The Reverse Black Swan, Part II
In the Reverse Black Swan Part I, I drew three conclusions from Taleb's work.
1) Unexpected technological breakthroughs are possible. That's good
2) The timing and nature of the breakthroughs cannot be controlled. That's bad
3) Unexpected large bad events are possible as well. That's bad. In fact, we can get bad events which have as big an impact, in the negative direction, as the technological innovations.
These principles help frame a very important policy question: How can we design our economy and financial system to decrease the odds of the negative Black Swans wiping us out, while doing the most to maximize the positive Black Swans of technological change? Or to put it another way, what kind of regulation do we need?
Reading and thinking about Taleb leads me a different answer than I would have given 6 months ago. Yes, we need more regulation--but it should be 'regulation by simplification' rather than 'regulation by supervision'.
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