Nassim Taleb — How Traders Make Billions in The New Age of Crisis (feat. Scott Patterson)

Tim Ferriss hosts Nassim Taleb and Scott Patterson, whose new book Chaos Kings profiles tail-risk traders like Mark Spitznagel of Universa. They explain how betting on extreme 'black swan' events works as a risk-management strategy of buying far-out-of-the-money puts, and why competitors who tried to cheapen the trade went bust. The conversation extends Taleb's precautionary principle from markets to pandemics, GMOs, nuclear power, and climate change, distinguishing 'fat-tailed' risks (pandemics, wars) from thin-tailed ones. They also cover skin in the game, the Bob Rubin trade, convexity, and where systemic risk now sits in the financial system.

• Patterson's 2007 Wall Street Journal story broke the news that Taleb's hedge fund Empirica had shut down and that Mark Spitznagel was launching a new fund, Universa, just before the 2007-2008 crisis.
  00:01:30
• In March-April 2020 Universa posted a three-month return of more than 4,000% on its positions during the COVID crash.
  00:19:30
• A competitor went bust by 'mitigating' the strategy, buying puts on the S&P 500 while selling puts on the German index for extra cash, then the markets diverged and they were wiped out.
  00:16:17
• Taleb argues banks are highly profitable except for the tail event that periodically destroys them, losing more money in 1982 and 2008 than the sector ever made in its history.
  00:26:46
• The precautionary principle should be applied to fat-tailed, non-insurable, contagious risks; Taleb ranks pandemics number one and wars a close second.
  01:00:20
• Spitznagel described a July 2008 S&P put bought for about $2 and sold for around $60 after the crash, the kind of convex return unavailable in other trading.
  01:22:52
• Taleb says Monsanto ran an intimidation campaign, sending the university hundreds of near-identical letters signed under different names to smear him over his GMO criticism.
  01:09:23
• Since 2008, risk has migrated from banks to hedge funds; Taleb names startups, VCs and private equity as the most fragile part of the system after 15 years of near-zero interest rates.
  01:36:58

• Taleb and Ferriss first met around 2001-2002 at a restaurant on Madison Avenue, predating any other podcast guest, and ate every egg in the store.
  00:05:46
• Taleb had warned about pandemics from financial-style connectivity since 2007, even discussing it in The Black Swan, and his group expected the next big one to be Ebola.
  00:21:35
• Taleb's rule for crises: 'if you must panic, panic early'; the Ottomans and Austrians controlled plagues with border quarantine stations called lazarettos.
  00:24:11
• Taleb keeps an undated resignation letter and recommends others write one, so you feel free and uncontrolled in your job.
  00:29:56
• Taleb says George Soros 'missed his career' wanting to be a philosopher; Warren Buffett also told Patterson he always wanted to write a book.
  00:51:57
• Taleb's fat-tail test: if you return from Mars to hear a billion people died, the cause is Ebola, not car accidents; one random death is more likely a car accident.
  00:56:43
• Taleb cites that Hiroshima cancers and Kuru disease, with median onset of years, were visible in tail cases within three to four months of exposure.
  01:05:09
• Germany shut its nuclear program after Fukushima (which killed no one via radiation) and built coal plants instead; Chernobyl radiation was lower than parts of Utah.
  01:35:23
• Taleb says 99 out of 100 option players are sellers because they crave steady income; Spitznagel succeeds because he is uniquely indifferent to steady income.
  01:45:50
• Taleb says Antifragile is his most misused book because people read it as 'what doesn't kill you makes you stronger,' missing that first you must eliminate fragilities.
  01:50:32

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