Ten principles for a Black Swan-proof world by Nassim Nicholas Taleb

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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 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.

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.