Before the crisis that started in 2007, both of us believed that the financial system was fragile and unsustainable, contrary to the near ubiquitous analyses at the time.
Now, there is something vastly riskier facing us, with risks that entail the survival of the global ecosystem — not the financial system. This time, the fight is against the current promotion of genetically modified organisms, or G.M.O.s.
Our critics held that the financial system was improved thanks to the unwavering progress of science and technology, which had blessed finance with more sophisticated economic insight. But the “tail risks,” or the effect from rare but monstrously consequential events, we held, had been increasing, owing to increasing complexity and globalization. Given that almost nobody was paying attention to the risks, we set ourselves and our clients to be protected from an eventual collapse of the banking system, which subsequently happened to the benefit of those who were prepared.
The fallacies used in the arguments against us at the time were as follows:
First, we were said to be “against science.” Our adversaries invoked consensus among economists in favor of these methods, a serious fallacy. Had science operated solely by consensus, we would still be stuck in the Middle Ages. According to scientific practice, scientific consensus is used in telling us what theory is wrong; it cannot determine what is right. Nor can it apply to risk management, which requires much greater scrutiny.
Second, we faced the argument that “more technology is invariably better,” a corruption of the notion of progress. In fact, only a small minority of technologies end up sticking; most fail because of some flaw identified over time.
Third, we were told that had ideas such as ours prevailed in the past, they would have hindered risk-taking. Yet, the first rule of risk-taking is to not cross the street blindfolded.
Fourth, toxic financial exposures were deemed to be “safe,” according to primitive risk models. But Fannie Mae went bust exactly because of overconfidence in its bad models (and, incidentally, after its bailout, appears to use the same risk models).
Fifth, the system kept relying on “predictions,” not noticing that the past track record of predictions by central bankers and economists can be used to make astrologists look good. Yet the entire economic system rested on these flimsy predictions — while we were advocating a system that had isolated parts to withstand prediction errors.
We were repeatedly told that there was evidence that the system was stable, that we were in “the Great Moderation,” a common practice that mistakes absence of evidence for evidence of absence. For the financial system to be viable, the solution is for it to resemble the restaurant business: decentralized, with mistakes that stay local and that cannot bring down the entire apparatus.
As we said, the financial system nearly collapsed, but it was only money. We now find ourselves facing nearly the same five fallacies for our caution against the growth in popularity of G.M.O.s.
First, there has been a tendency to label anyone who dislikes G.M.O.s as anti-science — and put them in the anti-antibiotics, antivaccine, even Luddite category. There is, of course, nothing scientific about the comparison. Nor is the scholastic invocation of a “consensus” a valid scientific argument.
Interestingly, there are similarities between arguments that are pro-G.M.O. and snake oil, the latter having relied on a cosmetic definition of science. The charge of “therapeutic nihilism” was leveled at people who contested snake oil medicine at the turn of the 20th century. (At that time, anything with the appearance of sophistication was considered “progress.”)
Second, we are told that a modified tomato is not different from a naturally occurring tomato. That is wrong: The statistical mechanism by which a tomato was built by nature is bottom-up, by tinkering in small steps (as with the restaurant business, distinct from contagion-prone banks). In nature, errors stay confined and, critically, isolated.
Third, the technological salvation argument we faced in finance is also present with G.M.O.s, which are intended to “save children by providing them with vitamin-enriched rice.” The argument’s flaw is obvious: In a complex system, we do not know the causal chain, and it is better to solve a problem by the simplest method, and one that is unlikely to cause a bigger problem.
Fourth, by leading to monoculture — which is the same in finance, where all risks became systemic — G.M.O.s threaten more than they can potentially help. Ireland’s population was decimated by the effect of monoculture during the potato famine. Just consider that the same can happen at a planetary scale.
Fifth, and what is most worrisome, is that the risk of G.M.O.s are more severe than those of finance. They can lead to complex chains of unpredictable changes in the ecosystem, while the methods of risk management with G.M.O.s — unlike finance, where some effort was made — are not even primitive.
The G.M.O. experiment, carried out in real time and with our entire food and ecological system as its laboratory, is perhaps the greatest case of human hubris ever. It creates yet another systemic, “too big too fail” enterprise — but one for which no bailouts will be possible when it fails.
Authors: Mark Spitznagel is the founder and chief investment officer of Universa Investments and author of “The Dao of Capital: Austrian Investing in a Distorted World.” Nassim Nicholas Taleb is distinguished scientific adviser at Universa Investments, author of “The Black Swan” and distinguished professor of risk engineering at New York University School of Engineering.
Now, there is something vastly riskier facing us, with risks that entail the survival of the global ecosystem — not the financial system. This time, the fight is against the current promotion of genetically modified organisms, or G.M.O.s.
Our critics held that the financial system was improved thanks to the unwavering progress of science and technology, which had blessed finance with more sophisticated economic insight. But the “tail risks,” or the effect from rare but monstrously consequential events, we held, had been increasing, owing to increasing complexity and globalization. Given that almost nobody was paying attention to the risks, we set ourselves and our clients to be protected from an eventual collapse of the banking system, which subsequently happened to the benefit of those who were prepared.
The fallacies used in the arguments against us at the time were as follows:
First, we were said to be “against science.” Our adversaries invoked consensus among economists in favor of these methods, a serious fallacy. Had science operated solely by consensus, we would still be stuck in the Middle Ages. According to scientific practice, scientific consensus is used in telling us what theory is wrong; it cannot determine what is right. Nor can it apply to risk management, which requires much greater scrutiny.
Second, we faced the argument that “more technology is invariably better,” a corruption of the notion of progress. In fact, only a small minority of technologies end up sticking; most fail because of some flaw identified over time.
Third, we were told that had ideas such as ours prevailed in the past, they would have hindered risk-taking. Yet, the first rule of risk-taking is to not cross the street blindfolded.
Fourth, toxic financial exposures were deemed to be “safe,” according to primitive risk models. But Fannie Mae went bust exactly because of overconfidence in its bad models (and, incidentally, after its bailout, appears to use the same risk models).
Fifth, the system kept relying on “predictions,” not noticing that the past track record of predictions by central bankers and economists can be used to make astrologists look good. Yet the entire economic system rested on these flimsy predictions — while we were advocating a system that had isolated parts to withstand prediction errors.
We were repeatedly told that there was evidence that the system was stable, that we were in “the Great Moderation,” a common practice that mistakes absence of evidence for evidence of absence. For the financial system to be viable, the solution is for it to resemble the restaurant business: decentralized, with mistakes that stay local and that cannot bring down the entire apparatus.
As we said, the financial system nearly collapsed, but it was only money. We now find ourselves facing nearly the same five fallacies for our caution against the growth in popularity of G.M.O.s.
First, there has been a tendency to label anyone who dislikes G.M.O.s as anti-science — and put them in the anti-antibiotics, antivaccine, even Luddite category. There is, of course, nothing scientific about the comparison. Nor is the scholastic invocation of a “consensus” a valid scientific argument.
Interestingly, there are similarities between arguments that are pro-G.M.O. and snake oil, the latter having relied on a cosmetic definition of science. The charge of “therapeutic nihilism” was leveled at people who contested snake oil medicine at the turn of the 20th century. (At that time, anything with the appearance of sophistication was considered “progress.”)
Second, we are told that a modified tomato is not different from a naturally occurring tomato. That is wrong: The statistical mechanism by which a tomato was built by nature is bottom-up, by tinkering in small steps (as with the restaurant business, distinct from contagion-prone banks). In nature, errors stay confined and, critically, isolated.
Third, the technological salvation argument we faced in finance is also present with G.M.O.s, which are intended to “save children by providing them with vitamin-enriched rice.” The argument’s flaw is obvious: In a complex system, we do not know the causal chain, and it is better to solve a problem by the simplest method, and one that is unlikely to cause a bigger problem.
Fourth, by leading to monoculture — which is the same in finance, where all risks became systemic — G.M.O.s threaten more than they can potentially help. Ireland’s population was decimated by the effect of monoculture during the potato famine. Just consider that the same can happen at a planetary scale.
Fifth, and what is most worrisome, is that the risk of G.M.O.s are more severe than those of finance. They can lead to complex chains of unpredictable changes in the ecosystem, while the methods of risk management with G.M.O.s — unlike finance, where some effort was made — are not even primitive.
The G.M.O. experiment, carried out in real time and with our entire food and ecological system as its laboratory, is perhaps the greatest case of human hubris ever. It creates yet another systemic, “too big too fail” enterprise — but one for which no bailouts will be possible when it fails.
Authors: Mark Spitznagel is the founder and chief investment officer of Universa Investments and author of “The Dao of Capital: Austrian Investing in a Distorted World.” Nassim Nicholas Taleb is distinguished scientific adviser at Universa Investments, author of “The Black Swan” and distinguished professor of risk engineering at New York University School of Engineering.
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