The Ten Principles for a Black-Swan-Robust Society

Excerpt from On Robustness and Fragility, Deeper Philosophical and Empirical Reflections by Nassim Nicholas Taleb (Context)

1. What is fragile should break early while it’s still small: Nothing should ever become too big to fail. Evolution in economic life helps those with the maximum amount of hidden risks 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 bailout should be free, small and risk-bearing. We got ourselves into 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 drove a school bus blindfolded (and crashed it) should never be given a new bus: The economics establishment (universities, regulators, central bankers, government officials, various organizations staffed with economists) lost its legitimacy with the failure of the system in 2008. It is irresponsible and foolish to put our trust in their ability to get us out of this mess. It is also irresponsible to listen to advice from the “risk experts” and business school academia still promoting their measurements, which failed us (such as Value-at-Risk). Find the smart people whose hands are clean to get us out of this mess.

4. Don’t 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” from these savings while claiming to be “conservative”. Bonuses don’t 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. Compensate 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. It’s the leverage of efficiency. Adding debt to that system produces wild and dangerous gyrations and provides no room for error. Complex systems survive thanks to slack and redundancy, not debt and optimization. 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 label: Complex financial products need to be banned because nobody understands them, and few are rational enough to know it. We need to protect citizens 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. We just need to be able to shrug off rumours, to be robust to 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 homoeopathy, it’s denial. The debt crisis is not a temporary problem, it’s a structural one. We need rehab.

9. Citizens should not depend on financial assets as a repository of value and rely on fallible “expert” advice for their retirement: Economic life should be definancialised. We should learn not to use markets as warehouses of value: they do not harbor the certainties that normal citizens can require, in spite of “expert” opinions. Investments should be for entertainment. Citizens should experience anxiety from their own business (which they control), not from their investments (which they do not control).

10. Make an omelet with the broken eggs: The crisis of 2008 was not a problem to fix with makeshift repairs. We will have to remake the system before it does so itself. Let us move voluntarily into a robust economy by helping what needs to be broken break on its own, converting debt into equity, marginalising the economics and business school establishments, 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 firms and no leverage – a world in which entrepreneurs, not bankers, take the risks, and in which companies are born and die every day without making the news.

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