black swan eventsSome people hate him, and some people love him. While I find him to be a bit arrogant, he is undoubtedly one of the greatest thinkers of our time. Taleb receives a strong endorsement from Howard Marks, in his new book The Most Important Thing.  Nassim Taleb is an expert on black swans. Black swans can be defined as massive and unexpected events that in hindsight seem obvious to the observer.

Here is a brief bio for anyone unfamiliar with Taleb:

Taleb wrote (before the Quake) about how Black Swans are becoming much more frequent. As I mention in this article I recommend reading all of Taleb’s books; The Black SwanFooled by Randomness, and “The Bed of Procrustes”.

The classic recent cases would be the uprisings in the Middle East and the tsunami in Japan. Taleb received over 600 interview requests since the earthquake in Japan. To my knowledge, this is the only interview he has done.  Taleb spoke with Wharton finance professor Richard Herring — who taught Taleb when he was a Wharton MBA student.

The interview was recorded, however there is no embed code. To see the full think you have to visit Wharton’s website.

Below are some selected excerpts from the interview:

Taleb: The events in the Middle East are not black swans. They were predictable to those who know the region well. At most, they were gray swans or perhaps white swans. One of the lessons of “Wild vs. Mild Randomness,” my chapter with Benoit Mandelbrot in your book, is what happens before you go into a period of wild randomness. You will find a long quiet period that is punctuated with absolute total turmoil…. In The Black Swan, I discussed Saudi Arabia as a prime case of the calm before the storm and the Great Moderation [the perceived end of economic volatility due to the creation of 20th century banking laws] in the same breath. I was comparing Italy with Saudi Arabia. Italy is an example of mild randomness in comparison with Saudi Arabia and Syria, which are examples of wild randomness. Italy has had 60 changes in regime in the post-war era, but they are inconsequential…. It is a prime example of noise. It’s very Italian and so it’s elegant noise, but it’s noise nonetheless. In contrast, Saudi Arabia and Syria have had the same regime in place for 40 some years. You may think it is stability, but it’s not. Once you remove the lid, the thing explodes.


Herring: How about Japan?

Taleb: It is a disaster that has been creeping up for a long time — fiscally — visibly.

Herring: And demographically as well.

Taleb: And now that they have that shock, we don’t know what can happen. But the Japanese had the luxury of selling us cars. They had a big government deficit, which is a huge source of fragility. But at the same time they were getting cash and they had a high saving rate that absorbed it. So that was okay…. But here we don’t have anything. We don’t have the same situation here as Japan, because not only do you have a high government deficit, but it is coupled with a big current account deficit and meager private savings….

Herring: Some people would say that part of the reason we have a very different pattern than Germany and Japan is that Germany and Japan used export-led growth until they became so large that it was very hard for the rest of the world to accept their exports. We became sort of the buyer of last resort. This is not a plausible excuse for our lack of budgetary control, but it does account for a basic structural difference.

Taleb: Maybe. It can let you off the hook for a while, but at some point, no.

Herring: The same problem arises with China, which also has pursued an export-led strategy and needs at some point to have balanced internal growth to stabilize.

Taleb: That is true. But I’m looking at … what would be the worst thing that can happen to us. The U.S. has to raise $1.5 trillion for next year, okay? We’re going to have to find buyers. We have some domestic savings — a few people willing to spend. Okay? The rest of the world may buy some. And then we have no buyers. So they have to call Bernanke to come and do his quantitative easing again.

The full interview can be found