Nassim Taleb is back in the news! This time, he is telling investment professionals not to go into investing in his new paper Why It is No Longer a Good Idea To Be In The Investment Industry.
For those unfamiliar with Taleb, he wrote Fooled by Randomness
and The Black Swan
, books primarily about why he is so smart and everyone else is pretty stupid. In addition to this, the former book was about how causality is generally overestimated and the latter book is about how the world is much more strange than we think. Indirectly, they are also about how the people who Taleb worked with or knows that ended up being far more successful than him did so only because they were luckier. While this is doubtlessly true in some cases, he likes to exaggerate the case and his latest paper is no exception. He even developed a name for these people.
The “spurious tail” is therefore the number of persons who rise to the top for no reasons other than mere luck, with subsequent rationalizations, analyses, explanations, and attributions. The performance in the “spurious tail” is only a matter of number of participants, the base population of those who tried.
With fat tails, he sees the spurious tail as far too hard to out compete. There is undoubtedly some luck when it comes to investment returns, as investors are making decisions while taking into account varying states of the world, only one of which will turn out to be true. But this analysis assumes that the only thing that matters are investment returns and ignores the rest of the factors that those in charge of allocating capital use when deciding to trust their money to an investment professional. Returns do help raise funds, but there are many other variables that matter, especially now when funds have to be registered with the SEC and people are worried about losing their money to another Madoff that the population of investors making spurious returns and raising capital is not rising that much relative to the assets deployed to investment professionals.
So what is Taleb's final advice?
To conclude, if you are starting a career, move away from investment management and performance related lotteries as you will be competing with a swelling future spurious tail. Pick a less commoditized business or a niche where there is a small number of direct competitors. Or, if you stay in trading, become a market-maker.
The "find yourself a niche with fewer competitors" idea is always good advice, but as for the other... maybe Knight Capital