How to Prepare for Black Swan Risks?


 
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How to Prepare for Black Swan Risks?
Jos Nieland, Teacher, Netherlands

According to Nassim Taleb, we can not prevent Black Swan risks (= rare events with a high impact) from happening now and then. But we CAN prepare for them. How?
Taleb is giving the following ways to prepare for Black Swans (in fourth quadrant situations):
1. Avoid optimization - Forget economics and learn to love redundancy. Keep some buffers and slack.
2. Donít use statistics to try to predict complex, fourth quadrant payoffs. Statistics donít work here. Try not to be exposed to events in the fourth quadrant.
3. No bonus without malus - Beware of the moral hazard (agency) problem. People, banks and organizations should enjoy both the positive and negative consequences of their acts and decisions.
4. Be very careful with risk information - Donít trust scenario analysis and stress testing. There is always more randomness then we think. We just donít know. Be extremely careful with using and interpret... Register

 
 
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