Book - The Black Swan by Nassim Nicholas Taleb
Overview
In this book, he explains the phenomenon of Black Swans, i.e. extremely unpredictable events that have a massive impact on our societies and the course of history.
The book focuses on the extreme impact of rare and unpredictable outlier events—and the human tendency to find simplistic explanations for these events, retrospectively. Taleb calls this the Black Swan theory.
The book covers subjects relating to knowledge, aesthetics, as well as ways of life, and uses elements of fiction and anecdotes from the author’s life to elaborate his theories.
Intro
The book illustrates a severe limitation in our learning from observations or experience and the fragility of our knowledge. One single observation can invalidate a general statement derived from millenia of confirmatory sighthings of millions of white swans. All you need is one single contradictory finding.
The book is not so much about exceptions as it is about the oversize role of extreme events in many domains of life. The book is not about the possibility of exceptions. It is about the “role” of the exceptional event leading to the degradation of predictability and the need to be robust to negative Black Swan and exposed to positive ones.
The central idea of the book concerns or blindness with respect to randomness, particularly the large deviations.
Life is the cumulative effect of a handful of significant shocks. It is not so hard to identify the role of Black Swans. Look into your own existence. Count the significant events. Look into your own personal life, to your choice of profession, or meeting your mate, your travels from your country of origin, the friendships and betrayals you faced, your sudden enrichment or impoverishment. How often did these things occur according to plan?
Definition of a Black Swan event
3 attributes
- Rarity
- It is an outlier.
- Lies outside the realm of regular expectations
- Nothing in the past can convincingly point to its possibility
- Extreme impact
- It carries an extreme impact
- Retrospective (though not prospective) predictability
- In spite of its outlier status, human nature makes us concoct explanations for its occurance after the fact, making it explainable and predictable.
- The highly expected not happening is also a Black Swan. By symmetry, the occurance of a highly improbable event is the equivalent of the non-occurance of a highly probable one.
Effects
A small number of Black Swan events explain almost everything in our world, from the success of ideas and religions, to the dynamics of historical events, to elements of our own personal lives.
The combination of low predictability and large impact makes the Black Swan a great puzzle. Almost all “social scientists” have operated under the false belief that their tools could measure uncertainty. The applications of the sciences of uncertainty to real-world problems have ridiculous effects; we see it in finance and economics. Our definitions of “risk” usually are a measure that exclude the possibility of Black Swan - hence, they have no better predictive value for assessing the total risks than astrology. Usually, intellectual fraud is dressed up with mathematics.
Coping with Black Swan events
A central idea in Taleb’s book is not to attempt to predict Black Swan events, but to build robustness to negative events and an ability to exploit positive events. “Robustness” reflects an attitude where nothing is permitted to fail under conditions of change. Taleb contends that banks and trading firms are vulnerable to hazardous Black Swan events and are exposed to losses beyond those predicted by their defective financial models.
The book asserts that a “Black Swan” event depends on the observer: for example, what may be a Black Swan surprise for a turkey is not a Black Swan surprise for its butcher. Hence the objective should be to “avoid being the turkey”, by identifying areas of vulnerability in order to “turn the Black Swans white”.
Summary
Taleb has referred to the book as an essay or a narrative with one single idea: “our blindness with respect to randomness, particularly large deviations.” The book moves from literary subjects in the beginning to scientific and mathematical subjects in the later portions. Part One and the beginning of Part Two delve into psychology. Taleb addresses science and business in the latter half of Part Two and Part Three. Part Four contains advice on how to approach the world in the face of uncertainty and still enjoy life.
Taleb acknowledges a contradiction in the book. He uses an exact metaphor, the Black Swan idea to argue against the “unknown, the abstract, and imprecise uncertain—white ravens, pink elephants, or evaporating denizens of a remote planet orbiting Tau Ceti.”
There is a contradiction; this book is a story, and I prefer to use stories and vignettes to illustrate our gullibility about stories and our preference for the dangerous compression of narratives…. You need a story to displace a story. Metaphors and stories are far more potent (alas) than ideas; they are also easier to remember and more fun to read.
Part one: Umberto Eco’s anti-library, or how we seek validation
In the first chapter, the Black Swan theory is first discussed in relation to Taleb’s coming of age in the Levant. The author then elucidates his approach to historical analysis. He describes history as opaque, essentially a black box of cause and effect. One sees events go in and events go out, but one has no way of determining which produced what effect. Taleb argues this is due to The Triplet of Opacity (an illusion of understanding in which we think we understand a complicated world).
The second chapter discusses a neuroscientist named Yevgenia Nikolayevna Krasnova, who rejects the distinction between fiction and nonfiction, and her book A Story of Recursion. She published her book on the web and was discovered by a small publishing company; they published her unedited work and the book became an international bestseller. The small publishing firm became a big corporation, and Krasnova became famous. But her next book fails. So, she experienced two black swans. The book goes on to reveal that the so-called author is a work of fiction, based in part on Taleb.
The third chapter introduces the concepts of Extremistan and Mediocristan. He uses them as guides to define the predictability of the environment one is studying. Mediocristan environments can safely use Gaussian distribution. In Extremistan environments, a Gaussian distribution should be used at one’s own peril. In this part he quotes Benoit Mandelbrot and his critique of the Gaussian distribution.
Chapter four brings together the topics discussed earlier into a narrative about a turkey before Thanksgiving who is fed and treated well for many consecutive days, only to be slaughtered and served as a meal. Taleb uses it to illustrate the philosophical problem of induction and how past performance is no indicator of future performance. He then takes the reader into the history of skepticism.
In chapter nine, Taleb outlines the multiple topics he previously has described and connects them as a single basic idea. In chapter thirteen, the book discusses what can be done regarding “epistemic arrogance”, which occurs whenever people begin to think they know more than they actually do. He recommends avoiding unnecessary dependence on large-scale harmful predictions, while being less cautious with smaller matters, such as going to a picnic. He makes a distinction between the American cultural perception of failure versus European and Asian stigma and embarrassment regarding failure: the latter is more tolerable for people taking small risks. He also describes the “barbell strategy” for investment that he used as a trader, which consists in avoiding medium risk investments and putting 85–90% of money in the safest instruments available and the remaining 10–15% on extremely speculative bets.
Overview: The Black Swan
What are Black Swans and why are they important?
For thousands of years, it was widely believed that all swans were white. Then in 1697, a Dutch explorer Willem de Vlamingh discovered black swans in Australia, debunking this universal “truth” overnight. The term “Black Swan” has since been used to describe the occurrence of a seemingly-impossible event.
3 key features of Black Swans
Taleb identifies 3 key features of Black Swans: • Rarity: Black Swans are outliers that can’t be reasonably expected to happen based on past events. • They have a profound impact on our society/world. • Retrospective predictability: Although the events are unpredictable, humans tend to explain them on hindsight as if they could be perfectly understood and predicted.
Black Swans are not inconsequential anomalies, but a significant phenomenon that shapes the very world we live in. Many historical events that drastically impacted our societies and lives were actually Black Swan events. These include the 2 world wars, the fall of the Berlin Wall, the 11 Sep 2001 terrorist attacks, the rise of the Internet, the 1987 stock-market crash, the 2008 financial crisis and the 2019 Covid pandemic. In all of these cases, no one could’ve predicted the events in advance (no matter what we claim afterward), nor could we have foreseen their sweeping effects.
Many of the major turning points in your personal life (e.g. how you met your spouse, your biggest gains and losses) were also likely to have been unexpected, i.e. they didn’t come from standard events on your daily schedule.
2 tYpes of uncertainty: Extremistan vs. Mediocristan
Differences between Extremistan vs. Mediocristan
Nassim Nicholas Taleb differentiates between 2 types of uncertainties:
• In Mediocristan environments, there’s a limit to the amount of randomness or deviation from the average. Inequalities exist, but they’re mild or controlled. Usually, there’re some physical constraints (e.g. height, weight, running speed) which limit the amount of variability. For example, if you add the tallest or heaviest man in history to a sample size of 1,000 people, the outlier won’t make a real difference to the average. There’s also typically a linear relationship between variables. Prediction is possible in such environments or systems.
• In Extremistan environments, there can be wild randomness and extreme deviations. Typically, there’re no physical constraints and no known upper/lower limits (e.g. knowledge, financial markets, e-book sales, social media “likes”). Thus, the outliers can make a big difference—if you add the net worth of Jeff Bezos or Bill Gates to a group of 1,000 people, it will drastically shift the average.
Scalability
A key difference between Mediocristan and Extremistan is the scalability. Something is scalable if it can grow exponentially with little/no additional resources. A massage therapist is a non-scalable profession since he/she can only serve so many clients in a day. However, a singer in the digital age is a scalable profession since he/she can perform a song once, record and disseminate it widely. Scalability can create vast inequalities, extremities and winner-takes-all situations. Top singers earn vastly more than average singers, even though they aren’t proportionately more talented.
Black Swans are so disruptive partially because they often appear in scalable Extremistan scenarios. A single unexpected event can flip everything on its head with potentially infinite impact. You can’t lose much weight in 1 day (Mediocristan), but you can lose all your money in an instant (Extremistan).
Overcoming our Blindness to Black Swans
Black Swans are the “unknown unknowns” which can’t be accounted for, even by the most sophisticated models. Yet, we tend to pretend that Black Swans don’t exist. We focus on what little we can see/grasp, deluding ourselves that we know exactly what’s happening. In reality, what we know is just a miniscule fraction of the vast amount of things that we don’t know.
Here’s a brief overview of why our world is inherently unpredictable and why our human mental biases lead us to be over-confident of our predictions and conclusions.
Human Biases and Tunneling
In the book, Nassim Nicholas Taleb explains why the human brain is so susceptible to misconceptions and overconfidence, and what we can do about it.
• The confirmation bias and the round-trip fallacy, including how we confuse an absence of evidence with an evidence of absence, and the difference between negative empiricism vs naive empiricism. • What’s the narrative fallacy and how to overcome it • Why we’re blind to nonlinearities and the implications • Why empirical evidence is flawed due to silent evidence and why we’re prone to the survivor bias
Difficulties of Prediction
Ultimately, our world and future are unknowable and unpredictable because of various factors, including:
• The role of chance and luck in inventions and game-changing discoveries • The inherently unpredictable nature of dynamical systems and variables that behave in inconsistent or nonlinear ways • We can’t make accurate predictions with flawed and incomplete information.
The Scandal of Prediction and Epistemic Arrogance
The combination of the 2 sets of factors above means that: humans are terrible at prediction, yet we keep making predictions without realizing how frequently we’re off the mark. Taleb calls this the “scandal of prediction”.
• What’s epistemic arrogance and its implications; • Why we should beware of experts’ predictions (and our own predictions); • Why the past is even harder to predict than the future; and • How to stop being suckers and start becoming smarter about the way we see the world.
Coping in a World of Uncertainty
If we’re surrounded by randomness and cannot plan ahead with certainty, is there anything we can do? In our complete Black Swan summary, we’ll explain how you can leverage the inherent asymmetry of Extremistan environments to maximize your upsides for positive Black Swans while minimizing the downsides for negative Black Swans.
Other Details in “The Black Swan” book
In this book, Nassim Nicholas Taleb uses numerous examples and research studies to explain the Black Swan phenomenon and the fallacy of human predictions. The book also includes detailed comparisons between Mediocristan and Extremistan environments, with several additional chapters to discuss the technicalities of concepts such as bell-curves, deviations, inequalities, randomness, fractality etc.