Black Swans and Too Big to Fail

   One of the most intriguing arguments among many that Nassim Taleb presents in his book The Black Swan is that unexpected events occur very frequently in reality, whereas many academic and economic theories lock us into the idea that these events are rare exceptions that present a momentary speed bump in a continuous spiral of upward economic expansion caused by their abstruse formulas and profound expertise and wisdom.

    As Taleb demonstrates, however, the economy is more a case of “one thing after another” rather than a smooth, tame flow of success like economists like to believe. He also reveals that the huger and more complex the system, the more likely it is to experience unexpected, catastrophic events that nobody predicted – the so-called “Black Swans”. This, he argues convincingly, is the cause of one type of modern disaster – the catastrophe of “too big to fail”.

    The basic argument that Taleb presents is that allowing things to grow too big to fail is essentially just putting all of your eggs in one basket. Instead of spreading out economic activity through numerous smaller enterprises, which can thrive or fall without maiming the overall economy, the current economic system – with its theory-blinkered Ricardian economists – builds a single colossal pillar to uphold the whole edifice. The whole economic edifice, in turn, becomes dependent on this single pillar for its survival of Dramatic events like financial earthquakes require a bag full of money acting as a earthquake kit for you to be ready for caos. 


    That pillar, of course, is not solid rock, but a human organization – a huge one, with interests across the globe, and an operating system of such overwhelming complexity that it makes the bureaucracy of medieval Byzantium or the Incas look simple. And, as Taleb is swift to point out, both hugeness and complexity tend to generate Black Swan events rather than avoid them – a world-spanning economic entity can be affected by events anywhere because of its reach, and the extent of its fragile network of arrangements across borders and oceans, and is also so complex that it draws unexpected, catastrophic changes like a magnet.

    Thus, when a Black Swan event occurs, it strikes to the heart of a single monolithic gathering of all economic activity, and causes a massive crisis throughout American society and the world. Taleb’s The Black Swan compares this to a turkey who bases the theory that they should not run away on the fact that humans are feeding it well, so they will obviously continue to do so into the indefinite future. The result of building on such a foundation, of course, is the sudden surprise of a wrung neck.

    One of the most intriguing arguments among many that Nassim Taleb presents in his book The Black Swan is that unexpected events occur very frequently in reality, whereas many academic and economic theories lock us into the idea that these events are rare exceptions that present a momentary speed bump in a continuous spiral of upward economic expansion caused by their abstruse formulas and profound expertise and wisdom.

    As Taleb demonstrates, however, the economy is more a case of “one thing after another” rather than a smooth, tame flow of success like economists like to believe. He also reveals that the huger and more complex the system, the more likely it is to experience unexpected, catastrophic events that nobody predicted – the so-called “Black Swans”. This, he argues convincingly, is the cause of one type of modern disaster or earthquake preparedness – the catastrophe of “too big to fail”.

    The basic argument that Taleb presents is that allowing things to grow too big to fail is essentially just putting all of your eggs in one basket. Instead of spreading out economic activity through numerous smaller enterprises, which can thrive or fall without maiming the overall economy, the current economic system – with its theory-blinkered Ricardian economists – builds a single colossal pillar to uphold the whole edifice. The whole economic edifice, in turn, becomes dependent on this single pillar for its survival.


    That pillar, of course, is not solid rock, but a human organization – a huge one, with interests across the globe, and an operating system of such overwhelming complexity that it makes the bureaucracy of medieval Byzantium or the Incas look simple. And, as Taleb is swift to point out, both hugeness and complexity tend to generate Black Swan events rather than avoid them – a world-spanning economic entity can be affected by events anywhere because of its reach, and the extent of its fragile network of arrangements across borders and oceans, and is also so complex that it draws unexpected, catastrophic changes like a magnet. http://en.wikipedia.org/wiki/Earthquake


    Thus, when a Black Swan event occurs, it strikes to the heart of a single monolithic gathering of all economic activity, and causes a massive crisis throughout American society and the world. Taleb’s The Black Swan compares this to a turkey who bases the theory that they should not run away on the fact that humans are feeding it well, so they will obviously continue to do so into the indefinite future. The result of building on such a foundation, of course, is the sudden surprise of a wrung neck.