Ten principles for a Black Swan-proof world | Hacker News Reader

Ten principles for a Black Swan-proof world

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64 pointsahalan28 comments

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?

> Simplicity will fall naturally out of the process of refining derivatives markets.

Is there any empirical evidence that this is true?

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.

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.

Taleb would call you a "nerd". I think he'd be right.

edit: FWIW he'd probably say the same about me.

Original source: http://www.ft.com/cms/s/0/5d5aa24e-23a4-11de-996a-00144feabd...

needs Google referrer, though.

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.

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

With the qualifier of "if the mistake is big enough"

If the mistake is bad enough for you to go out of business, yes. Isn't that how it should work, you take the risk and you reap the rewards? As it says in #4: "capitalism is about rewards and punishments, not just rewards."

Basically, he's saying that we should allow banks to go bankrupt instead of bailing them out.

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.

Yikes, I just realized that I put down the wrong point. Point 3 was the one I objected to.

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.

Wouldn't that have killed the US economy?

He's also saying that no bank should be too big to fail.

> 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.

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.

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.

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.

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.

> 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.

Government HAS to step up every now and then to reassure me that everything will be ok.

No -- the government should step up every now and then to make things ok. There's a big difference between that and just stepping up and making reassuring sounds without actually doing anything.

Not to make this is an N-level deep thread but I totally agree with you. I didn't mean President going on national TV and saying "it's all good". I meant it in economic terms, like http://www.federalreserve.gov/monetarypolicy/fomc.htm doing their job.

There is disagreement about what steps central banks and others should take to control the economy. NNT thinks the Federal Reserve is incompetent, for example. I don't know whether he's right or not, but the point of view being expressed is not against central banks, regulation or interventions. It's against the necessity (perceived or otherwise) of these things to keep things running.

Its not the government's job. Nor is it somehow equipped to provide a better assessment of the economy than the citizenry. Its only equipped to present an overly optimistic view, which it has consistently done, as leaders tend to try to get re-elected. An inaccurate view is not helpful.

I don't think investors need government to reassure them. They need independent judgement that is not swayed by what the crowd or the leader of the crowd thinks. They need to assess facts.

Those that easily lose confidence sell too cheaply to those who don't lose confidence. And, in the process, increase the average confidence with which dollars are invested.

And the same thing is true of those who listen to the government versus those who pay attention to facts.

Over time, those that practice what works are rewarded and control more of the decisions. So, government handholding and back rubs are irrelevant.

Much more relevant is confidence that the government isn't giving deals to its friends. Bailouts and other goodies for those lobbying the system with lots of money.

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.

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."

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