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One day in 1996, a Wall Streettrader named Nassim Nicholas

Taleb went to see Victor Niederhoffer.Victor Niederhoffer was one of themost successful money managers in thecountry. He lived in and worked out of athirteen-acre compound in FairfieldCounty, Connecticut, and when Talebdrove up that day from his home inLarchmont he had to give his name atthe gate and then make his way down along, curving driveway. Niederhofferhad a squash court and a tennis courtand a swimming pool and a colossal,faux-alpine mansion in which virtuallyevery square inch of space was coveredwith American folk art. In those days,he played tennis regularly with the bil-lionaire financier George Soros. He hadjust written a best-selling book, “TheEducation of a Speculator,” which wasdedicated to his father, Artie Nieder-hoffer, a police officer from New YorkCity. He had a huge and eclectic libraryand a seemingly insatiable desire forknowledge. When Niederhoffer wentto Harvard as an undergraduate, heshowed up for the first squash practiceand announced that he would some-day be the best in that sport; and, sureenough, he soon beat the legendarySharif Khan to win the North Ameri-can Open Championship. That was thekind of man Niederhoffer was. He hadheard of Taleb’s growing reputation inthe esoteric field of options trading, andsummoned him to Connecticut. Talebwas in awe.

“He didn’t talk much, so I observedhim,”Taleb recalls. “I spent seven hourswatching him trade. Everyone else inhis office was in his twenties, and hewas in his fifties, and he had the mostenergy of all. Then, after the marketsclosed, he went out to hit a thousandbackhands on the tennis court.” Taleb is Greek-Orthodox Lebanese and hisfirst language is French, and in hispronunciation the name Niederhoffer

comes out as the slightly more exoticNiederhoffer. “Here was a guy living in a mansion with thousands of books,and that was my dream as a child,”Talebwent on. “He was part chevalier, partscholar. My respect for him was intense.”There was just one problem, however,and it is the key to understanding thestrange path that Nassim Taleb has cho-sen, and the position he now holds asWall Street’s principal dissident. De-spite his envy and admiration, he didnot want to be Victor Niederhoffer.For when he looked around him, at the books and the tennis court and thefolk art on the walls, and when he con-templated the countless millions thatNiederhoffer had made over the years,he could not escape the thought that itmight all have been the result of sheer,dumb luck.

Taleb knew how heretical thatthought was. Wall Street was dedicatedto the principle that skill and insightmattered in investing just as they did insurgery and golf and flying fighter jets.Those who had the foresight to graspthe role that software would play in themodern world bought Microsoft in1986, and made a fortune. Those whounderstood the psychology of invest-ment bubbles sold their tech stocks atthe end of 1999 and escaped the Nas-daq crash.Warren Buffett was known asthe Sage of Omaha because it seemedincontrovertible that if you started withnothing and ended up with billions thenyou had to be smarter than everyoneelse: Buffett was successful for a reason.Yet how could you know, Taleb won-dered, whether that reason wasn’t sim-ply a rationalization invented after thefact? George Soros used to say that hefollowed something called “the theoryof reflexivity.” But then, later, he wrotethat in most situations his theory “is sofeeble that it can be safely ignored.” Anold trading partner of Taleb’s, a mannamed Jean-Manuel Rozan, once spent

an entire afternoon arguing about thestock market with Soros. Soros was ve-hemently bearish, and he had an elab-orate theory to explain why—whichturned out to be entirely wrong. Thestock market boomed. Two years later,Rozan ran into Soros at a tennis tour-nament.“Do you remember our conver-sation?” Rozan asked. “I recall it verywell,” Soros replied. “I changed mymind, and made an absolute fortune.”He changed his mind! The truest thingabout Soros seemed to be what his sonRobert had once said:

My father will sit down and give you the-ories to explain why he does this or that. ButI remember seeing it as a kid and thinking,Jesus Christ, at least half of this is bullshit. Imean, you know the reason he changes hisposition on the market or whatever is be-cause his back starts killing him. It has noth-ing to do with reason. He literally goes into aspasm, and it’s this early warning sign.

For Taleb, then, the question whysomeone was a success in the finan-cial marketplace was vexing.Taleb coulddo the arithmetic in his head. Supposethat there were ten thousand invest-ment managers out there—which is not an outlandish number—and thatevery year, entirely by chance, half ofthem made money and half of themlost money. And suppose that every year the losers were tossed out, and the game replayed with those who re-mained. At the end of five years, therewould be three hundred and thirteenpeople who had made money in everyone of those years, and after ten yearsthere would be nine people who hadmade money every single year in arow—all out of pure luck. Niederhoffer,like Buffett and Soros, was a brilliantman. He had a Ph.D. in economicsfrom the University of Chicago. He hadpioneered the idea that through properstatistical analysis of patterns in themarket an investor could identify prof-itable anomalies. But who was to say IS

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162 THE NEW YORKER, APRIL 22 & 29, 2002

DEPT. OF FINANCE

BLOWING UP

How Nassim Taleb turned the inevitability of disaster into an investment strategy.

BY MALCOLM GLADWELL

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For Taleb, buying a stock is a gamble that the future will be an improvement on the past. And who knows if that will be true?

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that he wasn’t one of those lucky nine?And who was to say that in the eleventhyear Niederhoffer wouldn’t be one ofthe unlucky ones, who suddenly lost itall—who suddenly, as they say on WallStreet, “blew up”?

Taleb remembered his childhood inLebanon and watching his countryturn, as he put it, from “paradise to hell”in six months. His family once ownedvast tracts of land in northern Leba-non. All that was gone. He rememberedhis grandfather—the former DeputyPrime Minister of Lebanon and the sonof a Deputy Prime Minister of Leba-non and a man of great personal dig-nity—living out his days in a dowdyapartment in Athens. That was theproblem with a world in which therewas so much uncertainty about whythings ended up the way they did: younever knew whether one day your luckwould turn and it would all be washedaway.

So here is what Taleb took fromNiederhoffer. He saw that Niederhof-fer was a serious athlete, and he de-cided that he would be, too. He wouldbicycle to work and exercise in the gym. Niederhoffer was a staunch em-piricist, who had turned to Taleb thatday in Connecticut and said to himsternly, “Everything that can be testedmust be tested ”—and so when Talebstarted his own hedge fund, a few yearslater, he called it Empirica. But that is where he stopped. Nassim Taleb de-cided that he could not pursue an in-vestment strategy that had any chanceof blowing up.

Nassim Taleb is a tall, muscular manin his early forties, with a salt-and-

pepper beard. His eyebrows are heavyand his nose is long. His skin has theolive hue of the Levant. He is a man of moods, and when his world turnsdark his eyebrows come together andhis eyes narrow and it is as if he weregiving off an electrical charge. Some of his friends say that he looks likeSalman Rushdie, although at his officehis staff have pinned to the bulletinboard a photograph of a mullah theyswear is Taleb’s long-lost twin, whileTaleb himself maintains, wholly im-plausibly, that he resembles Sean Con-nery. He lives in a four-bedroom Tudorwith twenty-six Byzantine icons, nine-

teen Roman heads, and four thousandbooks, and he rises at dawn each day to spend an hour writing. He has aPh.D. from the University of Paris-Dauphine and is the author of twobooks, the first a highly regarded tech-nical work on derivatives, and the sec-ond a treatise entitled “Fooled by Ran-domness,” which was published lastyear and is to conventional Wall Streetwisdom approximately what MartinLuther’s ninety-five theses were to theCatholic Church. Some afternoons, hedrives into the city and attends a philos-ophy lecture at City University. In thefall, he teaches a course in mathematicalfinance at New York University, afterwhich he can often be found at the barat the Odeon restaurant, in Tribeca,holding forth, say, on the finer points of

stochastic volatility or the Greek poet C. P. Cavafy.

Taleb runs Empirica Capital out ofan anonymous concrete office park inthe woods on the outskirts of Green-wich, Connecticut. His offices consist,principally, of a trading floor about thesize of a Manhattan studio apartment.Taleb sits in one corner, in front of a laptop, surrounded by the rest of histeam—Mark Spitznagel, the chieftrader, another trader named DannyTosto, a programmer named WinnMartin, and a graduate student namedPallop Angsupun. Mark Spitznagel isperhaps thirty. Winn, Danny, and Pal-lop look as if they belong in high school.The room has an overstuffed bookshelfin one corner, and a television mutedand tuned to CNBC.There are two an-cient Greco-Syrian heads, one next toTaleb’s computer and the other, some-what bafflingly, on the floor, next to thedoor, as if it were being set out for thetrash. There is almost nothing on thewalls, except a slightly battered posterfor an exhibition of Greek artifacts, thesnapshot of the mullah, and a smallpen-and-ink drawing of the patronsaint of Empirica Capital, the philoso-pher Karl Popper.

164 THE NEW YORKER, APRIL 22 & 29, 2002

THE GRAND CONVERSATION

She. My people came from Korelitz,where they grew yellow cucumbers and studied the Talmud.He. Mine pored over the mud of mangold- and potato-pits or flicked through kale plants from Comber as bibliomancers of old went a-flicking through deckle-mold.

She. Mine would lie low in the shtetl when they heard the distant thunder stolen by the Cossacks.He. It was potato sacks lumped together on a settle mine found themselves lying under,the Peep O’Day Boys from Loughgall making Defenders of us all.

She. Mine once controlled the sugar trade from the islets of Langerhans and were granted the deed to Charlottesville. He. Indeed?

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On a recent spring morning, thestaff of Empirica were concerned withsolving a thorny problem, having to dowith the relation between the squareroot of n—where n is a given numberof random sets of observations—and aspeculator’s confidence in his estimates.Taleb was up at a whiteboard by thedoor, his marker squeaking furiously ashe scribbled possible solutions. Spitz-nagel and Pallop looked on intently.Spitznagel is a blond Midwesterner anddoes yoga; in contrast to Taleb, he ex-udes a certain laconic levelheadedness.In a bar,Taleb would pick a fight. Markwould break it up. Pallop is of Thai ex-traction and is doing a Ph.D. in finan-cial engineering at Princeton. He haslongish black hair, and a slightly quizzi-cal air. “Pallop is very lazy,” Taleb willremark, to no one in particular, severaltimes over the course of the day, al-though this is said with such affectionthat it suggests that “laziness,” in theTalebian nomenclature, is a synonymfor genius. Pallop’s computer was un-touched and he often turned his chairaround, so that he faced away from hisdesk. He was reading a book by thecognitive psychologists Amos Tverskyand Daniel Kahneman, whose argu-

ments, he said a bit disappointedly,were “not really quantifiable.”The threeargued about the solution. It appearedthat Taleb might be wrong, but beforethe matter could be resolved the mar-kets opened. Taleb returned to his deskand began to bicker with Mark aboutwhat exactly would be put on the com-pany sound system. Mark plays thepiano and the French horn and has ap-pointed himself the Empirica d.j. Hewanted to play Mahler, and Taleb doesnot like Mahler. “Mahler is not goodfor volatility,” Taleb complained. “Bachis good—the St. Matthew Passion!”Taleb gestured toward Spitznagel, whowas wearing a gray woollen turtleneck.“Look at him. He wants to be like vonKarajan, like someone who wants tolive in a castle. Technically superior tothe rest of us. No chitchatting! Topskier! That’s Mark!” As Mark rolled hiseyes, a man whom Taleb refers to,somewhat mysteriously, as Dr. Wuwandered in. Dr. Wu works for anotherhedge fund, down the hall, and is saidto be brilliant. He is thin and squintsthrough black-rimmed glasses. He wasasked his opinion on the square root ofn but declined to answer. “Dr. Wucomes here for intellectual kicks and to

borrow books and to talk music withMark,” Taleb explained after their visi-tor had drifted away. He added darkly,“Dr. Wu is a Mahlerian.”

Empirica follows a very particularinvestment strategy. It trades options,which is to say that it deals not in stocksand bonds but in the volatility of stocksand bonds. Imagine, for example, thatGeneral Motors stock is trading at fiftydollars, and that you are a major investoron Wall Street. An options trader comesup to you with a proposition. What if,within the next three months, he de-cides to sell you a share of G.M. atforty-five dollars? How much wouldyou charge for agreeing to buy it at that price? You would look at the his-tory of G.M. and see that in a three-month period it has rarely dropped tenper cent, and obviously the trader is onlygoing to make you buy his G.M. atforty-five dollars if the stock dropsbelow that point. So you decide you’llmake that promise—or sell that op-tion—for a relatively small fee, say,a dollar. You are betting on the highprobability that G.M. stock will stay relatively calm over the next threemonths—and if you are right you’llpocket the dollar as pure profit.The op-tions trader, on the other hand, is bet-ting on the unlikely event that G.M.stock will drop a lot, and if that happenshis profits are potentially huge. If thetrader bought a basket of options fromyou at a dollar each and G.M. drops to thirty-five dollars, he’ll buy a millionshares at thirty-five dollars and turnaround and force you to buy them atforty-five dollars, making himself sud-denly very rich and you substantiallypoorer.

That particular transaction is calledan “out-of-the-money option,”or, moretechnically, a three-month put with aforty-five strike. But an option can beconfigured in a vast number of ways.You could sell the trader a G.M. optionwith a thirty-dollar strike, or, if youwanted to bet against G.M. stock goingup, you could sell a G.M. option with asixty-dollar strike. You could sell or buyoptions on bonds, on the S. & P. index,on foreign currencies or on mortgages,or on the relationship among any num-ber of financial instruments of yourchoice; you could bet on the marketsbooming, or the markets crashing, or

THE NEW YORKER, APRIL 22 & 29, 2002 165

My people called a spade a spade and were admitted to the hanse of pike- and pickax-men, shovels leaning to their lean-to hovels.

She. Mine were trained to make a suture after the bomb and the bombast have done their very worst.He. Between fearsad and verstwe may yet construct our future as we’ve reconstructed our past and cry out, my love, each to each from his or her own quicken-queach.

She. Each from his stand of mountain ashwill cry out over valley farms spotlit with pear blossom.He.There some young Absalom picks his way through cache after cache of ammunition and small armshidden in grain wells, while his nag tugs at a rein caught on a snag.

—Paul Muldoon

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166 THE NEW YORKER, APRIL 22 & 29, 2002

I’ve driven across three deserts frommy home in El Paso, where there’s no

work, to Long Beach, where, I’m told,there’s so much. So what if I see onlytwo tower cranes in the skyline? At theunion hall, the business agent could careless that this journeyman carpenter hasarrived. But I sign the long out-of-worklist and then drive out to one of thecranes and ask.The superintendentthere gives me the old “check back intwo weeks,” which might be a kind no,but when you’re not working you haveto keep positive. You tell the man thankyou very much, and you shake his big,crusty hand firmly.

The next two weeks I sleep oncouches, imposing on friends andacquaintances.The super in Long Beachtells me twice more to check back in a couple of weeks. Keeping positive, Iscan the want ads, comparing prices fora weekly room.

One fine morning, positive happens:a job. O.K., only the promise of a week,possibly two, and something’s not right,because the job-hungry locals won’ttake it. It’s on a university campus,not my usual high-rise work. Beyondthe perimeter “Hard Hat Only” fence,you can see women carrying books. Mycrew begins with a Wally and a Daveand a Jorge and a Roger and anapprentice, Lumpy. But people keepquitting or getting fired, and Dave saysthat Brad, our foreman, got too muchauthority too young, and that’s what’swrong with this job. What an incredibledickhead, he explains.

I hear Brad screaming around thesite and map escapes when his hard hatapproaches. On day four, I’m too slow.

“Now,why would you guys think you’dhave to do it that way?” He has takenoff his hard hat, running his fingertipsthrough his old-fashioned flattop.

I want to say, “Because you so soesmart and we so so estupid.” But don’t.It’s just me and Dave. Brad starts shaking

his head. He decides to make it me.“I told you,” he says with a disgusted

sneer.“I don’t want you talking disrespectfully

to me,” I say.“I’m not even raising my voice,” he

says, a little surprised that I can speak.“O.K., then explain to me what it is

you want.”Dave has backed away, pretending

to do something else, his ears all satellitedish.

I don’t care now, so when Lumpywalks up and asks what’s wrong, I say,“Who knows? We’re supposed to divinethese things.”

“You mumbling?” Brad asks.“No. I just said I’ll take my time now.”

I stuff my tools and bags into my box.Jobless again, I insist on being

positive: that check-back-in-two-weeksjob really is getting close to needingmen. And I find somewhere to live:“Furn room.Quiet priv.home,by P.C.H.for working male. Prefer non-drinker.$125 dep. $95 wkly.”

A Spanish guy, she calls me. She isDanish, too talkative, and uses hiplanguage like “guilt trip.” Her ex-

husband was a drunken cop, in A.A.now, a bastard still, and her son is ajunkie. She’s supposed to take fourValiums a day, but she takes only one,because she “knows her body.” She hasbursitis in the shoulder. She pulls herblouse down over the bra strap, showingme where. I pay a week plus deposit.

There are two other boarders, bothkids from Oklahoma.They sit at thekitchen table and listen to her tell BigJim stories. Big Jim is her husband. BigJim, hyperactive, at the end of an all-night shift, having enough for twofloozies. Big Jim cracking three heads in a fight. Big Jim, so mad, picking upthat refrigerator and heaving it.

She is a neat maniac. Even if you’re a grease monkey, she says, there’s noreason you can’t keep your fingernailsclean. She doesn’t like it when the bedisn’t made in the morning. She likes thepillows fluffed out just so, and the bedcover under, then over, like this. Andthe decorative pillow goes centered. Onetime, I forgot to wipe the bathroom sinkdry after I brushed my teeth. It’s not sohard, she tells me. She has to un-reversethe sliding closet doors in my room.

She goes out on bingo nights, and Isit on a flowery couch in her living roomand smell the cleaning fluids and sprayseverywhere, drinking tap water from a mug with Danish names on it.Thereare bad oil paintings of sailboats and a needlepoint, framed, of a sailor fromsomewhere else and another time.Clocks, two to a wall, tick and chime,reminding endlessly. I don’t like to beunpositive, but I hate clocks. I don’thave clocks at home. I want to gohome. I don’t want to be doing any of this ever again, ever. ♦

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the markets staying the same. Optionsallow investors to gamble heavily andturn one dollar into ten.They also allowinvestors to hedge their risk.The reasonyour pension fund may not be wipedout in the next crash is that it has pro-tected itself by buying options. Whatdrives the options game is the notionthat the risks represented by all thesebets can be quantified; that by looking at the past behavior of G.M. you canfigure out the exact odds that G.M. willhit forty-five dollars in the next threemonths, and whether at a dollar thatoption is a good or a bad investment.The process is a lot like the way insur-ance companies analyze actuarial statis-tics in order to figure out how much tocharge for a life-insurance premium,and, to make those enormously techni-cal calculations, every investment bankhas, on staff, a team of Ph.D.s—physi-cists from Russia, applied mathemati-cians from China, computer scientistsfrom India. On Wall Street, thosePh.D.s are called “quants.”

Nassim Taleb and his team at Em-pirica are quants. But they reject thequant orthodoxy, because they don’t be-lieve that things like the stock marketbehave in the way that physical phe-nomena like mortality statistics do.Physical events, whether death rates orpoker games, are the predictable func-tion of a limited and stable set of fac-tors, and tend to follow what statisti-cians call a “normal distribution”—a bellcurve. But do the ups and downs of themarket follow a bell curve? The econo-mist Eugene Fama once pointed outthat if the movement of stock pricesfollowed a normal distribution you’d ex-pect a really big jump—what he speci-fied as a movement five standard devia-tions from the mean—once every seventhousand years. In fact, jumps of thatmagnitude happen in the stock marketevery three or four years, because investorsdon’t behave with any kind of statisticalorderliness. They change their mind.They do stupid things. They copy eachother.They panic. Fama concluded thatif you charted the market’s fluctuations,the graph would have a “fat tail”—meaning that at the upper and lowerends of the distribution there would bemany more outliers than statisticiansused to modelling the physical worldwould have imagined.

In the summer of 1997, Taleb pre-dicted that hedge funds like Long-Term Capital Management were headedfor trouble, because they did not un-derstand this notion of fat tails. Just a year later, L.T.C.M. sold an extraordi-nary number of long-dated indexed op-tions, because its computer models toldit that the markets ought to be calmingdown. And what happened? The Rus-sian government defaulted on its bonds;the markets went crazy; and in a mat-ter of weeks L.T.C.M. was finished.Mark Spitznagel, Taleb’s head trader,says that he recently heard one of theformer top executives of L.T.C.M. givea lecture in which he defended thegamble that the fund had made. “Whathe said was ‘Look, when I drive homeevery night in the fall I see all theseleaves scattered around the base of thetrees,’ ” Spitznagel recounts. “ ‘There isa statistical distribution that governsthe way they fall, and I can be pretty accurate in figuring out what that dis-tribution is going to be. But one day Icame home and the leaves were in littlepiles. Does that falsify my theory thatthere are statistical rules governing howleaves fall? No. It was a man-madeevent.’ ” In other words, the Russians,by defaulting on their bonds, did some-thing that they were not supposed todo, a once-in-a-lifetime, rule-breakingevent. But this, to Taleb, is just thepoint: in the markets, unlike in thephysical universe, the rules of the gamecan be changed. Central banks can de-cide to default on government-backedsecurities.

One of Taleb’s earliest Wall Streetmentors was a short-tempered French-man who dressed like a peacock andhad an almost neurotic obsession withrisk. He would call Taleb from Regine’sat three in the morning, or take a meet-ing in a Paris night club, sipping cham-pagne and surrounded by scantily cladwomen, and once he asked Taleb whatwould happen to his positions if a planecrashed into his building. Taleb wasyoung then and brushed him aside. Itseemed absurd. But nothing,Taleb soonrealized, is absurd.Taleb likes to invokePopper: “No amount of observationsof white swans can allow the inferencethat all swans are white, but the obser-vation of a single black swan is suffi-cient to refute that conclusion.” Because

L.T.C.M. had never seen a black swanin Russia, it thought no Russian blackswans existed.

Taleb, by contrast, has constructed atrading philosophy predicated entirelyon the existence of black swans—onthe possibility of some random, unex-pected event sweeping the markets. Henever sells options, then. He only buysthem. He’s never the one who can losea great deal of money if G.M. stocksuddenly plunges. Nor does he ever beton the market’s moving in one directionor another. That would require Taleb to assume that he understands the market, and he knows that he doesn’t.He doesn’t have Warren Buffett’s con-fidence. So he buys options on bothsides—on the possibility of the mar-ket’s moving both up and down. Andhe doesn’t bet on minor fluctuations inthe market. Why bother? If everyoneelse is vastly underestimating the possi-bility of rare events, then an option onG.M. at, say, forty dollars is going to be undervalued. So Taleb buys out-of-the-money options by the truckload.He buys them for hundreds of differentstocks, and if they expire worthless hesimply buys more. Taleb doesn’t eveninvest in stocks—not for Empirica andnot for his own personal account. Buy-ing a stock, unlike buying an option, isa gamble that the future will representan improved version of the past. Andwho knows whether that will be true?So all Taleb’s personal wealth—and the hundreds of millions of dollars thatEmpirica has in reserve—is in Trea-sury bills. Few on Wall Street havetaken the practice of buying options tosuch extremes. But if anything com-pletely out of the ordinary happens tothe stock market—if some randomevent sends a jolt through Wall Streetand pushes G.M. to, say, twenty dol-lars—Nassim Taleb will not end up in a dowdy apartment in Athens. He willbe very rich.

Not long ago, Taleb went to a din-ner in a French restaurant just north of Wall Street.The people at the dinnerwere all quants: men with bulging pock-ets and open-collared shirts and theserene and slightly detached air of thosewho daydream in numbers. Taleb sat at the end of the table, drinking pastisand discussing French literature. Therewas a chess grand master at the table,

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with a shock of white hair, who hadonce been one of Anatoly Karpov’steachers, and another man who over thecourse of his career had worked, succes-sively, at Stanford University, Exxon,Los Alamos National Laboratory, Mor-gan Stanley, and a boutique French investment bank. They talked aboutmathematics and chess and frettedabout one of their party who had not yet arrived and who had the reputation,as one of the quants worriedly said,of “not being able to find the bath-room.” When the check came, it wasgiven to a man who worked in risk man-agement at a big Wall Street bank, andhe stared at it for a long time, with aslight mixture of perplexity and amuse-ment, as if he could not remember whatit was like to deal with a mathematicalproblem of such banality. The men atthe table were in a business that wasformally about mathematics but was re-ally about epistemology, because to sellor to buy an option requires each partyto confront the question of what it is he truly knows. Taleb buys options because he is certain that, at root, heknows nothing—or, more precisely, thatother people believe they know morethan they do. But there were plenty ofpeople around that table who sold op-tions, who thought that if you weresmart enough to set the price of the op-tion properly you could win so many ofthose one-dollar bets on General Mo-tors that, even if the stock ever did dipbelow forty-five dollars, you’d still comeout far ahead. They believe that theworld is a place where, at the end of theday, leaves fall in a more or less pre-dictable pattern.

The distinction between these twosides is the divide that emerged betweenTaleb and Niederhoffer six years ago inConnecticut. Niederhoffer’s hero is thenineteenth-century scientist FrancisGalton. Niederhoffer named his eldestdaughter Galt, and there is a full-lengthportrait of Galton in his library. Galtonwas a statistician and a social scientist(and a geneticist and a meteorologist),and if he is your hero you believe that byaggregating and analyzing data points,you can learn whatever it is you need toknow.Taleb’s hero, on the other hand, isKarl Popper, who said that you cannotknow with certainty that a theory istrue; you can only know that it is not

true. Taleb makes much of what helearned from Niederhoffer, but Nieder-hoffer insists that his example waswasted on Taleb. “Rumpole of the Bai-ley, in one of his cases, talked aboutbeing tried by the bishop who doesn’tbelieve in God,” Niederhoffer says.“Nassim is the empiricist who doesn’tbelieve in empiricism.” What is it thatyou claim to learn from experience, ifyou believe that experience cannot betrusted? Today, Niederhoffer makes alot of his money selling options—andmore often than not the person towhom he sells those options is NassimTaleb. If one of them is up a dollar oneday, in other words, that dollar is likelyto have come from the other. Theteacher and pupil have become predatorand prey.

Years ago, Nassim Taleb worked atthe investment bank First Boston,

and one of the things that puzzled himwas what he saw as the mindless indus-try of the trading floor. A trader wassupposed to come in every morning andbuy and sell things, and on the basis ofhow much money he made buying andselling he was given a bonus. If he wenttoo many weeks without showing aprofit, his peers would start to look athim funny, and if he went too manymonths without showing a profit hewould be gone. The traders were oftenwell educated, and wore Savile Rowsuits and Ferragamo ties. They doveinto the markets with a frantic urgency.They read the Wall Street Journal closelyand gathered around the television tocatch breaking news.“There was alwaysall this shouting. The Fed did this, thePrime Minister of Spain did that,”Taleb recalls. “The Italian FinanceMinister says there will be no competi-tive devaluation, this number is higherthan expected, Abby Cohen just saidthis.” It was a scene that Taleb did notunderstand.

“He was always so conceptual aboutwhat he was doing,” says Howard Sav-ery, who worked with Taleb for manyyears at Banque Indosuez and at UBS.“He used to drive our floor trader—hisname was Tim—crazy. Floor tradersare used to precision: ‘Sell a hundred fu-tures at eighty-seven.’ Nassim wouldpick up the phone and say, ‘Tim, sellsome.’ And Tim would say, ‘How

168 THE NEW YORKER, APRIL 22 & 29, 2002

Sliver buildings are usually mediocreapartment towers crammed onto

tiny, town-house-sized plots.Thetwenty-four-story Austrian CulturalForum, which has just gone up onFifty-second Street next to LaGrenouille and the HarperCollinsbuilding, is the first sliver that is also aserious piece of architecture.The smallplot is used so brilliantly that you can’timagine the building being anywhereelse. In 1992, Raimund Abraham—anative of Austria who has been teachingarchitecture at Cooper Union for thirtyyears—won a competition to replace amansion on the site, which had housedthe Austrian cultural center since thenineteen-fifties.The Austrians wanteda building that would project a cliché-free image of their country. On apractical level, it had to include a largeart gallery, a small auditorium, a library,offices, and an apartment for thedirector of the Forum. Abraham, whohas lived in the United States since1964 but hasn’t built a public buildinghere until now, was the only one ofmore than two hundred competitorswho thought of placing the stairs acrossthe back of the tower instead of on theside, leaving the width of the structurefree. He put public spaces at thebottom, semiprivate spaces in themiddle, and the director’s apartment atthe top.The building narrows as itrises—a nod both to the old rules ofNew York City zoning, which shapetowers like pyramids, and to logic, sincethe public spaces require bigger floorsthan the private ones.The tower risesstraight up at the back, whereAbraham’s double fire stair zigzags in apattern he has likened to Brancusi’sEndless Column. But he saved thegreatest visual drama for the front: aseries of sharply slanted planes of glassand zinc that slice into the sky.

—Paul Goldberger

THE SKY LINE

BY ROBERT POLIDORI

NEO-

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many?’ And he would say, ‘Oh, a socialamount.’ It was like saying, ‘I don’t havea number in mind, I just know I want to sell.’ Nassim and his group had thisattitude that we’re not interested inknowing what the new trade number is.When everyone else was leaning overtheir desks, listening closely to the latestfigures, Nassim would make a big sceneof walking out of the room.”

At Empirica, there are no Wall StreetJournals to be found. There is very littleactive trading, because the options thatthe fund owns are selected by computer.Most of those options will be usefulonly if the market does something dra-matic, and, of course, on most days themarket doesn’t. So the job of Taleb andhis team is to wait and to think. Theyanalyze the company’s trading policies,back-test various strategies, and con-struct ever more sophisticated computermodels of options pricing. Danny, inthe corner, occasionally types things intothe computer. Pallop looks dreamily off into the distance. Spitznagel takescalls from traders, and toggles back andforth between screens on his computer.Taleb answers e-mails and calls one ofthe firm’s brokers in Chicago, affect-ing the kind of Brooklyn accent thatpeople from Brooklyn would have

if they were actually from northernLebanon: “Howyoudoin’?” It is closerto a classroom than to a trading floor.

“Pallop, did you introspect?” Talebcalled out at one point as he wanderedback in from lunch.

Pallop was asked what his Ph.D. isabout. “Pretty much this,” he said, wav-ing a languid hand around the room.

“It looks like we will have to write itfor him,” Taleb said, “because Pallop isvery lazy.”

Empirica has inverted the traditionalpsychology of investing. You and I, ifwe invest conventionally in the market,have a fairly large chance of making asmall amount of money in a given dayfrom dividends or interest or the generalupward trend of the market. We havealmost no chance of making a largeamount of money in one day, and thereis a very small, but real, possibility that ifthe market collapses we could blow up.We accept that distribution of risks be-cause, for fundamental reasons, it feelsright. In the book by Kahneman andTversky that Pallop was reading, for ex-ample, there is a description of a simpleexperiment, where a group of peoplewere told to imagine that they had threehundred dollars.They were then given achoice between (a) receiving another

hundred dollars or (b) tossing a coin sothat if they won they got two hundreddollars and if they lost they got nothing.Most of us, it turns out, prefer (a) to (b).But then Kahneman and Tversky did asecond experiment.They told people toimagine that they had five hundred dol-lars, and then asked them if they wouldrather (c) give up a hundred dollars or(d) toss a coin and pay two hundred dol-lars if they lost and nothing at all if theywon. Most of us now prefer (d) to (c).From a probabilistic standpoint, thosefour choices are identical: they all yieldan expected outcome of four hundreddollars. Nonetheless, we have strongpreferences among them. Why? Be-cause we’re more willing to gamblewhen it comes to losses, but are riskaverse when it comes to gains. That’swhy we like small daily winnings in thestock market, even if those entail therisk of losing everything in a crash.

At Empirica, by contrast, every daybrings a small but real possibility that itwill make a huge amount of money; nochance that it will blow up; and a verylarge possibility that it will lose a smallamount of money. All those dollar, andfifty-cent, options that Empirica has ac-cumulated—few of which will ever beexercised—soon begin to add up. Bylooking at a particular column on thecomputer screens showing Empirica’spositions, anyone at the firm can tellyou precisely how much money Empir-ica has lost or made so far that day. At11:30 A.M., for instance, they had recov-ered just twenty-eight per cent of themoney they had spent that day on op-tions. By 12:30, they had recovered fortyper cent, meaning that the day was notyet half over and Empirica was alreadyin the red to the tune of several hundredthousand dollars.The day before that, ithad made back eighty-five per cent ofits money; the day before that, eighty-four per cent; the day before that, sixty-five per cent; and the day before that alsosixty-five per cent; and, in fact—with afew notable exceptions, like the few dayswhen the market reopened after Sep-tember 11th—Empirica has done noth-ing but lose money since last April. “Wecannot blow up, we can only bleed todeath,” Taleb says, and bleeding todeath—absorbing the pain of steadylosses—is precisely what human beingsare hardwired to avoid.“Say you’ve got a

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“The judicial rulings are over here.That section is all lawyer jokes.”

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guy who is long on Russian bonds,”Savery says. “He’s making money everyday. One day, lightning strikes, and heloses five times what he made. Still, onthree hundred and sixty-four out ofthree hundred and sixty-five days he wasvery happily making money. It’s muchharder to be the other guy, the guy los-ing money three hundred and sixty-fourdays out of three hundred and sixty-five, because you start questioning your-self. Am I ever going to make it back?Am I really right? What if it takes tenyears? Will I even be sane ten years fromnow?” What the normal trader getsfrom his daily winnings is feedback, thepleasing illusion of progress. At Em-pirica, there is no feedback. “It’s likeyou’re playing the piano for ten yearsand you still can’t play ‘Chopsticks,’ ”Spitznagel says, “and the only thing youhave to keep you going is the belief thatone day you’ll wake up and play likeRachmaninoff.” Was it easy knowingthat Niederhoffer—who representedeverything they thought was wrong—was out there getting rich while theywere bleeding away? Of course it wasn’t.

If you watched Taleb closely thatday, you could see the little ways inwhich the steady drip of losses takes atoll. He glanced a bit too much at theBloomberg terminal. He leaned for-ward a bit too often to see the daily losscount. He succumbs to an array of su-perstitious tics. If the going is good, heparks in the same space every day; heturned against Mahler because he asso-ciates Mahler with last year’s long dryspell. “Nassim says all the time that heneeds me there, and I believe him,”Spitznagel says. He is around to remindTaleb that there is a point to waiting, tohelp Taleb resist the very human im-pulse to abandon everything and stanchthe pain of losing. “Mark is my cop,”Taleb says. So is Pallop: he is there to re-mind Taleb that Empirica has the intel-lectual edge.

“The key is not having the ideas buthaving the recipe to deal with yourideas,” Taleb says. “We don’t need mor-alizing. We need a set of tricks.” Histrick is a protocol that stipulates pre-cisely what has to be done in every situ-ation. “We built the protocol, and thereason we did was to tell the guys, Don’tlisten to me, listen to the protocol. Now,I have the right to change the protocol,

but there is a protocol to changing theprotocol. We have to be hard on our-selves to do what we do.The bias we seein Niederhoffer we see in ourselves.” Atthe quant dinner, Taleb devoured hisroll, and as the busboy came aroundwith more rolls Taleb shouted out “No,no!” and blocked his plate. It was anever-ending struggle, this battle be-tween head and heart.When the waitercame around with wine, he hastily cov-ered the glass with his hand. When thetime came to order, he asked for steakfrites—without the frites, please!—andthen immediately tried to hedge hischoice by negotiating with the personnext to him for a fraction of his frites.

The psychologist Walter Mischel hasdone a series of experiments where heputs a young child in a room and placestwo cookies in front of him, one smalland one large.The child is told that if hewants the small cookie he need only ringa bell and the experimenter will comeback into the room and give it to him. Ifhe wants the better treat, though, he hasto wait until the experimenter returnson his own, which might be anytime inthe next twenty minutes. Mischel hasvideotapes of six-year-olds, sitting inthe room by themselves, staring at thecookies, trying to persuade themselvesto wait. One girl starts to sing to herself.She whispers what seems to be the in-structions—that she can have the bigcookie if she can only wait. She closesher eyes.Then she turns her back on the

cookies. Another little boy swings hislegs violently back and forth, and thenpicks up the bell and examines it, try-ing to do anything but think about the cookie he could get by ringing it.The tapes document the beginnings of discipline and self-control—the tech-niques we learn to keep our impulses incheck—and to watch all the childrendesperately distracting themselves is to experience the shock of recognition:that’s Nassim Taleb!

There is something else as well thathelps to explain Taleb’s resolve—morethan the tics and the systems and theself-denying ordinances. It happened ayear or so before he went to see Nieder-hoffer. Taleb had been working as atrader at the Chicago Mercantile Ex-change, and he developed a persistentlyhoarse throat. At first, he thought noth-ing of it: a hoarse throat was an occupa-tional hazard of spending every day inthe pit. Finally, when he moved back toNew York, he went to see a doctor, inone of those Upper East Side prewarbuildings with a glamorous façade.Taleb sat in the office, staring out at theplain brick of the courtyard, reading themedical diplomas on the wall over andover, waiting and waiting for the verdict.The doctor returned and spoke in a low,grave voice: “I got the pathology report.It’s not as bad as it sounds . . .” But, ofcourse, it was; he had throat cancer.Taleb’s mind shut down. He left the of-fice. It was raining outside. He walked

“Didn’t this use to be the time slot for his news briefings?”

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and walked and ended up at a medicallibrary. There he read frantically abouthis disease, the rainwater forming apuddle under his feet. It made no sense.Throat cancer was the disease of some-one who has spent a lifetime smokingheavily. But Taleb was young, and hehad hardly smoked in his life. His risk of getting throat cancer was one in ahundred thousand, almost unimagin-ably small. He was a black swan! Thecancer is now beaten, but the memory of it is also Taleb’s secret, because onceyou have been a black swan—not justseen one, but lived and faced death asone—it becomes easier to imagine an-other on the horizon. As the day cameto an end, Taleb and his team turnedtheir attention once again to the prob-lem of the square root of n. Taleb was

back at the whiteboard. Spitznagel waslooking on. Pallop was idly peeling abanana. Outside, the sun was begin-ning to settle behind the trees. “You doa conversion to p1 and p2,” Taleb said.His marker was once again squeakingacross the whiteboard. “We say wehave a Gaussian distribution, and youhave the market switching from a low-volume regime to a high-volume—p21,p22. You have your eigenvalue . . .” Hefrowned and stared at his handiwork.The markets were now closed. Em-pirica had lost money, which meantthat somewhere off in Fairfield County,Niederhoffer had no doubt made money.That hurt, but if you steeled yourself,and thought about the problem athand, and kept in mind that some-day the market would do something

utterly unexpected because in the worldwe live in something utterly unex-pected always happens, then the hurtwas not so bad. Taleb eyed his equa-tions on the whiteboard, and arched aneyebrow. It was a very difficult prob-lem. “Where is Dr. Wu? Should wecall in Dr. Wu?”

Ayear after Nassim Taleb came tovisit him,Victor Niederhoffer blew

up. He sold a very large number of op-tions on the S. & P. index, taking mil-lions of dollars from other traders in ex-change for promising to buy a basket ofstocks from them at a preset price if themarket ever fell below a certain point. Itwas an unhedged bet, or what was calledon Wall Street a “naked put,” meaningthat he bet everything on one outcome:he bet in favor of the large probability of making a small amount of money,and against the small probability of los-ing a large amount of money—and helost. On October 27, 1997, the marketplummeted seven per cent, and Nieder-hoffer had to produce huge amounts of cash to back up all the options he’dsold at pre-crash strike prices. He ranthrough a hundred and thirty milliondollars—his cash reserves, his savings,his other stocks—and when his brokercame and asked for still more he didn’thave it. In a day, one of the most suc-cessful hedge funds in America waswiped out. Niederhoffer was forced toshut down his firm. He had to mort-gage his house. He had to borrowmoney from his children. He had to call Sotheby’s and sell his prized sil-ver collection—the massive nineteenth-century Brazilian “sculptural group ofvictory” made for the Visconde de Fi-gueiredo, the massive silver bowl de-signed by Tiffany & Company for theJames Gordon Bennett Cup yacht racein 1887, and on and on. He stayed awayfrom the auction. He couldn’t bear towatch.

“It was one of the worst things thathas ever happened to me in my life,right up there with the death of thoseclosest to me,” Niederhoffer said re-cently. It was a Saturday in March, andhe was in the library of his enormoushouse. Two weary-looking dogs wan-dered in and out. He is a tall man, thickthrough the upper body and trunk,with a long, imposing face and baleful,

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hooded eyes. He was shoeless. Onecollar flap on his shirt was twisted in-ward, and he looked away as he talked.“I let down my friends. I lost my busi-ness. I was a major money manager.Now I pretty much have had to startfrom ground zero.” He paused. “Fiveyears have passed. The beaver builds adam. The river washes it away, so hetries to build a better foundation, and Ithink I have. But I’m always mindful ofthe possibility of more failures.” In thedistance, there was a knock on thefront door. It was a man named MiltonBond, an artist who had come to pre-sent Niederhoffer with a painting hehad done of Moby Dick ramming thePequod. It was in the folk-art style thatNiederhoffer likes so much, and hewent to meet Bond in the foyer, kneel-ing down in front of the painting asBond unwrapped it. Niederhoffer hasother paintings of the Pequod in hishouse, and some of the Essex—theship that inspired Melville’s story. Inhis office, on a prominent wall, is apainting of the Titanic. They were, hesaid, reminders to stay humble. “One ofthe reasons I’ve paid lots of attention tothe Essex is that it turns out that thecaptain of the Essex, as soon as he gotback to Nantucket, was given anotherjob,” Niederhoffer said. “They thoughthe did a good job in getting back afterthe ship was rammed. The captain wasasked, ‘How could people give you an-other ship?’ And he said, ‘I guess on thetheory that lightning doesn’t striketwice.’ It was a fairly random thing.But then he was given the other ship,and that one foundered, too. Got stuckin the ice. At that time, he was a lostman. He wouldn’t even let them savehim. They had to forcibly remove himfrom the ship. He spent the rest of hislife as a janitor in Nantucket. He be-came what on Wall Street they call a‘ghost.’ ” Niederhoffer was back in hisstudy now, his lanky body stretchedout, his feet up on the table, his eyes alittle rheumy. “You see? I can’t afford tofail a second time. Then I’ll be a totalwashout. That’s the significance of theEssex.”

A month or so before Niederhofferblew up, Taleb had dinner with him ata restaurant in Westport, and Nieder-hoffer told him that he had been sellingnaked puts. You can imagine the two of

them across the table from each other,Niederhoffer explaining that his specu-lation was an acceptable risk, that theodds of the market going down soheavily that he would be wiped outwere minuscule, and Taleb listeningand shaking his head, and thinkingabout black swans. “I was depressedwhen I left him,” Taleb said. “Here is aguy who goes out and hits a thousandbackhands. He plays chess like his lifedepends on it. Here is a guy who, what-ever he wakes up in the morning anddecides to do, he does better than any-one else. I was talking to my hero. . . .”This was the reason Taleb didn’t wantto be Niederhoffer when Niederhofferwas at his height—the reason Talebdidn’t want the silver and the house andthe tennis matches with George Soros.He could see all too clearly where itmight end up. In his mind’s eye, hecould envision Niederhoffer borrow-ing money from his children, and sell-ing his silver, and talking in a hollowvoice about letting down his friends,and Taleb did not know if he had the strength to live with that possibil-ity. Unlike Niederhoffer, Taleb neverthought he was invincible. You couldn’tif you had watched your homelandblow up, and had been the one non-

smoker in a hundred thousand whogets throat cancer. For Taleb there was never any alternative to the pain-ful process of insuring himself againstcatastrophe.

This kind of caution does not seemheroic, of course. It seems like the joy-less prudence of the accountant and theSunday-school teacher.The truth is thatwe are drawn to the Niederhoffers ofthis world because we are all, at heart,like Niederhoffer: we associate the will-ingness to risk great failure—and theability to climb back from catastro-phe—with courage. But in this we arewrong. That is the lesson of NassimTaleb and Victor Niederhoffer, and alsothe lesson of our volatile times.There ismore courage and heroism in defyingthe human impulse, in taking the pur-poseful and painful steps to prepare forthe unimaginable.

Last fall, Niederhoffer sold a largenumber of options, betting that themarkets would be quiet, and they were,until out of nowhere two planes crashedinto the World Trade Center. “I was exposed. It was nip and tuck.” Nieder-hoffer shook his head, because there was no way to have anticipated Sep-tember 11th. “That was a totally unex-pected event.” ♦

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