Outliers – Notes

Last evening I borrowed Malcolm Gladwell’s Outliers from the library. Finished off reading it in one sitting this morning. I had been disappointed with his earlier book (The Tipping Point) and have been describing it as a blog post that has been written in 200 pages.

Outliers, on the other hand, is significantly better. For starters, there is a really nice narrative style which goes the book going. Having read the book, I still haven’t understood the central idea of it, but there are enough interesting sub-plots and side-fundaes that it’s worth reading. Some notes.

  • The second chapter of the book hints that you need to spend a considerable amount of time fighting it out at something before you become a stud in that. Gladwell claims there are no “natural studs” at anything, and people become studs at something only after reasonable effort. I think the key is on taking that step up to studness after you have put enough fight, and some people (pure fighters) don’t seeem to do that
  • There is tremendous non-linearity in the world, and this is a point that Nassim Taleb had also made in Fooled by Randomness. Basically, there are some discrete steps. For example, if I had applied the brakes even one second earlier, I could’ve prevented the car crash I was involved in this April. One extra mark here or there can change a candidate’s JEE rank by 500 places, and totally change his life. Etc.
  • Gladwell talks about “honor cultures” – where people tend to take offence easily. He claims that this kind of culture is more prevalent in pastoral communities where people need to be more aggressive and possessive. When I read about “honor cultures”, I was reminded of Rajasthan, and the Rajputs there going to war on one another on trivial “honour issues”, and Prithviraj Chauhan using “honour” as the excuse for supposedly pardoning Mohd Ghori in the first battle of Tarain in 1190. Was Rajasthan a traditionally pastoral society in those days?
  • The Power Distance Index that he talks about makes sense, but unfortunately India is not mentioned in the studies that he quotes. I would expect India to have a fairly high power distance index, but I’d also be interested in seeing if India’s PDI varies regionally – I would expect it to be higher in the north than in the south
  • A while back, I had written one reason as to why there doesn’t exist a strong breakfast culture in North India. Gladwell’s chapter on rice cultivation inspires an alternate reasoning. He claims that rice farming is much harder than wheat farming, and the former tends to take longer hours, and occupies a larger proportion of the year. Maybe due to the longer hours, south indians felt the need for three meals a day, while two were sufficient in the north. Also, rice digests quicker than wheat, so eating at more frequent intervals is warranted.
  • The epilogue, in which Gladwell talks about his mother’s family, gives an indcation about the “race system” in Jamaica. Compared to our caste system, which is discrete, Jamaican discrimination is on a continuous scale which has several shades of brown between black and white. Also, this continuous scale means that a child lies somewhere on the colour line between his father and his mother, and his standing in society is determined by his own colour. On the other hand, in the Indian caste system, rules dictate that the child belongs to either the father’s or the mother’s caste. Interesting to see how much of a difference this has made in general economic development.

I know a lot of this might not make sense to you if you haven’t read the book. I have just noted some headline points here. If you need more fundaes, leave a comment with your question and I’ll write about it.

And I would definitely recommend you to read the book. Nice quick read it is.

Taleb’s Recipe

No, unlike the previous post, this has nothing to do about food. It is about Nassim Nicholas Taleb’s recent op-ed in the Financial Times where he gives his “recipe” for saving the global financial system. Two of my favourite bloggers Arnold Kling and Felix Salmon have responded to it, but I didn’t like either so I thought I should post my response as well.

I borrowed The Black Swan from Aadisht sometime in late 2007. I tried starting to read it several times but never got past Taleb’s childhood stories of his hometown Amioun. I took a couple of months to get past the first 50 pages, I think. And then it was easy reading. I loved the sub-plots. I broadly bought into the main plot. By the time I had finished reading the book, I wanted to ask Taleb to accept me as his sisya. I  bought and read Fooled By Randomness, and liked that too. And then decided to read The Black Swan yet again. It was only a couple of months back that I finally returned the latter book to Aadisht (in the meantime he had bought two other copies of it, and read it).

Till very recently, I would read up any article of Taleb’s that I could find. I wrote to him a couple of times with my CP, and he even responded. I infact wrote to him about “Positive Black Swans and the World of Romance” and he responded with a “Thanks Karthik, Ciao, Nassim”. I had become a worshipper.

However, now I think he’s kinda lost it. I don’t think he intends to write another book and so he has nicely settled down to peddling his last theory (black swan). In response to a recent post on studs and fighters, Kunal had said, “He that is good with a hammer tends to think everything is a nail.”. The same disease affects Taleb I think, as he goes around the world trying to force-fit his black swan model to every conceivable problem.

And then I have a problem with people like Taleb and Satyajit Das, and actually with all those ibankers who are asking for bailouts. These guys made full use of capitalism, and made heaps of money, when things were good. And now that their money has been made, they call for government intervention, and socialism. Taleb and Das are different from the other wall streeters because they are calling for full-scale government intervention, unless the other bankers who are only calling for a bailout!

Now that the elaborate intro is done, let us get to the point. Taleb’s essay consists of ten points. The headings are italicized and there’s a detailed explanation. For purpose of brevity I’m putting only the headings here, and writing my comments after each of them. Go to the FT site to read the full points that Taleb has written.

1. What is fragile should break early while it is still small.

I agree with this. And my take is that competitors need to keep each other in check. For example, if this round of bailouts were not to happen and the biggies were let to fall, no one would grow so big in the future, and even if they did, they would make sure that they were insulated enough from one another. This round of bailouts will make the next crisis (whenever it will happen) worse.

2. No socialisation of losses and privatisation of gains.

Agree with this.

3. People who were driving a school bus blindfolded (and crashed it) should never be given a new bus.

Taleb has clearly not learnt his own lessons (fooled by randomness). I might have crashed the school bus once, but it may not be my mistake. the one data point of one bus crash should not be used to decide my career as a driver. One should look at how the driver drove before the crash to determine whether he gets a second chance. Blanket banning of people involved will not help.

4. Do not let someone making an “incentive” bonus manage a nuclear plant – or your financial risks.

It’s all about structuring. Taleb was a trader and he forgets about structuring. As long as incentives of the employee and the employer are reasonably well aligned, there is no problem with an incentive bonus. The problem in ibanking was that too much emphasis was placed on short-term performance of employees. It’s tragic that the fall of the financial system has brought to an end what was an excellent compensation system (in principle, mind you; not the way it was practised) – where each person was paid fairly based on his/her contribution.

5. Counter-balance complexity with simplicity.

I think the simplest way would be to leave things to the market. Government intervention would lead to a new form of complexity, and in the overall scheme of things increase complexity rather than decrease it. None of the stuff that Taleb has mentioned is easily implementable.

6. Do not give children sticks of dynamite, even if they come with a warning .

Again Taleb prescribes mai-baap sarkaar. Does he realize that if governments had always had tight control over the markets, the markets wouldn’t have crashed on October 19 1987, and he wouldn’t have made any money? (Taleb has reportedly made 97% of his life’s earnings out of this one event). What is “complex derivatives”? And how can you ban it? If you ban it, it’ll go to the black market. You are better off collecting hefty security transaction tax.

7. Only Ponzi schemes should depend on confidence. Governments should never need to “restore confidence”.

I agree

8. Do not give an addict more drugs if he has withdrawal pains.

Agree once again. We need to structurally change things to get to saner leverage than what was practised 1-2 years back. Regulations should be simple and principles-based, minimizing chance for regulatory arbitrage. Remember that the purpose of creation of most “complex derivatives” in the last 25 years is regulatory arbitrage.

9. Citizens should not depend on financial assets or fallible “expert” advice for their retirement.

Bullshit. The point on markets not containing information, that is.

10. Make an omelette with the broken eggs.

None of this makes any kind of practical sense. It’s just an old man ranting. Thanks, guru (pun intended).