Reflections on a Crisis: the Impact of the Highly Improbable

Nassim Taleb (Author), Daniel Kahneman (Princeton University) and John Brockman (edge.org) try to reflect crisis, decision making, psychology in a conversation. With "The black swan" Nassim Taleb wrote a book that surprisingly describes the current financial crisis with the phenomenon of the "black swan". These phenomenons have three components:Thy have huge effects, they happen totally unexpected and people try to explain them afterwards to make sense. It is about the Impact of the Highly Improbable. The following is more or less a summary of what Taleb says, we are hearing a very enganged and insightful monologue. Taleb describes the irrationality of human decision taken different examples into account: E.g. people rather make a hundred times a dollar than one time 100 dollars. The other way round they rather miss one time a lot instead of losing small amounts over a long time. Decision alternatives might be the same but changing only little details, statistics of decisions would change immensly. Kahnemann then describes the phenomenon that people expect the same things to happen again and that things will go on the same forever. Both examples have seen experimental evidence. But empirics as a method is exactly what is being questioned here. Especially in medicine there is a history of failure in empirics because it totally ignores rare events. Rare events are so hard to model, so scientists don't look at them. Like the drunken man who looks for his keys in the obviously wrong place, just because there's light. All of these form the basis for economic bubble bursts. People just expected it to go on like that forever, whith all the growth, with all the risks, with all the hybris of top managers. The financial system is too fragile. It is interwoven and built on very high risks. In contrast to nature: Mother nature does not like to be sensible to rare events. We have two kidneys, two lungs - the economic system has no spare parts because it is too costy. It became more and more fragile because capitalism tells us to reduce costs. The problem is that society relies so much on the financial system. It's a utility, like water in your house, it's like an army. But banks cannot be trusted with financial markets because of the said risks they are taking ignoring the rare events. Next problem is the responsibilty of everybody in the end. The only ones who took back bonuses from mangagers where the Swiss from UBS. In all other countries, the losses are brough back to society who has to bail out banks. It is continuing: Profits are theirs, losses are ours. What would Taleb advise the new secretary of treasure? What did the bank do with the bail out? They keep on overpaying people, they pay investors and they double up, they even increased risks! I think we have enough evidence: I would like to have banks nationalized and have everybodyd fired. I want everybody involved taking these immense risks out tomorrow! I want business schools to stop teaching portfolio theory. Session ends and I really encourage you to watch the video since it was impossible to summarize all that was said while writing it down live.