The Black Swan: The Impact of the Highly Improbable
By Nassim Nicholas Taleb
Random House (April 17, 2007)

Summary

In Taleb's second book (see Fooled by Randomness) he discourses on fundamental issues of knowledge, what is and is not knowable, and some of the consequences of what we know (and do not know) and what we think we know.

Taleb's main thesis is that most every area of human activity (and its consequences) is best represented, understood and described by power law distributions, 'Mandelbrotian' randomness and scalable dynamics (what he labels 'Extremistan') rather than by Gaussian distributions, Gaussian randomness and non-scalable dynamics (labeled "Mediocristan'). Despite this, our human brains (and academic institutions) seem predisposed to view the world through 'Gaussian' glasses and this creates problems, not the least of which is the inability to acknowledge or account for the effect of the 'Black Swans' of the title.

There are many examples of the difference presented, but one of the most compelling is the example of the Casinos, those bastions of 'chance'. It turns out that the least of the casino's worries is someone walking away with $1B - the laws of Gaussian distributions and probabilities insure that this will never happen. On the other hand, the worst potential losses the casinos have dealt with:

• An irreplaceable performer (Roy of 'Sigfried and Roy') was mauled by a tiger and their main show was lost (a $100M hit)
• A disgruntled contractor's plans to dynamite the Casino (thwarted)
• An employee not filing IRS forms for years resulting in a huge tax fine
• The kidnapping of a casino owner's daughter and his embezzlement of casino money to pay the ransom

These 'Black Swans' dwarf all of the other Casino risks related to gamblers actually winning a large amount. These types of examples illustrate clearly Taleb's main point - the important things in life we can't predict, but we can prepare for.

There are several distinct 'behaviors' that Taleb cites that get us into trouble. These are:

• Confirmation bias - we seek to confirm our opinions, not falsify them (which, by the way, is a much more powerful, useful and difficult activity)
• Narrative fallacy - we like stories and are highly influenced by them even when they are not true or misleading
• Silent Evidence - we ignore it, even though it is usually much more plentiful and useful than the evidence that is visible
• Ludic fallacy - we believe that things operate by the rules and have a hard time understanding (typical) reality that doesn't abide by known rules
• We think we know more than we do

These get us into trouble and blind us to the inevitability of the Black Swans that will dominate the outcomes we expect and seek.

Rating and Opinion

Despite Taleb's idiosyncratic writing style, the points he is making come through clearly and powerfully. Part philosophy, part diatribe and part anecdotal narrative, with a sprinkling of math and theory thrown in, The Black Swan makes a powerful case for viewing the human influenced world through different glasses and using different tools to do so.

A self-avowed skeptical empiricist, and (once) practicing options trader, Taleb's experiences come from the real-world and he has a hard time reconciling the theoretical 'rational' utility of conventional economics with what actually happens with people living their daily lives. For those of us who have a skeptical bias, operate in the 'messy' real-world of irrational and emotional human behavior, and wonder about what we are taught about 'portfolio theory' and 'model equilibriums', Taleb's book is a breath of fresh air. It skewers the conventional wisdom and the pretentious mathemetician economists who promulgate it.

Quotes

"Metaphors and stories are far more potent (alas) than ideas; they are easier to remember and more fun to read. ...Ideas come and go, stories stay." ( pp xxvii)

"History is opaque. You see what comes out, not the script that produces events, the generator of history." (pp. 8)

"We harbor a crippling dislike of the abstract." (pp. 74)

"Randomness and uncertainty are abstractions. We respect what has happened, ignoring what could have happened." (pp. 132)

Related

Read as Well: Fooled by Randomness

Read Instead: -

Footprint

316 pages
Thought Level: 80%
Time to Read: 9 ½ hours (144K words * 0.8 T.L. / 12K wph)
Concept Density: 30% (Good)
Interest Factor: (Very High)