Nassim “Black Swans? Yeah, That Was Me” Taleb released a new paper on financial institutions over the weekend, titled “Too Big to Fail, Hidden Risks, and the Fallacy of Large Institutions”.
Extract (emphasis FT Alphaville’s):
Large institutions are disproportionately more fragile to Black Swans.
This paper establishes the case for a fallacy of economies of scale in large aggregate institutions. The problem of rogue trading is taken as a case example of hidden risks where rogue traders and losses are considered independently and dependently of the institution’s size. Both independent and dependent loss and hidden positions are shown to lead to the paper’s conclusion, that size and economies of scale have commensurate risks that mitigate the advantages of size.
Note that by rogue trader, Taleb means Jerome Kerviel, to whose exploits he devotes three pages of the brief paper and many, many equations. Like these:
Good bedside reading, then.