Ten Principles for a “Black Swan” Robust World


Assuming that you have more than a passing interest in how and why our economy got to where it is and you don’t get your financial commentary, from the “red tops” you may have heard of Nassim Nicholas Taleb author of “The Black Swan”. He is, amongst other things, brilliant (if controversial) Distinguished Professor of Risk Engineering, NYU .

Like or loathe his views he is not afraid to challenge the, apparent, institutional blind faith in “conventional wisdom” and put his money where his mouth is…to very good effect!

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1. What is fragile should break early while it is still small. Nothing should ever become too big to fail.

2. No socialisation of losses and privatisation of gains.

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

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

5. Counter-balance complexity with simplicity.

6. Do not give children sticks of dynamite, even if they come with a warning.

7. Only Ponzi schemes should depend on confidence. Governments should never need to “restore confidence”.

8. Do not give an addict more drugs if he has withdrawal pains.

9. Citizens should not depend on financial assets or fallible “expert” advice for their retirement.

10. Make an omelette with the broken eggs.

So why do I feel the need to laud someone that I have never met…but would very much like to, whose most famous literary work I have yet to read(!) – although I have read several of his papers – and who operates on an entirely different intellectual {and financial} plain to myself?

Well, because what he says makes so much sense! He is unimpressed by [nae dismissive of] the closed-shop greed mentality that pervades the global financial sector.

I have read much of his work and have been struck by the frequency with which he uses terms, with which I have become increasingly familiar during my (unintended) extended sabbatical.

In a forthcoming blog I will explain why these terms have become SO important to me and the new venture I will shortly launch. But this isn’t just about me, my new business, or, indeed, NN Taleb. As you look at these words and, hopefully, explore some of Prof Taleb’s writings please consider some of the books, articles and news items you will have, inevitably, seen on the subject of banking crisis – risk management failure(s) – credit crunch – recession, etc.

I’m sure you get the picture!

MODEL – RISK – ROBUST – COMPLEXITY – SYSTEMIC – TRANSPARENCY – RATING – SUSTAINABILITY – PROFITABILITY – INTERDEPENDENCE – GOVERNANCE – CREDIT – PROBABILITY – RANDOM(NESS) – ENTROPY – POWER LAW – ADAPTABILITY – OPACITY – FRAGILITY – REGULATION – CRITICALITY – FINANCE – BANKING – INSURANCE – PROTECTION – QUANTITIVE – PRICE – RETURN – INCENTIVE – RESILIENCE I’m sure there are some really obvious omissions but I am trying to wean myself off the compulsion to try to make “perfect” and complete every blog, piece of research, letter, presentation…shit I’m doing it again!

Warning of the global banking crisis

In 2007, in The Black Swan

“Globalization creates interlocking fragility, while reducing volatility and giving the appearance of stability. In other words it creates devastating Black Swans. We have never lived before under the threat of a global collapse. Financial Institutions have been merging into a smaller number of very large banks. Almost all banks are interrelated. So the financial ecology is swelling into gigantic, incestuous, bureaucratic banks – when one fails, they all fall. The increased concentration among banks seems to have the effect of making financial crisis less likely, but when they happen they are more global in scale and hit us very hard. We have moved from a diversified ecology of small banks, with varied lending policies, to a more homogeneous framework of firms that all resemble one another. True, we now have fewer failures, but when they occur ….I shiver at the thought…”

PLEASE DON’T GET TOO HUNG UP ON DAVID CAMERON’S “INSIGHT”!!!

One Response to Ten Principles for a “Black Swan” Robust World

  1. Lauren says:

    Very interesting, N. N. Taleb hits the nail on the head…it seems so glaringly obvious and yet nothing gets done. Had never thought of the effects of globalization of the banks either. Where to start though………

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