Book Summary: The Black Swan

by Nassim Nicholas Taleb

What’s it about?

A Black Swan is a future event that is unforeseeable, but that seems inevitable in hindsight.

In the increasingly globalized and specialized world, we frequently find people making very sophisticated and detailed forecasts and predictions about the future. This happens in science (“Experts predict this technology will be comsumer-ready by 20xx…”), politics (war timelines), economics, and business (profit projections). These predictions usually come from the smartest minds on the planet, and employ highly complex mathematical models, often derived from physics. Unfortunately, they’re also frequently dead wrong.

This book is about our arrogance when it comes to predicting the future, and how neither you nor I nor expert economists and politicians are as clever as thing we are. A fallacy of modern science is the belief that we can look at past data and use induction to make guesses about what will happen in the future. This may work for some types of predictions, like physical characteristics; given what we know about the historical average height of humans, we can pretty safely say that a 9-foot-tall person will not be born tomorrow. We do this by looking at past data and extending it into the unknown future. There is comparatively little variation in the physical world. But we erroneously use this same method when we try to forecast variable that are much less predicable and more variable than physical characteristics. Wealth, war, and economic measures are far too diverse for these methods to apply.

Imagine a turkey who looks at the past and sees the farmer being kind to him every day for a thousand days. The farmer feeds him well, cleans his coop, performs medical checkups, and the turkey has no reason at all to doubt the farmer’s benevolence. If the turkey takes the historical data and projects into the future, he would expect nothing but peace and love from the farmer. But when Thanksgiving comes around, the turkey loses anyway.

So to avoid the fate of the turkey, we should put a little less faith in standard models of prediction. Economists didn’t foresee the financial crisis of 2008 (or any financial crisis for that matter), yet they continue to use the exact same forecasting methods and we continue to trust them. Rather than try to predict the future down to the decimal point and then betting all our money on that one horse, we should be more conservative and resist the urge to optimize, optimize, optimize. We should admit that our predictions are frequently wrong, and instead of trying to forecast, we should devote more resources to our defence against destructive Black Swans. We’re can’t predict when or why or how they will unfold, but if we can at least prepare for their possibility the world will be better off.

Why I read it:

Taleb is a fascinating character– a former Wall Street quant, and a highly literate public intellectual. He’s a skeptic with an inclination toward practical rather than academic philosophy.

My impressions:

Apply this to personal life. There are two kinds of Black Swans– negative and positive.

  • Negative: unexpected death, financial ruin, unhappiness for whatever reason.
  • Positive: winning the lottery, meeting the woman of your dreams, good fortune of any kind.

Neither are necessarily extreme, but both are completely unpredictable. So how to do you live with this concept in mind? You try to maximize your exposure to positive black swans while minimizing exposure to the negative.

Understand that many things in the world have asymmetrical payoffs– the wins and the losses are seldom of the same magnitude. Therefore it is possible to put yourself in the position to benefit from positive Black Swans without risking a while lot. Say you’re investing in stocks. Put 80% of your money in extremely low-risk places, but invest the remaining 20% in ultra-high-risk things like start-ups. If they tank, oh well, but if they succeed, you just might have the next Facebook on your hands. This works for everything. Approach that beautiful woman, or send that email to a potential employer, because the potential payoffs are greater than the potential risks. Be very aggressive when you can gain exposure to a positive Black Swan and be very conservative when you are under threat from a negative Black Swan.

Remember the story of the painter who was struggling with his depiction of foam around the a horse’s mouth. He tried unsuccessfully and made a mess, and in frustration, took the sponge he used for cleaning his brush and threw it at the painting. When the sponge hit, it left a perfect pattern of foam on the horse’s mouth.

Moral: Embrace serendipity. We dramatically overestimate our ability to see the true odds of the events that run our lives, and we are fooled into thinking that there is some order, that we have more control over it than we really do. The sooner we resign ourselves to this fact, the sooner we can conquer arrogance and live happier lives.

Further Questions:

  • This book is informative, but sometimes not very practical. How can I make sure I keep these ideas at the top of my head every day? How can I turn them into practice and not just theory?
  • What are some other examples of the ludic fallacy (mistaking the map for the territory)?
  • There is the suggestion that stoicism is aggressive because it entails prior rejection or indifference to an experience before it happens as a way to prepare for its loss or inadequacy. Does anyone else characterize stoicism like this?

Quotes:

“Trial and error means trying a lot.”

 

“[C]ontrary to social-science wisdom, almost no discovery, no technologies of note, came from design and planning–they were just Black Swans . . . The strategy is, then, to tinker as much as possible and try to collect as many Black Swan opportunities as you can.”

 

“The classical model of discovery is as follows: you search for what you know (say, a new way to reach India) and  find something you didn’t know was there (America).

 

If you think that the inventions we see around us came from someone sitting in a cubicle and concocting them according to a timetable, think again: almost everything of the moment is the product of serendipity.”

 

“Missing a train is only painful if you run after it!”

 

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