Nassim Nicholas Taleb is a well-known scholar of mathematical finance. Taleb teaches risk engineering at New York University. He is also the author of a major best-selling book: The Black Swan. In the world of personal finance, a “black swan event” is a massive change in investment conditions which is either predictable or unpredictable. Either way, the black swan event has a disproportionate impact on the finances of those touched by the event.
I would say that the market collapse of 2008-2009 qualifies as a black swan event for retirees, wouldn’t you?
Many would say that this was a black swan event because almost every asset category- even those thought to be non-correlated – went down together.
A corollary aspect of black swan theory is that people blind themselves to to the potential effects of black swan events on the world around them. When they do occur, folks pretend that they knew it was coming all along, expected it, and were prepared for it. This sounds like the investment and Wall Street finance community doesn’t it?
Taleb recently gave a speech in Canada that was critical of the stimulus policies of the U.S. government. Taleb believes that governments need to cut debt and refrain from bailing out failing companies. That, according to Taleb, is the only way that governments can shield their economies from the negative consequences of erroneous budget forecasts.
About forecasts, Taleb said this:
Today there is a dependency on people who have never been able to forecast anything. What kind of system is insulated from forecasting errors? A system where debts are low and companies are allowed to die young when they are fragile. Companies always end up dying one day anyway.
This over-dependence on financial forecasting applies to investment markets as well.
Taleb was critical of banks and securities firms because they do not properly warn investors of the risks when they invest their retirement savings in the stock market.
This leads to a key warning from Taleb’s speech concerning retirement investing:
People should use financial markets to have fun, but not as a depository of value. Investors have been deceived. People were told that markets go up regularly, but if you look at the last 10 years that’s not been the case. The risks are always greater than what people are told.
I wonder if Zvi Bodie and Taleb know each other?
Now you understand why I created the Failsafe Retirement System and why I am using it myself.
Here is a link to an article reporting Taleb’s speech.