(2012-02-13) Taleb Black Swan Volatility Public Policy

Nassim Taleb on how attempts to use Public Policy to reduce volatility only increase the effects of Black Swan-s by reducing Resilience. Examples:

• Credit Crisis 2008: During the 1990s, U.S. Federal Reserve Chair Alan Greenspan wanted to iron out the economic cycle's booms and busts, and he sought to control economic swings with interest-rate reductions at the slightest sign of a downward tick in the economic data. Furthermore, he adapted his economic policy to guarantee bank rescues, with implicit promises of a backstop -- the now infamous "Greenspan put." These policies proved to have grave delayed side effects. Washington stabilized the market with bailouts and by allowing certain companies to grow "TooBigToFail."
• Revolts Of 2011: U.S. policy toward the Middle East has historically, and especially since 9/11 (World Trade Center), been unduly focused on the repression of any and all political fluctuations in the name of preventing "Islamic Fundamentalism" -- a trope that Mubarak repeated until his last moments in power and that Libyan leader Muammar al-Qaddafi continues to emphasize today, blaming Osama bin Laden for what has befallen him. This is wrong. The West and its autocratic Arab allies have strengthened Islamic fundamentalists by forcing them underground, and even more so by killing them.

Alongside the "catalysts as causes" confusion sit two mental biases: the illusion of control and the action bias (the illusion that doing something is always better than doing nothing). This leads to the desire to impose man-made solutions. Alan Greenspan's actions were harmful, but it would have been hard to justify inaction in a democracy where the incentive is to always promise a better outcome than the other guy, regardless of the actual, delayed cost.

It is the system and its fragility, not events, that must be studied -- what physicists call "PercolationTheory," in which the properties of the terrain are studied rather than those of a single element of the terrain.

Variation is information. When there is no variation, there is no information.