Absence of Volatility is Not Absence of Risk
In Extremistan, low measured volatility can coexist with large, unexpected jumps. Calm periods can therefore give a misleading impression of safety.
THE IDEA
Low volatility does not by itself establish low risk. In Extremistan, where extreme events are more common than a normal distribution would predict, calm periods can be followed by large, unpredictable jumps. Taleb treats the financial crisis of 2008 as an example: he argues that the Great Moderation encouraged policymakers, including Ben Bernanke, and banks to underestimate systemic risk.
When to use it
Financial risk management: Avoid over-reliance on Value-at-Risk (VaR) models that use historical volatility to estimate future risk.
Personal finance: Recognize that a stable stock price may suddenly crash; diversify across uncorrelated assets.
Business strategy: Understand that a calm competitive landscape might precede a disruptive innovation or market shift.
Project management: Anticipate that long periods of smooth progress in a complex project could mask accumulating risks that trigger a crisis.
FROM THEORY TO EVERYDAY LIFE
In practice
Ben Bernanke’s Mistake
In Taleb’s account, Ben Bernanke, former Chairman of the Federal Reserve, was fooled by low volatility into believing the economy was stable, leading to an underestimation of risk before the 2008 financial crisis.
The Great Moderation Trap
Taleb links the Great Moderation (1980s–2007) to a false sense of security from low volatility in asset prices and economic output, arguing that it encouraged excessive leverage and risk.
A MOMENT TO REFLECT
Put it to work.
How might low volatility in a market or system be a warning sign rather than a sign of safety?
Can you recall a personal or professional situation where a period of calm led you to underestimate the possibility of a dramatic change?
What metrics could you use alongside volatility to better assess true risk?
Often confused with
CONTINUE THE CONVERSATION
Source texts
- The Black Swan The Impact of the Highly Improbable With a new section On Robustness and Fragility (Nassim Nicholas Taleb)