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« Gold Diggers | Main | Out of the Box Thinking »

October 08, 2009

Comments

CK

Quality Excursions are Black Swans. Prevention is key.

micro CEO

Taleb is of my favorite authors of recent days. I read Taleb's first book (Fooled by Randomness) and can highly recommend it. Some may argue that he speaks in terms of perfect 20/20 hindsight vision, but more financial black swans will inevitably strike again, in the not so distant future.
The combination of hard statistics (accounting) and psychology (investing) is what makes it so unique as Taleb points out.

One of his analogies that has stuck with me is:

Suppose there are 2 traders and one make 10% YoY profit by careful and conservative investment, while the other makes 50% YoY profit by holding a revolver to his head and betting with Wall Street that he will not die when he pulls the trigger (hence he is rich survivor with a 5 out of 6 chance). Which trader should be respected more and rewarded by Wall Street investors?

By the current system, the guy with the revolver is the one who gets promoted because he made more money in a year. Wall Street does not (did not?) care about the risks as long as the rewards are superior...

In reality, we don't have a clear idea where are the revolvers and how many chambers they may have. If there are 1000 chambers and only one bullet, then we may get a false sense of confidence about the safety of the game of financial Russian roulette... That is the point I remember most from Taleb.

Fred Wang

Something to think about
"One of the myths about capitalism is that it is about incentives. It is also about disincentives. No one should have a piece of the upside without a share of the downside. However, the very nature of compensation adds to risk. If you give someone a bonus without clawback provisions, he or she will have an incentive to hide risk by engaging in transactions that have a high probability of generating small profits and a small probability of blowups. Executives can thus collect bonuses for several years. If blowups eventually take place, the managers may have to apologize but won’t have to return past bonuses. This applies to corporations, too. That’s why many CEOs become rich while shareholders stay poor. Society and shareholders should have the legal power to get back the bonuses of those who fail us. That would make the world a better place.

Moreover, we shouldn’t offer bonuses to those who manage risky establishments such as nuclear plants and banks. The chances are that they will cut corners in order to maximize profits. Society gives its greatest risk-management task to the military, but soldiers don’t get bonuses." From Nassim Speech

Mike G

A person's or organization's mindset determines how they look at Black Swans. Some embrace the fact that such events will occur, but others seem to completely discount the possibilities. These people/organizations are very much in danger, as Murphy's Law guarantees those who ignore the Black Swan will definitely find one (or more)!

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