'Sicko' and 'The Black Swan'

I'm a big fan of Nassim Nicholas Taleb's take on the world of investing, which he has described in very slight detail in his two books, Fooled by Randomness and The Black Swan.

I'm not quite as much a fan of this gun owner:



But I did go see 'Sicko' on opening night in Santa Monica (very friendly Michael Moore territory, btw.) I wasn't particularly impressed by the movie for a variety of reasons, and I think Moore missed a real opportunity to make some points that couldn't be disputed by some PR hacks somewhere. More on that in another post perhaps...

Back to Taleb: he refers to the investment strategy employed by most stock pickers as something to the effect of "picking up pennies in front of a steamroller." In other words, most investors have exposed themselves to a tremendously large risk while they grab very small profits. Of course, they don't see the steamroller until it hits them - otherwise known as "blowing up." The unexpected event that steamrolls them is "The Black Swan."

Moore's movie makes the same point: health insurance in the United States leaves us, as a group, picking pennies in front of a steamroller. Predictable events, like a physical or a mammogram or a monthly prescription, are handled relatively well by insurance plans, and don't usually cost the insured a particularly large amount of money.

But a big, unexpected problem - cancer, a car accident - generally falls outside of what's manageable under a health plan. Remember all the first responders who went to the World Trade Center site after 9/11 to dig up bodies and rubble? Many of them developed serious respiratory illnesses. Those who worked for large fire and police departments are generally covered by extensive health plans designed to handle the frequent illnesses and injuries that emergency workers encounter. These are expected events.

But what about all of the people who came from volunteer fire departments in suburban and rural New York and New Jersey? They generally have inadequate insurance with large co-pays, limited drug coverage, lifetime maximums, and limited access to the treatment required for the serious problems they have.

The problem, of course, is that they never anticipated these kinds of events. Unfortunately, their health plans did, and protected themselves. But this isn't somebody dropping a stack of chips in the stock market, hoping to dump a hot company for a quick buck. These are emergency workers who got steamrolled by their insurance companies following a 'Black Swan'.

'Black Swans' in the health care system are very different from their counterparts in the stock market. In health care, individuals don't expect to get cancer; but the insurers know to expect a certain percentage of their subscribers to get cancer. They can set their payment schedules so that they still make money even if their group cancer rates are in the 99.99th percentile.

This strikes me as unacceptable. When we know that a certain percentage of people will get cancer, every individual must be protected from that 'Black Swan'. If it's a good strategy for a stock portfolio, it's essential for medicine.