Well, you have to ask yourself, has Taleb's screaming actually made ANY difference? Here's some examples of attempts at constructive analysis: 1. Behavioral finance research is all about problems with efficient mkts. Kahneman and Tversky's prospect theory, to name only the seminal contributors to the field. 1. Extreme value theory as applied to finance (GEV and extreme VaR). 1. Something just starting now, afaik, is research into modeling of the ecology and robustness of complex financial agent-based networks, e.g. this: http://www.nature.com/nature/journal/v451/n7181/full/451893a.html All these are actual attempts, past, present and future, to constructively address the flaws in our current understanding of finance. People doing this don't spend all their time screaming on TV just how sh1t stupid everything and everyone is. They have just been quietly going about their work. In my view, they deserve a lot more respect than NNT could ever hope to garner.
True, which is why I said I don't mind when Taleb goes on one of his rants about the people who have, intentionally or accidentally, misused the models. My problem is when he raves about the models themselves, without actually offering any useful alternatives.
Random Capital has answered your question, but just in case you need it, Taleb takes issue with the way the word 'Risk' is (ab)used in the equation you cited. That's the relevance for what we saw in 2008. By the way, I didn't think Taleb's book was as bad as some think, although it was definitely stretched out and Taleb himself is not exactly loathe to encourage the cult of personality. To his credit, he admits that he's a giant egotist.
Okay, I won't pretend that I'm not out of my depth, because I am. I studied CAPM while doing my MBA in the early '80s. At the time, I figured that if this is what it took to operate in the markets, then it was not for me. Although I was able to complete the courses well enough with good grades, it never connected with me. And so I went into corporate banking for the next several years instead. That is why the mere mention of CAPM gets me riled. As for the other stuff you refer to that I know nothing about, at the end of the day, does it not all come down to predicting human behavior in the face of uncertainty? And, if so, then what kind of robustness can you really even hope for?
Yes, but whereas EVT at least attempts to be rigorous and systematic, NNT just wrings his hands, dramatically and epistemologically (a word he seems to be particularly fond of). I have personally not seen NNT offer anything productive. Most of what he says (incl the infamous 10 principles: http://www.fooledbyrandomness.com/tenprinciples.pdf) is either hand-waving or "thou shalt not" commandments. We all know the proscriptive bits, it's the prescriptive that's difficult.
I have no problem with CAPM proponents or opponents, like yourself. People in behavioral finance (my personal favorite field) have been poking holes in CAPM and trying to come up with its alternatives for years. I have a problem with Taleb because, compared to the 'unsung heroes' I mentioned, he offers so very little to the debate. Yes, you're right, it's all about trying to understand human behavior. I don't know what sort of robustness I am hoping for, but I'll let you know when/if I see it. What are you suggesting? That study of human behavior is futile, because it's inherently beyond our understanding? Maybe it is, but, then again, history is full of examples where phenomena that were thought beyond understanding suddenly got explained and understood. That's scientific progress and I am a fan.
Too many assumptions. The world simply is not constructed the way these guys would like. The below letter appeared in today's FT in re an article written by folks following the assumptions in CAPM and Black Scholes and all that, and addresses this: http://www.ft.com/cms/s/0/2b1f32fa-8d20-11de-a540-00144feabdc0.html