Nassim Nicholas Taleb Called It

Nassim Nicholas Taleb saw the market downturn coming 4 years ago, and was prepared to profit from it. He is a font of pessimism about banks and the market, and one of the most fascinating men alive.

Taleb's argument is that statistics and probability can only do so much to quantify and manage risk. Statistics and probability are great for games like craps, where the events are well-defined and you can calculate the probability and the expectation of every bet. Hedge-fund types can apply these statistics to make small gains in everyday market trading. The problem is that the small gains are overwhelmed by sweeping disasters, bubbles or failures in the market (or in craps, the likelihood that robbers shoot up the casino and steal everyone's money). The statistical tools being used today are just not good enough to evaluate the probability of those sweeping negative events, like the subprime crisis. Consequently everyone will over-estimate the chance of the market going up and up. Taleb bets against all of Wall Street by buying cheap options with extremely small odds. when markets operate normally, he loses small amounts on these options; when the markets lose a lot of money, he calls in the options and makes a fortune.

If you want to learn more about the theory read The Black Swan interesting the whole way through. Read more in this June profile of Taleb in the UK Times, or check out his website.

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