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NASSIM TALEB: Donald Trump's election win was no 'black swan'

Some black waterfowl.

Nassim Nicholas Taleb, the man who popularized the “black swan” concept, says that Donald J. Trump’s defeat of Hillary Clinton in the presidential election was not a black swan event.

“An event that is 50/50 cannot be possibly a Black Swan event.  The ones who see it as such need to review their modeling assumptions (or maybe can find more success in astrology),” Taleb, the author of “The Black Swan” and “Antifragile,” wrote in a recent email Q&A with Yahoo Finance.

Nearly every major poll had suggested that Clinton would be victorious. Taleb called the polls “both unsophisticated and naive.”

“The problem is that demonizing Trump and his followers as the media did by calling them “racists”, ‘nazis’ had the effect of pushing them to hide their allegiance. It did not change their mind but rather maybe made them more likely to vote (proving to be an ineffective policy).”

Taleb is also the “Distinguished Scientific Advisor” to Universa Investments, a hedge fund founded by Mark Spitznagel in January 2007 that specializes in convex tail hedging and investing.

On election night, the markets went haywire.  As it became clear that Trump would win, Dow Jones Industrial futures dropped 5%. Across Wall Street, the consensus was that a Trump win would result in a sell-off. Overnight, though, those same futures roared back and the market finished the day up 6%.

“The longer term implications have little to do with the outcome, as the stock market is most certainly sick, but not from the result showing either Hillary or Trump winning. Most amateurs equated a Trump win with a market collapse, but the idea is an eventual collapse regardless of the winner due to our continued accumulation of debt and potential and necessary eventual rise in interest rates.  Hedging against this eventual collapse should remain the focus, which we (at Universa) do for a living,” Taleb wrote.

Nassim Taleb (Photo Credit: Reuters)

Here’s the full Q&A:

Yahoo Finance: Why do you think so many people got it wrong?

Taleb: Basically the mainstream media is presumptuous club for people with 1) a lack of understanding of complex systems, 2) a fear of diverging from the norm, 3) zero independent thought.

Further, statisticians led by Nate Silver seem to have missed the discovery of option theory more than 100 years ago and ignore simple analytical tools that one should use when forecasting binary elections.  With high uncertainty, probabilities are closer to 50/50, but such public statisticians can’t stand what they deem as imprecision (and want to sell newspapers).

YF: If folks got it right, how? What were they looking at?

Taleb: One cannot expect to fool people permanently. The left knew Hillary was a closet corporate servant; libertarians knew that she loved both the state and large corporations, in addition to destabilizing adventurism (such as Libya).  I fail to see how a leftist can love butchering people in Libya or Yemen. So the label “Democrat” lost its effect.  Further, the Obama-Clinton crowd was deeply in bed with lobbyists, so people knew they need to change the furniture and flood the stables, as they should once in a while.

But the polls were both unsophisticated and naive.  The problem is that demonizing Trump and his followers as the media did by calling them “racists”, “nazis” had the effect of pushing them to hide their allegiance. It did not change their mind but rather maybe made them more likely to vote (proving to be an ineffective policy).

I held that owing to uncertainty, any odds that diverged far from 50-50 were unrigorous.

The main surprise event is that the New York Times is now so impotent and weak that it can no longer control America. The Media is gone. Social media are much harder to fully control.

YF: What was the best way to make money off this? / play this?

Taleb: The longer term implications have little to do with the outcome, as the stock market is most certainly sick, but not from the result showing either Hillary or Trump winning. Most amateurs equated a Trump win with a market collapse, but the idea is an eventual collapse regardless of the winner due to our continued accumulation of debt and potential and necessary eventual rise in interest rates.  Hedging against this eventual collapse should remain the focus, which we (at Universa) do for a living.

YF: Was this a ‘Black Swan’ event? Why or why not?

Taleb: An event that is 50/50 cannot be possibly a Black Swan event.  The ones who see it as such need to review their modeling assumptions (or maybe can find more success in astrology).


Julia La Roche is a finance reporter at Yahoo Finance.

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