Nassim Taleb on Learning to Love Volatility

Here’s a good thought provoking weekend read from Nassim Taleb.  In it, he offers his 5 policy rules for establishing what he calls “antifragility”:

Rule 1: Think of the economy as being more like a cat than a washing machine.

We are victims of the post-Enlightenment view that the world functions like a sophisticated machine, to be understood like a textbook engineering problem and run by wonks. In other words, like a home appliance, not like the human body. If this were so, our institutions would have no self-healing properties and would need someone to run and micromanage them, to protect their safety, because they cannot survive on their own.

By contrast, natural or organic systems are antifragile: They need some dose of disorder in order to develop. Deprive your bones of stress and they become brittle. This denial of the antifragility of living or complex systems is the costliest mistake that we have made in modern times. Stifling natural fluctuations masks real problems, causing the explosions to be both delayed and more intense when they do take place. As with the flammable material accumulating on the forest floor in the absence of forest fires, problems hide in the absence of stressors, and the resulting cumulative harm can take on tragic proportions.

Read more here.



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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • Ryan Melvey

    Another interesting framework to overlay on top of this is Hyman Minsky’s work which suggests that stability itself is destabilizing because stability encourages greater use of leverage. Both of these thoughts point towards letting the economy experience small crises periodically in order to avoid building up towards a fatal one.

  • SS
  • Johnny Evers

    Brilliant piece.
    Decentralize, decentralize, decentralize.

  • REN

    Here is a link where Nassim advocates that banks get rid of debt by trading equity.

    Either he is a banking agent, or uninformed, or a dupe who thinks all money must come into existence with debt contracts. Assets are grabbed by banks to settle debt contracts in lieu of money. In this way, producing citizens are held down to benefit a “credit creating” plutocracy. The BSR could have easily been put away a long time ago with direct spend.

    According to Nassim’s piece, the banks instead of grabbing the asset whole cloth will instead just take a portion of debtor’s “equity.” So, how did the private banks create the loaned debt money to begin with? Oh yes, hypothecating the debtor, and creating credit with keyboard entries.

    Nothing wrong with decentralizing and having an economy balance itself. But, the fact of the matter is we don’t have a money system that has natural feedback. We have a private banking usury driven credit system. All sectors have to borrow credit and pay back more via the usury mechanism, meaning that all sectors are unbalanced. There is always a net drain.

    How about just direct spend debt free into the household sector, and let them drive the economy, and that way the debt contracts are paid down over time? That way the usury mechanism is intercepted and recycled back to whence it came. Purchasing power is then in the hands of the household sector and the economy serves them, instead of credit masters.

  • Johnny Evers

    One of the problems we have is that we’ve made debt sacred, that it must not be allowed to fail. Maybe it’s because we consider debt an asset. So Greece is not allowed to default, for example. And Fannie Mae had to be rescued. And struggling homeowners are shamed into keeping up their payments. All of that merely extends the crisis and creates further problems, while protecting the lending class.
    Individuals, corporations, countries have been bankrupting themselves forever and it’s silly to think it’s the end of the world when it happens. Most of the time it’s a good thing.

  • Ryan Melvey

    Thanks for the link! I will check it out.

  • Boston Larry

    Government bonds are backed by a promise to pay. Since a democratic gov’t represents the people, then a gov bond is a promise by the people of that nation to pay interest and principal on the bond. If it is not “sacred”, then it is damn close. If we ever don’t pay, it is not due to lack of ability, but due to willingness. That would be a huge mistake if the US ever failed to pay timely interest. it would backfire on us.

  • beowulf

    Bill Clinton has made the point that the govt isn’t allowed to default (he said last year if faced with a debt ceiling, he’d blow right past it). After the Civil War, the Radical Republicans (Radical in the sense they were 100 years ahead of their time in thinking black people should be allowed to vote) enacted the 14th Amendment which included the clause, “The validity of the public debt of the United States… shall not be questioned”. They didn’t want ex-Confederates coming back to Congress and blowing up the Yankee government by blocking debt repayment.
    As the Supreme Court memorably put it,
    “The Constitution gives to the Congress the power to borrow money on the credit of the United States, an unqualified power, a power vital to the government, upon which in an extremity its very life may depend. The binding quality of the promise of the United States is of the essence of the credit which is so pledged. Having this power to authorize the issue of definite obligations for the payment of money borrowed, the Congress has not been vested with authority to alter or destroy those obligations.”

  • EconFan

    thanks for the quote. I just saw Lincoln and am struck by what has become to the GOP .

  • Johnny Evers

    Fellas, I meant that financial sector debt is held sacred. The federal government now guarantees financial institution debt and keeps the consumer in debt servitude.
    And we all understand that federal debt — T-notes — serve as money and not debt. A T-note is not a promise to pay, it’s a financial instrument with the same power as a dollar. When you have a T-note, you’ve exchanged your dollar for the note; you’ve already been paid, plus now you get interest.
    MR doesn’t say that expressly, perhaps, but that’s the takeway. You’ll note that MR says that federal debt will be rolled over, never paid down.

  • Andrew P

    If you are going to compare the financial system to a forest full of dry tinder ready to explode, you need to have a discussion as to how one executes a controlled burn of excess debt before it piles up too high (just as is done to prevent disastrous forest fires). Can the Federal Reserve cordon off a segment of say, the housing market, and burn all its questionable debt to the ground to prevent it from accumulating?

  • John Carney

    I think NNT’s point is a very important one that certain schools of thought that put price stability and/or full employment at their center should consider. Those schools assume that these are the proper goals of economic policy. NNT says these should not be goals at all.

  • beowulf

    “NNT says these should not be goals at all.”
    Then NNT should write his Congressman :o)

    “The medium-term goals…. in each Economic Report thereafter shall include (as part of the five-year goals in each Economic Report) interim numerical goals for—
    (1) reducing the rate of unemployment, as set forth pursuant to section 1022 (d) of this title, to not more than…. 4 per centum among individuals aged sixteen and over…;
    (2) reducing the rate of inflation, as set forth pursuant to section 1022 (e) of this title, to not more than 3 per centum… Provided, That policies and programs for reducing the rate of inflation shall be designed so as not to impede achievement of the goals and timetables specified in clause (1) of this subsection for the reduction of unemployment”

    It is odd that the Full Employment Act’s 4% U3, 3% inflation rate goals are ignored pretty much by everyone. The CBO assumes full employment U3 is over 5% and the Fed appears to think that setting a 3% inflation target is a felony (and neither, apparently, can absorb the horrifying thought of prioritizing “the goals and timetables” of full employment over those of price stability).

  • EconFan

    actually I dont think ‘all’ politicans understand it if Clinton had to explain this during the debt ceiling circus. Interestingly, the ‘radical Republicans’ created the 14th amendment language to keep a possible (Confederate) majority in Congress from blowing up the executive by forcing a default on debt.
    and for related reasons, these same ‘radical Republicans’ would have(but for deaths of Lincoln and Stevens) also created fiat money (greenback) in order to ensure that the government and not banks controlled the money supply.