Taleb´s function is to puke regularly on Wall Street. Maybe he puts his basic thesis best in a a paper titled “Bleed or Blow up”. If your portfolio is long options, it will bleed slowly because of the time decay, but would make lots of money once in a while. If it is short options, it will make steady money with little volatility for a long time, and then blow up suddenly one day.
Most hedge funds are “Blow up” type, the best example being Victor Neiderhoffer, whose demise was admirably chronicled by John Cassidy. Taleb did start a “Bleed” type hedge fund, called “Empirica Capital” whose rise was admirably chronicled by Malcolm Gladwell. Empirica Capital, ahem, bled to death in the few years after that article was written. So Taleb had the time to take a sabbatical and write his second book, Black Swan.
Taleb probably realized that taking his ideas to the logical extreme (if selling lots of options blows up your portfolio, buying lots of options should make a lot of money), doesn’t work all the time. So, he tried to re-invent his bleeding (bloody?) hedge fund as Guerilla warfare. At certain times, it might pay being long a lot of options for a short while. Trouble is no one knows what these times are. His trader, Mark Spitznagel, was about to start a new hedge fund in July 2007 to go long options. He was just a bit too late. All the money had already been made by Paulson Capital and Goldman Sachs.
So, Taleb is not a great money manager himself. But he is very good for saying the Wall Street is rotten. Just like Maanga might not be a great blog in itself (Though I would think the presence of Gasquet fan alone puts it among the giants), but a fantastic one for puking on rotten blogs.
A writer´s thinking evolves as he lives. “Fooled by randomness” definitely argued for a hedge fund like “Empirica Capital”. After the failure of his hedge fund, Taleb realized that there were some black swans that could be tamed when he read Benoit Mandelbrot´s “(Mis) behavior of the markets” and added those to his list as grey Swans. He also learned a little more about human behavior, about why investors loved “Blow up” type hedge funds as opposed to “Bleed” type hedge funds by studying more prospect theory developed by Daniel Kahnemann and Amos Tversky. A recent essay by him in Wilmott magazine says most of what Taleb wants to say without the stories.
So Black Swan = Fooled by randomness + Prospect Theory + Benoit Mandelbrot
There are better attacks on Wall Street, but those have gone unnoticed because the papers have been more technical or because Wall Street, that consensus thinking, self-reproducing force like mommy bloggers, doesn’t care. The best in my opinion is a paper by Richard Roll, innocently titled “A mean variance analysis of tracking error” whose one line summary calls into question all of long only asset management as currently practiced. For Long/short or hedge fund strategies, the equivalent is a paper by Andrew Weisman called “Dangerous Attractions”. It might be worth paying the $45 that you paid for Taleb´s book to read his paper.