The Black Swan: The Impact of the Highly Improbable | Nassim Nicholas Taleb

The Black Swan: The Impact of the Highly Improbable | Nassim Nicholas Taleb | The tail effect in a bell curve

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The Black Swan: Th...

	The Black Swan: The Impact of the Highly Improbable Nassim Nicholas Taleb Random House, 2007 - 400 pages average customer review:based on 341 reviews view larger image
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What happens to the Turkey on the 1001st day?

I can't comment on the science behind this book. I will say that - at least from this layman's perspective - Taleb offers magnitudes of insight on the ideas of unpredictability and randomness, and does a bang-up job of upsetting the status quo.

The book is centered on the concept of a Black Swan - an event that lies outside the narrow periphery of our knowledge, has an extreme impact or causes a major upset (whether it be cultural, financial, political, et al.), and is characterized by a rampant slew of retrospectives - all the media, the so-called "experts", and the authorities suddenly have the details on why it happened.

For instance, we are told by historians of the outbreak of WW2: "tensions were mounting" throughout Europe, and that there were "escalating crises" abound, but according to bond prices (which offer a good understanding of history, says Taleb), there was no sign of this to speak of! "One would suppose that people living through the beginning of WW2 had an inkling that something momentous was taking place. Not at all."

The idea of retrospective distortion and over-interpretation fascinates me. How people attempt to fit messy empirical reality into neatly organized interpretations! The problem with our predictions, and our retrospectives, is that they are often framed from a naive perspective that we live in a place called Mediocristan, a place where randomness is mild, or Type 01, when we really live in a place called Extremistan - where reality is characterized by wild, unpredictable events that completely upset the averages of the bell curve.

...We come out the other side mistrusting the arrogance of almost all predictions! What does bird poop have to do with one of the most fundamental physical theories? Do we think that our wars are "under-control", or do we consider the unpredictability of conflict - that a small conflict might someday spiral unpredictably out of control and result in the decimation of the entire human race!?! How has the Nobel Prize been exploited to sell methods of market-interpretation that are completely unscientific, yet universally accepted and completely institutionalized? We are treated to an interesting investigation of this arrogance which dominates so many fields of study and indeed, we find that it is an arrogance deeply embedded in our minds!

Despite the seemingly bleak picture, The Black Swan is great fun to read and offers tips ("be as hyper-conservative and as hyper-aggressive as you can!") on how to cope and perhaps even thrive in this chaotic, simmering soup we call Civilization.

If you are like me, you will enjoy reading about things like the narrative fallacy, confirmation bias, the ludic fallacy, the problem of induction, et al. My only criticism of book is it's repetition, but honestly - I hardly noticed.

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The tail effect in a bell curve

Very nice book, explains how the tail (outliers) in a bell curve is so imporant. Must read for financial engineers.

What we don't know can hurt us

In 1997 my cousin worked on Wall Street and suggested to her colleagues that the office keep a rubber raft in the storage room in case the World Trade Center gets attacked again. She had to leave soon after that. They thought she was crazy. In fact, she was dead right. She had predicted what this book calls a "Black Swan"...something that most people cannot or will not predict.

One reason why I never bought real estate is because I have always been concerned about the effect of a nuclear bomb or nuclear reactor accident on said purchase. Most people would laugh at me for saying that. I hope that I am never correct, but I fear that somewhere, some day, real estate in a given area will approach zero value because of such a "black swan" event.

This is one of the best books you can read that describes how knowing what you don't know is more important than knowing what you know. It is interesting to know that the US Military takes this book and this author very seriously. Rumsfeld apparently quoted him several times when he was in office.

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A good point, but Taleb overdoes it

Nassim Taleb has written a very enthusiastic book, and provides some very tasteful food for thought. The problem is, Taleb himself is far too pleased with his own work.
Talebs confidence in his own ideas helps him write a book which is easy and fun to read. For an economist, interested in the philosophical background of the science, he offers plenty of very interesting references. I will most certainly dig more into the thoughts of Karl Popper and Benoit Mandelbrot.
But Taleb's confidence also helps him make several rather banal mistakes. His main adversary is the statistician Gauss and his normal distribution. Taleb is right that many economists and financial analysts rely far too much on normal distribution. But figure 7 on page 238 reveals that Taleb himself does not understand the concept pretty good: "..as your sample size increases, the observed average will present itself with less and less dispersion".
His confidence also makes Taleb jump to conclusions and make banal errors (the French Maginot Line, the main line of defence built in the 1930s, was not built where the Germans attacked France in World War One). Taleb even goes in his own primary trap: the confirmation bias. Every little thing happening by chance is counted as evidence of his Black Swan theory. But the story of penicillin is famous just because it was sensational, not because it is the normal way of making major medical breakthroughs.
It is probably not worthwhile to read this book, although there are grains of gold in it. The book is written in the spring of 2007, before subprime. In a footnote Taleb is writing about the risk of Fannie Mae: it "seems to be sitting on a barrel of dynamite." Touché!

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