Nassim Taleb on BP oil spill
My expl of BP spill in The Black Swan II : “don’t give the manager of a nuclear plant an incentive bonus based on cost savings”.
I spoke with Nassim and asked him to expound upon his tweet. Here is what Nassim wrote me:
Because security analysts and investment “experts” don’t understand robustness and redundancy, managers have an incentive to hide risks of blowups, Black Swan exposures, by cutting corners they get better numbers and appear cosmetically to be profitable while sitting on dynamite. This is not too different from banks stashing their portfolios with more and more hidden risks. So this condition of increased fragility over time comes from the incentive system and the bogus risk measures and empirically invalid business school techniques used by analysts. A manager collects annual bonuses, and does not pay back his past compensation in the event of a blowup. There is a mismatch between the bonus frequency and the time to eventual blowup.
The tragedy is that, in this case, as with banks, there are externalities and shareholders are not the ones footing the bill, but society at large.
More can be found about the 10 rules for a black swan robust society in Nassim’s second edition of The Black Swan.