Wednesday, September 29, 2010

Taleb's Ten Principles of Risk Management

In a dinner that took place in Montreal and hosted by Palos Management, Nassim Nicholas Taleb, the author of "Fooled by Randomness" and "The Black Swan" offered ten rules to “transform the general population into a more hardened and seasoned society better able to confront unpredictable and spontaneous happenstances that confront economic life". Here are his "ten principals to either eliminate or combat theses upsetting black swans":

1) Fragile financial ideas should be broken early when they are still small.

2) Financial losses should never be socialized while financial gains and profits should in all cases be privatized.

3) Failed leaders should never be reconsidered or rehired. It is irresponsible to put confidence in them a second time.

4) Capitalism is about profit and losses and therefore an affair of rewards and penalties for its agents, not just rewards.

5) Simplicity should be kept at all cost for it may be the only ingredient that can make good, offset or compensate for the very complex system of globalization.

6) Complicated financial products, even if labeled as hazardous, should be prevented from being sold.

7) Government should not be obliged to restore lost confidence in a product, company or institution.

8) Financial problems should not be overdosed with more debt just because the lack of it hurts.

9) Broken eggs should turn into an omelette, meaning that bad debt should quickly be converted into equity.

10) Financial advisors should not only pass rigorous proficiency tests but have an unblemished reputation.

I refer you to the original text by Hubert Marleau from Palos Management if you want to learn more.


  1. "9) Broken eggs should turn into an omelette, meaning that bad debt should quickly be converted into equity."

    Are we referring to CDOs, CLOs, CMBS (commercial mortgaged-backed securities), RACER, RMBS (residential mortgage-backed securities) and such-like?

  2. I am not sure because I was not at the conference. But I think the idea is converting debt into equity (as much as possible) in order to deleverage the system. Some of the debt instruments would obviously be more difficult to convert but the point is that currrently excess debt is choking the economy and inhibiting entrepreneurs and other "productive" risk takers(as opposed to speculators) from taking risks.

  3. Another view of what he's saying in #9 is that we need ironclad protections for bondholder rights if we are to maintain robust credit markets and important sources of funding for business. Unfortunately, by denying bondholders the rights that were due them in the GM and Chrysler actions, the Obama administration did much to undermine faith in bonds. We'll have to wait to see what the long-term implications of that will be.