’Black Swan’s’ Taleb to Advise IMF on Risk

Nassim Taleb, author of “The Black Swan,” will work with the International Monetary Fund on drawing up measures to detect hidden risks in the financial system for G-20 ministers and central bank governors.

Taleb will team up with the IMF’s Monetary and Capital Markets department on a paper for the G-20 to develop ways to apply his method for identifying tail risks, or the chances of low probability, high-impact events, according to a letter from Elie Canetti, an IMF adviser. He won’t be paid for his work and he won’t speak on behalf of the IMF in public, Canetti said.

The IMF’s decision gives Taleb’s ideas recognition among policy makers, whom he has accused of papering over risks by bailing out banks during the financial crisis. His best-selling book “The Black Swan” argued that history is littered with high-impact rare events known in quantitative finance as “fat tails.” Taleb has criticized economists and Wall Street analysts for using traditional models such as value-at-risk, which banks use to decide how much to wager in the market.

“We will work together to develop financial, and potentially fiscal applications of your simple heuristic to detect fragility, model error and hidden tail exposures,” Canetti wrote.

Taleb will testify today before the U.S. Congress’s Committee on Financial Services about the establishment of the Office of Financial Research, set up under the Dodd-Frank financial reform act. The OFR, as part of the U.S. Treasury, is aimed at improving the quality of financial data available for policy makers to analyze the financial system. In his testimony, Taleb said throwing money at the office may create new risks.

“This aims at the creation of an omniscient Soviet-style risk manager,” he said, according to an advance copy of his testimony. “It makes us fall into the naive illusion of risk management that got us here.”

Taleb’s work with the IMF comes after it was asked in 2009 to draw up proposals for G-20 finance ministers and central bank governors for strengthening the collection of data and plugging information gaps in global financial markets.

His “research is part of the fund’s broader efforts to strengthen its early warning capacities, and will be among the many inputs to the IMF’s response to the G-20’s request,” IMF spokesman William Murray said in an e-mail today.

To contact the reporter on this story: Stephanie Baker in London at stebaker@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

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NYU Professor Nassim Taleb

Jonathan Fickies/Bloomberg

Nassim Taleb, New York University professor and author of "The Black Swan: The Impact of the Highly Improbable," speaks during a television interview in New York.

Nassim Taleb, New York University professor and author of "The Black Swan: The Impact of the Highly Improbable," speaks during a television interview in New York. Photographer: Jonathan Fickies/Bloomberg

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