Nassim Nicholas Taleb the author of the brilliant The Black Swan: The Impact of the Highly Improbable
presents in the Financial Times Ten principles for a Black Swan-proof world. [via]
Also very worth reading is his essay The Fourth Quadrant: A map of the limits of statistics.
Taleb, looking at the cataclysmic situation facing financial institutions today, points out that “the banking system, betting against Black Swans, has lost over 1 Trillion dollars (so far), more than was ever made in the history of banking”.
But, as he points out, there is also good news.
“We can identify where the danger zone is located, which I call the fourth quadrant, and show it on a map with more or less clear boundaries. A map is a useful thing because you know where you are safe and where your knowledge is questionable.”
I’m not sure that those with the power to change things and those that caused the financial chaos have learnt the lesson and will likely ignore the advice of Nassim Nicholas Taleb.
The reason they got us into this mess and were allowed to get away with it for so long was because they were making money hand over fist using financial instruments that nobody really understood. However they were clearly operating off the map and the system became prone to be hit by a Black Swan event.
Their narrative didn’t tie with the reality of the situation at the time and in the future they will restructure the narrative of these current events to suit their own purposes. It will be the fault of the sub-prime house buyers and the poor management at the companies that collapsed and not faults inherent in the system and the lack of proper regulation.