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

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

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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 314 reviews view larger image
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The Black Swan of American Unreason

I recently purchased this book off of Amazon. I am a long-time customer who has purchased many items, but I have never before been so wonderfully surprised about an item I purchased from the site. When the book arrived, I opened the packaging and saw the cover of "The Black Swan". I was keen to begin reading it so I started thumbing through the book. Something seemed amiss so I closed the book and took off the book cover to check the hardback binding. It too read "The Black Swan". So I continued to thumb through the pages. To my amazement, inside the book were the pages of "THE AGE OF AMERICAN UNREASON" by Susan Jacoby!!

I have yet to begin reading either book (I ordered another "The Black Swan" which did arrive in proper condition) but imagine the linkage between the randomness proposition of "The Black Swan" and society's devaluation of knowledge and rationalization precept of "The Age of American Unreason" will be intriguing. Do we seek to rationalize otherwise random events because we no longer value knowledge in our society, or does our arrogance preclude us from prioritizing the accumulation of knowledge, thus leading to poor rationalization of events we experience? Hopefully I will get through both books soon to find out.

Nevertheless, the order was most fulfilling to me because now I have the definitive proof that you can't judge a book by its cover :)

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Worth reading

Very interesting subject and worth reading, although the not especially well written and the author gets arrogant and annoying at times.

A unique treatment with valuable philosophical insights

This popularizer is a polemic on the platonicity of mathematical models, more specifically about their failures on taking into account of black swans. Black swans are the remnants consequential of the greedy reductionists' over simplifications of the reality. Black swans in summary have the following features: (1) rarity, (2) extreme impact, and (3) retrospective predictability. In the book the author has presented a plurality of ideas under the umbrella idea of black swans, together with a plethora of examples in various contexts. The arguments are terse, witty, pungent, occasionally offensive (to parties of vested interests and to other readers I suppose), fun and like the author's previous book "Fooled by randomness", worthy of re-reading. The author has done an excellent job in dumbing down technicalities for general audiences.

The book presents one novel demarcation (as stressed by the Popperian author, the demarcation is only an approximation for convenience) of randomness: (1) Mediocristan, and (2) Extremistan. Examples of Mediocristans are human's physical heights, actual weight of a minted coin, coin flipping, casino games, etc. Mediocristans are well taken care of by the traditional mathematical models and well established concepts relevant to the understanding of the traditional view of randomness, such as Gaussian distribution, standard deviation, statistical significance, etc. Extremistans, such as wealth, various phenomenon and statistics in wars (e.g. number of deaths), market behaviors, etc, are typically man-made or things that humans don't know much about. The author argues that as the world has become more complicated, it is moving deeper into Extremistans, and is less and less governed by Mediocristans. This change, along with people's ignorance of black swans, results in various phenomenon with significant impact such the surge of inequality (e.g. of wealth), the market crash of 1987 (in which the author has made a fortune), the S&L meltdown in the early 90s, LTCM's failure, or aberrant activities such as Gaussian delusions and applying flawed mathematical models to not so appropriate circumstances.

The nature of black swans can be vividly exemplified by the turkey problem coined by the author, a.k.a. the problem of induction. A well-fed Turkey could not know what would be happening to him on the Thanksgiving Day by inducing from how well he was treated in the days before. Like how the contemporaries of World War II couldn't realize the advent of event until after the facts. The problem of induction is an ancient philosophical problem first formalized in the modern epistemological context by Hume. Induction might be indispensible in the context of Mediocristans. However, it may fail miserably with Extremistans in the face of the "unknown unknowns", lest the probability of rare events is allegedly not computable. Experts who create mathematical models to capture black swans are said to be committing the Ludic Fallacy: believing that the structured randomness found in games resembles the unstructured randomness found in life.

The author uses black swans to explain the failure of the Efficient Market Hypothesis, the Modern Portfolio Theory, the misuse of science in the context of Sociology, Political Science, etc., the "theorizing disease" (relying much on incorrectly formulated knowledge as a therapy or consolation to ignorance and the stigmatic status quo of being not having control), the problems of heeding much to or totally relying on expert advices (e.g. a medical doctor might confuse NED (No Evidence of Disease) with END (Evidence of No Disease)), etc. The later part of the book discusses topics from basic binomial distribution to Mandelbrot randomness.

This book comes without much analytic data to sustain the author's hypothesis. Despite this, unlike many your-mom-is-a-female commercial books full of repetitive clichés found in the market, 'The Black Swan' is a well condensed tour-de-force and a convincing thesis that needs much attention. The author preaches against (1) naive empiricism (e.g. the meltdown of the Mortgage Backed Security market is a 'one in XXX billions' phenomenon), and (2) extreme skepticism (e.g. one believing in something with all the evidences pointing against it), and advocates beliefs in true and practical empiricism. In the author's word, he preaches practicality and does not want to be "a sucker in things that matter". He advises everyone to make decisions without being the turkey. The truth lies in realizing our limits and the understanding of the asymmetry of knowledge. The Popperian negative empiricism, a.k.a the certainty of falsification ("you know what is wrong with a lot more confidence than what you know is right") is the way to go. To be realistic, one needs to search for weakness in what he/she believes.

The author has made quite numerous suggestions on dealing with Black Swans, for example:
- Delay theorizing to avoid the 'theorizing disease' (".. not theorizing is an act.. The theorizing can correspond to the absence of willed activities, the default option. It takes considerable efforts to see facts and remember them, while withholding judgment and resisting explanations."). The author believes that those who delay theorizing are better off because of the problem of 'conformation bias' and the tendency of rejecting one's own established hypothesis.
- Avoid being overwhelmed by too much information, as too much information may be toxic.
- Avoid making predictions, as predicting is pretty much guessing.
- Avoid making predictions, as predicting is pretty much guessing.
- Avoid looking for the precise and local. Instead, as chance favors the prepared, don't look for something particular every morning but work hard to let contingency enter one's life.
- Gain exposure to serendipities, i.e. get free-lottery tickets and don't let presented opportunities go easily.
- Reduce exposure to negative black swans. Be protected on big bets.
- Avoid penalizing oneself with second guesses and on thinking too much about black swans.
- Ignore institutionalized frauds.

To those who are tolerant of the occasional bragging and nagging by the authors (some are indeed funny), this will be one interesting and memorable read.

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Thought provoking, but a tough read...

I became interested in this book after reading a review in the Wall Street Journal. Unfortunately, I had a very difficult time slogging through to the end. NNT should have stuck to his "day job" as a trader or hired a ghost writer, since he seems to have great difficulty in stringing together a coherent set of thoughts in prose. As one reviewer has noted, a 10-page article written by an accomplished journalist would probably have sufficed to communicate the key themes of the book. HOWEVER - I give the book 3 stars because of the subject material, which I deem to be thought provoking and worthy of further study. Key points made in the book:
- Certain natural processes, such as the height to which we humans grow, are very well predicted by the normal, or Gaussian, distribution, in which the probability of extreme values is exceedingly low.
- As a consequence, and due to certain failings of human instinct, we attempt to apply the Gaussian distribution to all manner of domains to which it should not be applied, such as world affairs, finance, and investing.
- The result is a gross and dangerous underestimate of the risks from extreme events, the "unknown unknowns," the "Black Swans."
- What does that mean practically? For one thing, for the individual investor it means that all those handy financial and retirement calculators that estimate your future investment results based on the average annual returns and standard deviations of various asset classes over the last 60 or so years are giving you a false sense of security. In NNT's view, there is a very real possibility of a Black Swan event that swoops in and blows up your hard-earned portfolio. Or in less dramatic terms, it means you may be eating dog food at age 70.
NNT pretty much leaves the reader to draw his or her own conclusions about the meaning of the Black Swan in their own affairs. There is not much investing advice in the book - NNT made his money betting on Grey Swans - highly unlikely but predictable events - not Black Swans. How do you place a bet on an event that cannot be foreseen? The salvation of reading this book to the end was precisely that it made me think hard about what the Black Swan means to me as an individual investor. My conclusion was that rather than modifying anything I am already doing, I needed to adopt a certain mindset. I need to be mentally prepared for the fact that there is a very real possibility that some Black Swan event could occur in my lifetime that completely wipes out the portfolio I spent the last 27 years amassing. If that happens, I don't want to find myself on a window ledge like many did in 1929. With that in mind, I resolve to do the following:
- Diversify my portfolio (done)
- Own my home outright (10 years to go on a 15 year mortgage)
- Eschew debt (always have)
- Live below my means and keep saving something (check)
- Stay healthy (trying my best)
- If the dreaded Black Swan does happen, be mentally prepared, accept my fate, and move on.

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