And guess what? They blow up on the risks that bring them a tiny amount of money. You see, selling that option that explodes every 10 years by saying, oh, no, we're in a different environment. It'll never happen. So sitting on dynamite. So that tiny, tiny, tiny tail option is what cost the banking system. They lost more money than ever made in the history of banking in 1982. Money center banks, that is. And did the same 2007. Okay? And a business that's hugely profitable except for that tail event.

34:08So I'm saying that if you just remove that, banks would do well. It's the same thing in society. If you figure out how to remove that tail risk, sometimes not complicated. Well, let me ask. I'll stand in for the audience and also for myself. and not to throw my audience under the bus, but what are the incentives or the circumstances that prevent them from taking a certain percentage of their assets and allocating it to something like a universa so that they are less at risk in that way? They just don't have to do that. They could just avoid some trades. But let me explain to you the dynamics of the bonus system.

34:43This led to my book Skin in a Game later on. If you have skin in a game, you're going to worry about blow up because it's your money. If you don't have skin in the game, you're CEO of a company or you're a fund manager, any kind of financial venture, what is your incentive? It's to print good numbers because you don't pay for the downside. So you print good numbers. You collect money on the profits. Annual bonus. And annual bonus. So this I call the generalized Bob Rubin trade. Generalized Robert Rubin trade. He made$100 million at Citibank or Citicorp or something. thing. Over 10 years, about 10 years, he collected$100 million in compensation.

35:21The bank was insolvent in 2008, near insolvent, if it weren't for the taxpayer, and it was the last minute. All he had to do was write an apology letter. We didn't see these events. It was a black swan named after a book by a very, very stubborn man. So something like that. So that's all he had to do is say, I'm sorry. All right? You keep your bonus. You don't show up to work. So this you can generalize. It's the same thing with supply chain. With the supply chain, a lot of firms concentrated everything on one supplier instead of being diversified. What did that lead to? Okay, better bottom line, but what I call pseudo-efficiency because they're short that option.

36:02And it so happens that if their supplier is in Wuhan, guess what? You've got a problem, all right? That problem 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 odds are you're never going to get there.

36:28Just a quick thanks to one of our sponsors and we'll be right back to the show. This episode is brought to you by LinkedIn Jobs. These days, every new potential hire can feel like a high stakes gamble for your small business. So you want to be 100 % certain that you have access to the most qualified candidates. That's why you should check out LinkedIn Jobs. LinkedIn Jobs helps you find the right people for your team faster and for free. Add your job and the purple hashtag hiring frame to your LinkedIn profile to spread the word that you're hiring. Simple tools like screening questions make it easy to focus on candidates with just the right skills and experience so you can quickly prioritize who you'd like to interview and hire.

37:05It's why small businesses rate LinkedIn Jobs number one in delivering quality hires versus leading competitors. LinkedIn Jobs helps you find the qualified candidates you want to talk to faster. So post your job for free at linkedin.com slash Tim. That's linkedin.com slash Tim to post your job for free. Terms and conditions apply. Now, Seem, 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?

37:42I 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 of Flandby, how you thought about that problem. So you write the resignation letter and you don't date it. Yeah. I'm very fascinated by your ways of thinking, the way that you've embraced different philosophies.

38:23And 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 in parentheses, artists, fragility is when you care more about the few who hate your work than the multitude who loves it. And then quotation marks, politicians. Have you always had that type of robustness or resilience against criticism? Is that something that is inborn? Maybe because I was never really someone who took established ideas at face value.

39:08So you necessarily have, you know, violate some norms, some thinking norms. And often people protect those norms by, you know, attacking a reputation. And I realized that while writing fooled by randomness. I say, hey, you're saying that what I'm doing is random. We're using wrong models. These don't work. So they attack your reputation. So I realized quickly it was time that my reputation was going to be under some kind of fire. And I decided that no, my reputation is how a few important people or people who know something about the subject view me. And it's not like I don't care about my reputation.

39:47I 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 going to hate. This resembles another aphorism inspired by Charlie Mungers. One of Charlie Mungers is that you want to be the most ethical person when people think that you're corrupt or you want to be the most corrupt person when people think that you're ethical. Make your choice and use it as guideline. It's the same thing.

40:27So, except that 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, you have your children, or whatever, your family members. But there are also, there's a lot of people on the planet, and I care about my reputation, but in these circles, not with the general public. So it allows you to take much, much more aggressive positions, which I've done over a long life. And Mark, for example, has a lot of enemies. And they're going to pick on something. And you don't care. So you're doing the right things.

41:01And 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 and 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.

41:47I've met a lot of hedge fund managers over the years. None like this guy, I have to say. We'll probably come back to that. I'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 as good. He told me, he's like, did I have a little greed in me? Yeah, I did. It was the 80s. And he grew up in a family that was, his father was a minister in a church.

42:30He was sort of a hippie, didn't believe in pursuit of wealth. Mark took the exact opposite view of that. But that was constantly something driving him was the desire to make money. A lot of other hedge fund managers I've met over the years, they have that drive. And it's something that many people look at these guys and think, you're worth a billion dollars. You're worth$2 billion. And yet you're a maniac. You go into work every day and just go crazy. You drive all your employees crazy because you want to be richer than the next guy. I don't think Mark has quite that sort of insane level of greed as some do.

43:13I've met Ken Griffin, founder of Citadel, disciple of Ed Thorpe, who we talked about, we might talk about later, Cliff Asnes, who is a stark enemy of— A friend, initially. Initially a friend. Yeah, and I have to say Cliff is a nice guy when you meet him. Not a nice guy, but friends who are not nice guys. He's also got a dark side. also somebody extremely focused on being wealthy very smart they're all extremely smart and i think that's in personalities that's uh i think one of the things that has helped drive my books is these are interesting people you know a lot of them are mathematicians scientists they come out of university with a different expertise in making money but then they apply that on wall street to making money.

43:58So it's a combination of they have to be leaders. They are extremely driven. It baffles me because I'm not like that. I have a degree in English. And I think that's actually why I sympathize with Nassim's writing so much is I came out of a tradition that I love the works of Dostoevsky and existentialism. And one of my favorite books is The Irrational Man. And I came into Wall Street and started reading about how there's this belief that people are rational and the markets are rational and they are predictable because of this. And I thought, that is just crazy. You know, to me, I look at financial markets and I see black swans.

44:45I 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. I'll let him answer this. People say I'm contrarian. I'm with a conspiracy theorist on many other things. I'm against him on many other things. Some are just contrarian because they have a father problem. So to me, contrarian is an explicit rather than attribute.

45:24you so but the other thing is i thought it's not 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 market that's just the thing that drives him he doesn't look at the stock market page you know every day like some people do he's you have to figure out what people envy yourself so you know 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 of people who had more erudition than me. Okay, so more erudite.

46:02And you realize that that's what makes me tick. Being envious is not good, you see. But at the same time, if you figure out who you tend to envy. I don't believe in this. I say, oh, people are having enough. There's someone here from East Hampton, the fellow who wrote Cash 22. A lot of interesting folks out there. Yeah. He met a financier at the time, four hedge funds. And the financier said, what is it that about you, because he was an author, a very successful one, what is it that distinguishes you from me? You know, look, he told him, I know the meaning of enough. So in other words, you know, you're upper bound.

46:43and effectively I don't play that game I say there's a meaning I am literally and I say envious of people who are erudites like if someone knows Latin very well I'm envious if someone knows Sanskrit I'm envious right and I discovered that early on so I made money on Wall Street because I wanted to make money on Wall Street but I didn't think it was worth the effort and luckily with a combination with Universa I had so much leverage which was marked on all this stuff. So the spillover on me was more than satisfactory. So I have knock on wood a lot more than I wished. So part of the reason I'm asking, we're talking about the ideas, but the person who's acting as the vessel or communicator of these ideas, the developer of these ideas, is integrally related to, I think, the sort of totality that I want to explore.

47:35So part of what interests me about your story and your thinking is how various inputs have impacted your thinking around not just markets, but other things. So for instance, like the Stoics and the Seneca the Younger and so on, or other philosophical inputs, did those come early and then aid you, you think, in your career when you were active in the markets? Or did those come later and you sort of always had a deep interest, but were able to explore them at a later point. No, it's actually, I started liking the Stoics and those people I've talked about, I liked them much earlier on in my life.

48:14But I went overboard. For every idea I've had, I did the exact opposite of what one should do is, like, if you had an idea, say, oh, I had this idea, right? It's go look, because I don't consider myself so different from others. And then particularly when you look at history, you know, so many tens of thousands of scholars surviving works. So I went back and figured out of the scholars, of these scholars, who had similar ideas or who preceded the ideas. 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.

48:56And then, of course, into others about this fundamental skepticism. Because I noticed a lot of people are skeptical, particularly conspiracy theorists. They're skeptical of small things, but not about big ones. All right? They get taken for a ride. It's find me a conspiracy theorist or find me someone who's naturally skeptic of all things, and I'll show you a turkey. So I wanted to find people who are fundamentally skeptic, being skeptic and being skeptic about important things, not about small things. What would be an example of a big thing? A big thing, like, let me give you an example. I wrote a paper, it never ended up in a book, on the stock market and religion.

49:37It'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 pseudoscientific theory on whatever it is. But they don't believe in religion. And the reverse, all right? And people who are religious, typically, they're harder. And there's some, I don't know, research on that. There's a guy called Bar-Lahmi, Bar-Halahmi, I think, who did some studies about skepticism. People go to religion about affairs.

50:16Skepticism is where it matters. And I wrote about it, I think, in the Black Swan. I said, skepticism is where it matters. And I noticed that a lot of these big skeptics were not skeptical of God and things you can't do anything about. They were skeptical of the charlatan. They're skeptical of things, of someone trying to take advantage of you. That's where you exercise your skepticism. Among the great skeptics, there is a Bishop Uwe. He was probably one of the second most erudite person of his time. Second was this guy called Scaliger. The guy is phenomenal. He could translate into Arabic. He was Roman authors, Latin authors, and vice versa.

50:55Okay, Scaliger. Scaligeri. There are a lot of... Pierre Bale. Pierre Bale has a lot of works. He's one of those skeptics. Hume was one of those skeptics, but these people preceded Hume. Hume is known because he wrote in a language of a country that had a lot of ships and a lot of trade across the world. But a lot of these ideas came from groups of people in France or among Protestants in France. And it was called the Fideists. Originates, of course, in the Levant. And of course you have the great Al-Ghazal, the Islamic theologian, Iranian origin, who definitely was showing you how all these arguments are weak, you know, could dismantle arguments, by showing you could be skeptical about human arguments about God.

51:43Okay, a lot more than that. I think it was Spinoza coming out of that same tradition, very skeptical. He was skeptical about the text that was, these people say, okay, trust Sandy's text, and be skeptical about things that really matter. And there was actually a skeptical school of medicine, practicing medicine. So what? I went back through history. 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 a letter from someone, hey, how come you missed so-and-so, right? Okay. And sure enough, I go back to the inserto and I add that person.

52:22And this is why it has survived. the five books, the insert all. 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 polycrisis and the new age of crisis. What does this refer to? you 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 a economist adam twos 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 the whole becomes greater and worse you know 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 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?

54:30And what Nassim and Mark do is they think about the extreme events and how to protect against them. Nassim co-wrote a paper about this exact issue called the precautionary principle. 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, you know, 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. Yeah, exponential. Things that have these properties that you need to take extreme precaution and not take that risk.

55:12Basically, 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 Nassim, 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. You know, 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 Nassim and Mark, Nassim said, no way, I'm not, I have no interest in doing that with you.

55:56It took a while. And then you were like, I have these blackened white photos, you might want to take a look at it. So I had you convince me to do it. It was, it wore him 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 eventually he said he was talking. 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 Nassim ever since I've known him.

56:35And so to me, it was like... The identity piece. Yeah, that he's not a traitor. And I thought I agreed because it's true. He's not been a traitor for a long, long time. And it's obvious where his interests are. What would it, 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 Bar Endless. 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 or actually one book so yeah it was not you know it was not not what he wanted out of life okay He's a Middle European intellectual who would have liked to be remembered as someone for ideas.

57:41And he envied, of course, Karl Popper, who he claims was his professor, but it was beyond. So I wrote about it for my randomness. I said, here's this fellow who is, I say, okay, but he also does to distinguish himself from other financiers. He is also, or has intellectual aims. I said, I don't want to be that. I want to be someone who produces intellectual work and who happens to have had contact with reality, thanks to trading, and thanks to Mark and the guys that still have some contact with reality. But I'm not cut for that. When I was writing Food by Random, it was 2019 that I realized I was not, I don't want to be like Soros.

58:24Because 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. He didn't control life. Buffett told me he wanted to write a book. 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. Yeah. He wants to be thought of as an intellectual, too. Well, I mean, it's not the same. But the Savior of Omaha has something that I didn't put in a precautionary principle, but that's probably very inspiring because he understood the asymmetry.

59:09If you say no a thousand times, he says no, if he doubts. And that's the precautionary principle. Could you give people the precautionary principle 101 just to back up? Okay, let me ask you. You're Tim Ferriss 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 you'll walk maybe you'll ride a bicycle you know 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 and his investments.

59:56That's my precautionary principle, the idea that there's an asymmetry. And there's uncertainty about certain things. It's not good. So the climate, for example, if you have uncertainty about the climate, stop these models. 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 the story of a plane or I take water. I say, this is glass of water on the table. There's no evidence that it's poisonous. Would you drink it? No, there's no evidence. The wording would spook me. There's no evidence that. But when you tell them, hey, you know, you should worry about GMOs, they say there's no evidence they're harmful.

1:00:35Yeah, 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 a precautionary principle. But then what we did is we noticed a lot of people, in fact, it was a counter precautionary principle, because a lot of people were invoking it for nothing, to say we're going to have a non-naive precautionary principle by delineating the areas where you should exercise such precaution systematically as a planet or as a communal group. And what I'll say, number one, you need fat tails. Now, what does fat tail mean? Let me explain to you.

1:01:11Let's say you go to planet Mars. Okay, Elon would help you get there. You have a 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. 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 tales. Fat tales. You have to identify things backwards. If you hear the big thing, where did it come from? And you have to get these. Okay? So they have different dynamics because they scale differently.

1:02:00So in the black swan, I show the difference with the following metaphor. There are environments where you may have a large deviation, but it's not going to be consequential because it can't be very big. So if I take a thousand people and put them on a scale and add to that sample the largest human being confined on the planet, how much of the total will he or she represent? It's 30 basis points, nothing, okay? And then if you go from 1 ,000 to 10 ,000, it dilutes completely. So you can have a tail event that's not going to be consequential. Extremistan is different. Extremistan, if you gather 1 ,000 people and add to that sample the wealthiest person on the planet, how much of the total will he or she represent?

1:02:49All of it. There'd be a running error. There'd be a running error. I mean, there'd be on average on the planet Earth, right? There'd be in total, maybe they have 2 or 3 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 Universa. Universa is named after the universal mechanism that generates fat tails. That was the name of the car. So everything we're in it, basically intellectually, everything, all the 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.

1:03:30So concentration. Like, for example, you have a lot of people, all the wealth comes from one person. It so happened that under Fat Tales, the models that we use for risk management on Wall Street are BS. This is why I have a lot of enemies. This is why I have to protect myself against reputational damage, all right? So because all the economists hate me, all their models are based on that. So what is Fat Tales? Practically everything in socioeconomic life is Fat Tales. what is not fat tailed, number of calories we're going to eat tonight. How many calories can we have in one day tonight? We can only go for the gold.

1:04:05I'd say we could each down a few thousand calories a piece. Two thousand. Say I go for three thousand for me. All right. I can play with fat and stuff. Three thousand. That's nothing. How many calories do I consume a year? Yeah. Not a single day is going to make a difference. Can you lose all your money in a single day? Yes. There we go. So you 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 what 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 i've got close close second wars and pandemics And so you can use that to prioritize application of the precautionary principle?

1:04:56Bingo. And let me tell you how. For example, if cancer is thin tails, nuclear, thin tail. If you can diversify it, it's thin tails. If you can have a thousand nuclear reactors, all right? If you can insure it rather than one, it is thin tail. If you can insure it, thin tail. If you can insure it, non-insurable, fat tails. So a lot of things that are believed to be very risky, but they're not nuclear for me. I mean, not for one of my co-authors, but I'll settle it with a beer. What's it, English? Rupert Reed is a co-author and also a major character in the book. He's a very environmentally focused person.

1:05:40He's a leader in climate these days. And yeah, he told me that's one thing that he disputed the precautionary principle paper was Nassim. Which was written with him first, drinking, you know, in an English pub somewhere in northern England, where the portions are like smaller than what they give you for espresso in Italy, you know, the Restrezzo. Like you sip them. So we had to have like, again, it's like with you and the eggs, all right? So to go back to the insurable, we don't have to worry about it. And a very simple example I give that when Ebola started or later on when COVID started, people were using the arguments, yeah, you know, 3 ,000 Americans die every year drowning in a swimming pool.

1:06:26That was something by a guy called Dr. Phil. Should we shut down pools? At a time, less than 1 ,000 Americans had died of COVID. And then I presented the following argument. I said, if I die drowning in a swimming pool, my neighbor drowning in her or his swimming pool has not changed. If I die of COVID, the odds of my neighbor dying of COVID has increased. So you have that transmission that makes it fat-tailed, that mechanism of transmission. So this is why you cannot compare, as basically the press in the beginning, the so-called established press, was against our ideas. because it was racist against China.

1:07:06They could not distinguish between risks of car accidents and heart attacks and risks of things spreading. This is why, for example, I am in favor of vaccines, the risk is thin-tailed, and I'm against GMOs because they spread in the environment. Let me ask you a question so I better understand this. 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.

1:07:44Number 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, they say, why don't you exercise the precaution principle? I say, I have to worry about a pandemic a lot more. Yeah, in comparison to what? In comparison to that. Plus, very quickly, after about a billion people had jabs, I was initially skeptical about a vaccine in the sense that let's wait and see.

1:08:23the 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, okay, they say on average took 10 years or eight years, whatever, to get cancer.

1:09:08No, 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 bad cow disease. Things for which we have data of early exposure and then early disease, early onset of disease. So I looked at vaccines with all these conspiracy theorists and everything and said the focus is enormous and we can see anything. But it followed that class of risks where you have to have mistakes going to take place in a genetic or DNA or this is where after a billion jabs, I said, okay, I'm going to go for it, okay?

1:09:51And visibly, the risk is much smaller. The risk may exist, but it's much smaller than the risk of COVID. And plus, there are a lot of numbers about COVID people weren't aware of. Number one, something that people didn't think about immediately is that COVID raised the risk of death, your multiple of deaths, beyond the age of 30 because we don't have much of an effect for younger people, or we don't think so. The force of mortality... Like all-cause mortality? No, it went up from COVID across the board in the same way. Say, for example, you're exposed to COVID, you have 10 % chance of mortality, 1.1%, 10 % increase in all-cause mortality.

1:10:35It'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 I took the social security numbers just to say, okay, it's not my numbers. Social security number, look at it. If you're a female, 30-year-old, you have 1 in 700 chance of dying. Male, 1 in 400 chance of dying. That goes up by 10%. Okay, with COVID. If you're 80 years old, you have 1 in whatever, it goes up by 10%. Or something. I mean, the 10 % depends on the exposure period.

1:11:12But 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 percent? Plus the effect it has on years lost and life expectancy is much more dramatic for a 40-year-old than it is for a 90-year-old. So this is how I looked at it. And of course, by then we had 8 billion traps. So we had the answer. How do you think about, say, GMOs? This is something I actually don't know much about, but in terms of the precautionary principle and risk assessment, how do you think of... I mean, a vaccine is to counter a disease.

1:11:51GMO 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 a gene would spread through the environment, uncontrolled spread is fat-tailed, whereas selective breeding is very slow. As Rupert Reed said, he cited, I don't know who said, that if your horse is blind, make sure you ride it slowly. So there are two classes, like Mediocristan and Extremistan. Mediocristan, like calories versus Extremistan, stock market.

1:12:32Selective breeding versus GMOs. I mean, you're jumping so many steps with GMOs. So it's a different class of risk. Right, because of the risk of uncontrolled spread. Exactly. And then you have a blight that spreads like COVID did the whole planet. And we're much more connected than before. Plus, they have never done a proper risk study on GMOs, on the environment. Not one. They're saying there's no evidence they're harmful. Look, people are eating it. I mean, I'm a scientist. I like to see randomized controlled studies. I like to see things. I like to see something a little more formal than claims.

1:13:07And then you don't realize what happened. No matter what you say about Monsanto, I think would be an underestimation of their evil attribute. Because they really wrecked science. Because they had groups of people who would go and intimidate scientists. And people on a salary. Scientists are afraid of losing their job, losing their postdoc position. They would contact your boss. They would contact practically everyone. They did that to me, but visibly it was like water on a duck's back, right? hundreds of letters to the university. Because of your commentary on GMOs? Because of that paper. That paper.

1:13:45And then somehow I used the R word in the past. In French, it says just like it says like you're a slow thinking person. The R word. And then they would have 15 letters from mothers of children with special needs who don't like that a professor at NYU would use such language that's insulting to myself. The point is, when they showed me the letters, they're different names, but it was written almost on the same... Letterhead. Exactly. And the language was the same. So I realized there was a smear campaign. Plus, there were a lot of other things they did. Petitions, all kinds of things. And online harassment.

1:14:26But with me, it didn't work. But the people they select for these things are usually dumb. Think about it. Who would engage with smear campaigning? 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 confabulated or whatever. They're Luddite. Okay, yeah, you would have been against the fire. No, it's not the same thing. Anti-science. Anti-science. Because science, anti-science. And usually they're never used by scientists.

1:15:06and they had a few scientists who knew nothing about risk and probability. So that was, but anyway, we had fun fighting. It was a long fight. But then what happened, they were bought by Bayer, and Bayer was a little more civilized than Monsanto, and then 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?

1:15:51Well, 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 know, 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.

1:16:44Like I said, in Europe, they do use it. GMOs are not widely adapted in Europe, and primarily because of the precautionary principle. And they have lobbyists in Europe. I know because they all attack me. I see them online all the time, coming from Europe. Italy, for example. Italy, of all places. That place would damage it big times reputationally. If you had GMOs and 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 the soil. And it's the same people who are producing both, right?

1:17:24so one could be an excuse to sell the other. To me, one of the really interesting aspects of the precautionary principle is the notion of uncertainty. So, you know, when you look at climate change, the uncertainty of models has been used as a cudgel by the deniers and by the fossil fuel industry for decades. That there is a level of uncertainty in these predictions. We don't really know how bad it's going to get. We need to sit tight and assess the risks that we're facing. And what they showed is that uncertainty is a reason for taking precaution. Because if you are uncertain about the potential future destruction or massive degradation of the biosphere because of polluting it with carbon dioxide and methane and other greenhouse gases, maybe you should stop doing that.

1:18:19or 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, you know, what the hell? But let me tell you ironically what happened to me the first time I formulated the argument. It's actually in the Black Swan, second edition, and I was with David Cameron on stage. And I said, we have uncertainty about these models. So avoid these models and just don't pollute. in a paper I later rewrote with my friend Yanir and others by saying the more uncertainty there is in a model the more you have to be it's just like the more uncertainty you have about the skills of the pilot the more you're cautious you should take another plane so what happened the next day 20 newspaper articles in the UK Taleb, Black Swan author is a climate denier okay, trying to convince Cameron probably had a cottage industry of modelers It would be out of business if you follow these principles.

1:19:19So 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... They used me 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. I was 20 journalists. I wrote to every journal, explaining 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 much a debate, an honorable debate, is where you represent the person's opinion, like what Karl Popper would always very faithfully represent the person's position, and then attack it, whereas they were taking selected cherry-picking from it.

1:20:00Creating a straw man argument. Exactly, and that's for you, it would say, give me a letter written by an honest man and I'll get him held. 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... You say the danger's in the dose. Sorry? The danger's in the dose. The danger's in the dose. The nonlinearity. We put that in a precaution principle. The nonlinearity, the convexity, that's the theme of antifragile, the convexity.

1:20:35That you're... Because you're dosing the atmosphere with carbon dioxide. you're going to end up with a very bad outcome eventually. Exactly. So let me give you an example to go back to before when we were talking about when I used GMO versus selective breeding, tell you why speed and fragility. An example I use in antifragile. If I bank a car against a wall at one mile per hour, a hundred times, okay, it's not going to be the risk of your banking at once at a hundred miles per hour. Okay, so this is where if you have acceleration of harm, like if I jump 10 feet, I'm harmed more than twice than if I jump 5 feet.

1:21:16So we showed 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, the same with Black Swan. I know Black Swan is read more now than it was a year after publication. But in spite of all of these arguments being presented, people couldn't grasp our paper. And I discovered why. Something I figured out only recently. When I talk to young people at 23 or 24, they know exactly what I'm talking about.

1:22:00Their parents are the problem. So, what is convexity? Just to refresh. Okay. So, again, we're going to talk about Universa or something embedded in a Universa story, but the convexity is if the market goes down 10%, you make a million dollars. If it goes down 20%, you make$10 million, you have convexity. And this is what everything is based on. Well, that general idea. Sorry? Yeah. We'll call it convex and concave. And probably the best illustration is how we fared in 2007. And I explained it in a black swan. right before it happened. I looked at the risk of Fannie Mae by a deserter who, you know, left Fannie Mae and distributed the risk reports, okay?

1:22:47We looked at the risk of Fannie Mae and noticed that if the market, say, an interest rate or mortgage premium or something like that is increased by 100 basis points, they lost X. 200 basis points, 20 times X. 300 basis points, I said, they're sitting on a barrel of dynamite in the black swan. 2007, five months later, okay, they started going on and eventually they lost, they booked$600 billion losses. Why they said, oh, they reacted to me by saying, oh, we monitor our risk, we have 15 PhDs, okay? 15 PhDs, 15 trillion PhDs. It's not going to help you with this. So this is convexity on the losses and we're doing the reverse on the profit side.

1:23:31And there've been some, a lot of people got upset the way Mark presents the numbers that he writes to his investors. You know, you're fired with the SEC. All the numbers are available. They tell them, listen, we made 4 ,000 % on your maximum loss, okay? Whereas if you invest in the S &P, you can lose 100 % of what you have. So the return that you have on that maximum possible potential loss. In other words, when you go to bed in the evening, all you could lose is that much and how much these options were explosive on our maximum loss, all right? Yeah, yeah. So that was... A-centred. Sorry? The asymmetrical upside.

1:24:04That was the asymmetry, the 4 ,000-some percent. But that's not the first time it happened. Nobody noticed. When I was trading, and I discovered that before the crisis of 1987, there was a plaza accord where a bunch of people got together secretly on a Sunday and made an announcement we're going to support the currencies against the dollars, the dollar is too expensive. We had a huge move. I was at work. We had a tiny risk. There was an explosion in my P &L. okay, they brought detectives or inspectors to figure out why the P &L is so large for that so little risk. Because you had your maximum risk, all you could lose is, say, X thousand dollars, and the P &L exploded.

1:24:47I told them that's how it works. They couldn't believe it, right? So, I decided, okay, I'm going to make a living out of that. Now, when you say exploded, this is in a bad way or a good way? Good. Good way, I see. The P &L. Yeah, so the P &L was too large for the risk. They say we're supposed to only take... You said your computers couldn't handle the numbers. Yeah, no, that was... So for them, it's like 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. That's what I mean.

1:25:18And the computers would take something like 10 hours at a time to compute the P &L, at the end of the P &L. 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 the same thing happened to Mark. This is the trade that they did for, you know, that's the beginning of the trade that became Empirica Universa. 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.

1:26:33Yeah, but 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$0.05 and end up having to buy them for$40. And then there's a Niederhofer story, same story, where he liquidated and what he blew up. I mean, he blew up many times, but at one time in the book, you can see the prices.

1:27:09He sold them for$0.05,$0.10, and then he had to buy them back, and I was buying them back to$40. That's what I noticed. It's called selling volatility. Selling out-of-the-money, tails, selling rare events, And you don't need a large deviation. People panic. They pay anything, or sometimes they're forced to, because the clearinghouses or counterparties cannot handle the risk. They say, I'm going to close you out, sorry. And you close out, hey, there's no liquidity. It's like the famous saying, sell everything. And then the clerk, I told you to sell everything, why are you not moving? He said, please tell me, to whom, sir?

1:27:46You see? Let's see. Let me ask a question that's been sort of percolating in my mind, and it may not be a good question, but I'm curious, you mentioned Soros, and I don't know that much about Soros, I've never met him, but I want to say Soros is also known as the man who broke the Bank of England, right, or the British pound. So one of my questions is, in this increasingly interconnected world, where the equivalent of the Black Plague, whatever that might be, and it could be in pandemic form or otherwise, instead of taking 300 years is over a weekend in terms of spread, and things are so interdependent.

1:28:21Is 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 in activist investors and so on.

1:29:01And 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 and not among investors but like in the banking yeah banking or hedge funds or crypto i think that financial markets over the past 20 years and increasingly with electronic trading are more and more interconnected than ever you know this is something i got in my second book about high frequency trading is how you could see the potential risk of some giant move in a 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.

1:30:11That 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 if 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.

1:30:51So this property of globalization is similar to the one that came with it, which is that we're going to have shortages and then gluts. Now we're in a phase between shortage and glut, But shortages can be very deep, where containers go up 10 times in a shipping container. And you're going to have a lot of the reverse happening. Because I've never seen shortages without gluts. I've seen gluts without shortages, but never shortages without gluts. But they're very deep. We didn't have that before. We all depend on... The world's getting bigger and bigger and bigger, but it's like a large movie theater with the same door.

1:31:35You see, it's the size of the door that matters when you want to get out, not the size of the theater. So the supply chain is narrow and got narrower. And it's gotten narrower. Now probably it will expand and branch out and we'll have better networks. But people would not understand that. This is why people like to sell tail events, because it costs money to diversify your sources of, you know, whatever. And 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.

1:32:14So 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 fill in the blank. but very well-funded investors who are looking for black swan or black swan-like opportunities, their ability to create a self-fulfilling prophecy in a sense. As they say, predictions are self-fulfilling and they're also self-canceling. Early on, the self-fulfilling, people get on the bandwagon, and then sure enough, that's how the glut takes place after the shortage. But one thing, you know, that's quite what you'd 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.

1:33:16It's like as with pandemics, the Ottomans and the Austrians figured it out, or Lazaretos, okay, simple, right? The Venetians were experts at it. The rules are very simple. There are not that many of them. When we talk about precautionary principle, a lot of people have the illusion that it multiplies into zillions of regulations. No. One comment I'd like to make about regulators, like European regulators, they're great at being regulators. They regulate for pleasure. And if you put 200 ,000 people in Brussels, you know, of course they have great fresh fries and beef tallow and whatever, duck fat, whatever.

1:33:53But 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, right? How much energy should be or the speed of your windshield wiper on a farm tractor if it has a windshield. That kind of thing. But they can't control the borders. And they didn't think of COVID. of all the people we spoke to, because a lot of people try to talk to me about risk, thinking that, you know, we should talk to someone like me about risk. Okay. And usually I get upset because, hey, where's the next black swan?

1:34:31You'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 withstand 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?

1:35:12All traditional societies or traditional communities, like Italy would resist GMOs. And also people online may say, oh, this is anti-scientific. They know science is not about that, for example. So it depends on which domain. There's some domain. Some people are good at some domain, not others. Like Russia is very good at some classes of risk, but not visibly at others. It depends on countries. Like Italy got paranoid about nuclear. There's one attribute of our environment that we should realize is the non-trivial effects of propaganda on the mind of people, particularly when it's well organized.

1:35:54The KGB was not very good at spying, we discovered, but was very good at disinformation. So everybody panicked about the nuclear because they didn't want Reagan to put ballistic missiles in Germany. And they infiltrated, Putin knows something about it when he was in Germany, they infiltrated all these green movements by directing the greens against nuclear, for example. So I truly think that we're suffering a lot from this disinformation up to today, when people worry about some risks, not others. Another example of that is Germany with Fukushima, that freaked out over something that actually didn't kill people, shut down their entire nuclear program, and in its place, opened up a bunch of coal-fired power plants.

1:36:45Which is, you know, obviously much more direct risk to humanity than nuclear power plants that don't kill people. The radiation in Chernobyl, I knew that when I was running the Black Swan, I didn't talk about it because I know it was dicey, was lower than that in Utah. But that's not the point. it says Chernobyl is too big. If you make small reactors, let them blow up. So what happens if you can, because of convexity, you see one reactor is vastly more dangerous than 10 small ones. And the 10 small ones are not likely to blow up at the same time. I don't know if one reactor, how, what's the, what's the factor, you know, what's the multiplier, but they are nonlinearities.

1:37:26But definitely when you have a lot of small ones, it can blow up at different times. One thing about our previous conversation when you say the banking sector, 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 Soho lofts, $10 million Soho lofts, basically, it's a utility. Because they don't let it go under. It's not the one you've got to worry about. It's the saving it, again, that you have to worry about. The effect of saving it. Like, we saved it in 2008 with what? It was government debt. And it exploded.

1:38:02it. And then again, in 2020, they bought so much commercial paper and so many things. Again, all these things aimed at saving the financial system, bank-wise, have spillover effects, but they're going to save the 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, right?

1:38:41So you have a lot of big hedge funds, but I guess they can be diversified. Hedge funds have skill 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 counterexample. No, no. No, it is. The skin in the game is a disincentive, of course, but also skin in the game is a filter. So where are the people from? Is anybody from Locked Up Capital Management still around? Last I heard John Merriweather was, 10 years ago, trying to start a hedge fund. Well, there you go. So if you can't recover, the skin in the game is falling in effect.

1:39:21The reason you don't see too many crazy drivers is because they're dead. Because you inflict risk on others, but you experience the same risk. So you tend to exit the pool. So it seems then, maybe I'm misunderstanding, but that the migration of risk-taking to the hedge funds, assuming that the GPs or the people running the fund have sufficient skin in the game, would seem to be a net positive. The hedge funds are okay, but we have had the risky part, the ones that are most fragile, the private equity. and, of course, by far, people who need funding because, I don't know if you realize, but since we had our three bottles of pink champagne, there was like four bottles, whatever, a lot of pink champagne to celebrate Lehman's departure right from this town.

1:40:11Since then, we put interest rates at close to zero. So when I was a student, for me, an investment was something that generates cash flow. So you build something that generates cash flow. So you value cash flow and or residual value at the end. So you can tolerate negative cash flow if you're going to get some later on. So it's like us, if you discover gold later on. So the business model was cash flow based, whether short-term or long-term cash flow. The world has changed, all right, in the funding world. What is the game now is who you're going to sell your company to. I see. You're still talking about startups in this case?

1:40:50Exactly. Startups are 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 L &M models, you know, Shattrub PT, by saying, oh, we have this startup, I'm investing in this startup. And looked at the rationale, and then he said, yeah, I'd be able to sell it within two years. I said, listen, this is a trap, okay? So companies, say even Twitter was operating on a follow-in modus, we go to the market as a cash machine. So you don't even have to generate cash. So basically everything came from, it has Ponzi characteristics.

1:41:28Someone else will buy our company or we're packaging a company to sell it to someone else. Now, that started before the great financial crisis, but it was very moderate. Of course, it took place during the crazy period of the internet bubble and then died. So we had had episodes of that effect. But now it's ingrained in people who 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 don't know how to invest. So I think the most fragile part today is not the banks, of course, as we said. And it's not hedge funds because they're sort of like mature adults, typically.

1:42:08It is those startups and VCs and venture capitalists. Venture capitalists actually played quite a nasty game because they cashed out. All of them are rich on companies that never made a penny. You see, I know a lot. Take how many billionaires you have from Silicon Valley, right, who ever made a penny. It's valuation, maybe, as I say. Yeah, yeah, there's a lot to that game. I will say also I think there are going to be tremendous fatalities in the next probably three quarters in the startup world because there's been a lot of contraction of funding, which I think is ultimately probably a good thing.

1:42:50But a lot of these companies are raised. It's not a good thing. It's a necessary thing. Yeah, no. Well, right. I mean, it's the calling of the herd, so I think we're going to see a lot of it. But think about it. This will finally get waiters because we have shortage of waiters. Okay. We finally will get waiters. I mean, you go to restaurants, and they have one waiter for the whole room. And they said, we'll get more waiters. We'll get more people who will help you mow the grass and stuff. I mean, we've got a lot of supply. Former startup founders serving you your Negroni. We'll see how it shakes out.

1:43:27I'm curious to see. Nassim, are there any ideas, concepts you would like to discuss? is there anything that we've missed? Ed Thorpe? We could always talk about Ed Thorpe. No, I mean, convexity is at the center of things. So I started writing on convexity, or studying convexity. You know, between the time we had the... The eggs and the champagne. The eggs. No, no, the eggs. The eggs was 2002, 2001, 2002. And since then, I had some 80 scientific papers. So my enemies, they don't know how to handle it because they can't say it's not science. So anyway, I think the central thing for me is convexity, and it led me into papers in oncology, in medicine.

1:44:12Because again, oncologists knew stuff, doctors knew stuff, but the language they used did not accommodate this notion of convexity. Ten 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 on tails. I'm saying convexity is the most important. For example, people don't realize that convexity means you like volatility. Concavity, you don't. On the zone where you're convex. And people missed the point that was already mentioned in a paper I wrote before COVID on citing sources for lung ventilators.

1:44:51If 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 higher, when I wrote Antifragile, I was writing between 2009 and 2012, nobody believed in heart rate variability. You see? They thought you need a steady heart rate. It's a predictor of death. So it's the same thing for a lot of things where you have, that's the 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.

1:45:32And the same thing with nutrition. But nutrition, figured out early on, intermittent fasting. Well, it's a convexity thing. Instead of having a dose throughout the day, you have it, and it's a different response. But there's a limit. You'd rather have your calories, a concentration limit. You'd rather have your calories, once a day is okay, once a week, not so sure, you see? So there is an optimum thing. It's the same thing can be generalized to other things. This is what I'm working on. And it's taken me a while. All that 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?

1:46:10Or would you say skip that instead? 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. because someone's going to give them the story. You sell options, you have steady income. There's nothing people like more than steady income. And the reason Mark is in business, because he's the only person I know who doesn't care about the psychological prop-up for having steady income. Because everybody else will have steady income, they would debase the trade to have a steady income.

1:46:43And sure enough, you get steady income by selling the tails. And that is generalized. To give you an idea, companies that have steady income are short an option somewhere. Say that one more time. Companies that have steady income are short an option somewhere. So it's not trading options that will help you. It's looking at optionality in business and in places who will short that optionality. Like you can have two funds. They won't have the same return. One fund can have a lot of short options and one fund can be robust. You won't be able from the outside and security analysts have no idea. Weapons of mass destruction.

1:47:23That's what Warren Buffett called them. Ordinary people should stay away from these derivative 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. You know, mom and pop, how do you, how does mom and pop protect themselves against these things? is 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%, this is something that Mark talks a lot about. You lose 50%. To get back to where you were before it happened, you have to make 100%.

1:48:08So these are the things that you really want to protect yourself against. And my editor was like, well, he wanted to know for his own, because he was getting scared. How does an 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. A dentist should focus on dentistry, not trading gold. My experience, you see people whose business is not the finance and they think that they've got to make money out of their checking account. So what happens is they have so much scrutiny by their own business. Say they run a bakery, they know the suppliers, this guy pays, guys, they know all the risks.

1:48:48And then they blindly put their money into something they have no idea what's going on. So this is where the sucker, you know what I'm saying, is domain dependent, that some people are skeptical in one area but don't transfer to the stock market? It's the same thing. So there's something about the stock market, particularly with the weakness of religion, that makes people believe in stories of returns but not believe in theological arguments that we've had for 2 ,000 years. So it's the same thing. Tell people, listen, what do you do? Oh, I have a bakery. Focus on baking. And use your money to preserve.

1:49:23That's not your business. So this is what you tell a pop and mom. You don't tell them how to do universal trade. You tell them they can't do it. The problem is it's not an option. After being in Silicon Valley for 17 years and having some pretty good luck with startups, I get the question, 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 switch box and you're dedicating your time to that, do not do it. Unless you're a trader, don't trade. Yeah. Unless you're a baker, don't bake. Unless you're a dynamite maker, okay, don't make dynamite.

1:50:01And stuff like that. It's elementary. This is Scott. The new book, Chaos Kings, How Wall Street Traders Make Billions in the New Age of Crisis is available. where all fine books can be found. And you can find you online, scottpattersonbooks.com, on Twitter, at Patterson Scott. And Nassim, where would you like people to engage with you, if they engage with you, or with your books, understanding that you have begun work on these various, I suppose, parts of your multi-part essay at different points in time. Is there a place where you would suggest people engage with your work first? I suppose it depends on their orientation.

1:50:39I think fooled by randomness is the one that people like the most. The blacks want what they slight the most. And antifragile is the one they misuse the most. Misuse? Misuse, yeah, because they say, oh yeah, the virus, you get stronger. What doesn't kill you makes you stronger. 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 Fooled by Randomness is a good start or if your lawyer is skinning 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?

1:51:23well 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 Latin a trestis a language trestis with 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 Principia. For example, why the risk of an individual getting this doesn't translate into a collective risk in the same way.

1:52:04Right, the swimming pool versus COVID. 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 virtuous society. Typically, if you force, no. A lot of greedy individuals can build a virtuous society. That's the Adam Smith argument, or actually one-mile branch. 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.

1:52:43And why, for example, you could be libertarian at the national level and autocratic at the municipal level. You see, or communist in the kibbutz, but libertarian at the state level. You 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 explored was structured in it on the main difference between BS and non-BS, what I call verbalism. BS as in bullshit? Yeah. Okay, I was just making sure I'm understanding. Verbalism and non-verbalism, what is non-BS, because a lot of scientific papers have BS and a lot of casual things don't have BS.

1:53:23So I'm exploring all of these in a volume. I may call it summa or principia, to give it an arrogant title. Principia. I like it. Or summa or pincipia incertorum or something. So what characterizes non-BS, I have to ask? I have rigidity of meaning. Rigidity of meaning. I learned that from arbitrage trading. I learned a lot of things from trading. Arbitrage trading is a law of one price. If you combine things, they should have the same price here in Singapore or downtown, uptown, combination. That you should have no arbitrage. I can't really buy it. I used to do arbitrage. I started doing arbitrages like buy an option with this, this converted to a cross, and end up with something cheaper than some other one I would short, and then you get it.

1:54:11So it should not have a law of one price. I say rigidity and 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. Well, hopefully it's a good citation. What you call retrospective bigoteering. Oh, yeah. Okay, so in other words, I have a so-called retrospective bigoteering. I have one section is on scalability, and one section is on the passage of time, how we don't get time right. And in it, I explain why, for example, it is improper to blame someone, past individual, retrospectively, for values we have today where we didn't have then.

1:54:47You see, it's like, for example, Aristotle did not like, he was, you know, a male chauvinist. I say, okay, is it, was it, it is wrong. Yeah, we know now, but he didn't know. You see? He didn't know. It's just like saying, okay, why don't we blame him for not using a computer? Okay, there's no computer at the time. So you've got to look at these terms. It should not flow back values backwards. But effectively, the Talmud, which I've been studying for a while, had a lot of things on it. And I'm going to tell you what it has on it. So, for example, they say Noah was virtuous for his day. Someone pointed that to me in the Talmud.

1:55:25Twitter is very helpful. But I like these ancient texts to see how they would judge their own. Effectively, when in the 18th century, they had different values than the 15th century. And how did they judge them? And at the same time, the wise people know that, hey, they did not. It was not part of the customs at the time. How did you decide specifically on the Talmud? Because that's not your upbringing. No, it's because I like Aramaic, which is closer to my native language, which is the Levantine dialect, Aramaic. and then started having interaction on Twitter with people who are Talmudic scholars.

1:56:00Based on the interest in the language? No, I put something in there. No, my interest in the language, I have interest in ancient languages, more than interest in ideas. But I'm poor with languages. So it's not taking me anywhere except exploring texts. And I'm enjoying stuff. So you have a collection of ancient wisdom embedded in the Talmud. that is very interesting because it's monumental work. I'm just wondering, I guess, in addition to or amongst the different sacred texts or scriptures that you could study, why that stands out? No, what stands out really is more like someone like Aquinas, the Summa Theologian, because it's written by one person, whereas the Talmud is a concoction of opinion on opinion.

1:56:48But I like the Talmud only because I have the privilege of understanding Semitic languages, so I'm enjoying it more for linguistic stuff, just for the fun of it. And it's fun to read something and you understand. This is why, 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 I like about Aquinas is, took a topic and boom, put everything in it. All the questions and answers you can have in it. He questioned himself. So this is why I'm much more impressed with Aquinas.

1:57:24As 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, not 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. No, I enjoy that. I don't do as well with Greek as I should, ancient Greek. I can do better with modern, but Latin is easier than the Semitic language. But the grammar is more complicated than Arabic and Latin. Well, we could go down that rabbit hole.

1:58:01Maybe 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? I really appreciate you taking the time. I 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.

1:58:40But that thing is sending shockwaves through the climate technology world in ways that's just, it's kind of mind-blowing. And it's changed the game for America, at least, 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. Yeah, I find the entire space super fascinating. And I know we were talking about the ideas in the current books. We didn't allocate a lot of real estate to that particular topic. But I was thinking about what you were mentioning about climate change and some of the challenges in engaging different parties.

1:59:22And what I've found, I live in Texas, right? A lot of people engaged in the hydrocarbon businesses and so on. And I've spent time with a lot of these people who are not stupid. There's some very smart people, but there are, you study the incentives and you see certain behaviors. you looked at the sort of incumbent interests and where I have found productive conversations to be had is if I avoid certain types of language. So for instance, if I don't mention climate change, but I say, let's put aside the question of whether humans are causing this or not, which is very painful for a lot of people to do, but it's a great way to fight, you know, but if I'm like, look, let's put that aside and just look at extreme weather events and look at some of the upside potential with some of these technologies and like where they could find incentives like financial incentives outside of some of their current sandboxes i've had pretty good luck engaging people with that i don't always have the most compelling uh opportunities to immediately present them necessarily although there are i 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.

2:00:40And 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 bipartisan competition with China in competition. Well, I guess we can, we can save that for a round two, but really appreciate the time from both of you took a ton of notes for people listening.

2:01:23Also 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. Last time, he went and paid. No games. I won't skulk off and surreptitiously pay for anything. So on that note, off to dinner we go. And thank you very much, guys. And to everybody listening, thanks for tuning in.

2:02:26most things I've found or discovered or have started exploring over that week. It's kind of like my diary of cool things. It often includes articles I'm reading, books I'm reading, albums, perhaps, gadgets, gizmos, all sorts of tech tricks and so on that get sent to me by my friends, including a lot of podcast guests. And these strange esoteric things end up in my field, and then I test them, and then I share them with you. So if that sounds fun, again, it's very short, a little tiny bite of goodness before you head off for the weekend, something to think about. If you'd like to try it out, just go to tim.blog slash Friday.

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