Some Thoughts on “Nassim Taleb on Living with Black Swans”

First it is a good read – Nassim Taleb on Living with Black Swans

Several interesting parallels on Nassim’s take on the current situation in the financial system to individual traders or trading models –

• Traders who never experienced significant losses in the beginning of their trading career are likely the ones who blow up their trading accounts
• Trading models optimized for specific part of historical data can and will fail in the future if common sense money management protection is not applied
• The successful traders who make money year in year out are not those you find from the newspapers or other media because they perform like, well, variety stores that make money with no buzz

The scary thing though, is that firm traders and quants, due to the natural of their contractual relationships with their firms, of course would not apply common sense or systematic control to reduce risk exposures because that would cut down their performance (and bonus cheque size) significantly.

Like Nassim said in his other books, the only control in this case is the risk manager of the firm. If he is performing his job, his firm will not produce glowing performance. Hence he will be fired. If he is not doing his job, and that the firm is allowed to take on significant risk that can ruin the firm and its shareholders, he would be able to keep his job and probably get a bigger year end bonus. The catch is that when the firm blow up, he just has to make a career change.

For normal people who are assigned the role, there is no choice but to ride the gravy train – til it falls off the cliff.

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