Making prudent investments and avoiding massive debt might keep a business from eye-popping profits, but it will also keep that business alive long after its showier peers went bust, a best-selling author told an audience at a Boston conference.
"Everyone knows how to make money, few people know how to avoid blowing up," said Nassim N. Taleb, author of "The Black Swan: The Impact of the Highly Improbable." Taleb spoke Wednesday at the Risk and Insurance Management Services conference.
Taleb’s book, released in 2007, describes "Black Swan" events: Improbable happenings that have enormous impacts, such as major scientific discoveries, wars and financial markets.
The Black Swan Event is almost impossible to forecast, and Taleb has said that the recent economic crisis – the size and scope of which has caught even experts off-guard – helped drive his point home.
Forecasts are not to be trusted, Taleb said, because there’s no way of knowing the future. Debts make companies and people vulnerable because they depend on such forecasts. He advised to look to the wisdom of past generations, explaining how grandmothers always taught younger generations to industriously save income and not get into debt. Religions used to – and still do, in the case of Islam – specifically prohibit borrowing, he said.
Wisdom should win out over statistical models, he said, because statistics are narrow and only deal with empirical data, which cannot deal with unpredictable events.
People and companies should also spend less time trying to be enormously profitable and more time figuring out how to avoid financial implosion. Everyone spends so much time trying to unlock the keys to wealth that they lose sight of the serious risks they’re taking, he said.
Looking at the American financial system’s ongoing flaws, Taleb said company leaders should not get enormous financial rewards for destructive strategies, and that no institution should become big enough to bring down other entities.
"In the presence of a lot of interdependencies, no unit should be too big," he said.
