Nassim Nicholas "Black Swan" Taleb's letter to UK Conservative Party Leader David Cameron
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Finance ·
Aug 18, 2009 | 0 Comments
Full letter of Nassim Nicholas "Black Swan" Taleb's letter to to UK Conservative Party Leader David Cameron here
Interesting parts:
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What is a Black Swan? It is a low-probability, high-impact event that, because of its rarity and the instability of the environment, cannot be scientifically evaluated in terms of risk and return. Although Black Swans are rarely predicted, they are retrospectively seen as having been anticipated, which makes us overestimate our abilities to see them coming. Black Swans can emerge as a result of our intellectual arrogance and our ignorance of our limitations. Some elements of the future are simply beyond our grasp.
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We live in an increasingly complex system and complexity causes Black Swans. How? The more interdependent we become, the harder it is to trace the cause of an event and the tougher to forecast accurately, meaning the traditional tools of economics will fail us. And since the spread of the internet, rumours go round the world in minutes. Consider the run on Icelandic banks. It took place at BlackBerry speed.
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Be careful, too, of the so-called science of economics. Economists have been no better in their predictions than cab drivers. We have an "expert" problem, in which the expert provides you with misplaced confidence, but no information.
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If we are to have regulators, we need them to operate along conservative lines and conserve the rich knowledge and understanding of risk transmitted through generations of practice, of trial and error. We replaced the heuristics of the elders with arrogant (and incompetent) beliefs, breaking, in the name of science, the chain of knowledge.
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Obama is giving the large institutions that failed us, like the IMF and the World Bank, even more powers. He is increasingly dependent on the visionary expert who failed us and does not understand the properties of complex systems and stifling long traditions of wisdom in understanding risk. Just consider the players: Larry Summers, director of the National Economic Council (who, among other things, made both Harvard University and the banking system more fragile), Bernanke (who increased reliance on the error-prone "models") and Tim Geithner, secretary of the US Treasury (who failed to understand that property prices can take extreme deviations).
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