31 Jan Redundancy as Insurance (NASSIM NICHOLAS TALEB) | Part B’
All Mediterranean cultures developed through time a dogma against debt. Felix qui nihil debet goes the Roman proverb: “Happy is he who owes nothing.” Grandmothers who survived the Great Depression would have advised the exact opposite of debt: redundancy; they would urge us to have several years of income in cash before taking any personal risk—exactly my barbell idea of Chapter 11, in which one keeps high cash reserves while taking more aggressive risks but with a small portion of the portfolio. Had banks done that, there would have been no bank crises in history.
We have documents since the Babylonians showing the ills of debt; Near Eastern religions banned debt. This tells me that one of the purposes of religion and tradition has been to enforce interdicts—simply to protect people against their own epistemic arrogance. Why? Debt implies a strong statement about the future, and a high degree of reliance on forecasts. If you borrow a hundred dollars and invest in a project, you still owe a hundred dollars even if you fail in the project (but you do a lot better in the event you succeed). So debt is dangerous if you have some overconfidence about the future and are Black Swan blind, which we all tend to be. And forecasting is harmful since people (especially governments) borrow in response to a forecast (or use the forecast as a cognitive excuse to borrow). My Scandal of Prediction (i.e., bogus predictions that seem to be there to satisfy psychological needs) is compounded by the Scandal of Debt: borrowing makes you more vulnerable to forecast errors.
Big Is Ugly—and Fragile
Second, Mother Nature does not like anything too big.
The largest land animal is the elephant, and there is a reason for that.
If I went on a rampage and shot an elephant, I might be put in jail, and get yelled at by my mother, but I would hardly disturb the ecology of Mother Nature. On the other hand, my point about banks in Chapter 14—that if you shot a large bank, I would “shiver at the consequences” and that “if one falls, they all fall”—was subsequently illustrated by events: one bank failure, that of Lehman Brothers, in September 2008, brought down the entire edifice. Mother Nature does not limit the interactions between entities; it just limits the size of its units. (Hence my idea is not to stop globalization and ban the Internet; as we will see, much more stability would be achieved by stopping governments from helping companies when they become large and by giving back advantages to the small guy.)
But there is another reason for man-made structures not to get too large.
The notion of “economies of scale”—that companies save money when they become large, hence more efficient—is often, apparently behind company expansions and mergers. It is prevalent in the collective consciousness without evidence for it; in fact, the evidence would suggest the opposite.
Yet, for obvious reasons, people keep doing these mergers—they are not good for companies, they are good for Wall Street bonuses; a company getting larger is good for the CEO.
Well, I realized that as they become larger, companies appear to be more “efficient,” but they are also much more vulnerable to outside contingencies, those contingencies commonly known as “Black Swans” after a book of that name. All that under the illusion of more stability. Add the fact that when companies are large, they need to optimize so as to satisfy Wall Street analysts.
Wall Street analysts (MBA types) will pressure companies to sell the extra kidney and ditch insurance to raise their “earnings per share” and “improve their bot-tom line”—hence eventually contributing to their bankruptcy.
Charles Tapiero and I have shown mathematically that a certain class of unforeseen errors and random shocks hurts large organisms vastly more than smaller ones.
In another paper, we computed the costs to society of such size; don’t forget that companies, when they fall, cost us. The problem with governments is that they will tend to support these fragile organisms “because they are large employers” and because they have lobbyists, the kind of phony but visible advertised contributions so decried by Bastiat.
Urge companies get government support and become progressively larger and more fragile, and, in a way, run government, an-other prophetic view of Karl Marx and Friedrich Engels. Hairdressers and small businesses on the other hand, fail without anyone caring about them; they need to be efficient and to obey the laws of nature.
The Black Swan
NASSIM NICHOLAS TALEB