Always good advice for any investor

e.g. Perhaps a distributed, hyper-localized system of business would be vulnerable to localized manias? Or perhaps a a hyper-cautious small scale world would not be able to find the drug researchers required to combat sudden avian bird flu?

Okay, not great examples but I’m thinking on my feet.

The point I took away from Black Swan is to expect the unexpected, and to try and make sure you have lifeboats, rather than thinking you can prevent them altogether.

Here are my comments to his top 10:

T. What is fragile should break early while it is still small.

Me: Okay, I agree with this point. Somehow, we must keep the Citi’s and the AIGs of the world from getting “too big to fail”, but that is a hazardous road as it involves government intervention and therefore “unintended consequences”.

T: No socialisation of losses and privatisation of gains.

Me: I think this point is overdone by the Taleb camp. Once the “too big to fail” do fail, there is nothing to be done but to save them to save the world economy. Hindsight is 20/20

T. People who were driving a school bus blindfolded (and crashed it) should never be given a new bus.

Me: Another great sound bite that doesn’t make real world sense. Who knows how to fix complex securities and resultant damage to the global economy and banking system if not bankers and economists. Janitors?

T. Do not let someone making an “incentive” bonus manage a nuclear plant – or your financial risks.

Me: Okay, but this is going to require lots of regulation. And the “free marketers” are not going to like that. Isn’t Taleb a free marketer? Doesn’t he think the markets know better than the government? He is contradicting himself.

T. Counter-balance complexity with simplicity.

Me: More regulation. Eliminating debt from the economy sounds good, but will lock us into lower growth and limit improvements in lifestyle, not just here, but especially in the developing world. Low leverage means higher cost of capital. It is a straight forward (linear) relationship. Higher cost of capital (interest rates) means less of everything for everyone. A harsh prescription

T. Do not give children sticks of dynamite, even if they come with a warning.

ME: who decides what is a complex derivative? If we limit financial products we limit growth and prosperity. Maybe better to regulate ALL financial products and purveyors and require them to be traded in an open market in order to provide visibility (I don’t know why we don’t have “toxic assets” trading in open markets yet. That is the best way to clear them at a fair price).

T. Only Ponzi schemes should depend on confidence.

ME: Dumb metaphor and conclusion. Economics is all about human behavior which is about psychology. Of course it is governments’ role to maintain the confidence of its people. That is one of its principle responsibilities encoded in our American “Declaration of Independence”: “the pursuit of happiness”. Government is responsible to create a stable and safe environment so the individual can do just that. That is why we agree to pay taxes.

T. Do not give an addict more drugs if he has withdrawal pains.

Me: Wrong, Dr. Taleb. A more reasonable physician might use methadone or a nicotine patch to help the patient rid his addiction. Going “cold turkey” is only for masochists (maybe like Taleb)

T. Citizens should not depend on financial assets or fallible “expert” advice for their retirement.

ME: Agreed, they should read my blog and yours and become knowledgable about finance and economics so they can make intelligent decisions of their own.

T. Make an omelette with the broken eggs.

Me: I think it is perfectly acceptable to make an omelette with a broken egg, so bad metaphor (he really needs to work on him allegory / metaphor skills). I don’t think there is anything patchwork about the radical actions taken to fix the economy. There are resources being applied that were only academic theory two years ago. This is the biggest economic experiment in history, and Taleb calls it patchwork? But his conclusion is fine, and really is the strength of our national economy: small business and entrepreurs building from the ashes of the fallen. There has already been lots of creative destruction and plenty of businesses are failing as they should in a capitalist economy, providing fertilizer for new growth.

T: “In other words, a place more resistant to black swans.”

Me: In saying this, he misses the whole point of his own argument. Black swans are just that, tail ends of a probability curve. There will always be tails. They aren’t going away, unless Taleb knows how to reinvent probability. This sounds like the same argument from Greenspan of managing the economy to “eliminate the business cycle”. It can’t be done! Human nature does not change. Greed and fear will always exist and will just promulgate in a different way in the future that has not yet been imagined. How do you regulate the unknown?