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00:00YET A CONVERSATION WITH MESSING PALETTE -- NASSIM TALEB. > > YOU KNOW HIM AS THE AUTHOR OF " BLACK SWAN " , AND I WANT TO PRESENT A NEW BOOK, " SKIN IN THE GAME: HIDDEN ASYMMETRIES IN DAILY LIFE. " THE SUBTITLE OF THIS BOOK GIVES IT AWAY, HIDDEN THE SYMMETRIES IN DAILY LIFE. SO MANY PEOPLE CLAIM TO BE IN THE BUSINESS OF FINANCE ARE IN SEARCH OF THAT MYTHICAL TRADE. THIS BOOK IS FULL OF PRACTICAL ADVICE. EXPLAIN. NASSIM: IT TELLS YOU WHAT IS MORALLY AND COMMERCIALLY ACCEPTABLE, FOR THE GREATER GOOD -- FOR THE COMMUNITY, AND FOR THE INDIVIDUAL. WHAT IS USEFUL FOR THE COMMUNITY IS THAT, NOW SHALL NOT HAVE PROFITS AND GIVE THE RISKS TO OTHERS, AND SHOULD TAKE A PORTION OF THE RISKS. > > YOU CALL THIS TO BOB RUBIN TRADE. NASSIM: THE BOB RUBIN TRADE IS AFTER A PERSON -- THE FORMER TREASURE TERRY -- TREASURY SECRETARY. HE WAS SELLING THINGS THAT EXPLODE -- AND WHAT HAPPENS AS CITIBANK WAS INSOLVENT -- AND THEN, SOMEONE SAID, " BLACK SWAN " . > > SO HE WAS NOT ALONE. YOU USE HIM AS AN EXAMPLE BECAUSE HE IS EMBLEMATIC OF THAT PROBLEM. NASSIM: EXACTLY, HE THINKS SOCIETY OWES SOME PROFITS. > > WISEST WALL STREET HAS WHAT YOU CLAIM TO BE A MISCONCEPTION OR MISATTRIBUTION ABOUT THE NOTION OF SKIN IN THE GAME? NASSIM: THEY DON ' T UNDERSTAND THREE THINGS. NUMBER ONE, IT IS NOT JUST INCENTIVES, DISINCENTIVES ARE THERE FOR A REASON. SINCE THE BEGINNING OF TIME AND CIVILIZATION, WE HAVE HAD RULES THAT DON ' T ALLOW THE ARCHITECT THE BUILD A STRUCTURE AND WALK AWAY IF IT COLLAPSES AND KILLS PEOPLE. > > BACK IN BABYLON. NASSIM: EXACTLY, AND SKIN IN THE GAME IS A FILTER MECHANISM. THEY ARE LIKELY TO DIE IN THE ACCIDENT, AND IF YOU HAD A BAD DRIVER, NOT LIKELY TO DIE IN AN ACCIDENT AND NOT BE PENALIZED -- > > HOW DO WE MAKE THE FINANCIAL SYSTEM MORE DARWINIAN? NASSIM: IT IS WORKING BY ITSELF, AND LET ME EXPLAIN. HEDGE FUNDS, MOST RISKS HAVE MIGRATED TO HEDGE FUNDS, AND HEDGE FUNDS REQUIRE THE OWNER OR OWNERS TO HAVE MORE PERSON THE EQUIVALENT OF 50% OF THE NET WORTH THE FUND. NOT JUST REINVESTED PROFITS, IT IS THEIR NET WORTH. TO PREVENT THEM FROM BARBARIC TRAITS. > > BECAUSE IF THE FONT LOSES MONEY COMING THEY SUFFER AS WELL? NASSIM: BE THE PERSON TO HAVE -- SOMEONE WHO COOKS THE FOOD TO TASTE IT IN THIS POINT. > > LET ' S TALK ABOUT HEDGE FUNDS, THERE IS STILL A SYMMETRICAL QUALITIES, IN OTHER WORDS, IF THE HEDGE FUND MAKES MONEY -- I AS THE INVESTOR MAKE MONEY, BUT THE HEDGE FUND SHARES PROFITS, AND THE TRADER GETS PAID A PERCENTAGE OF THOSE PROFITS. THE HEDGE FUND LOSES MONEY IT DOESN ' T GIVE MONEY BACK, AND IT DOESN ' T SURROUND MONEY TO THE CLIENT. NASSIM: MANY HEDGE FUNDS HAVE CALLBACKS, AND THEY HAVE TO WAIT TO RECOVER AT THE HIGH WATERMARK. THE ESSENTIAL ATTRIBUTE AND RISK ATTRIBUTE IS HANDLED BY FORCING THE PERSON TO EAT HIS OR HER OWN COOKING. > > THE ARGUMENT YOU MAKE IS THE RISK HAS BEEN TRANSFERRED FROM PREVIOUS BANKS -- TO HEDGE FUNDS. THAT IS ONLY IN THE SECURITIES BUSINESS. BANKS ARE STILL IN THE BUSINESS OF MAKING LOANS. MANY BACKERS SAY THERE IS NOTHING RISKIER THAN A LOAN. NASSIM: THE CURRENT CHAIRPERSON OF CITIBANK, WAS MAKING TWENTYSOMETHING BILLION DOLLARS IN BONUSES? DOES IT MAKE A DIFFERENCE, WE ' RE IN A SITUATION WHERE YOU CALL SEEKING COMMENT PEOPLE BENEFITING OF TAKING ADVANTAGE OF THE SITUATION AND MISUNDERSTANDING SYMMETRY. > > I WANT TO BORROW A QUARTER FROM THE BOOK, YOU SAY, " COME UP OUR MESSAGES TO FOCUS ON THOSE WHO ARE PROFESSIONALLY SLANTED, CAUSING HIM WITHOUT BEING ACCOUNTABLE TO IT. THE STRUCTURE OF THEIR OWN OCCUPATION " NASSIM: THEY DON ' T INFLICT MORE HARM ON SOCIETY AS THEY TAKE, DRIVERS ARE NOT CALIBRATED, BUTCHERS ARE NOT CALIBRATED, EVERYTHING -- MOST PEOPLE, EXCEPT FOR POLICYMAKERS. WE ARE REBELLING AGAINST IN ITALY, BUREAUCRATS HAVE NO PENALTY IF THEY ENCOURAGE THE GOVERNMENT TO ATTACK -- EUROPEAN GOVERNMENT TO ATTACK. > > THAT IS WHY THE FIVE-STAR MOVEMENT MADE GAINS IN YESTERDAY ' S ELECTION? NASSIM: TYPICALLY FROM ITALY. PEOPLE UNDERSTAND YET A COUSIN PEOPLE WHO ARE NOT ACCOUNTABLE AND IF YOU LIVE IN A COMMUNITY -- YOU HAVE SKIN IN A GAME. IF YOU SIT IN AN OFFICE WITH A SPREADSHEET, NO. > > SOME EUROPEANS ARE FREAKING OUT ABOUT THE ITALIAN ELECTIONS. NASSIM: A WHOLE CLASS. THERE IS A WHOLE CLASS OF PEOPLE -- EXPERTS, AND A ARE NOT PENALIZED BECAUSE THEY HAVE NO CONTEXT TO REALITY AND A ARE NOT BEEN WHEN THEY MAKE MISTAKES. PEOPLE ARE DETECTING IT. > > WOULD YOU CALL THAT A TIME ELECTION RESULT IF ARABLE ONE -- AS A FAVORABLE ONE? NASSIM: THERE ' S A CERTAIN CLASS OF PEOPLE IN BUREAUCRATS -- MOST AMERICANS ARE CALIBRATED, AND THERE ARE FED UP WITH THESE EXPERTS. > > AND THAT IS WHAT PUT DONALD TRUMP IN OFFICE? NASSIM: IT COULD BE LEFT OR RIGHT, BUT YOU CANNOT FOOL PEOPLE FOREVER, AND THERE IS A CLASS OF ECONOMISTS -- THEY JUDGE ONE ANOTHER, AND THE BOOK OFFERS METRICS, METHODS, AND YOU CAN GUESS IF AN INDUSTRY IS CALIBRATED, LIKE THE RESTAURANT INDUSTRY. THERE ARE JUST BY CLIENTS, NOT OWNERS, AND BANKS ARE NOT JUDGED BY CONSTITUENTS, AND THEY EVENTUALLY ROT. > > I WANT TO BRING THE CONCEPT BACK TO THE VERY BUSINESS YOU STARTED YOUR CAREER, OPTIONS TRADING. IN RECENT WEEKS WE SAW AN EXPLOSION IN VIX AND PEOPLE LOST A LOT OF MONEY. WHAT ARE THE LESSONS TO BE LEARNED? NASSIM: THAT IS THE STORY OF MY LIFE. THE PROBLEM IS THEY DON ' T UNDERSTAND THAT THIS CONCEPT I WROTE ABOUT IN DYNAMIC HEDGING, YOU DISCOVER EARLY ON IN TRADING, IT IS ON AVERAGE, FOUR FEET DEEP. THEY MEASURE VOLATILITY NOT REALIZING THEY MAY LOW UP IN SHORT VOLATILITY. THESE INDUSTRIES WERE RIGHT IN THEIR CONCEPT -- THE VIX IS OVERVALUED. > > YOU MEAN THE VIX UNDER 10, SEVEN, OR EIGHT? NASSIM: THE VIX IS OVERVALUED AND YOU MAKE A DIFFERENCE -- AND THEY DIDN ' T GET THE IDEA THAT THE FIX WAS OVERVALUED. DOESN ' T NECESSARILY IMPLY YOU MAKE MONEY -- EFFECTIVELY THEY WERE RIGHT AND BLOWN UP. > > HOW DO YOU EXTEND THAT PRINCIPLE TO FINANCIAL MARKETS GOING FORWARD? NASSIM: YES TO HAVE FEWER FINANCE PROFESSORS SURE OF THESE BAD MODELS INVOLVED, PEOPLE HAVE GREATER. MYSELF, THEY KNOW THESE TRICKS. [LAUGHTER] > > YOU SAY IN THE BUT THAT NO INDIVIDUAL CAN GET THE SAME RETURN AS THE MARKET UNLESS HE HAS INFINITE POCKETS. NASSIM: THIS IS SOMETHING YOU KNOW WHEN YOU TRADE. > > THAT IS BECAUSE I THINK THIS IS EFFECTIVELY AN ARGUMENT FOR BEING A PASSIVE INVESTOR. UNLESS YOU ARE PREPARED TO ACCEPT -- NASSIM: IT IS THE IDEA TO BE MORE CONSERVATIVE THAN YOU SHOULD BE AND YOU SHOULD HAVE A PROTECTION AND SOME KIND OF INSURANCE IF YOU HAVE AN EXPOSURE. IF THE MARKET GOES DOWN 30% HARMS YOU TO THE POINT OF THREATENING YOUR FINANCIAL HEALTH COMPLETELY -- AND MAYBE BANKRUPTING DEAL, THEN YOU NEED PROTECTION. > > ONE THING THAT KEEPS COMING THROUGH WITH ME IN EVERY CONVERSATION, IT IS ALMOST THAT NOBODY HAS LEARNED ANYTHING. NASSIM: YOU ONLY LEARNED SURVIVAL. AN ARTICLE SUMMARIZING THE BOOKS OF THE FOLLOWING, RESTAURANT OWNERS DON ' T IMPROVE BECAUSE RESTAURANT OWNERS LEARN. RESTAURANTS IMPROVE BANKRUPTCY FROM BANKRUPTCY THE BANKRUPTCY. IT IS THE SAME THING IN THE ECOLOGY OF MARKETS. YOU ONLY LEARN VIA SURVIVAL. OF THOSE PEOPLE HAVE NOT BEEN EXPOSED TO THE THREAT OF BANKRUPTCY AND WILL NEVER LEARN BECAUSE THEY ARE NOT HARMED. LIKE WHEN GOLDMAN SACHS WAS A PARTNERSHIP. TODAY, THE INCENTIVE IS NOT TO UNDERSTAND MARKETS. > > I AM WE HAVE TO LEAVE IT THERE. NASSIM: MY FAVORITE INTERVIEW. > > THANKS. [LAUGHTER] HIS NEWEST BOOK, " SKIN IN THE GAME: HIDDEN ASYMMETRIES IN DAILY LIFE. " SCARLET: YOU CAN CATCH ALL OF OUR INTERVIEWS ON THE BLOOMBERG THE FUNCTION, TV < GO > . THIS IS A STEPHEN MOORE OF THE HERITAGE FOUNDATION TALKING ABOUT WHY THE TARIFFS ON STEEL AND ALUMINUM IMPORTS IS NOT SUCH A WISE IDEA. JULIA: FROM NEW YORK, THIS IS BLOOMBERG. ♪

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Nassim Taleb Says Investors Need 'Insurance' From Market Drops

Nassim Nicholas Taleb, distinguished professor of risk engineering at New York University, discusses his new book "Skin in the Game: Hidden Asymmetries in Daily Life," financial firm accountability, and market volatility with Bloomberg's Erik Schatzker on "Bloomberg Markets." (Source: Bloomberg)

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