Wednesday, April 08, 2009

Ten principles for a Black Swan-proof world

From the FT today. This comment article by Nassim Nicholas Taleb is worth remembering. In summary, with our comments:

1. What is fragile should break early while it is still small. The most complex become the biggest, and the most complex become the most fragile. Offshore operators, take note.

2. No socialisation of losses and privatisation of gains. On bailouts.

3. People who were driving a school bus blindfolded (and crashed it) should never be given a new bus. On the economics establishment (universities, regulators, central bankers, government officials, various organisations staffed with economists). Study offshore!

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

5. Counter-balance complexity with simplicity. The complex economy is already a form of leverage: the leverage of efficiency. Offshore operators, take note.

6. Do not give children sticks of dynamite, even if they come with a warning. On derivatives, bankers, gullible regulators and economic theorists.

7. Only Ponzi schemes should depend on confidence. On cascading rumours and complex systems.

8. Do not give an addict more drugs if he has withdrawal pains. On leverage. Offshore operators, take note.

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

10. Make an omelette with the broken eggs. Time for Capitalism 2.0, Taleb says (we say Capitalism 2.0 came in with the Bretton Woods system; we say time for Capitalism 3.0.) Tackle offshore, the heart of the system.


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