The Farcical Swan

Decent article in the New York Times dealing with the shortcomings of Value at Risk. Nassim Taleb is frequently quoted but does not come out as well as the other more measured and cogent experts consulted for the article.

I think the problem with Taleb is that he pushed a good concept (the Black Swan) to its farcical extreme (which incidently is exactly what happened with VaR). Nothing illustrates that better than when he says: “Any system susceptible to a black swan will eventually blow up”.The problem with this statement is that most of the systems we use and live in are susceptible to a black swan (a meteor could hit us, a nuclear bomb could go off, etc...). So what are we supposed to do, never take another risk, never plan another project, hide in a cave and pray?

And how about positive black swans (which Taleb talks about in his books but seems to have forgotten lately)? In trying to avoid negative black swans, we may also deprive ourselves of potential positive black swans and a missed positive black swan can be just as costly as a realized negative one.