Black Swan Sequel

NASSIM TALEB’S UPCOMING BOOK HAS ADVICE FOR PROTECTING AGAINST RANDOM EVENTS — AND PERHAPS EVEN GAINING FROM THEM.

STEPHANIE BAKER

ILLUSTRATION BY JESSE LENZ (PHOTO SOURCE: ANNA SCHORI/REDUX)

JPMorgan Chase’s Jamie Dimon might do well to read Nassim Taleb’s next book, Antifragile: Things That Gain From Disorder, to be published this fall. After his bank’s $2 billion trading loss, he might benefit from a dose of what Taleb calls antifragility. While Taleb’s 2007 best-seller, The Black Swan, was his treatise on the potentially huge impact of rare events, this one is his philosophical reflections on how to make yourself less vulnerable when the shocks come. With its musings on Nietzsche, this is not a finance book, but financiers may find it illuminating.

These rules are gleaned from an advance manuscript.

1 SIZE HURTS YOU DURING TIMES OF STRESS.

Taleb makes the obvious yet often-ignored point that size alone can create fragility. He points to Societe Generale SA’s fire sale in 2008 of trader Jerome Kerviel’s $70 billion in stock market bets for a loss of almost $6billion. A fast sale of holdings a 10th of that size might have been absorbed by the market without losses.

2 NEVER MARRY THE ROCK STAR.

To explain this idea, Taleb borrows from evolutionary biology. “Females in the animal kingdom, in some monogamous species, and in humans, tend to marry the equivalent of the accountant, or even more boring, the economist — someone stable who can provide — and once in a while, cheat with the aggressive alpha, the rock star,” Taleb writes. “They limit their downside while getting genetic upside.” Applying that to finance means placing 90 percent of your cash in a safe, inflation-protected investment and 10 percent in something riskier. Your downside risk is only 10 percent, while your upside could be multiples of that.

3 NEVER ASK PEOPLE FOR THEIR OPINIONS, FORECASTS OR RECOMMENDATIONS. JUST ASK THEM WHAT THEY HAVE — OR DON’T HAVE — IN THEIR PORTFOLIOS.

This is Taleb’s test of who has skin in the game. Bankers, politicians and bureaucrats don’t, and therefore they avoid the consequences of their decisions. Politicians bail out bankers at the expense of taxpayers, who do have skin in the game.

117 HOURS

GETTY IMAGES (GAVEL)

Time between first trade of Facebook shares and first shareholder lawsuit being filed.

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