At blame for the financial crisis is the nature of man, say two renowned scientists: Nobel Prize winning psychologist Daniel Kahneman and scholar of risk and randomness Nassim Taleb. View the complete 1 hour video of the session as the greatest living psychologist and the foremost scholar of unforeseen events discuss hindsight biases, the illusion of patterns, perception of risk, and denial. Kahneman explains why there are bubbles in the financial markets, even though everyone knows that they eventually burst. Taleb speaks out sharply against the bankers: "I want those responsible for the crisis gone today; today and not tomorrow." The risk models of banks are a plague, he says, the bankers are charlatans. Taleb has become famous with his theory of the black swan. Black swans are events that are not previously seen—not even with the best model. Taleb had an early warning before the crisis. In 2003 he took note of the balance sheet of the U.S. mortgage finance giant Fannie Mae, and he saw "dynamite". "Bankers are very dangerous." Taleb calls for rigorous changes: nationalize banks—and abolish financial models. Kahneman does not quite agree with him. Certainly, the models are not capable of predicting a collapse. But one should not ignore our human nature. People will always require and use models and get benefit from them—even if they are wrong.

Brief summary. I encourage you to watch the video.

Taleb describes the irrationality of human decision making. People will rather make a hundred times a dollar than 100 dollars at once. They prefer to lose a lot of money at once instead of losing small amounts over longer period. Kahnemann describes how people expect the same things to happen over and over again. They think it'll go on forever without change. Both observations are supported by experimental evidence.

Naïve formation of views based on past experience is exactly what is being questioned here. We ignore rare events. Rare events are hard to model and scientists ignore them. Thus bubbles are formed and thus they burst. People expected it to go on forever, with all the inherently implicit risks and hubris of top managers.

The financial system is too fragile. It is interwoven and built on very high risks. In contrast to nature: it does not like to be overly exposed to rare events. We have two kidneys, two lungs, eyes etc. — the economic system has no spare parts because it is considered to be too costly. It became more and more fragile because capitalism is about cost reduction.

We're too dependent on our financial system. It's a utility, like tap water in your house. But banks cannot be trusted with financial markets. By taking the said risks they ignore rare but possible events. The only ones who took back bonuses from managers where the Swiss from UBS. In other countries the whole society pays for the losses and bailouts. “They rigged the game. We pay them for their profits, there is no clawback so their incentive is to hide the risk they are taking.”

What would Taleb advise the new secretary of treasure? He has simple proposal to as he puts it, “save capitalism and free markets from the banks.” What did the banks do with all the bailout money? They keep on overpaying people, they pay investors and they double up. They increase the risks! Taleb would like to have banks nationalized and have everybody fired. "I want everybody involved taking these immense risks out now! I want business schools to stop teaching portfolio theory."

Taleb, who as you may have noticed doesn’t mince words, is no fan of private equity. “Private equity has absolutely no reason to exist. The private equity holder has all the upside and the banks all the downside.” He’d have no objection to a system where private equity funds itself via hedge funds, so long as neither party had any recourse to government insurance. And a bit like an Old Testament prophet, Taleb is angry and wants those he thinks are responsible to suffer. “I want them poor and they deserve to be poor. You can’t have capitalism without punishment.” After all of that, most people in the room needed a drink.