An Evening with Nassim Taleb
I have the great fortune of traveling extensively for work and was recently lucky enough to be able to spend an evening with Nassim Taleb, sponsored by RBS (Royal Bank of Scotland) in Milan, Italy. His discussion focused on his most recent book, Antifragile, which I highly recommend, but he’s probably most famous for his tome, The Black Swan, which has become a staple of economic discussions. His comments were so intriguing that I thought I’d share a few, with my commentary in italics:
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Too many decision makers in the world today do not have sufficient skin in the game, which degrades the quality of their decision making. Without skin in the game, decision makers have incentives to hide risks, thus the wisdom of Hammurabi’s the Law of the Builder in which bridge engineers slept under the very bridges they were building: those with the ability to have the most thorough knowledge would take on the greatest risk.
This is one of the many reasons we prefer fund managers to have a considerable portion of their own wealth invested in the funds they manage.
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Organic systems that are most likely to survive and thrive need volatility. Removing it slowly kills them. Consider the great lengths that various public entities have gone to in order to reduce volatility in the economy. By the time the financial crisis occurred, almost every bank executive in office had never experienced a financial crisis first-hand, thus their ability to accurately identify emerging risks and manage them was correlated with their lifelong experience in the “Great Moderation”. The Federal Reserve had for years assured them that it would make sure that a crisis was avoided. The consequence of this tempering of previously normal levels of volatility speaks for itself, in our experience with a financial crisis that surpassed any previously experienced.
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GDP generated by borrowing ignores the future impact of having to repay those funds. In 2006, total US Federal Debt reached $8 trillion. It is now over $16 trillion. The debt incurred in the 230 years from 1776 to 2006, has more than doubled in the past 7 years.
