Nassim Nicholas Taleb – Forget Forecasting

At an Oslo Business Forum and Thommessen event in the beginning of May, Nassim Nicholas Taleb, a mathematical statistician, former option trader, and risk analyst, engaged in a discussion with Frode Strand-Nielsen, Managing Partner at FSN Capital. During the session, Nassim elaborated on his thoughts about forecasting—and argued that it’s actually a waste of time. Here, we’ll give you Nassim’s key insights on why you should forget forecasting.

We Live in a World of Black Swans

Nassim is known as the father of a concept called the Black Swan; an event that is rare, hard to predict, has a catastrophic impact, and in retrospect is explained as if it was predictable. What he highlighted about this concept is that “the Black Swan is very subjective”. As an example, Nassim explained that the events on September 11th in 2001 was for most of us purely Black Swan as no real model could predict it. “But for those involved in the plot, it was not a Black Swan. They were in those planes and they knew it was going to happen. So, it depends on the observer.”

The conclusion that we should make due to the subjectivity of Black Swan events is that we should not waste time trying to predict them. Rather, you should focus on being robust and ready for whatever the Black Swan is. “There are ways to tackle uncertainty that don’t involve forecasting. Try to build something that resists all manner of forecast and forecast errors.”

The Folly of Forecasting

Nassim emphasized that he believes forecasting is absurd and folly. “These people [forecasters] don’t really have skin in the game. They just need to tell a good story.” While working on Wallstreet for years, he saw that investors don’t really even listen to the forecasters. “The forecast is for the customers.”

Nassim admitted that sometimes investors can get ideas from the forecasts, but these predictions can’t fully be relied on. He argued that forecasters often forget what matters. The big unexpected events are the things that shape the world, and those are not included in forecasts simply because even by definition you can’t predict them.

“What is important is not so much to forecast but to understand the world via forecasting and make sure you are robust to certain surprising events.”

Why We Want to Believe Forecasts

Our inability to know what will happen in the future causes us anxiety. Nassim explained that earlier most people used religion to get through the anxiety caused by uncertainty whereas nowadays, more and more people rely on science. The problem however is that “the job of science is not to forecast, it’s to progressively eliminate what is wrong”. In the case of weather, forecasting often works as the predictions are made for a short term. But in larger unexpected events using science to forecast doesn’t help.

As we don’t have ways to relieve our anxiety caused by uncertainty, we start falling prey to people giving us numbers. According to Nassim, what often happens is that we start anchoring to those forecast numbers in the hope to relieve our anxiety. This in turn can cause us to get ready for future events that will not happen and avoid getting ready for unexpected events that will.

“What you do is that you don’t have a forecast but instead have a collection of things that can happen in the world and you make sure that you are ok across these possible events. You don’t need to have a precise forecast.”

Be Antifragile

Already in his 20s during the market crash of 1987, Nassim became financially independent. He told that many people said he won because he was able to predict the crash but he himself thinks differently. “I just said that extreme events are more likely. I was equipped to make money if they happen and lose a little if they don’t.”

Nassim then continued to explain how he sees there are two classes of people: the antifragile people and the ones who are harmed by any type of uncertainty. The people who he refers to as antifragile are the ones who are able to navigate uncertainty with trial and error.

In the prologue of his book Antifragile, Nassim defines the term in the following way: “Some things benefit from shocks; they thrive and grow when exposed to volatility, randomness, disorder, and stressors and love adventure, risk, and uncertainty. Yet, in spite of the ubiquity of the phenomenon, there is no word for the exact opposite of fragile. Let us call it antifragile. Antifragility is beyond resilience or robustness. The resilient resists shocks and stays the same; the antifragile gets better.”

In the world we live in today, it is arguably the antifragiles who thrive.

Use the Barbell Strategy to Avoid Forecasting

A great practical strategy to avoid forecasting and rather prepare, is Nassim’s investment strategy called the Barbell Strategy. It aims to make sure that a majority of your capital is safe while using the remaining small portion on risky investments.

“My idea of a Barbell is how do you face uncertainty given that we don’t know the risks. Conventional financial models tell you to invest in medium risk securities. But if you don’t know the risks then these medium risk securities are very risky. What I know is that a zero risk security is a zero risk security. So, instead of having my money in medium risk securities, I have a proportion, say 80%, in zero risk securities and the remaining 20% in maximum risk items.”

According to Nassim, with this strategy you can avoid losing huge portions of your investments but you have a chance to occasionally make significant wins.