Newer insights have unmasked established concepts as unreliable in certain cases. As a reference, I take the worst type of optimizer - Markowitz' concept of diversification. But also in times where the market shifts into new regimes established models do not work properly - Black vs. Bachelier revisited.
In general NN Taleb has warned the financial world that "black swan" events are inevitable and hard to predict. And we know about the problems with expected returns in finance a swell as the innovation risk of complicated models.
Here, I try to compile thoughts into insights on a system and process level, helping to avoid risky horror in general.
1. Beware UTOPE
Unfortunate cosT Of Pattern rEcognition - I wrote about this trap here. It is about the problem with human nature seeing meaningful patterns where they do not exist.
On the technical level this is related to the big joke of big data.
2. Beware Innovation Risk
When 3 rights make a wrong - a more-complete, but more-complicated model may carry greater risk than a cruder one if the user is not qualified for the job
3. Beware The Complex Tightly Coupled System Risk
The tight integration trap - a complex system can have untended consequences and tightly coupled means there is not enough time to react to them. We know that in finance the unexpected will happen and we cannot predict it - we need to get used to it and if possible turn it into an opportunity.
4. Play The Cash Cow Game
Optimize risk in the regimes where you know the conditions with a tendency to lower risk in, say, 80 percent of the cases (a safe game with very low probability to ruin). You can then play a higher risk game in the rest of the cases - 7 paradigms of modern risk management (for the details)
The next insight I take directly from NN Taleb
5. The Right Kind of Luck
There are unexpected events that can help you a lot or harm you a little and this that can help you a little or harm you a lot. Distinguish between risk with a lower and higher upside.
Our contribution is technology, producing a lot of risk information automatically and support the easy programmatic manipulation to get better insight faster.
