In yesterday's Financial Times Nassim Nicholas Taleb gives "Ten Principles of a Black Swan-Proof World." Here they are:
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 – and hence the most fragile – 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 incentive" bonus manage a nuclear plant – or your financial risks. Odds are he would cut every corner on safety to show “profits” while claiming to be “conservative”. 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 “hedging” products, and from gullible regulators who listen to economic theorists.
7. Only Ponzi schemes should depend on confidence. Governments should never need to "restore confidence." 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 “expert” 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 “Nobel” 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.
Maybe Nassim Nicholas Taleb should be advising the President.
Showing posts with label Black Swan. Show all posts
Showing posts with label Black Swan. Show all posts
Wednesday, April 8, 2009
Friday, December 19, 2008
Being a Bystander
In a recent article Nassim Nicholas Taleb and Pablo Triana co-wrote a piece, Bystanders to the Financial Crisis Were Many for the Financial Times. In it they write of the not so innocent role bystanders play in financial crises, one that continues to hail quantitative methods such as Value-at-Risk that have been proven faulty and destructive.
As in the Black Swan, Taleb does not give those who teach and continue to ascribe to such methods, including Nobel economists, a break. He considers them disingenuous. Taleb has little regard for the position of Nobels; his quest is toward an empiricism that challenges such theories that continue to create greater risks than the value such Value-at-Risk methods purport.
The article goes a little further and requires us all to get off the bystander fence and act. The article begins with a historic event where a woman was raped and robbed while others stood near and not come to her rescue. The authors conclude that there are no innocent bystanders.
Taleb and Triana have a “bias for action” as Tom Peters would say. Action is needed by all and the lack thereof is akin to those who have actually committed the crime. Aligned with this type of criminal behavior is that of professors and the like who continue to teach methods that have been proven to be faulty, perpetuating fallacies. Everybody has a responsibility. There are no innocent bystanders.
Reading the article, I could not help but to align the many investors who invested with Bernard Madoff who proclaim him now to be a crook but who themselves had great returns beforehand, probably the likes that would raise the eyebrow of a neophyte investor, let alone one who has done so for many years to the tune of hundreds of millions of dollars.
Over these few days I have heard known and unknown investors talk about the Madoff Ponzi scheme. Those well-known ones speak of the criminal behavior of Madoff, but after reading this article I wonder about their implicit or complicit role in the scandal.
Some investors seemed to have literally been duped by Madoff and their life savings and earnings devastated. But others seem to have washed their hands of him taking the loss now after the great gains before.
These investors now come across as bystanders, innocent of any guilt. But after reading this article I come away with a different perception. Perhaps they too, as the bystanders in the this, are indeed not guilt-less.
As in the Black Swan, Taleb does not give those who teach and continue to ascribe to such methods, including Nobel economists, a break. He considers them disingenuous. Taleb has little regard for the position of Nobels; his quest is toward an empiricism that challenges such theories that continue to create greater risks than the value such Value-at-Risk methods purport.
The article goes a little further and requires us all to get off the bystander fence and act. The article begins with a historic event where a woman was raped and robbed while others stood near and not come to her rescue. The authors conclude that there are no innocent bystanders.
Taleb and Triana have a “bias for action” as Tom Peters would say. Action is needed by all and the lack thereof is akin to those who have actually committed the crime. Aligned with this type of criminal behavior is that of professors and the like who continue to teach methods that have been proven to be faulty, perpetuating fallacies. Everybody has a responsibility. There are no innocent bystanders.
Reading the article, I could not help but to align the many investors who invested with Bernard Madoff who proclaim him now to be a crook but who themselves had great returns beforehand, probably the likes that would raise the eyebrow of a neophyte investor, let alone one who has done so for many years to the tune of hundreds of millions of dollars.
Over these few days I have heard known and unknown investors talk about the Madoff Ponzi scheme. Those well-known ones speak of the criminal behavior of Madoff, but after reading this article I wonder about their implicit or complicit role in the scandal.
Some investors seemed to have literally been duped by Madoff and their life savings and earnings devastated. But others seem to have washed their hands of him taking the loss now after the great gains before.
These investors now come across as bystanders, innocent of any guilt. But after reading this article I come away with a different perception. Perhaps they too, as the bystanders in the this, are indeed not guilt-less.
Monday, August 18, 2008
Being Swayed by Stories
All is art in business, medicine, education, sports, etc. But in The Black Swan Nassim Nicholas Taleb reminds us that aesthetics are not necessarily factual. History is not always so. Taleb speaks of being "swayed by stories," being mainly convinced by narratives and not facts.
All is art in that each profession has a story that draws. (Art draws.) Each profession has a history that is told and told again in laboratories, cubicles, classrooms, and on the baseball diamond. (Think Yogi Berra.) What matters most is not to be "swayed by stories" alone, but by fact.
Are we more "swayed by stories" or fact in the world of work?
All is art in that each profession has a story that draws. (Art draws.) Each profession has a history that is told and told again in laboratories, cubicles, classrooms, and on the baseball diamond. (Think Yogi Berra.) What matters most is not to be "swayed by stories" alone, but by fact.
Are we more "swayed by stories" or fact in the world of work?
Monday, July 14, 2008
Being Categorized
If you have not read The Black Swan by Nassim Nicholas Taleb, it is a must read. (I'm savoring it page by page. For me, it's one of those.) Tom Peters says, "Read it, Dammit!" in a recent post.
Here is a quote about being categorized:
"Categorizing is necessary for humans, but it becomes pathological when the category is seen as definitive, preventing people from considering the fuzziness of boundaries, let alone their categories."
While categories may be necessary or impossible to avoid, always leave room for the non-definitive; leave room for the non-descriptive. We are then without boundaries, experiencing life fully as it happens.
Here is a quote about being categorized:
"Categorizing is necessary for humans, but it becomes pathological when the category is seen as definitive, preventing people from considering the fuzziness of boundaries, let alone their categories."
While categories may be necessary or impossible to avoid, always leave room for the non-definitive; leave room for the non-descriptive. We are then without boundaries, experiencing life fully as it happens.
Sunday, May 25, 2008
Being Among Black Swans
In a recent post, "READ IT! DAMN IT," Tom Peters urges us to purchase the book, The Black Swan by Nassim Nicholas Taleb. It arrived on my doorstep yesterday and I am LOVING it! One thing that struck me immediately in the prologue is that when the author speaks of the sightings of black swans he indicates that many have sent him pictures since the book, indicating that they are "quite ugly." Something struck me profoundly about this statement.
Purity, beauty, elegance and others such words associated with whiteness and by extension the color of swans are perhaps colored by by the assualt on consciousness of what whiteness entails. Such distinction such as "white swans" was never even a part of my consciousness, nor have I ever read of it in any books. SWANS ARE WHITE! Can anybody say SWAN LAKE!
Can you picture all the beauty of Tchaikovsky's music and the whiteness of the set, costumes, and ballerinas. Now imagine blackness on the same set being performed to the same music. Weird, eh? But to whom? Blackness is without doubt associated with darkness, ominous things, evil and other such words are in reverse associated in our consciousness. I can clearly see how such descriptives as "quite ugly" could be readily associated with black swans, although I'm sure their elegance and grace on the water is no different.
We may have all in the West have had the same reaction of the first sighting of black swans. Collective cultural consciousness is no joke, nor is our narrow understanding of the possible and our inability to see beyond what our physical eyes can see. Such matters need addressing (this book seems to be so relevant in this regard), for our world is indeed flatter than ever and our dependence on one another seems to be greater still.
Purity, beauty, elegance and others such words associated with whiteness and by extension the color of swans are perhaps colored by by the assualt on consciousness of what whiteness entails. Such distinction such as "white swans" was never even a part of my consciousness, nor have I ever read of it in any books. SWANS ARE WHITE! Can anybody say SWAN LAKE!
Can you picture all the beauty of Tchaikovsky's music and the whiteness of the set, costumes, and ballerinas. Now imagine blackness on the same set being performed to the same music. Weird, eh? But to whom? Blackness is without doubt associated with darkness, ominous things, evil and other such words are in reverse associated in our consciousness. I can clearly see how such descriptives as "quite ugly" could be readily associated with black swans, although I'm sure their elegance and grace on the water is no different.
We may have all in the West have had the same reaction of the first sighting of black swans. Collective cultural consciousness is no joke, nor is our narrow understanding of the possible and our inability to see beyond what our physical eyes can see. Such matters need addressing (this book seems to be so relevant in this regard), for our world is indeed flatter than ever and our dependence on one another seems to be greater still.
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