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Nicholas Taleb Writes 10 Commandments for Dealing with Black Swans

Steve Puma | Wednesday April 15th, 2009 | 0 Comments

Talebimage013.pngEver since the current financial crisis began, Nicholas Nassim Taleb, author of The Black Swan: The Impact of the Highly Improbable, has been everywhere. His astute and irreverent analysis of why human psychology is ill-equipped to deal with very unlikely yet very impactful events has captured the attention of many who are searching for answers in uncertain times.
Mr. Taleb is in the headlines again with a Financial Times opinion piece entitled Ten principles for a Black Swan-proof world, which lists some principles for preparing for, avoiding, and dealing with these unlikely events.
For those unfamiliar with the term, a “black swan” is any event which can have an extremely large impact, but is so unlikely to occur that it is considered impossible. According to Wikipedia: “The term Black Swan comes from the assumption that ‘All swans are white.’ In that context, a black swan was a metaphor for something that could not exist. The 17th Century discovery of black swans in Australia metamorphosed the term to connote that the perceived impossibility actually came to pass.”

I am a huge fan of Taleb’s work, partly because he takes the mask off of so-called “experts,” especially financial experts, who claim to be able to control chaotic phenomenon, such as stock markets, but are, in reality, no more likely to control them than a layperson. My favorite of the ten rules:

2. No socialization of losses and privatization of gains. Whatever may need to be bailed out should be nationalized; 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.
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.

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.

Taleb’s straightforward and sarcastic delivery is entertaining, and the content rings true like the advice your grandpa would to try give give you about living in the Depression. It definitely deserves a read-through.
Some Nicholas Nassim Taleb videos:

Interview with Ariana Huffington (Video)

Daniel Kahneman & Nassim Nicholas Taleb: A Conversation in Munich

Discussions with Madelbrot: Present Economy worse than Depression


Steve Puma is a technologist, sustainability consultant and strategist. He currently writes for 3p as well as on his personal blog, ThePumaBlog.com, about the intersection of sustainability, technology, innovation, and the future. Steve holds an MBA in Sustainable Management from the Presidio School of Management and a BA in Computer Science from Rutgers University. You can contact Steve through email or LinkedIn, or follow him on twitter.


Categorized: Investment & Markets|

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