Jason’s Ranting & Raving

Those who don’t read have no advantage over those who can’t.

Book Review: The Black Swan by Nassim Nicholas Taleb

Posted by jaystile on November 19, 2008

The Black Swan: The Impact of the Highly Improbable Event by Nassim Nicholas Taleb is at heart a philosophy book about economics. My first reaction is that the book could’ve been shortened by about 100 pages. The major theme of the book is that you don’t know what you don’t know, so quit acting like you do.

A black swan is a highly improbable event. This can be good or bad. For instance, e-mail, who knew the ramifications it would have in every day personal and business life. On the negative side consider a recent black swan. The risk that was revealed that banks were taking investors money in the sub-prime mortgage meltdown with banks writing off BILLIONS of dollars as lost. These companies were considered a ‘safe’ place for your money.

Nassim Nicholas Taleb (NNT) gives examples in his book as a series of small essays or stories. He describes ‘confirmation bias’ which leads to the title of the book. If every swan that anyone has ever seen is white, then all swans are white. This is the problem. The actual statement should be that no evidence of a swan other than white has been found. (btw Black Swans exist in Australia). This confirmation bias is prevalent is all aspects of life as humans try to find evidence to confirm our worldwide. We are not skeptical creatures by nature.

The next item he rails about is the ‘ludic fallacy’. The ludic fallacy is that life does not mimic games. If you flip a coin 99 times and it is always heads what is the chance that the next flip is tails? The mathematician says 50%, the real world says about 1/100 and that the initial assumptions were incorrect. Also, there is no randomness in a casino. All the odds are fixed, and due to the law of large numbers everything averages out. If you go to the casino and ‘take down the house’, it is just a drop in the bucket. They prefer to have one million people bet $1 than to have one person bet $1000000. Then what is the casino’s black swan? How about a tiger maiming one of their star attractions on stage.

NNT goes on to criticize experts when they make predictions. There are some jobs where a person can be an expert. A doctor, a mechanic, an USDA inspector. It is a good idea to listen to them. The other ‘experts’ have jobs where they cannot predict anything but pretend to, namely economists. Real life resembles a fractal distribution not a bell curve that analysts use. You cannot predict a black swan, you cannot known the unknown, all you can do is prepare. You can prepare to jump at a business opportunity for a positive black swan, or you can hedge your investments against the negative black swan.

There is a lot more to say about this book, but you’ll have to read it yourself. It took me awhile to work through this book, but it was worth the read. Next on the list is ‘The 10 cent plauge’.

As a personal note to you, please read more. Those who don’t read have no advantage over those who cannot.

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