Ten principles for a Black Swan-proof world
By Nassim Nicholas Taleb
Published: April 7 2009 20:02 | Last updated: April 7 2009 20:02
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 riskbearing.
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.
4. Do not let someone making an “incentive” bonus manage a nuclear plant – or your financial
risks. Odds are he would cut every corner on safety to show “profits” while claiming to be
“conservative”. Bonuses do not accommodate the hidden risks of blow-ups. It is the asymmetry
of the bonus system that got us here. No incentives without disincentives: capitalism is about
rewards and punishments, not just rewards.
5. Counter-balance complexity with simplicity. Complexity from globalisation and highly
networked economic life needs to be countered by simplicity in financial products. The complex
economy is already a form of leverage: the leverage of efficiency. Such systems survive thanks
to slack and redundancy; adding debt produces wild and dangerous gyrations and leaves no
room for error. Capitalism cannot avoid fads and bubbles: equity bubbles (as in 2000) have
proved to be mild; debt bubbles are vicious.
6. Do not give children sticks of dynamite, even if they come with a warning . Complex
derivatives need to be banned because nobody understands them and few are rational enough
to know it. Citizens must be protected from themselves, from bankers selling them “hedging”
products, and from gullible regulators who listen to economic theorists.
7. Only Ponzi schemes should depend on confidence. Governments should never need to
“restore confidence”. Cascading rumours are a product of complex systems. Governments
cannot stop the rumours. Simply, we need to be in a position to shrug off rumours, be robust
in the face of them.
8. Do not give an addict more drugs if he has withdrawal pains. Using leverage to cure the
problems of too much leverage is not homeopathy, it is denial. The debt crisis is not a
temporary problem, it is a structural one. We need rehab.
9. Citizens should not depend on financial assets or fallible “expert” advice for their retirement.
Economic life should be definancialised. We should learn not to use markets as storehouses of
value: they do not harbour the certainties that normal citizens require. Citizens should
experience anxiety about their own businesses (which they control), not their investments
(which they do not control).
10. Make an omelette with the broken eggs. Finally, this crisis cannot be fixed with makeshift
repairs, no more than a boat with a rotten hull can be fixed with ad-hoc patches. We need to
rebuild the hull with new (stronger) materials; we will have to remake the system before it does
so itself. Let us move voluntarily into Capitalism 2.0 by helping what needs to be broken break
on its own, converting debt into equity, marginalising the economics and business school
establishments, shutting down the “Nobel” in economics, banning leveraged buyouts, putting
bankers where they belong, clawing back the bonuses of those who got us here, and teaching
people to navigate a world with fewer certainties.
Then we will see an economic life closer to our biological environment: smaller companies,
richer ecology, no leverage. A world in which entrepreneurs, not bankers, take the risks and
companies are born and die every day without making the news.
In other words, a place more resistant to black swans.
The writer is a veteran trader, a distinguished professor at New York University’s Polytechnic
The only thing that is certain is uncertainty.
