As I understand it, Nicholas Nassim Taleb’s argument runs something like this:

• We’ve always been vulnerable to shocks. Shocks – the Black Swans – are unavoidable.
• The size of a shock is partly a function of the size of the system it affects. Globalisation means shocks can be very large indeed.
• The internet and digital abundance are other factors. Because they’re not rooted in the physical world, they can produce changes that are unintuitive and, erm, shocking.
• Complex financial instruments are a feature of the internet and digital abundance. We’re not capable of understanding them from our human perspective.
• We’re not, as a species, capable of thinking about ‘debt’ in a rational manner. It simply isn’t real to us. Empirical evidence demonstrates this clearly.

Therefore, a combination of a massively hyper-connected system, digital goods and complex financial instruments are cognitive kryptonite.

We only have two rational responses to this:

1. End globalisation
2. Convert debt (which we’re not capable of thinking about) to equity (which we are, relatively, because we own a stake)

This summary comes from what Nassim Taleb says on this radio show.

Here’s a piece from ft.com in which he and Mark Spitznagel lay it out, slightly differently to my mind:

Our analysis is as follows. First, debt and leverage cause fragility; they leave less room for errors as the economic system loses its ability to withstand extreme variations in the prices of securities and goods. Equity, by contrast, is robust: the collapse of the technology bubble in 2000 did not have significant consequences because internet companies, while able to raise large amounts of equity, had no access to credit markets.

Second, the complexity created by globalisation and the internet causes economic and business values (such as company revenues, commodity prices or unemployment) to experience more extreme variations than ever before. Add to that the proliferation of systems that run more smoothly than before, but experience rare, but violent blow-ups.

I’ve probably got this wrong. If you read it and spot how, I’d appreciate a heads-up.

Ta!

No related posts.