Ontonix can help with elephant etiquette, Swans and the visually impaired…
Friday, 17 September, 2010 Leave a comment
Like him or not, agree with him or not you can’t say that Nassim Taleb (NNT) isn’t “good value”!? He wears his heart on his sleeve and says what he thinks.
NNT Big game hunter
Whilst others are content to talk “elephant droppings” about rules to regulate elephant behaviour…that they wont read (even if they could) he has determined the best means of dealing with an elephant infestation, is neatly folding his jacket, rolling up his sleeves and is staring-down the elephant on his fireside rug before launching his first attempt to teach the elephant about living room etiquette!!!
Even in this brief summary references to “low probability”, “tail risks”, “nonlinearity”, “complex/complexification” – he is even making up words in an effort to convey the extent of the threat WE have created – the message should be clear that a new approach is required to avoid or prepare for future “Black Swans” and risk “Blind Spots” (recommended article).
Ontonix UK: Complex Systems Management, Business Risk Management….Elephant trainers
NNT, in a new essay says:
The interplay of the following five forces, all linked to the misperception, misunderstanding, and hiding of the risks of consequential low probability events (Black Swans).
Increase in hidden risks of low probability events (tail risks) across all aspects of economic life, not just banking; while tail risks are not possible to price, neither mathematically nor empirically. The same nonlinearity came from the increase in debt, operational leverage, and the use of complex derivatives.
Asymmetric and flawed incentives that favour risk hiding in the tails, two flaws in the compensation methods, based on cosmetic earnings not truly risk-adjusted ones a) asymmetric payoff: upside, never downside (free option); b) flawed frequency: annual compensation for risks that blow-up every few years, with absence of
Increased promotion of methods helping to hide of tail risks VaR and similar methods promoted tail risks. See my argument that information has harmful side effects as it does increase overconfidence and risk taking.
Increased role of tail events in economic life thanks to “complexification” by the internet and globalization, in addition to optimization of the systems.
Growing misunderstanding of tail risks Ironically while tail risks have increased, financial and economic theories that discount tail risks have been more vigorously promoted (while operators understood risks heuristically in the past3), particularly after the crash of 1987, after the “Nobel” for makers of “portfolio theory”. Note the outrageous fact that the entire economics establishment missed the rise in these risks, without incurring subsequent problems in credibility.
Taleb goes on to point out the responsible parties and suggested remedies.
Read the full PDF
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