One of the things that I’ve enjoyed most about being in business has been the exposure to new ways of thinking and a whole new genre of books. The Black Swan, by Nassim Nicholas Taleb, is a book that has definitely challenged my thinking.
What is a Black Swan?
A Black Swan has 3 attributes:
First it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility. Second, it carries an extreme impact. Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable. (p xvii)
It’s a humbling book in many ways and Taleb drives home his ideas of the “Impact of the Highly Improbable”. There are some great stories inside, from a turkey being stuffed to financial markets to billiards to melting ice.
Funnily enough, after reading this book, I’ve been left feeling grateful. Enormously grateful. Every now and then it’s good to be reminded of the spectacular odds that we’ve faced to get to where we are in an infinite universe.
Here are a few of my notes:
- Beware the bell curve
We need to be careful of the environment we’re in when we’re dealing with probabilities and outcomes. He talks about the difference between Mediocristan (where the bell curve applies) and Extremistan (where it absolutely does NOT).
- Mediocristan vs Extremistan:
Non-scalable ScalableMild or type 1 randomness vs Wild (even superwild) or type 2 randomness
The most typical member is mediocre vs The most “typical” is either a giant or dwarf, ie there is no typical member.
Winners get a small segment of the total pie vs Winner-take-almost-all effects
Example: audience of an opera singer before the gramophone vs Today’s audience for an artist
More likely to be found in our ancestral environment vs More likely to be found in our modern environment
Impervious to the Black Swan vs Vulnerable to the Black Swan
Subject to gravity vs There are no physical constraints on what a number can be
Corresponds (generally) to physical quantities: ie height vs Corresponds to numbers, say, wealth.
As close to utopian equality as reality can spontaneously deliver vs Dominated by winner-take-all inequality
Total is not determined by a single instance or observation vs Total will be determined by a small number of extreme events
When you observe for a while you can get to know what’s going on vs It takes a long time to know what’s going on
Tyranny of the collective vs Tyranny of the accidental
Easy to predict from what you see and extend to what you do not see vs Hard to predict from past information
History crawls vs History jumps
Events are distributed* according to the “bell curve” (the GIF) or its variations vs The distribution is either mandelbrotian “gray” Swans (tractable scientifically) or totally intractable Black Swans
*What I call “probability distribution” here is the model used to calculate the odds of different events, how they are distributed. When I say that an event is distributed according to the “bell curve”, I mean that the Gaussian bell curve (after C.F. Gauss) can help provide probabilities of various occurrences.
- We are hopeless at predicting
Did you know that to predict the 56th impact of a billiard ball on a pool table, “…every single elementary particle in the universe needs to be present in your calculations”?
- All pieces of information are not equal in importance (p 58)
The single observation that disproves the theory is far more important than the previous million observations that confirmed it. Example: A million sightings of white swans in Europe led to the belief that all swans were white. Then they found a black swan in Australia.
- Be an empirical skeptic
Formulate a bold conjecture then start looking for the observation that will prove you wrong.
- Luck favours the prepared
- Focus on the consequences
In order to make a decision, you need to focus on the consequences (which you can know) rather than the probability (which you can’t know).
- Don’t try to predict the precise Black Swan.
- Seize any opportunity or anything that looks like an opportunity.
Finding something that you’re not looking for.
- Barbell investment strategy
Taking maximum exposure to the positive Black Swans while remaining paranoid about the negative ones.(p207)