“In economic life and history more generally, just about everything of consequence comes from black swans; ordinary events have paltry effects in the long term.”
-Nassim Nicholas Taleb
Nassim Taleb’s contribution to the world of finance are two fascinating concepts — essays really — subsequently expanded into book length. The first is Fooled By Randomness: The Hidden Role of Chance in Life and in the Markets, which describes the tendency of investors to find patterns where none exist, and to attribute to skill that which might be better credited to luck.
His second book is a corollary of sorts, almost the inverse to Fooled by Randomness: The Black Swan: Second Edition: The Impact of the Highly Improbable. The key takeaway being that we dramatically underestimate the probabilities of improbable events, as well as their outsized impacts.
Over the weekend, Taleb had a worthwhile essay in the WSJ: Learning to Love Volatility. I can sum it up in Taleb’s 5 rules:
Rule 1: Think of the economy as being more like a cat than a washing machine.
Rule 2: Favor businesses that benefit from their own mistakes, not those whose mistakes percolate into the system.
Rule 3: Small is beautiful, but it is also efficient.
Rule 4: Trial and error beats academic knowledge.
Rule 5: Decision makers must have skin in the game.
Its worth reading the entire thing.
Over the years, I’ve found that Taleb’s essays are the best way to digest his thinking. This one is no different.
Learning to Love Volatility
Nassim Nicholas Taleb
WSJ, November 16, 2012