Breeding black swans

I had a disturbing thought while rereading Malcolm Gladwell's piece on Nassim Taleb in his latest book which collects his New Yorker essays. What if Taleb is not only profiting from unknownable random adverse events, but also encouraging their proliferation?

The logic runs like this. You place a series of bets, where if you lose you lose $1 and if you win you win $1000000. The bets are on some implausible condition, one which (at the outset) there is no chance of happening. You bet the first time, you lose; the counterparty is $1 richer and one iota more confident. You bet again.

If there really is a one in a million chance of winning, in the long run you will break even. The scary notion, though is the thought that by losing over and over again you can change the probabilities of the game, so that once you have lost 1000 times your opponent – who is $1000 richer – will start making decisions about how they conduct their business that increases the chance that you will win this long-shot bet.

Your series of losses are funding the adversary's bad behavior. They are up $1000, haven't lost in 3 years, have an unbroken string of fiscal quarters where each and every quarter they beat the analysts estimates by a penny. Management becomes bolder, knowing that their track record demands that they confidently take on risks that 3 or 6 or 12 years ago whey would have shunned. After a long interrupted run of good fortune misinterpreted as careful skill they seek out the next incrementally more risky and profitable opportunity in order to pursue the growth that you have funded.

I'm challenged to reconcile the strategy of "small wins", where you look to succeed in small ways over and over again to build confidence, with the Taleb style strategy of "small losses" where you take lots and lots of calibrated long shot bets that often lose. It's discouraging to think that the confidence that you are building with the Karl Weick style small win strategy of building upon small incremental gains might be deliberately funded by someone who is set up to profit big time if you grow for a long time and then lose it all.


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