Principles for a Black Swan-proof world

http://money.ninemsn.com.au/article.aspx?id=798993

by peter123 • 17 years ago

33 25 17 years ago

money.ninemsn.com.au

tokenadult2• 17 years ago

No registration required to read it here:

http://money.ninemsn.com.au/article.aspx?id=798993

g_ford• 17 years ago

Or if google is the referrer. And since I have HN as a feed in iGoogle I didn't even realise until I came to read the comments.

praptak• 17 years ago

Or if you substitute "True" for "False" in the "Authorized=" part of the link.

brown9• 17 years ago

Also no registration required if you copy and paste the headline into Google News, which results in: http://www.ft.com/cms/s/0/5d5aa24e-23a4-11de-996a-00144feabd...

mattchew• 17 years ago

"I do not think that phrase means what you think it means . . ." oh, wait, who was the author of the article again?

The article is strange to me. First, I thought Taleb scorned the FT crowd. Second, since when did he start writing in bullet-pointed pop journalist style? Maybe this was an experiment or a joke. Or just a bad day.

jerf3• 17 years ago

The last line in the article is "In other words, a place more resistant to black swans." I bet an editor "amped up" the title to "Black Swan-proof" without asking the author.

And he may despise the FT crowd, but that is also exactly the crowd his message needs to be in front of.

froo3• 17 years ago

I always get a little tingle deep inside me whenever I hear about this black swan theory, whats more, suggesting principles for a black swan proof world (I know it's just the title, sensationalism never solved anything) is like pissing into the wind.

It will only come back to haunt you.

"black swans" are just one of those facts of life, The sun rises in the morning, water is wet, shit happens.

Best anyone can do is attempt to minimise the factors that cause Black Swan events, you can never completely eliminate them.

Offtopic point, the black swan is actually the symbol for the West Australian flag (my home state)

http://media-2.web.britannica.com/eb-media//21/5021-004-C61F...

So these topics always give me a giggle, because I've seen many, many black swans in my lifetime (actually, probably many more black swans than white swans)

cameldrv• 17 years ago

Taleb's point is not to reduce the probability of having a black swan, which he essentially assumes to be fixed, but to reduce the impact when they happen. His point is that if you are leveraged 30:1, there will always be black swans that your model says will virtually never happen, but do, and cause your assents to go down by say, 5%, and wipe out your equity and cause you to default.

What Taleb is getting at is that you just shouldn't leverage 30:1, and so if you hit a black swan, maybe your assets go down by 10% or 20% instead of 100% and then defaulting to bondholders as well.

froo3• 17 years ago

Taleb's point is not to reduce the probability of having a black swan, which he essentially assumes to be fixed

But the probability isn't fixed, given black swan events are dependent on taking bigger risks. If you minimise risk, you can essentially completely avoid black swan events.

To explain it using the core idea, the black swan was discovered in these regions of Australia. If explorers never took the risk to explore these parts, then they would have never been discovered.

So no, the probability isn't fixed. The probability of a "black swan event" occurring is more or less proportional to the complexity of the system that it relates too and the risk that an organisation is willing to take.

Using the horrible september 11 attacks as an example, Al Qaeda more than likely wouldn't have attacked if they didn't see their way of life as being threatened in some way. This was, for all intensive purposes, an intensely complex political matter which was created as a result of risks taken by previous governments.

Do I think what happened is right? Hell no, lives were lost on both sides as a result of people taking risks that they perhaps shouldn't have. Human error at it's worst.

tokenadult2• 17 years ago

A lot of people maybe haven't heard Taleb's illustration (spoken in a conference of which the video was posted to HN) about what he means by avoiding harm from black swans. He points out that if you live in Florida, you can't be sure when the next hurricane will come or how strong it will be. But you can build a hurricane-proof house, resistant to any strength of hurricane. That's what he means by avoiding harm from black swans in general: not that black swan events won't happen, but that prudent investors invest in a way such that when they happen, they don't cause irreparable damage.

jerf3• 17 years ago

I'm intrigued by "capitalism 2.0", but I'm at a bit of a loss as to how to get from here to there. There's a lot of government intervention required in Taleb's bullet points that won't happen for decades, if ever. His proposed interventions don't have anything in them for the government in the time spans they talk about and don't leave a lot of room for governments to collect more power and exercise it for their personal gain, which seems to be about all they are good for lately.

What might work is a lot of people voluntarily adopting the aspects of Capitalism 2.0 they can control. The downside is they won't grow as much during the boom times, but come next bust they'll be the only ones left standing. If enough people do that, will the point be made? Can people who eschew leverage and survive during the times nobody else is? If not, Capitalism 2.0 may be beautiful but is fundamentally unstable in its own way.

(It's beautiful to imagine a world where a magic authority can enact perfect legislation to make capitalism 2.0 a reality, but unfortunately, every significant nation-state on earth would have to be brought on board at once, lest one nation-state start leveraging and gain a temporary-but-huge advantage. A full transition would be a boil-the-ocean approach; an interesting question is whether there's a more personal approach that could do some good. The only other halfway realistic prospect would be new colonies that could implement these economics from scratch. Since a new colony would by necessity be on a frontier (space or ocean), they might be open to these ideas. You can't breath leverage or use it for delta-V.)

Herring2• 17 years ago

Curious, what advantage?

jibiki• 17 years ago

Think Iceland circa 2006.

jerf3• 17 years ago

You can't think of advantageous ways for a nation state to use a burst of funding, even if it comes due in a huge way five years later?

It's the same advantage corporations get, only with military options.

Confusion2• 17 years ago

It is completely unrealistic to expect any of these principles to be upheld. Capitalism is like evolution: a force of nature. It weeds out the less profitable and that is the only thing it does.

Only the first principle may be upheld by governments: by imposing their own risk calculations, they may be able to ensure that no financial institution gets too big to fail. Not by making sure they do not get big, but by making sure they can always bear the risks.

zzkt• 17 years ago

April Fools Day was last week.

Confusion2• 17 years ago

I'm not sure what you are referring to, but if it is to my assertion that 'capitalism is a force of nature', then I advise you to read Marx. He already understood that capitalism is almost unavoidable in trading systems. It is an emergent phenomenon, like avalanches are emergent phenomena of the combination of snowfall, mountains and gravity.

ftse• 17 years ago

I suspect it is too late to 'fix' the system.

"People who were driving a school bus blindfolded (and crashed it) should never be given a new bus."

Unfortunately for us the bus driver is the gatekeeper to the garage and he decides who gets to drive.

Herring2• 17 years ago

Do not let someone making an "incentive" bonus manage a nuclear plant – or your financial risks.

The problem is that you're uh.. incentivizing the wrong thing. This is basic capitalism.

khafra• 17 years ago

I wonder what happens if you pay and give retirement benefits to national and state legislators as percentage of per capita GDP.

yummyfajitas• 17 years ago

They will try to create/prop up speculative bubbles?

alecco• 17 years ago

  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.

You got me on "hello"...

Principles for a Black Swan-proof world

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