Nassim Taleb's Ten Principles

One of the latest things hitting the interweb is a post in the FT written by Nassim Nicholas Taleb called Ten principles for a Black Swan-proof world. I am a huge fan of Taleb’s work, that a prominent philosopher has a background in trading makes his writings all the more relevant for people very interested in markets. His work has helped many people with critical thinking and reasoning.

That being said I find the commentary to be a bit odd like perhaps he was asked to put this together by a publisher, literary agent or the like. A Black Swan is an event that cannot be reasonably predicted, specifically the term originated out of shock that black swans (the actual bird) existed. They were previously believed to only be white; a black bird was simply unfathomable.

As you make your way through the list of ten principles you will probably agree with all of them but they don’t address back swans they address future financial crises that might resemble the current one. Nothing should ever be too big to fail is logical because too big to fail implies that it is too big to save. Who disagrees with that, but an institution being too big that then fails will never be a black swan again. Was it even a black swan before?

Fannie and Freddie have effectively failed, was this a black swan? Well I seem to remember many people (not the majority mind you) calling Fannie a house of cards back in the mid-1990’s. Was AIG a black swan? That one might have been but how many people have been warning about a derivatives triggered meltdown for most of this decade? If you read anything by Michael Panzner earlier in the decade and then looked at AIG’s books then a failure became fathomable – even if you did not agree with Panzner you could fathom the possibility.

I am not smart enough to even give an example of what a true black swan would be. We have had them in the past and they will occur in the future but the list is not a black swan defense it is a solid recipe for sounder financial system and several of the points made merit their own posts which I will try to delve into in the next few days.

** Editor's Note:  Don't miss Roger's follow-up piece on Taleb's 9th principle.

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