The Black Swan by Nassim Nicholas Taleb

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Black Swan by Nassim Taleb

The Black Swan: The Impact of the Highly Improbable by Nassim Nicholas Taleb is one of those books that can completely change the way you see the world. It talks about the unknown unknown, the black swan, the highly improbable unpredictable event that changes the world and which we will we later try to explain away.

You believe all swans are white. Each time you see a white swan, it’s just confirmation of your belief. People can see millions of white swans, but it only takes one black swan to prove everything wrong.

I first heard of this book on Talk of the Nation’s Interview with Taleb, it stayed in my mind throughout my adventures in Thailand, and upon my return I finally got my hands on a copy and fell in love with it.

Here are some of the topics covered (not a complete nor ordered list, nor exact quotes, just general highlights of parts I loved):

1. Mundanistan vs Extremistan: Take a 10,000 people to a stadium. No matter how fat one guy is, he’s not going to change the average weight by any noticeable amount. Same with height. Same with age. Now imagine you’re measuring net worth. A guy like Bill Gates will blow the average out of the stadium. Measures like height, weight, etc are from Mundanistan. Measures like net worth, people killed in a war or by a disease, the impact of a new invention etc, are from Extremistan. Averages and standard deviations and predictions can fail in Extremistan. For the most part…. we live in Extremistan… and we shouldn’t depend on Mundanistan prediction methods on things that can have huge impacts on our lives.

2. Silent Evidence: “These souls prayed to the gods and were saved.” “What about those who weren’t?” Most interesting professions, like writing or trading etc have huge cemeteries. When we look at the winning record of associates at a firm, or books sales, or even the stock picks of the latest hot fund, there’s a lot we don’t see. What about all the guys who are fired each year? What about all the authors who fail? What about all the companies that went bust and were replaced? Or the funds that were hot that no longer are? We often read books by successful CEOs listing the qualities they think made them get there (I’m particularly guilty), but we don’t see the thousands who have those same qualities who failed.

3. The Ludic Fallacy: Mistaking the map for the terrain. Best illustrated with the help of Fat Tony.

Thought experiment at a bar (this isn’t an exact quote, sounded much better in the book):
Taleb: I tossed a fair coin 99 times and got heads each time. What are my odds of heads on the next toss?
Dr. John (the actuary): 50/50.
Fat Tony: At least 99 to 1.
Dr. John: But why? The previous tosses have nothing to do with the next one.
Fat Tony: You’re either full of crap or a pure sucker to buy that fifty percent business. The coin’s gotta be loaded.

In other words: it’s more likely there’s something wrong with the assumption of fair play than a fair coin landing 99 times in a row on heads.

Further examples of this are in how we deal with probability. Most people think of probability as chances in dice and card games, but as one example points out: what were some of the biggest losses a casino had to deal with? A tiger attack on one of the Casino’s top performers, a pissed off contractor trying to dynamite the foundation columns, an employee filing papers that needed to be filed with IRS only in files in his own desk, and a kidnapping of the owner’s daughter. Think outside the box. There are many more things we don’t know than we know.

4. Induction: Don’t be the turkey!
Turkey wakes up every morning and gets fed and cared for by humans. It’s been true for 999 days. But on the 1000th day, there’s a very unpleasant surprise. Induction can be deadly.

5. Ties and Mice and Experts
Just because someone speaks with authority, has a suit on, and has a fancy position doesn’t mean you should trust him (or her). Next time you deal with a self-assured expert (political analyst, fancy academic, economist, etc) imagine dropping a mouse down his shirt and seeing his reaction. I was crying from laughter during the first detailed elaboration.

6. Survival Bias: Why didn’t the Plague kill more people? Because we’re still here. If it did, we wouldn’t be here asking. Casanova had his lucky star that he believed helped him back up. How could he bounce back so many times? Well, he might have, but thousands of other Casanova’s didn’t. You’re not hearing from them. Sitting next to a guy at a Casino, who just won some 1 to 100,000 prize. “It has to be destiny. I mean look at the chances.” Yeah, look at them, there were 999,999 others who failed. Don’t ask how could it be that you got here, but think of all the minor things that could have made you not be here. (Similar to 2. Silent evidence.. they’re all inter-related)

7. Butterflies and Chaos and Discoveries: They cleaned all the bird poop off the satellite, but the noise was still there. Turns out those noises were from the birth of the universe. They were just getting rid of bird crap. The guys that deduced those signals should exist had to read about the noise from the paper. Ditto for penicillin, another accident. Heck, ditto for Columbus and America. Big discoveries often happen when people are looking for something else. The weather simulator gave completely different results for the same input. A bug? No, it was from rounding some really small, super-tiny, unimportant number. The so-called butterfly causing a hurricane… two years later. But here’s the thing, this is not an invitation to analyze butterflies! The point is, in highly complex systems, minor measurements can completely change the results. The whole point is it’s extremely difficult to predict.

8. Diaries and Noise:
Instead of rebuilding memory and answers to suit events, keep a diary, with your predictions and analysis. Much more humbling. Interestingly, regarding news and info (and going well with Ferris’ low information diet): more information can hurt your performance. Take a fire hydrant and blur it. Now unblur it in a number of steps, say 20 for Group 1, and 10 (corresponding to each second unblur) of the previous group. If we stop at each common unblur and ask both groups if they recognize it, the group with just 10 steps would see it at an earlier step than the group with 20. More data, slower recognition. Ditto for investing, perhaps computers can run on nanosecond algorithms however, for people, this can create a lot of confusion, stress, and wasted effort. In addition to being blinded, we’re wired to make connections and see stories. They make memory doable, but the “because” isn’t a fact. Niederhoffer also stressed this in his books (Education of a Speculator, Practical Speculation) in regards to financial news headlines. Interestingly enough, he also avoids the news… except for the National Inquirer.

9. Anti-Platonicity: I whine about categories enough. The book does too.

10. More more and more:
These are just a few of the things covered in the book, others include fractals, a simple overview of black swan investing strategy (only minor but very interesting), surprising praise of army analysts, wonderful treatment of self-confident academics and professionals and high brow opera culture, anecdotes, scientific and philosophical references, different modes of reasoning, exposing oneself to opportunities, linguistic mistakes that cost us bigtime! All told in a down to earth, understandable, funny, very funny voice.

This should be required reading before entering college. It could help raise many interesting questions. The induction part, actually highlights a really interesting point in writing persuasive essays on standardized tests (my favorite subject to teach)… using single examples, the narrative, isn’t the logical/scientific way to prove stuff… although it’s very effective for its given purposes (getting into college, getting a higher score… or to get viewers for news-stories news headlines).

I actually didn’t read the book, I listened to it… twice. It’s the perfect journey book, on drives from SF to SJ, I sometimes ended up sitting in the car minutes after arriving to get the last morsel from the chapter. Some neat books that gave background to this read: Niederhoffer’s Education of a Speculator and Practical Speculation, Ariely’s Predictably Irrational, and Tim Ferriss’s The 4-Hour Workweek. I think the direct link between the interview and getting the books was probably from Daily Speculations. In any case, The Black Swan is a must read, a book that can change the way you see the world.

Two articles worth reading:
Blowing Up: How Nassim Taleb turned the inevitability of disaster into an investment strategy (2002)
Nassim Nicholas Taleb: the prophet of boom and doom (2008)

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