Nassim Taleb: ‘Big corporations will always fail’


Building Robustness–(more) lessons from nature

imageI realised some time ago that I quote NNT more than just about anyone else. Even Seth Godin, for whom I have already declared my “love”.

SO I have given much thought to the reasons why.

It didn’t take me too long to figure that the biggest attraction – for both – is that they “cut through the crap”!.They simplify matters that others love to make complex or that we overcomplicate ourselves. This is a brief extract from an interview (June 2010) that appeared in The Observer. It isn’t rocket science – so don’t try to make it sound like it is – it is much closer to our hearts!

Your new Black Swan chapter looks back on the financial crash, but it

begins by thinking about what we might have learned from studying the

human body…

The notion of fragility and robustness that I am bringing is applicable across domains. The human body has built-in redundancies: two eyes, two kidneys, two lungs. It is good to incorporate that model into everything we create. In financial entities it creates less growth but more robustness. Also, wherever you have a lot of interactions, it is important to have nothing too large. Why has evolution made an elephant the largest thing on land, and in the ocean a whale?

You have to have a dogma that mother nature knows best.

Would you describe the black swan idea as a philosophy of humility – that

is, we never know as much as we think we do?

I would say it is more making a map of what you don’t know and confining it. The human body – we don’t know large parts of it. The economy, likewise. We shouldn’t treat it all the same. We must acknowledge where a lack of knowledge can harm us. Our lack of knowledge is everywhere, but in some domains, as we have seen, it can have monumental consequences.

Should anything be too big to fail?

I just wrote a paper explaining why size necessarily brings fragility. You have family owned businesses that have been around for 500 years. You cannot name a corporation that survives intact for even a few decades. We should not be concerned about wealth; we are rich enough, but we should be very concerned about robustness.

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Will the Euro Survive? Will the EU Survive?


Following  the bailout of Greece earlier this year today (22/11/2010) it is Ireland’s turn. The Europeans are facing the bitter truth that certain lifestyles are not sustainable. While this is certainly the case, it is also true that the richer nations won’t be willing to subsidise the poorer nations for ever. This places not only the Euro under pressure, it also suggests that a couple of bailouts more will question seriously the European Union itself. The Daily Telegraph sustains in a recent article that the Euro will not survive five years (read here).

 

Along similar lines are the comments of Joseph Stiglitz (see his article).

 

 

Using Eurostat’s macroeconomic data – the same data which we use to analyse the entire EU economy, publishing our quarterly Structural Fragility Reports – we have conducted an analysis of the so-called PIGS (Portugal, Ireland, Greece and Spain) as well as that of the big four economies (Germany, France, Italy and the UK. The idea is to confront these two systems and to analyse their resilience. Here is what we found.

 

First of all the PIGS. Below the Complexity & Risk Map of the four economies is illustrated, indicating, first of all, an alarming one-star complexity rating. This points to very low resilience (robustness), hence very high fragility. This means the structure of the combined economies is close to  dissolving. The map has a density of 23% pointing to a fairly high risk of contagion. The system functions close to its critical complexity – the current complexity of this system of four countries is 48.4 while the critical complexity (maximum complexity sustainable with the current structure of the economy) is 53. This means there is very little margin for error. Moreover, for systems functioning so close to their critical complexity it is extremely difficult to make credible forecasts.

 

The Complexity Profile reported below illustrates in what measure each of the four countries contributes to the overall headache of the EU (and the BCE). Spain, being the biggest economy, has the largest footprint in the PIGS economy and contributes to 27% of the problem (complexity). Follows Greece (23%) while Ireland and Portugal contribute each around 19%. Based on the Complexity Profile, it is clearly Spain that will need to be bailed out (if at all necessary) because it can do the most damage in case of default. The problem is that the EU may not have enough resources to bail out such a large economy.

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