Black Swan Author Nassim Taleb Linked To Stock Market Flash Crash

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The title of the book that seems to examine stuff no one thinks can happen – like last week’s high speed trading meltdown of the Dow Jones Industrial Average – is called Black Swan. “Black Swan: The Impact of the Highly Improbable” author Nassim Taleb describes the rise of the Internet and the September 11, 2001 attacks as examples of Black Swan Events. In Black Swan, Taleb’s argument is that since Black Swan events cannot be predicted, society should at least try to practice policies that may minimize the damage of events, like the Wall Street flash crash, when they do.

Wall Street’s Black Swan

Last week’s stock market flash crash is being referred to by various media as a Black Swan event. Coincidently, The Wall Street Journal reports that hedge fund manager Nassim Taleb’s advises made a big stock market bet that could likely be related to the near-catastrophe market selloff when, in just a matter of minutes, the Dow dropped nearly 1,000 points. In lieu of fast cash loans, Universa Investments LP purchased 50,000 options that would pay off if the stock market dropped off a cliff. The buy may have contributed to the panicked selling, according to the Journal. Many investors are already on the run because of the Greek debt crisis, so one big bet on failure is enough to send them running for the exits. They trampled each other on the way out, because of high speed trading.

Black Swan author Nassim Taleb speaks out on CNBC

Black Swan author Nassim Taleb showed up on CNBC Wednesday to talk about the Wall Street Journal’s Black Swan theory and the flash crash. He dismissed the link between himself and Universa’s Wall Street gamble. “I don’t know anything about Thursday’s event,” he said. “I don’t have enough facts to say whether the collapse was a Black Swan event.” Taleb said things have changed for the worse since he quit everyday trading a year ago. His statement:

The world is vastly more fragile than it was when I left it. The crisis of 2008 was caused by debt, hidden risks and irresponsible risk management. We have more debt, more irresponsible risk management and a lower tax base and more hidden risks.”

About the Black Swan

Black Swan wasn’t coined by Nassim Taleb. Used to describe improbability, the term Black Swan has been around for many, many years. Always white, it is rare to find black featured swans, but they do hatch up for no apparent reason. Taleb uses the term to focus on the markets. In “Black Swan: The Impact of the Highly Improbable,” he seems to predict a global financial collapse. He says that this is due to the globalization of the financial markets. When one financial giant fails, the rest falls like dominoes.

Predicting the unpredictable: What will be the next Black Swan?

Because they are unpredictable and improbable, Taleb says that Black Swan events cannot be averted. But he appeared to have the ability to see into the future last year when he listed “Ten Principles for a Black-proof World” in the Financial Times. But it may be too late for markets, governments and the public at large. On CNBC Thursday, he said the government should shoot for a surplus — definitely a Black Swan event. He also said the worst may just be around the corner. His proclamation:

The U.S. is going to have $5 trillion to $6 trillion to borrow in the next 10 years. It’s going to be competing with European governments and corporates. One day, you’re going to have a bad auction. And that day will be the start of something new.

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