

Principles for a Black Swan-proof world - peter123
http://money.ninemsn.com.au/article.aspx?id=798993

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tokenadult
No registration required to read it here:

<http://money.ninemsn.com.au/article.aspx?id=798993>

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g_ford
Or if google is the referrer. And since I have HN as a feed in iGoogle I
didn't even realise until I came to read the comments.

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praptak
Or if you substitute "True" for "False" in the "Authorized=" part of the link.

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jerf
I'm intrigued by "capitalism 2.0", but I'm at a bit of a loss as to how to get
from here to there. There's a lot of government intervention required in
Taleb's bullet points that won't happen for decades, if ever. His proposed
interventions don't have anything in them for the government in the time spans
they talk about and don't leave a lot of room for governments to collect more
power and exercise it for their personal gain, which seems to be about all
they are good for lately.

What might work is a lot of people voluntarily adopting the aspects of
Capitalism 2.0 they can control. The downside is they won't grow as much
during the boom times, but come next bust they'll be the only ones left
standing. If enough people do that, will the point be made? Can people who
eschew leverage and survive during the times nobody else is? If not,
Capitalism 2.0 may be beautiful but is fundamentally unstable in its own way.

(It's beautiful to imagine a world where a magic authority can enact perfect
legislation to make capitalism 2.0 a reality, but unfortunately, every
significant nation-state on earth would have to be brought on board at once,
lest one nation-state start leveraging and gain a temporary-but-huge
advantage. A full transition would be a boil-the-ocean approach; an
interesting question is whether there's a more personal approach that could do
some good. The only other halfway realistic prospect would be new colonies
that could implement these economics from scratch. Since a new colony would by
necessity be on a frontier (space or ocean), they might be open to these
ideas. You can't breath leverage or use it for delta-V.)

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Herring
Curious, what advantage?

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jerf
You can't think of advantageous ways for a nation state to use a burst of
funding, even if it comes due in a huge way five years later?

It's the same advantage corporations get, only with military options.

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froo
I always get a little tingle deep inside me whenever I hear about this black
swan theory, whats more, suggesting principles for a black swan proof world (I
know it's just the title, sensationalism never solved anything) is like
pissing into the wind.

It will only come back to haunt you.

"black swans" are just one of those facts of life, The sun rises in the
morning, water is wet, shit happens.

Best anyone can do is attempt to minimise the factors that cause Black Swan
events, you can never completely eliminate them.

Offtopic point, the black swan is actually the symbol for the West Australian
flag (my home state)

[http://media-2.web.britannica.com/eb-
media//21/5021-004-C61F...](http://media-2.web.britannica.com/eb-
media//21/5021-004-C61F3D04.gif)

So these topics always give me a giggle, because I've seen many, many black
swans in my lifetime (actually, probably many more black swans than white
swans)

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cameldrv
Taleb's point is not to reduce the probability of having a black swan, which
he essentially assumes to be fixed, but to reduce the impact when they happen.
His point is that if you are leveraged 30:1, there will always be black swans
that your model says will virtually never happen, but do, and cause your
assents to go down by say, 5%, and wipe out your equity and cause you to
default.

What Taleb is getting at is that you just shouldn't leverage 30:1, and so if
you hit a black swan, maybe your assets go down by 10% or 20% instead of 100%
and then defaulting to bondholders as well.

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froo
_Taleb's point is not to reduce the probability of having a black swan, which
he essentially assumes to be fixed_

But the probability isn't fixed, given black swan events are dependent on
taking bigger risks. If you minimise risk, you can essentially completely
avoid black swan events.

To explain it using the core idea, the black swan was discovered in these
regions of Australia. If explorers never took the risk to explore these parts,
then they would have never been discovered.

So no, the probability isn't fixed. The probability of a "black swan event"
occurring is more or less proportional to the complexity of the system that it
relates too and the risk that an organisation is willing to take.

Using the horrible september 11 attacks as an example, Al Qaeda more than
likely wouldn't have attacked if they didn't see their way of life as being
threatened in some way. This was, for all intensive purposes, an intensely
complex political matter which was created as a result of risks taken by
previous governments.

Do I think what happened is right? Hell no, lives were lost on both sides as a
result of people taking risks that they perhaps shouldn't have. Human error at
it's worst.

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flipbrad
You open your argument with the implicit statement that we can consciously
(thus should) control and minimise risk (to the point where black swans are
eliminated) - and that it would be desirable to do so. but using your swan
argument, to minimise that risk the explorers would have to have know about
the risk - how could they? - and then decided that in light of it, it wasn't
worth going to australia.

now, i have no particular affinity for australia nor its brash and smelly
inhabitants, but frankly, i don't see either of those positions as logically
tenable!

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froo
Well, to explore unexplored areas involves risk of some form, it is just the
magnitude of that risk that is unknown.

So then to simply avoid unexplored areas and as such, minimising risk,
therefore it could have been possible to never see a black swan.

Now, on a more personal note as an Australian. Black Swans are primarily and
originally were native to the Western side of the country in the southern
areas, but are also found on the Eastern coast of Oz as a result of human
interference. When Australia was "discovered" and originally settled, that was
done on the Eastern coast of Australia (hence why the east coast of Australia
has about 80% of the total population of the country) and only through risk of
magnitude unknown would it have been possible to discover the black swans.

So no, you're assertion is wrong sir. Thank you for insulting a country you
know sweet FA about.

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Herring
_Do not let someone making an "incentive" bonus manage a nuclear plant – or
your financial risks._

The problem is that you're uh.. incentivizing the wrong thing. This is basic
capitalism.

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khafra
I wonder what happens if you pay and give retirement benefits to national and
state legislators as percentage of per capita GDP.

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yummyfajitas
They will try to create/prop up speculative bubbles?

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alecco

      Then we will see an economic life closer to our biological environment: smaller
      companies, richer ecology, no leverage. A world in which entrepreneurs, not bankers, take
      the risks and companies are born and die every day without making the news.
    
      In other words, a place more resistant to black swans.
    

You got me on "hello"...

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mattchew
"I do not think that phrase means what you think it means . . ." oh, wait, who
was the author of the article again?

The article is strange to me. First, I thought Taleb scorned the FT crowd.
Second, since when did he start writing in bullet-pointed pop journalist
style? Maybe this was an experiment or a joke. Or just a bad day.

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jerf
The last line in the article is "In other words, a place more resistant to
black swans." I bet an editor "amped up" the title to "Black Swan-proof"
without asking the author.

And he may despise the FT crowd, but that is also exactly the crowd his
message needs to be in front of.

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brown9
Also no registration required if you copy and paste the headline into Google
News, which results in:
[http://www.ft.com/cms/s/0/5d5aa24e-23a4-11de-996a-00144feabd...](http://www.ft.com/cms/s/0/5d5aa24e-23a4-11de-996a-00144feabdc0.html)

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ftse
I suspect it is too late to 'fix' the system.

"People who were driving a school bus blindfolded (and crashed it) should
never be given a new bus."

Unfortunately for us the bus driver is the gatekeeper to the garage and he
decides who gets to drive.

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Confusion
It is completely unrealistic to expect any of these principles to be upheld.
Capitalism is like evolution: a force of nature. It weeds out the less
profitable and that is the _only_ thing it does.

Only the first principle may be upheld by governments: by imposing their own
risk calculations, they may be able to ensure that no financial institution
gets too big to fail. Not by making sure they do not get big, but by making
sure they can always bear the risks.

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zzkt
April Fools Day was last week.

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Confusion
I'm not sure what you are referring to, but if it is to my assertion that
'capitalism is a force of nature', then I advise you to read Marx. He already
understood that capitalism is almost unavoidable in trading systems. It is an
emergent phenomenon, like avalanches are emergent phenomena of the combination
of snowfall, mountains and gravity.

