CONSUELO MACK: If you look at the events of the
last two years, a lot of people were shocked at what happened, the
market meltdown, the credit freeze-over, and a very popular book over
the last couple years has been The Black Swan,
by Nassim Taleb. He’s been on WealthTrack, and the fact that people
look at what these “black swan” events and say this is a
once-in-a-lifetime, a once in a generation, a once in a 100-year
perfect storm. But you’re saying not so, and you have to figure they’ll
happen more often.

BRUCE BERKOWITZ: That’s
right. Hurricane predictions, you say this is a storm that will happen
every one in 300 years or one in 100 years, but we seem to have these 1
in 100-year storms every seven to 15 years. We don’t get it right.
There’s a problem with the modeling. There’s a lack of common sense,
and also with statistical theory that it’s only going to happen once in
100 years- what happens if it happens in the first year rather than the
70th year? Your statistics is all about the spinning of a roulette
wheel in the Monte Carlo simulations. But you can’t apply that, for
example, to Russian roulette. If you have a gun with 1,000 chambers and
one bullet, does it pay to put it to your head and pull the trigger?
The answer is no because if that bullet is in the first chamber, you
can’t pull again. You’re dead.
So a lot of statistics assume that
you can keep spinning and spinning and take chances and chances when,
if you play Russian roulette, you can’t continue. And this probability
theory that people apply to investing takes you down a very treacherous
path.