http://www.ft.com/cms/s/0/5d5aa24e-23a4-11...?nclick_check=1 Ten principles for a Black Swan-proof world By Nassim Nicholas Taleb Published: April 7 2009 20:02 | Last updated: April 7 2009 20:02 1. What is fragile should break early while it is still small. Nothing should ever become too big to fail. Evolution in economic life helps those with the maximum amount of hidden risks â and hence the most fragile â become the biggest. 2. No socialisation of losses and privatisation of gains. Whatever may need to be bailed out should be nationalised; whatever does not need a bail-out should be free, small and risk-bearing. We have managed to combine the worst of capitalism and socialism. In France in the 1980s, the socialists took over the banks. In the US in the 2000s, the banks took over the government. This is surreal. 3. People who were driving a school bus blindfolded (and crashed it) should never be given a new bus. The economics establishment (universities, regulators, central bankers, government officials, various organisations staffed with economists) lost its legitimacy with the failure of the system. It is irresponsible and foolish to put our trust in the ability of such experts to get us out of this mess. Instead, find the smart people whose hands are clean. 4. Do not let someone making an âincentiveâ bonus manage a nuclear plant â or your financial risks. Odds are he would cut every corner on safety to show âprofitsâ while claiming to be âconservativeâ. Bonuses do not accommodate the hidden risks of blow-ups. It is the asymmetry of the bonus system that got us here. No incentives without disincentives: capitalism is about rewards and punishments, not just rewards. 5. Counter-balance complexity with simplicity. Complexity from globalisation and highly networked economic life needs to be countered by simplicity in financial products. The complex economy is already a form of leverage: the leverage of efficiency. Such systems survive thanks to slack and redundancy; adding debt produces wild and dangerous gyrations and leaves no room for error. Capitalism cannot avoid fads and bubbles: equity bubbles (as in 2000) have proved to be mild; debt bubbles are vicious. 6. Do not give children sticks of dynamite, even if they come with a warning . Complex derivatives need to be banned because nobody understands them and few are rational enough to know it. Citizens must be protected from themselves, from bankers selling them âhedgingâ products, and from gullible regulators who listen to economic theorists. 7. Only Ponzi schemes should depend on confidence. Governments should never need to ârestore confidenceâ. Cascading rumours are a product of complex systems. Governments cannot stop the rumours. Simply, we need to be in a position to shrug off rumours, be robust in the face of them. 8. Do not give an addict more drugs if he has withdrawal pains. Using leverage to cure the problems of too much leverage is not homeopathy, it is denial. The debt crisis is not a temporary problem, it is a structural one. We need rehab. 9. Citizens should not depend on financial assets or fallible âexpertâ advice for their retirement. Economic life should be definancialised. We should learn not to use markets as storehouses of value: they do not harbour the certainties that normal citizens require. Citizens should experience anxiety about their own businesses (which they control), not their investments (which they do not control). 10. Make an omelette with the broken eggs. Finally, this crisis cannot be fixed with makeshift repairs, no more than a boat with a rotten hull can be fixed with ad-hoc patches. We need to rebuild the hull with new (stronger) materials; we will have to remake the system before it does so itself. Let us move voluntarily into Capitalism 2.0 by helping what needs to be broken break on its own, converting debt into equity, marginalising the economics and business school establishments, shutting down the âNobelâ in economics, banning leveraged buyouts, putting bankers where they belong, clawing back the bonuses of those who got us here, and teaching people to navigate a world with fewer certainties. Then we will see an economic life closer to our biological environment: smaller companies, richer ecology, no leverage. A world in which entrepreneurs, not bankers, take the risks and companies are born and die every day without making the news. In other words, a place more resistant to black swans.
there were plenty of people who predicted this banking/housing debacle years in advance. they wrote about it, not as being random, but with logical conclusions based on the simple cause and effect phenomena. Taleb's logica is flawed. when he doesn't understand an event it is random, and when he does we should bow at his feet for ascribing his convaluted theory to his monetary gain. we live in world with relative laws and taleb's philosophy is a couple thousand years removed. stop giving him press already.
My favor show are always nature show with animal. Seeing what natural things to survive make me always wondering how far and different between us and them.
My Favorite-- 4. Do not let someone making an âincentiveâ bonus manage a nuclear plant â or your financial risks. Odds are he would cut every corner on safety to show âprofitsâ while claiming to be âconservativeâ. Bonuses do not accommodate the hidden risks of blow-ups. It is the asymmetry of the bonus system that got us here. No incentives without disincentives: capitalism is about rewards and punishments, not just rewards. ----------------------------------------------------------- How many clueless twenty and thirty somethings made millions and millions just by leveraging up when times were good only to blow up spectacularly when the market crashed? They can walk away and probably never have to work again, while their clients suffered massive losses.
Taleb has been quite explicit in saying the current problems are NOT a black swan (ie "random") because they were, in fact, predictable.
It has to be asked - everybody knew the compensation schemes going in - why would someone put themselves at risk by giving the bonus-incentivized crowd access to so much of their money?
11. End the Fed. Artificially low interest rates are the fulcrum of this mess and the shit storms of the past. Having a cheap money agenda is like throwing $100 bills onto the street in downtown NYC, people will push/shove lie cheat do whatever to get their share. Not to mention the inflation tax and the exacerbated business cycle it creates. But that's the political economy 4 ya.
Taleb IS saying this TODAY, after his "theory" has been validated, i.e. because he made money. Otherwise, this event(s) would have been filed away as "random." Taleb's own reality, like all of us, has some fundamental (relative) truth. It is clear though Taleb is still searching for the "truth." In the mean time the sheep are there for him to lead. baaahhhaaaa
I read Black Swan on holiday and wasnt that impressed. It's full of stuff like: If you ask 100 people their favourite colour you will get black and blue. If you want to be a socialist move to France. There is no such thing as an elite behind the scenes just look at google they got rich from their basement. Everyone is his own black swan. Blalabla