4 ms·

Ten principles for a Black Swan-proof world

64 points by ahalan 15y ago

raphman 15y ago
Original source: http://www.ft.com/cms/s/0/5d5aa24e-23a4-11de-996a-00144feabdc0.html http://www.ft.com/cms/s/0/5d5aa24e-23a4-11de-996a-00144feabd... needs Google referrer, though.
chime 15y ago
> Only Ponzi schemes should depend on confidence. Governments should never need to “restore confidence”. I wholeheartedly disagree. Confidence in this instance is just trust that your assets won't suddenly become worthless or your standard of living won't drop drastically overnight. It is a GOOD thing that I have the choice to have or not have confidence in the Government. It means (a) I am not expected to have blind faith and (b) I have the right to assess the level of risk involved in trading and conduct my economic activities accordingly. I absolutely need the Government to restore consumer confidence in the housing market before I buy a new house. Last time people felt overconfident about the housing market, it caused a boom and bust.
- drcube 15y ago
  What do they think money is? It's basically just fungible units of "confidence". Or maybe "trust" is a better word. That goes for gold as well as the "fiat" variety.
  - javascriptlol 15y ago
    You have misinterpreted this completely. The linked PDF doesn't mention fiat currency once. NNT says a lot of bullshit, but it's amazing how willing people are to comment without even reading the paper and taking some time to reflect upon it.
    - drcube 15y ago
      No, but it did mention "confidence". My point is that that is the entire basis for money. Deep down, the economy is psychological. You can't "shrug it off" and "remain robust" when the people who make up the economy stop believing in it.
- javascriptlol 15y ago
  You've missed his point. He's not arguing that people should not assess their confidence before investing. He's arguing that the government should not need to prop up confidence. The comparison to Ponzi schemes is because he believes (rightly or not) that many of these interventions are not sustainable.
  - chime 15y ago
    > He's arguing that the government should not need to prop up confidence. But that's the most important function of the government in any economy. I understand he is point: make the markets fail-safe and idiot-proof and there won't be a need for government to keep reassuring us that everything is fine. And that's precisely what I'm disagreeing about. I'm saying that is not how markets work. Things HAVE to have risk, things HAVE to go up and down. Government HAS to step up every now and then to reassure me that everything will be ok. Even if you remove all possibility of corruption and theft from both the markets and the government, I will still need the government to assure me because of the uncertainties and unknowns in any market-driven economy.
    - javascriptlol 15y ago
      You can assert that the government "has to" do these things, but I do not believe you can substantiate that point. I don't think NNT can prove that things would be better without government intervention, either. However, there is an important general point here about kinds of fragility that are being built into society. I think it will (sadly) go ignored while people argue about fiat currency, quantitative easing and other magic cures.
      - lutorm 15y ago
        He's not arguing that "things would be better without government intervention". My impression was that his argument was that government shouldn't assume only the risks and not the profits. Quoting from the article: "Whatever may need to be bailed out should be nationalised; whatever does not need a bail-out should be free, small and riskbearing."
    - 15y ago
MrMan 15y ago
Making financial subjects into moral parables is not an effective way to deal with complexity. Simplicity will fall naturally out of the process of refining derivatives markets. Insurance is a derivative. Options are derivatives. Common Stock is actually arguably a derivative as well. Welcome to capitalism! Complexity is born of there being lots of people on Earth who trade goods and services. No way back except to wish calamity on us all?
- javascriptlol 15y ago
  Taleb would call you a "nerd". I think he'd be right. edit: FWIW he'd probably say the same about me.
- aangjie 15y ago
  Agreed Complexity is a living day truth. I do agree that progess in complexity has to be limited for safety. i.e: there must be some limits(ex:safety factor in civil/mech engineering design, testcases in s/w engg.??) that have to be held for a long enough time. Ofcoures NNT writes for the masses, so opts for limits that majority of people can understand. And that usually is a lot more orthodox.
- _delirium 15y ago
  > Simplicity will fall naturally out of the process of refining derivatives markets. Is there any empirical evidence that this is true?
- nandemo 15y ago
  His point is not "all derivatives are bad", but rather that some derivatives are too complex and hence might have hidden risks that are potentially catastrophic (as in the mortgage-backed derivatives crisis). Stock options like standard puts and calls, though risky, are well understood in terms of the underlying.
jamesaguilar 15y ago
Am I misreading number point two or does it basically say, "One mistake and you are out?"
- dlss 15y ago
  With the qualifier of "if the mistake is big enough"
- nandemo 15y ago
  Basically, he's saying that we should allow banks to go bankrupt instead of bailing them out.
  - jamesaguilar 15y ago
    He also mentions academic economists. I guess that was my main objection, especially since many academic economists did not support the policies that ultimately caused the financial crisis.
  - Fliko 15y ago
    Wouldn't that have killed the US economy?
    - neilk 15y ago
      He's also saying that no bank should be too big to fail.
  - kristianp 15y ago
    Here's what he actually said. It's pretty clear: 2. No socialisation of losses and privatisation of gains. Whatever may need to be bailed out should be nationalised; whatever does not need a bail-out should be free, small and riskbearing. And the next sentence criticises what was done. 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.
drallison 15y ago
Taleb's point is that there no real way to create a Black Swan proof world, but that by applying a few straight forward rules the impact of a Black Swan Event can be kept bounded. He also believes, that reckless behavior should not be encouraged by social and/or economic policies.

64 points by ahalan 15y ago

Original source: http://www.ft.com/cms/s/0/5d5aa24e-23a4-11de-996a-00144feabdc0.html http://www.ft.com/cms/s/0/5d5aa24e-23a4-11de-996a-00144feabd... needs Google referrer, though.

chime 15y ago

> Only Ponzi schemes should depend on confidence. Governments should never need to “restore confidence”. I wholeheartedly disagree. Confidence in this instance is just trust that your assets won't suddenly become worthless or your standard of living won't drop drastically overnight. It is a GOOD thing that I have the choice to have or not have confidence in the Government. It means (a) I am not expected to have blind faith and (b) I have the right to assess the level of risk involved in trading and conduct my economic activities accordingly. I absolutely need the Government to restore consumer confidence in the housing market before I buy a new house. Last time people felt overconfident about the housing market, it caused a boom and bust.

drcube 15y ago
What do they think money is? It's basically just fungible units of "confidence". Or maybe "trust" is a better word. That goes for gold as well as the "fiat" variety.
- javascriptlol 15y ago
  You have misinterpreted this completely. The linked PDF doesn't mention fiat currency once. NNT says a lot of bullshit, but it's amazing how willing people are to comment without even reading the paper and taking some time to reflect upon it.
  - drcube 15y ago
    No, but it did mention "confidence". My point is that that is the entire basis for money. Deep down, the economy is psychological. You can't "shrug it off" and "remain robust" when the people who make up the economy stop believing in it.
javascriptlol 15y ago
You've missed his point. He's not arguing that people should not assess their confidence before investing. He's arguing that the government should not need to prop up confidence. The comparison to Ponzi schemes is because he believes (rightly or not) that many of these interventions are not sustainable.
- chime 15y ago
  > He's arguing that the government should not need to prop up confidence. But that's the most important function of the government in any economy. I understand he is point: make the markets fail-safe and idiot-proof and there won't be a need for government to keep reassuring us that everything is fine. And that's precisely what I'm disagreeing about. I'm saying that is not how markets work. Things HAVE to have risk, things HAVE to go up and down. Government HAS to step up every now and then to reassure me that everything will be ok. Even if you remove all possibility of corruption and theft from both the markets and the government, I will still need the government to assure me because of the uncertainties and unknowns in any market-driven economy.
  - javascriptlol 15y ago
    You can assert that the government "has to" do these things, but I do not believe you can substantiate that point. I don't think NNT can prove that things would be better without government intervention, either. However, there is an important general point here about kinds of fragility that are being built into society. I think it will (sadly) go ignored while people argue about fiat currency, quantitative easing and other magic cures.
    - lutorm 15y ago
      He's not arguing that "things would be better without government intervention". My impression was that his argument was that government shouldn't assume only the risks and not the profits. Quoting from the article: "Whatever may need to be bailed out should be nationalised; whatever does not need a bail-out should be free, small and riskbearing."
  - 15y ago

MrMan 15y ago

Making financial subjects into moral parables is not an effective way to deal with complexity. Simplicity will fall naturally out of the process of refining derivatives markets. Insurance is a derivative. Options are derivatives. Common Stock is actually arguably a derivative as well. Welcome to capitalism! Complexity is born of there being lots of people on Earth who trade goods and services. No way back except to wish calamity on us all?

javascriptlol 15y ago
Taleb would call you a "nerd". I think he'd be right. edit: FWIW he'd probably say the same about me.
aangjie 15y ago
Agreed Complexity is a living day truth. I do agree that progess in complexity has to be limited for safety. i.e: there must be some limits(ex:safety factor in civil/mech engineering design, testcases in s/w engg.??) that have to be held for a long enough time. Ofcoures NNT writes for the masses, so opts for limits that majority of people can understand. And that usually is a lot more orthodox.
_delirium 15y ago
> Simplicity will fall naturally out of the process of refining derivatives markets. Is there any empirical evidence that this is true?
nandemo 15y ago
His point is not "all derivatives are bad", but rather that some derivatives are too complex and hence might have hidden risks that are potentially catastrophic (as in the mortgage-backed derivatives crisis). Stock options like standard puts and calls, though risky, are well understood in terms of the underlying.

jamesaguilar 15y ago

Am I misreading number point two or does it basically say, "One mistake and you are out?"

dlss 15y ago
With the qualifier of "if the mistake is big enough"
nandemo 15y ago
Basically, he's saying that we should allow banks to go bankrupt instead of bailing them out.
- jamesaguilar 15y ago
  He also mentions academic economists. I guess that was my main objection, especially since many academic economists did not support the policies that ultimately caused the financial crisis.
- Fliko 15y ago
  Wouldn't that have killed the US economy?
  - neilk 15y ago
    He's also saying that no bank should be too big to fail.
- kristianp 15y ago
  Here's what he actually said. It's pretty clear: 2. No socialisation of losses and privatisation of gains. Whatever may need to be bailed out should be nationalised; whatever does not need a bail-out should be free, small and riskbearing. And the next sentence criticises what was done. 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.

drallison 15y ago

Taleb's point is that there no real way to create a Black Swan proof world, but that by applying a few straight forward rules the impact of a Black Swan Event can be kept bounded. He also believes, that reckless behavior should not be encouraged by social and/or economic policies.