The Black Swan

I saw on Facebook that a friend of mine from high school liked this book. That’s the only research I did before I bought it. This friend of mine is smart, damn smart. I’m not, which is a problem because the concepts behind The Black Swan are complicated. In fact, this is probably the most intellectually challenging book I’ve read in at least five years. I’ll try, through this note, to make sense of the concepts so I can apply them to my business and personal life.

This book advocates a method of thought that most people don’t engage in. It debunks Nobel Prize winners (like Myron Scholes), famous philosophers (like Plato), and bestselling authors (like Malcolm Gladwell). In fact, Taleb throws some highly conventional scientific and mathematical theories (like the Gaussian Bell Curve) under the proverbial bus. He then stomps on them and calls their mothers a bad name.

Taleb is an interesting and funny man, with a self-deprecating sense of humor. He does not write in a linear manner, rather, he ruminates on pages. My small brain found an endless supply of knowledge nuggets but I continuously struggled with fitting it all together. That’s what this time is for. I’m reading through my Kindle notes trying to make sense of the monster and using, for the first time, Scrivener for the writing activity. I’m serious about this because I don’t want to have to do a whole re-reading to make sense of this beast.

So what is this Black Swan? Taleb outlines three traits of a Black Swan.

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 (unlike the bird). Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable. (Kindle ref. 375)

Taleb is interested, I think, in Black Swans for a few reasons. First of all, he’s a scholarly type and he just likes thinking about this stuff. Second, he has an ego and certainly takes great satisfaction in trying to prove other scholarly types wrong. Finally, I think he cares about the state of this world and desires to promote some change to make the world, in his view, a better place.

So what is, if any, this change he’s trying to promote? This quote from Taleb should give you some indication:

The central idea of this book concerns our blindness with respect to randomness, particularly large deviations: Why do we, scientists or nonscientists, hotshots or regular Joes, tend to see the pennies instead of the dollars? (Kindle ref. 397)

This blindness could lead not only to bad decisions, but to tragedy. To start remediating this blindness we must recognize the particular “state” we’re in with respect to randomness. Are we in Mediocristan or are we in Extremistan? These are Taleb’s proxies for certain states of the world that we must be able to recognize when we start down this road of analyzing Black swans.

In Mediocristan, you can use standard decision making techniques and apply some of the statistics you learned in college to survive and thrive. There are no Black Swans in Mediocristan. It’s a simple world, described by Taleb as such:

I can state the supreme law of Mediocristan as follows: When your sample is large, no single instance will significantly change the aggregate or the total. The largest observation will remain impressive, but eventually insignificant, to the sum. (Kindle ref. 1203)

Extremistan is a much different place.

In Extremistan, inequalities are such that one single observation can disproportionately impact the aggregate, or the total. (Kindle ref. 1223)

For the most part, Extremistan more closely approximates the world we live in today. It is the place where Black Swans happen. It is a world of stock market crashes, bank failures, and 9/11. If you don’t recognize when the situation calls for you to view things as if you’re in Extremistan, then you’re ripe for making bad decisions and giving inadequate explanations for all aspects of life, love, economics, and politics; you’re ripe for falling prey to the Black Swan.

However, it’s within our power to change our method of thought so we don’t imperil ourselves to Black Swans. Or better yet, so we can take advantage of Black Swans. To do so, in general, Taleb feels we must gain some erudition.

Let me insist that erudition is important to me. It signals genuine intellectual curiosity. It accompanies an open mind and the desire to probe the ideas of others. Above all, an erudite can be dissatisfied with his own knowledge, and such dissatisfaction is a wonderful shield against Platonicity, the simplifications of the five-minute manager, or the philistinism of the overspecialized scholar. Indeed, scholarship without erudition can lead to disaster (Kindle ref. 1507)

This erudition is necessary in ceding that the human mind makes some thought errors that could cause “Black Swan blindness.” Taleb embarks on a lengthy chapter on each of five thought errors.

  1. We focus on preselected segments of the seen and generalize from it to the unseen: the error of confirmation.
  2. We fool ourselves with stories that cater to our Platonic thirst for distinct patters: the narrative fallacy.
  3. We behave as if the Black Swan does not exist: human nature is not programmed for Black Swans.
  4. What we see is not necessarily all that is there. History hides Black Swans from us and gives us a mistaken idea about the odds of these events: this is the distortion of silent evidence.
  5. We “tunnel”: that is, we focus on a a few well-defined sources of uncertainty, on too specific a list of Black Swans (at the expense of others that do not easily come to mind). (Kindel ref. 1531)

When he gets through describing these, we’re half way through the book, kind of (there’s a postscript that’s pretty long, but pretty rich). So far, Taleb has shown us the pitfalls in our understanding of the world. He now endeavors to explain just how poorly we humans are at predicting. Taleb is fixated on prediction because, as he says, “Prediction, not narration, is the real test of our understanding of the world.”

Our understanding of the world is what’s at stake folks. Taleb is trying to help us figure out “what’s going on” around here. But we are intrinsically horrible at predicting, so what do we do? Taleb seems to be saying that corporate profits and book sales and blockbuster inventions are mostly lucky, so are we to just sit around and hope that we have more good luck than bad luck?

Well, Taleb’s reason for loving America may provide some insight:

In fact, the reason I felt immediately at home in America is precisely because American culture encourages the process of failure, unlike the cultures of Europe and Asia where failure is met with stigma and embarrassment. America’s specialty is to take these small risks for the rest of the world, which explains this country’s disproportionate share in innovations. (Kindle ref. 4499)

This culture allowed him to get rich using a “barbell strategy” or, as he puts it, “to be as hyperconservative and hyperaggressive as you can be instead of being mildly aggressive or conservative.” (Kindle loc. 4515) He advocates, for instance (as an alternative to medium risk investments), socking away 85-90% of your money in T-bills (extremely safe, for money you’re not willing to lose) and putting the rest in extremely speculative bets – taking some small speculative risks that result in more failures than successes, but exposing you to the potential for one or more huge payoffs (I’m paraphrasing from chapter 13, not sure how much is a direct quote).

He runs through implementation of this “barbell strategy” with 5 key recommendations. They’re great reading, but I won’t list them here. Buy the book! I’ve reread them multiple times and still think I’m going to have study them to understand how to implement them. He sums it up like this:

All these recommendations have one point in common: asymmetry. Put yourself in situations where favorable consequences are much larger than unfavorable ones.

Indeed, the notion of asymmetric outcomes is the central idea of this book: I will never get to know the unknown since, by definition, it is unknown. However, I can always guess how it might affect me, and I should base my decisions around that.

Wow, we still have a large, complicated, but optional portion of the book to go. It’s evident that I’m going to have to do a second reading. Taleb starts digging deeply into methods to turn Black Swans into Gray Swans, the pitfalls of the Gaussian Bell Curve (which he calls GIF, Great Intellectual Fraud), and some heavy philosophy. It’s confusing and I should have stopped and rehashed things before I moved on. He states in the intro to this section that it can be skipped. And even if you press on, he forewarns you periodically about parts that can be skipped. He clearly cares about his readers.

I really liked Taleb’s tone, his humor, and his delivery. The guy is a genius and he wants nothing more than to sit around the rest of his life and think about Black Swans. He said early on that he wants to be “a flâneur, a professional meditator.” It would be a beautiful thing to have such a luxury.

And I loved his parting shot:

I am sometimes taken aback by how people can have a miserable day or get angry because they feel cheated by a bad meal, cold coffee, a social rebuff, or a rude reception. Recall my discussion in Chapter 8 on the difficulty in seeing the true odds of the events that run your own life. We are quick to forget that just being alive is an extraordinary piece of good luck, a remote event, a chance occurrence of monstrous proportions.

Imagine a speck of dust next to a planet a billion times the size of the earth. The speck of dust represents the odds in favor of your being born; the huge planet would be the odds against it. So stop sweating the small stuff. Don’t be like the ingrate who got a castle as a present and worried about the mildew in the bathroom. Stop looking the gift horse in the mouth-remember that you are a Black Swan. And thank you for reading my book. (Kindle loc. 6192)

You are most welcome NNT, and I hope to be diving back in occasionally.