401(k)s Gutted By Risk Management Gone Wild, 'Black Swan' Guy Says - InformationWeek

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11/10/2008
06:39 PM
Alexander Wolfe
Alexander Wolfe
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401(k)s Gutted By Risk Management Gone Wild, 'Black Swan' Guy Says

The reason your 401(k)s are underwater -- melted like an ice cream cone on the sidewalk, is how the pseudonymous Stanley Bing puts it -- is because the financial analysts who were managing your nut have been trained all wrong. All those business schools have been pushing out MBAs trained erroneously (insanely!) in risk analysis, which paradoxically is really risky. Oh, now you tell us! Well, that's what Nassim

The reason your 401(k)s are underwater -- melted like an ice cream cone on the sidewalk, is how the pseudonymous Stanley Bing puts it -- is because the financial analysts who were managing your nut have been trained all wrong. All those business schools have been pushing out MBAs trained erroneously (insanely!) in risk analysis, which paradoxically is really risky. Oh, now you tell us! Well, that's what Nassim Nicholas Taleb, author of "The Black Swan," is indeed saying. Tell it, Nassim.I was enthralled by The Black Swan, which immediately appealed to the contrarian in me, when it appeared last year. Subtitled "The Impact of the Highly Improbable," its thesis is that everything the experts think they know about forecasting is wrong, and if you think you can predict the future performance of the stock market from a study of past trends, you're going to lose lots of money. The still-ongoing stock market crash is the type of unpredictable, earthshaking event -- call it a "black swan" -- which is precisely what the book is talking about. So, too, are the perilous states of GM, Ford, and Chrysler.

Which brings us to today's subject; namely, a sad financial state of affairs likely weighing on your mind even more than the generally difficult state of the economy. I'm speaking, of course, about your 401(k). I was driving to work minding my own business last Friday when what did I happen upon on the radio but WBBR, the Bloomberg radio station in New York. (In recent days, I've begun bypassing Imus, Boomer, and Mike & Mike in search of a little stock-market learnin'. )

Anyway, so Taleb was being interviewed on Bloomberg. His subject was 401(k)s, and his thesis was that business schools have been teaching bogus risk-management models, which have caused the then-students, now financial managers, to totally screw up your retirement investments.

"You have a business school establishment that's completely disconnected from what's going on" because it depends too greatly on equations, Taleb said, according to a press release about the show, posted here. "We should learn to abandon these bogus matters, and instead of using a computer we should look at the world with the naked eye."

(Or, you could simply put your money into T-bills. Taleb didn't actually say that part; I am, on the advice of a couple of rich guys I know.)

Taleb goes on to say that portfolio theory is hogwash, and adds some other criticisms. So I guess you could pretty much take this opposites-on-steriods stuff full circle, to the point where it becomes meaningless. Still, it's refreshing when you first encounter it, and his book is wonderful food for thought.

He's also a very interesting talk-show guest, and I encourage you to listen to the Bloomberg podcast clip.

When you're done with that, read my original post, The Black Swan, Or You Can't Predict The Next Google.

What moths are flying out of your wallet? Leave a comment below, or shoot me an e-mail directly at [email protected].

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