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Too Big to Fail, Hidden Risks, and the Fallacy of Large Institutions

Posted: 5 May 2009  

Charles S. Tapiero

NYU Polytechnic School of Engineering - Department of Finance and Risk Engineering

Nassim Nicholas Taleb

NYU-Tandon School of Engineering

Date Written: May 2, 2009

Abstract

Large institutions are disproportionately more fragile to Black Swans.

This paper establishes the case for a fallacy of economies of scale in large aggregate institutions. The problem of rogue trading is taken as a case example of hidden risks where rogue traders and losses are considered independently and dependently of the institution’s size. Both independent and dependent loss and hidden positions are shown to lead to the paper’s conclusion, that size and economies of scale have commensurate risks that mitigate the advantages of size.

Keywords: economies of scale, banking crisis, risk management, operational risk

JEL Classification: D8, G11, G12, G13, N00

Suggested Citation

Tapiero, Charles S. and Taleb, Nassim Nicholas, Too Big to Fail, Hidden Risks, and the Fallacy of Large Institutions (May 2, 2009). Available at SSRN: https://ssrn.com/abstract=1398102 or http://dx.doi.org/10.2139/ssrn.1398102

Charles S. Tapiero

NYU Polytechnic School of Engineering - Department of Finance and Risk Engineering ( email )

Brooklyn, NY 11201
United States

Nassim Nicholas Taleb (Contact Author)

NYU-Tandon School of Engineering ( email )

Bobst Library, E-resource Acquisitions
20 Cooper Square 3rd Floor
New York, NY 10003-711
United States

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