Wednesday, March 18, 2009

The Washington Post: A Conversation With Nassim Nicholas Taleb

How do you define a Black Swan? If they're so unexpected, how can we prepare for them?

A Black Swan is an exception, like the bird. It is an event with massive consequences that is unexpected. My idea is not simply to say that these things happen. My idea has been to identify the vulnerabilities, the spots where people are driving the school bus blindfolded. In banking, I identified a huge amount of risk taking on the part of banks that were using bogus models to estimate their risks.

It was so painful to watch the banking system become so fragile to the Black Swans. Now there is wealth turning into air as we speak.

What do you see ahead? What do you make of the mainstream economists who predict that the economy will turn around later this year or next?

Look, globalization has created this interlocking fragility. At no time in the history of the universe has the cancellation of a Christmas order in New York meant layoffs in China. So for a while it created the illusion of stability, but it has created this devastating Black Swan.

Complex systems do not like debt. So it will proceed to destroy tens of trillions in debt until society rebuilds itself in an ultraconservative manner. We are in for a worse ride than people think.

People have the problem of denial. This is one of the things I learned in Lebanon. Everybody who left Beirut when the war started, including my parents, said, 'Oh, its temporary.' It lasted 17 years! People tend to underestimate the gravity of these situations. That's how they work.

Is this crisis going to last 17 years?

Unfortunately no, complex systems cascade much faster than that. However, the destruction will be deeper than people anticipate. It will bring down a lot of people.

My rosy scenario is that a better economic environment will develop, a low-debt, robust growth world, in which whatever is fragile will be allowed to break early and not late.

My nightmare scenario is that the government saves Citibank once again, as well as the other banks, and business resumes as usual. Then, the next time the system breaks, it breaks much, much bigger.
Related books:
The Black Swan: The Impact of the Highly Improbable (also available in an Audio Book)
Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets (also available in an Audio Book)