Below are the three of his most significant points. We call them “risks hiding in plain sight.”
Banks, economists, and academia alike continue to be enthralled to what Taleb calls the “ludic – Latin for game – fallacy.” They build computer models and make forecasts based on game or portfolio theory. They preach the universal applicability of tools such as the normal distribution curve, means, and standard deviations to the organic socio-economic world of business. But in the real world, the cards are marked, the coins biased, and nobody acts in totally rational ways.
In business, we must work only with data and be skeptical of all expert opinion. Never use an external model for making predictions about your business. Rather, build a model from your own data and even then, remember it’s only a model and not reality.
I have a friend who runs a successful PR agency. He is his business. He is 100% dependent upon his brain continuing to function properly. Outside of work, his hobbies are base-jumping and heli-skiing. He is typical of us all, when he underestimates the risks–by a factor of between 20 and 30 times – to his most precious asset. And he does likewise with the consequences to his life of serious injury.
- We need to be liked! We over-praise! We are always combining feedback, both positive and negative, with multiple compliments.
- We want only good news. So when we receive feedback that we don’t like, we do our best to disprove it. This is a well-documented psychological phenomenon called the “confirmation bias.” It is the tendency to seek out, interpret, lean towards, and recall only that which confirms our own beliefs, while simultaneously giving less and less, if any, consideration to alternatives. We worry more about terrorism than swimming pool accidents. We think more about bird flu than we do about diabetes. We also only listen to news channels that have the news we like to hear, like either liberal or conservative writers.
Aggressive tinkering is the engine of growth for ALL small businesses, if targeted on total customer service. Taleb emphasizes the organic nature of business. It is not an engineered thing. Wealth creation is nonlinear. Frequency distributions cannot accurately describe it. Economic growth, sales revenue increases, and profit improvement are always nonlinear.
A dual strategy towards risk taking
Be ultra-conservative with 90% of your investments, and ultra-aggressive with the 10% that you can afford to lose. So, for example, with your pension, is most of it in municipal bonds and treasury bills? These are as close to guaranteed as we can have in our world. Only gamble an affordable proportion of it in venture capital where the upside is scalable and loaded with potential. Imagine getting in on the ground floor of the next Tesla or Microsoft.
Remember Siegfried’s Tiger!
Read Taleb’s books and be aware that the stock market is like the casino industry. They are both subject to the ludic fallacy and our confirmation bias, and they cannot cope with volatility. Casinos spend millions on security cameras and anti-cheating eventualities, even though the real-world data shows them that their “black swans” come from outside their game mindsets. Their uninsured losses were massive, and 267 people became unemployed when the Las Vegas headliner Siegfried (one half of Siegfried and Roy) was mauled by Mantecore, his own white tiger, during a performance in 2003.
So, in summary, don’t get complacent about the model you use to plan your future, and avoid using an external model for making predictions about your business. Rather, build a model from your own data and keep revising it, and remember it’s only a model and not reality. Beware of the black swans.