The Risk Animal
Nassim Taleb discusses financial markets and our inability to avoid crises. He describes risk as like a predatory animal that always succeeds in finding the weakest quarry on which to prey. That’s the same idea that I try to get at when I say that you cannot make financial markets idiot-proof, because they’ll just build a better idiot.
Thanks to Marshall Jevons for the pointer.
I think that it is human nature to be over-confident about one’s own beliefs and abilities. As Tyler Cowen and Robin Hanson point out, one of the consequences of over-confidence is disagreement. You and I cannot both be rational, equally informed, and in disagreement. Yet we often are.
Another consequence of over-confidence is excessive risk-taking. In making financial decisions, it might be good to ask oneself, “How can I protect myself from knowing less than what I think I know?”
In Taleb’s terms, we should act as if there is a Black Swan out there. Something will happen that we don’t expect, because we are over-confident in forming our expectations.