Richard Smith reviews a book by one of Taleb's advocates at Yves's place. Here's a juicy morsel:

Chapter 2: modern finance theory is a crock, peddled by charlatans at business schools who have managed to seal themselves off from the usual empirical tests of a theory.

I’ll admit I don’t see what logical point there is in attacking the character of business school teachers in this manner, whether it is a correct assessment or not.

Surely "charlatan," for example, not an attack on character, but simply a statement of fact? Likewise "managed to seal themselves off from the usual empirical tests of a theory"; "salt water economists" have complained that this is exactly what "fresh water economists" (i.e., those who hail from Chicago) have done. It's hard to call bullshit without naming or at least indicating the bullshitters, right?

However the empirical criticism really does stack up. Consider GS CFO David Viniar’s notorious comments from August 2007 when the ABS meltdown got into full swing (Ch1, p12): “We were seeing things that were 25-standard-deviation moves, several days in a row”. To which the rejoinder from an empirically-minded observer simply has to be “No you weren’t, imbecile: those observations actually mean that your models are hopelessly wrong”. ...

Even if you assume (very charitably, I grimly suspect) that Viniar is not just parroting his VaR model outputs (more on that later), and is a bit more sophisticated about his distributions, he is still goofing, big time. And if Mandelbrot, and Taleb, his follower, and Triana, his follower, are right about the kind of distribution that underlies financial market price movements, there just ain’t sech a thing as a standard deviation of price movements, nor no correlation neither. Both standard deviation and correlation are defined in terms of variance. Since variance is infinite for stable distributions (other than the normal distribution), neither standard deviation nor correlation is defined for the distribution of market prices (a Levy skew alpha stable distribution, if you want the full geeky glory). On this theory, Viniar is talking about things that just don’t exist. Not encouraging behaviour in a CFO.

So here is the bleedin’ obvious: given its track record of ultra-wild underestimates of the frequency of sharp price moves, the assumption of normal distributions in stock price changes must be among the most lavishly disconfirmed scientific hypotheses of all time. No wonder, then, that Taleb and Triana are somewhat ratty with its various obstinately blithe proponents.

FAIL. Wherever you look. Economics? FAIL, as we see. Journalism? FAIL. Banksters? FAIL. Accountability? FAIL. Transparency? FAIL. And on and on and on.

NOTE You know, I dated a model once. But, in retrospect, I'm not sure if they were evenly distributed or not...