Investors Should Sue Central Bank of Sweden, Taleb Says

One of the things that makes Nassim Nicholas Taleb one of the most interesting author and thinker of today is his ability to come up with totally different views on the economy  – and life in general. Now, author of the bestseller “The Black Swan” says investors who lost money in the financial crisis should sue the Swedish Central Bank for awarding the Nobel Prize to economists whose theories have brought down the global economy.

“If no one else sues them, I will.”

Nassim Nicolas Taleb

Nassim Nicolas Taleb

The Swedish Central Bank’s Nobel Prize in Economic Sciences was yesterday awarded to Peter A. Diamond (US),  Dale T. Mortensen (US)  and Christopher A. Pissarides (UK) for their “analysis of markets with search frictions”. However, the controversial professor, philosopher and author, Nassim Taleb, is not happy about the whole Nobel-Prize-of-Economics-thing that he believes give legitimacy to useless and invalid economic theories.

“I want to make the Nobel accountable,” Taleb says in an interview with Bloomberg last week.

“Citizens should sue if they lost their job or business owing to the breakdown in the financial system,” he says.

According to Taleb, has the Nobel Prize for Economics conferred legitimacy on risk models that caused investors huge losses and taxpayers billions in bailouts.

The Royal Swedish Academy of Sciences

Sweden’s central bank announced this year’s award, yesterday, October 11th.

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The “Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel” for 2010 was awarded to Peter A. Diamond, (Massachusetts Institute of Technology, Cambridge, USA), Dale T. Mortensen, (Northwestern University, Evanston, USA) and Christopher A. Pissarides, (London School of Economics and Political Science, UK) for their “analysis of markets with search frictions”.

“Why are so many people unemployed at the same time that there are a large number of job openings? How can economic policy affect unemployment? This year’s Laureates have developed a theory which can be used to answer these questions. This theory is also applicable to markets other than the labor market,” The Royal Swedish Academy of Sciences writes in the press release.

(More on the Swedish 2010 Prize in Economic Science here).

The Nobel prizes in physics, chemistry, medicine, peace and literature were established in the will of Alfred Nobel, the Swedish inventor of dynamite who died in 1896.

The first awards were handed out 1901.

The Swedish Central Bank founded the economics award in 1968 in memory of Nobel.

Previous winners of that prize include Milton Friedman, Amartya Sen, Paul Krugman, Robert Merton and Myron Scholes, the last two for inventing the option pricing formula, the Black-Sholes model, still used by most derivative traders.

The former derivatives trader, Nassim Taleb, is a professor of risk engineering and advises the California-based fund, Universa Investments LP,  that bets on extreme market moves.

Giving Invalid Legitimacy

Taleb single out the Nobel award to Harry Markowitz, Merton Miller and William Sharpe in 1990 for their work on portfolio theory and asset-pricing models.

“People are using Sharpe theory that vastly underestimates the risks they’re taking and overexpose them to equities,” Taleb says.

“I’m not blaming them for coming up with the idea, but I’m blaming the Nobel Prize for giving them legitimacy, he says.

Adding: “No one would have taken Markowitz seriously without the Nobel stamp.”

“No one would have taken Markowitz seriously without the Nobel stamp.”

William Sharpe

Markowitz, a professor of finance at the Rady School of Management at the University of California, San Diego, didn’t return a phone call seeking comment.

Miller, who was a professor at the University of Chicago, died in 2000 at the age of 77.

“People used the theory and assigned numerical forecasts to the algebra,” says professor of finance William Sharpe at the Graduate School of Business at Stanford University,over the phone.

“But I’m not going to take the blame for the numbers they put in,” he says.

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“If no one else sues them, I will”

"The Brown Horse: The Impact of The Highly Impossible"

In his 2007 bestseller “The Black Swan: The Impact of the Highly Improbable,” Taleb described how unforeseen events can roil markets.

He warned then – and he warns now – that bankers are relying too much on the probability models, and disregarding the potential for unexpected catastrophes.

“If no one else sues them, I will,” Taleb says, but declined to say where or on what basis a lawsuit could be brought.

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(h/t: The Collector)

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Related by the Econotwist’s:

China To Invest In Nassim Taleb’s Bear Fund

Global Economy On Fast Track To Disaster

Nassim Taleb’s Favorite Books

New Testimony From Taleb

Mother Earth On Crack

China: “Mother of All Black Swans”

2010 Analysis: “11 Black Swans”

2010 Analysis: The Road to Disaster

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