New Paper by Black Swan Author: Is Not Cutting Losses in Investing Safer? The Hidden Structural Risks Behind It

Nassim Nicholas Taleb, author of the Black Swan theory, has published a new paper pointing out that the sense of security many people have about “stop-losses” is actually a misconception. He emphasizes that stop-losses are not a talisman for reducing risk, but rather concentrate the probability of losses, which would otherwise be distributed, into a single price point, creating a subtle yet more dangerous “hidden peak risk.”

(Background: Have Bitcoin top indicators failed? How should investors recalibrate?)
(Supplement: How to survive a Bitcoin winter? Investment strategies, advice, and bottom detection)

On December 4, Nassim Nicholas Taleb, author of the Black Swan theory, shared his latest paper “Trading With a Stop” on the X platform, drawing significant attention from the financial community. He presents a counterintuitive argument: “Stop-losses” are not the panacea investors believe, and may even create new risks. This view not only challenges mainstream investment philosophies but also prompts many market participants—who rely on stop-losses as a basic risk control tool—to rethink their trading logic.

In short, the core point of the entire paper can be summed up in one sentence:
A stop-loss does not reduce risk, but rather compresses dispersed, natural risk into a concentrated, fragile “explosion point.”

Why isn’t a stop-loss the “protection mechanism” you think it is?

Most investors believe that as long as they set a stop-loss, they can limit their maximum loss and prevent losses from spiraling out of control. However, Taleb points out that this is a longstanding misconception in the investment community. Without a stop-loss, a position can lose 5%, 10%, 20%, even 80%—these outcomes are naturally and widely distributed across different probability ranges, like a smooth beach.

However, once investors set a stop-loss, say at -5%, the situation changes completely. Outcomes that could have occurred at -10%, -20%, or even -80% do not truly disappear; instead, they are compressed and concentrated at the single -5% point.

Taleb uses a physics concept to describe this phenomenon: “Dirac Mass”—that is, a previously smooth distribution is sharply squeezed into a highly concentrated peak. In plain language: a stop-loss causes all the bad outcomes you might face to pile up at the same point, turning it into a fragile, obvious, and highly visible risk concentration zone.

Market Pathways Are Rewritten: Stop-Losses Are Not Static, They Affect the Market

Taleb points out that once stop-losses are set, the possible paths of asset prices are no longer random; instead, it’s like movement against a wall. The closer the market gets to your stop-loss point, the more likely investor behavior changes, and market liquidity becomes concentrated.

At the same time, these stop-loss points do not exist in isolation—they combine with others’ stop-losses to form a huge, fragile liquidity zone in the market. Market prices are naturally drawn there, as large numbers of orders are waiting to be triggered.

Thus, what appears to be “risk reduction” through stop-losses actually creates new discontinuous risks and may even intensify volatility, causing sudden jumps at specific price levels.

Taleb: A Stop-Loss Is a Tradeoff, Not Insurance

However, Taleb’s paper does not advocate that investors never use stop-losses. What he emphasizes is: stop-losses do not reduce risk, but rather reallocate it into another form. Through stop-losses, you exchange:

• A high-probability small loss (getting stopped out)
• For avoiding a low-probability but extreme large loss (crash, gap down)

This is a trade-off, not a free protection mechanism.

In fact, the market has also, through empirical rules, arrived at similar conclusions to Taleb’s. Large players often deliberately hit retail investors’ stop-losses before reversing the market. One trading strategy, therefore, is to target these false breakouts.

To break the pattern of stop-losses being hunted, another potential method is for investors to use trigger orders (orders placed only when a specified price is reached), but this would require the majority of investors to do so, and some whales may still use fake orders to influence market perception. The situation overall is not that simple.

After Taleb’s paper was published, it quickly sparked discussion on social platforms. User @b66ny bluntly stated:

“A stop-loss is not a talisman—it’s a time bomb placed at your chosen price.”

He pointed out that stop-losses pull all the previously dispersed loss probabilities into one spot, making that price level the most fragile, easiest to attack, and most likely to attract liquidity in the market.

Many investors believe the market is “chasing stop-losses,” but to some extent, it’s because everyone sets their stop-losses at the same level, collectively creating a liquidity black hole. He concludes:

“A stop-loss is not a magic tool to reduce risk; it’s a choice—a choice of where to die, and whether the death is worth it.”

Taleb’s paper also reminds investors: stop-losses are not to be avoided, but must be properly understood. In risk management, there is no such thing as zero-cost protection. Understanding what you’re truly taking on is the most critical safety measure in investing.

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This article “Black Swan Author’s New Paper: Is Not Using Stop-Losses Safer? The Hidden Structural Risk” was originally published by BlockTempo, the most influential blockchain news media.