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Taleb: Government Deficits Could Be the Next 'Black Swan' – BusinessWeek

Q: The new edition of The Black Swan includes what you call “10 principles for a Black-Swan robust society.” One of them is: “Citizens should not depend on financial assets as a repository of value and should not rely on fallible ‘expert’ advice for their retirement.” Can you explain what you mean?

Taleb: The problem is that citizens are being led to invest in securities they don’t understand by people who themselves don’t quite understand the risks involved. The stock market is probably the best thing in the world, but the true risks of the stock market are vastly greater than the representations. And this leads to extremely strange situations in which, say, someone has a bakery, is extremely paranoid about suppliers, very careful about risks, and protects his business with appropriate insurance. Then, at some point, he puts his $122,000 in savings in a fund that he knows nothing about, based on risk measures he knows nothing about, in companies very few people know much about.

People use “risk measures,” but you’re really not measuring anything like you measure temperature or distance. You are making a speculative assessment of a future event. That’s not measuring, that’s estimating. And as we saw with BP (BP), with the banking system, and with Toyota (TM), companies themselves are hiding risks from the security analysts. They’re cutting corners. Companies have a tendency to hide risks.

So someone extremely careful and prudent in the management of his own affairs will be completely careless with the half of his savings invested in the stock market. I’m saying: Don’t use the stock market as a repository of value. It has vastly more risks than you think.

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