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Nassim Taleb — How to Prevent Other Financial Crises

Let us start with our conclusion, which is also a simple policy recommendation, and one that is not just easy to implement but has been part of history until recent days. We believe that “less is more” in complex systems—that simple heuristics and protocols are necessary for complex problems as elaborate rules often lead to “multiplicative branching” of side effects that cumulatively may have first order effects. So instead of relying on thousands of meandering pages of regulation, we should enforce a basic principle of “skin in the game” when it comes to financial oversight: “The captain goes down with the ship; every captain and every ship.”

That’s Nassim Taleb in a newly published paper. “In other words,” Taleb and his co-author argue, “nobody should be in a position to have the upside without sharing the downside, particularly when others may be harmed.”

They sounds an awful lot like Warren Buffett:

If I were running things if a bank had to go to the government for help, the CEO and his wife would forfeit all their net worth. … And that would apply to any C.E.O. that had been there in the previous two years. …I think you have to change the incentives. The incentives a few years ago were try and report higher quarterly earnings. It’s nice to have carrots, but you need sticks. The idea that some guy who’s worth $500 million leaves and only has $50 million left is not much of a stick as far as I’m concerned.

Incentives matter. Hammurabi’s code, formulated nearly 4,000 years ago, serves as a great example:

If a builder builds a house for a man and does not make its construction firm, and the house which he has built collapses and causes the death of the owner of the house, that builder shall be put to death.

“This principle,” Taleb writes, “has been applied by all civilizations, from the Roman heuristic that engineers spend time sleeping under the bridges they have built, to the maritime rule that the captain should be last to leave the ship when there is a risk of sinking”