Incentive Bonuses as a Nest of Black Swans

Nassim Taleb’s The Black Swan is a detailed and far-reaching book, arguing against the twin forces of narrow, dogmatic views and ivory tower complacency on the part of economists and leaders that has sent the American economy crashing squarely into a garbage chute of disruption and depression. He describes how Black Swan events – sudden, unforeseen changes in human affairs – happen constantly, but how current economic theory and the financial and economic earthquake preparedness to the system are based on the absence of such events, and are thus unable to cope with them: a certain road to disaster.

    The events, however, did not have the courtesy to stop existing just because the economists – in what can only be described as their overweening hubris – chose to ignore their existence. The fact of this is clearly demonstrated by the mortgage crisis in the United States, and the long economic decline thanks to frenzied export of American jobs and factories to sweatshop economies before that.

    Since these unexpected events had no way to be explained in the neat, formulaic, pre-packaged “expertise” of the economists, they refused to recognize them, until a catastrophe so vast they could not overlook it cropped up. Now, of course, the same people have been set to fix these problems, with no tools except their cramped theories, which cannot even explain what happened in a rational way.

    Taleb argues his case with both erudition and humor, as well as plenty of examples and stories to make his points more memorable. This is a book which not only educates, but entertains. You will find yourself smiling over his Fat Tony theory even as you nod in agreement to his intriguing propositions. Even if you do not agree with him, this is a book that stimulates thought, rather than a mere polemic. You should read it even if you disagree totally with his premise, because his incisive arguments will hone yours as you develop counter-arguments in your own mind, or in discussion with friends.

    Taleb identifies specific ways in which our current economy is built in a way to foster, rather than prevent, ruinous Black Swan events. These descriptions alone are worth the price of the book. Incentive bonuses, he points out, are a rich source of Black Swans VS caotic disastrous earthquake preparedness events.

    Those who receive bonuses for showing maximum profits will cut corners elsewhere – often on safeguards against financial problems – creating an unstable, fa├žade-like company that can trigger over into a Black Swan event at the drop of a hat, and sometimes not even that. Incentive bonuses give an incentive to create situations that will produce Black Swan events, and so Taleb suggest doing away with that entire part of the system.