How To Avoid Black Swans

Nassim Taleb, author of the eerily prescient books Fooled By Randomness and The Black Swan, has a very interesting column in the Financial Times. We have referenced Taleb before here at Invest With An Edge, and with good reason. He sees things most people miss.

Black swans are the rare, almost unknown possibilities that can come out of nowhere and cause great surprise. Avoiding them is an excellent idea. In the FT article, Taleb offers “Ten Principles for a Black Swan-Proof World.”

1. What is fragile should break early while it is still small. Nothing should ever become too big to fail. Evolution in economic life helps those with the maximum amount of hidden risks – and hence the most fragile – become the biggest.

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 risk-bearing. 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.

3. People who were driving a school bus blindfolded (and crashed it) should never be given a new bus. The economics establishment (universities, regulators, central bankers, government officials, various organisations staffed with economists) lost its legitimacy with the failure of the system. It is irresponsible and foolish to put our trust in the ability of such experts to get us out of this mess. Instead, find the smart people whose hands are clean.

Read the rest.