Going to Zero

Nassim Taleb has written about Risk in a very accessible way. His books include “Fooled by Randomness”, “The Black Swan”, and “Anti-Fragility”. He writes about risk and decision-making. In particular, he looks at tail risk. The extreme events that have never happened before, but will have a dramatic impact. Events that fundamentally change everything.  If you only look at what has happened, you assume that things are fairly controlled. That the world is like the spinning of a coin, or the roll of the dice, with varied but fixed outcomes. But it is more complicated than that. Real risk is not normal. It has fat tails, so there are more outliers (unusual observations), than would normally be expected. That is on both the upside and the downside. When normal changes, it can change dramatically. When you think through risk, you need to ask, “What makes this go to zero?”. You need to know what will destroy you, and you need to protect for those risks. Then you need to position yourself to be available for the positive surprises. Why could this go really well? You do not know that it is going to go really well. But you need to open yourself up to that possibility. Risk can't be studied purely by looking at history, even though history matters.