But only because there's a systemic bias towards discounting physical reality.

The markets are based on discounting physical reality. In a world where it's all numbers and nothing else matters, the bias becomes institutionalised and catastrophic.

I don't think Taleb makes that point, because he seems to have a binary view of physical reality - either it's irrelevant or it's catastrophic.

What depresses me is that financial modelling which takes into account physical reality - whether it's sustainability, or resource limitations, or climate change - is punished by the markets for being (ironically) 'unrealistic.'

In fact it's the woo-woo modelling which is pie in the sky, and will always - by definition - suffer a catastrophic collision with the real world when real world conditions change.

This shouldn't be confused with physical processes - like earthquakes - where we have very poor models, and/or very limited data. We have perfectly good models for many of the processes that cause financial breakdowns.

It's not that the maths doesn't work, but that the models and predictions are ignored for political reasons.

One issue with Taleb's essay is, that he totally doesn't understand the game, which was played.

The crash is no black swan event to the important players, it is more right at the center of the distribution.
In his 2006 published book Gabor Steingart, the chief editor of the economy part of Spiegel, wrote, the coming financial crisis in America will be the easiest to predict crisis ever (due to the horrendous double deficit of the US). Shall I believe, that lots of the investment banksters did not know there would come a crisis? How stupid could they be?

Taleb's fundamental misunderstanding is, that banksters try to create wealth for the bank's stockholders. But of course they want to create wealth for themselves. And this is done by creating a bubble.
Maybe a few really retarded people didn't get it, but unlike in academic science, in the for profit industry you don't tell the fool to stop, but you abuse the fool to take his money. So the fact, that until the end, there were a couple of fools not getting it, isn't a reason to assume, that not even quite a lot of people new, that there would be a crisis in the coming years (even if of course the time prediction indeed was not easy to do exactly, which would have increased the profit; the people who are really good at predicting, e.g. GS, however called 2006 the top, quite exactly)

Der Amerikaner ist die Orchidee unter den Menschen
Volker Pispers

Disagreement is what debate is all about :)

Bringing up the Dutch dykes is exactly the kind of things that Taleb warns about - a thinking that distributions of events caused by physical factors can give us lessons on distribution of events in the financial markets, caused by crowd psychology and movements.

What makes the dykes accessible to analysis is not the physical/crowd psychology distinction, but more simply the stationarity of the phenomenon. The physical laws are dependable and unchanging, so we know that looking at past records is subject to very few types of error, and there's not a moving target in the future.

On the other hand, saying that randomness in financial markets is caused by crowd psychology is a fancy way of calling attention to the feedback loop that's built into the system. It's a source of complication, but whether it's directly relevant depends on what the goals (and time range) of the analysis are. Most questions aren't scoped so that they require full understanding of the whole economy. Stationarity can still occur, as well as all the other properties which are represented by the theory of extreme events. Crucially, the extreme behaviour is still constrained, in an analogous way to the way that the Gaussian constrains phenomena in the light tail case.

His comments are not about statistics - it's about how some all too easily abuse them - or over-interpet them.

If that's so, then IMHO he's not a very good writer...

His quadrant is just a simple way to identify fields of activity where statistical analysis can provide information which is actually usable with enough confidence and, to me, it made sense (if you think about it, it's little different from Rumsfeld's "known knowns, unknown knowns, etc... " quip).

It would be good if the quadrant gave that kind of information, but instead it's really an oversimplification. If advice is the main point of the piece, he could have simply said: use the tools that you know already, on problems where you know already that they work well. The light or heavy tails are a red herring in that case.

If you recall Rumsfeld's quote, it was not very cogent either: he listed 3 cases while nicely ignoring the fourth:

There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don't know. But there are also unknown unknowns. There are things we don't know we don't know.

And what he didn't say was that there are unknown knowns, ie things that other people around him know, but that he is (or pretends to be) ignorant of. Perhaps he just forgot that case, or maybe he didn't want to remind the senators in front of him that the intelligence services don't know everything that's reasonably possible to know.

His basic point is only that humans in general, and financial market players in particular, tend to underestimate the probability of rare (and momentous) events.

Yes, it's a good basic point, but where does he go from there? He wants to convince himself and his readers that what he doesn't know how to do is ipso facto impossible. Worse, he doesn't actually deny that people are faced with the kind of problems that his classification marks as hopeless, but suggests tricks to formally convert those problems so that they get classified as something easier to deal with.

The world is the way it is. When reformulating a problem, the original difficulties must still be accounted for.

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$E(X_t|F_s) = X_s,\quad t > s$