The Black Swan– The Impact of the Highly Improbable

In his semi-coherent, often times rambling work on uncertainty and why we struggle so much with predicting it, Nassim Taleb certainly made me work hard to follow along. The juxtaposition of how clear Taleb makes his distain for financial professionals, economists, doctors, and other members of academia known, with how unclear his thesis and arguments are, make this book an annoying read. I have little patience for reading unnecessarily extended works; this book could have been half the length while still making all the same points. Taleb’s repetitive diatribes against pretty much everyone are distracting, just as I am getting into the meat of an important topic Taleb distracts me from it with his self inflating nonsense.

Taleb’s writing demonstrates a frustrating air of superiority and a lack of focus. But what about his ideas? Or at least his original ideas, as a lot of his ideas on human behavior and psychology were borrowed from Thinking Fast and Slow. Like I said, This book could easily be condensed into a more readable and enjoyable form. Let’s consolidate out the nonsense and examine some of the high points from his work that made me think about the world differently.

Before Europeans discovered Australia, they had never seen a black swan. Therefore they concluded that all swans were white. If I am in old world Europe and go to the Vltava river in Prague and see a white swan this is positive evidence, it reinforces my belief that all swans are white. However, it does not prove that all swans are white. I could go there everyday and see 1,000,000 white swans, bolstering my belief that all swans are white, but never proving it. If the next day I see a single black swan, my belief is shattered by this negative evidence. A single instance of negative evidence disproved my belief that was previously validated by millions of instances of positive evidence. Looking for positive evidence that confirms my belief, rather than negative evidence that refutes it, is called confirmation bias. We can never be certain that a black swan event is not lurking when we only seek to confirm our beliefs.

Taleb describes a black swan event as having three distinct attributes: unpredictability, consequences, and retrospective explainability. We need to look no further than this pandemic to see a black swan event. It was highly unpredictable, we didn’t know when or where it would surface. It has severe consequences, both in the lives lost from the virus and in the erratic government responses around the world that caused collateral damage. After the pandemic surfaced, we all suddenly “knew” how predictable it was. We pointed to the wet markets in Wuhan, where live animals of varying types are kept and slaughtered in abhorrent conditions in close contact with one another and with humans (we do similar things right here in America with our industrialized farming system–other than the bat eating). Our understanding of an event after it happens leads us to believe that it was explainable and therefore preventable.

Taleb goes on to discuss factors that blind us to the possibility of certain black swan events. Have you ever heard “past performance is not indicative of future results”? This saying is usually used as a disclaimer before the person saying it–usually a financial professional–uses past performance to indicate future results. Look at the graph below. In it we see life through the eyes of a turkey. With each day the turkey is fed, it becomes more assured that it will be fed the next day. This all works out great until the day before thanksgiving when the turkey is “harvested” rather than fed.

When the turkey is most confident it will be fed the next day (day 1000) the imminent risk of slaughter is at its highest. The separation between expectation (based off of the past) and what is about to happen to the turkey is what creates an opportunity for a black swan event to occur. This can be applied to anything. Taleb uses the turkey as an example so that we can extrapolate its circumstances to our own lives. We are the turkey when we ignore the possibility of black swan events and instead allow ourselves to believe that something will continue to happen just because it consistently happened before.

Taleb partly justifies his issues with academics and financial professionals in that they rely on the Gaussian distribution also called a normal curve or bell curve. He claims they apply it to areas where some of the risk is unknowable. And, where that unknowable risk is a black swan risk that will completely upend their assumptions. He breaks down the world of risks into two made-up countries: Mediocristan and Extremistan. The rules of Mediocristan are controlled by the mediocre; there are few extremes and no black swans. Imagine a room with 1000 people in it. Now weigh all of them and divide by 1000. Assume the average works out to 180 pounds, now add the heaviest person you can think of to the room, even if the person weighs 600 pounds, their influence of the average is small. A variable like weight belongs in the Mediocristan domain, and one would be justified in using a Gaussian distribution in evaluating variables like these. Compare that to the land of Extremistan where Taleb looks at variables like wealth. If you take the same 1000 people and average their net worth, your result could vary widely depending on your sample. But for the sake of argument assume the average is $500,000. Add in Jeff Bezos with a net worth of around $175 billion (post divorce) as the 1001st person in the group and the average skyrockets, making everyone a hundred-millionaire and close to being a billionaire. The outlier in Mediocristan had a very small influence on the average whereas the outlier in Extremistan shifted the average by a gigantic proportion. Taleb questions why we are using tools such as bell curves that are meant for risk assessment in places like Mediocristan, in places that exhibit Extremistan tendencies.

After 252 pages of twists and turns, Taleb presents his thesis.

Many people accepted my Black Swan idea but could not take it to its logical conclusion, which is that you cannot use one single measure for randomness called standard deviation (and call it “risk”); you cannot expect a simple answer to characterize uncertainty.

-Nassim Taleb, The Black Swan

Overall, I think this book is overhyped. Taleb introduces a new way to think about risk, but I don’t think he explains it clearly. His unorganized style make this convoluted subject matter difficult to truly understand. That being said, I do think the ideas within, once distilled, are thought provoking. But when the answer to most questions we cannot know is to know that there are unknown unknowns out there, there isn’t much else to say. Yes, there are things that we cannot know that we don’t know, but how the hell does that help me now?