The Enlightened Despot

As reported by Felix Salmon, Nassim Taleb thinks not:

Nassim Nicholas Taleb is angry. Not in the YouTube clip of the same name, but rather at Nobel laureate Bob Merton, whom Taleb attacked in a paper he co-wrote with Emanuel Derman of Columbia.

In the wake of that paper appearing, Merton sent Taleb a detailed and equation-filled eight-page note, dated December 2005, taking issue with the paper. “His argument was that my argument was not compatible with portfolio theory,” says Taleb, who says that Merton assumed, in his paper, the very constructs — things like beta — which Taleb criticized; which are as meaningful for him as astrology; and which have no place in the world of financial economics.

The article is actually pretty amusing, as it details the thoroughly childish interaction of these two heavyweight economists. But, as Salmon points out, the substantive disagreement between the two is a pretty big deal:

For the record, although I’m sympathetic to Taleb’s side of the debate, I have no reason to believe that Merton is waging some kind of deliberate proxy campaign against him.

The interesting thing for me about this particular academic feud, however, is that that for all its viciousness, the stakes really aren’t low at all. Taleb is working towards nothing less than the outright dismantling of Black-Scholes, portfolio theory, and the enormous financial edifices which have been built upon them; if he’s successful, essentially all the quants on Wall Street would be out of a job. Which I think is probably reason enough for many people to defend Merton right there: the man himself doesn’t need to direct anything at all.

Tags: economics, things beyond my ken

This entry was posted on Sunday, January 4th, 2009 at 12:10 am and is filed under posts by Akhbar. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.