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The Financial System and the Immune System

Posted Aug 19 2009 4:36pm

In this interview, Nassim Taleb says, as he has often said, that booms and busts are a fact of financial life, what we should do is make the financial system robust against them. He put it like this:

Capitalism will always produce shocks and crashes. I want a society that has a buffer against shocks.

Likewise, I say bacteria are a fact of life. To be healthy we need to make our bodies resistant to them — which means having a well-functioning immune system.

These are not subtle or difficult points. What interests me is the difficulty that experts have appreciating them. To repeat a story I’ve told before on this blog, a few years ago I noticed that the UC School of Public Health had a wide-ranging epidemiology course taught by someone I knew. I phoned him. “Will the course cover what makes us more or less susceptible to infection?” I asked. “No,” he said. I wasn’t exactly surprised — I have never seen this topic covered in any epidemiology textbook or even any epidemiology research paper — but still it is an amazing omission. They know we have an immune system, they just don’t think it matters! There’s an elephant in the room, and they’re ignoring it.

The parallel point about the financial system is that there is no study of what makes a financial system robust against shocks. Somehow finance professors, like epidemiology professors, haven’t grasped that something is missing.

Here are two more vast areas of ignorance:

1. Scientists know a lot about how to test ideas. They know almost nothing about how to come up with ideas worth testing. When a good way to generate ideas comes along — such as self-experimentation — they are dismissive. This is truly crippling: In an experimental science, for example, interesting new experimental effects aren’t discovered. Experimental psychology suffers from this problem. Experimental psychologists could self-experiment, but they don’t.

2. Economists know very little about how to generate new businesses — what makes the rate of new-business generation high or low. I came across a 500-page introductory economics textbook that had three empty paragraphs on the topic. Without new businesses to solve the problems created by old businesses (such as pollution), your society is in real trouble. The problems will pile up unsolved. This is what Jane Jacobs saw so clearly in The Economy of Cities and Jared Diamond completely missed in Collapse.

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