Business Insight Zone

For a while now I’ve been meaning to read The Black Swan, by Nassim Nicholas Taleb. It’s come highly recommended by many, including Tom Peters, who has raved about it repeatedly. I’ll post about it at length once I’ve read the book, but meanwhile I thought I’d share this interesting tidbit from Taleb:

Once again, real life is not a casino with simple bets. This is the error that helps the banking system go bust with an astonishing regularity — I’ve showed that institutions that are exposed to negative black swans, like banks and some classes of insurance ventures, have almost never profitable over long periods. The problem of the illustrative current subprime mess is not so much that the “quants” and other pseudo-experts in bank risk management were wrong about the probabilities (they were), but that they were severely wrong about the different layers of depth of potential negative outcomes.

I remember, just a couple of years ago, a lot of breathless coverage of the financial sector that talked about how all the math had changed when considering risk and leverage.

As Taleb points out, the math didn’t change, but many big and small financiers (plus homebuyers et al.) convinced themselves that it did . . . and so they got it wrong.

Taleb’s larger topic — how we fool ourselves about what we know and what it means — is a topic I expect to revisit again and again. I’m convinced that many of our standard operating procedures in business are grounded upon false assumptions, and that much success in business is there for the taking for any of us who are willing to examine our assumptions.