Skeptical empiricist Nassim Taleb joins one of his mentors: Benoit Mandelbrot, who pioneered fractal geometry and contributed to Chaos Theory, in criticizing the existing tenuous situation of the financial markets and the global economy. They highlight some of the key fallacies that economists and bankers believe–which is precisely the mindset that has prevented the financial industry from correctly appreciating risk and anticipating the current crisis:

• People believe that changes in history and in markets happen in small gradual increments, when the truth is that most of the time nearly nothing changes, and then all of a sudden a large unexpected change in the dynamics occurs which no one correctly predicted.
• People estimate risk based on historical experience of defaults and losses, this makes them totally unprepared for an unexpected and larger risk that will happen in the future.
• People think that consolidation and mergers of banks into larger entities makes them safer–but in reality this makes the whole financial system more delicate since it is now dependent on fewer entities, so a mistake by a large bank damages the system more than a mistake by a couple of smaller banks.
• People are inherently optimistic and underestimate the extent of the crisis. Both Taleb and Mandelbrot think the crisis is very likely worse than people are thinking.

Related Posts You May Wanna Read Too

• 2009 outlook is all about contradictions and black swans