A sucker game

A point from Nassim Taleb from his book “Antifragile: things that gain from disorder”.

Yes, he creates, I think, an appropriate new word to help get his meaning across. In one area Taleb presents his argument on medium risk (referral to a financial portfolio) and how he considers there to be no such thing as “moderate” risk.

His point is that in the event of a “Black Swan”, that is a catastrophic adverse event, then all – low, medium and high – risk is going to get hit. (As an aside, I consider that a negative Black Swan, to an expert intraday trader, can become a positive Black Swan).

Fully committed to a “moderate” risk account is, actually, at full risk; at best, this provides medium upside potential but with all the possible downside. That is because medium risks contain substantial measurement errors.

Taleb points out the following: rather than being fully committed to a “moderate” risk portfolio better to be 90 or 80 percent in a dull, inflation proof, no risk cash account and 10 to 20 percent in a very high-risk account. Moreover,  an adverse Black Swan is a potentially emotionally draining experience. 

The 80/20 example means that we have little downside – assuming that 10 to 20 percent downside is acceptable – whilst still exposed to massive upside.

To finish, Taleb writes: “Someone with 100 percent in so-called ‘medium’ risk securities has a risk of total ruin from the miscomputation of risks”…..”that in fact is a sucker game”.

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