The Black Swan
Author: Nassim Taleb
Published: 2010 (379 pages)
Started reading: 8.September.2016
Finished reading: 28.September.2016
I feel crass shoehorning this book into two takeaway lessons, given its philosophical depth and literary flair, but alas this blog is about reading for doing, and there are plenty of profound actionable insights to be mined from The Black Swan: Second Edition: The Impact of the Highly Improbable: With a new section: “On Robustness and Fragility” (Incerto).
A dazzling epistemological treatise, The Black Swan is a standalone volume in Nassim Taleb’s Incerto series, which also contains well-known works Fooled By Randomness and Antifragile.
It is one of the few books I intend to read again and again.
The “black swan” is a metaphor for an unpredictable yet consequential event, that is often rationalised in hindsight. It can have a positive or negative impact.
Its etymology is based on the accident of the ancients believing that all “swans” were white, until the discovery of black swans. Taleb’s usage of the metaphor is distinct from its use in describing the problem of induction, though he does deal with induction at length.
A Black Swan is a subjective, not objective, phenomenon. For example, 9/11 was a Black Swan to the CIA, but not from Al Qaeda’s perspective.
Black Swans arise in ‘Extremistan’ – those domains that experience fat-tail, rather than bell-curve, distribution.
“Less than 0.25 percent of all the companies listed in the world represent around half the market capitalization, a less than minuscule percentage of novels on the planet accounts for approximately half of fiction sales, less than 0.1 percent of drugs generate a little more than half the pharmaceutical industry’s sales – and less than 0.1 percent of risky events will cause at least half the damage and losses.”
– Nassim Taleb, The Black Swan
Events in Extremistan are inherently difficult to see coming.
Unlike “Type 1 Randomness” – the kind of randomness involved in games of dice or roulette – Black Swans possess an added layer of uncertainty that makes them unpredictable. The future is not just hard to predict because we are trying (and failing) to model complex, dynamic human or other (e.g.. climatic) systems, it is also fundamentally unpredictable because the course of history is determined by new technology, and we can’t anticipate precisely the technology of the future (since if we could, we would already have invented it).
Taleb illustrates the Type 1 and Type 2 distinction with the example of a Casino hosting a conference at which he was a speaker. The Casino management was expert in assessing and insuring against risks like cheating or big wins (known unknowns), but its biggest cost that year had been a $100 million payout to a performer who was mauled when his typically docile tiger turned on him during a show. This, to quote Donald Rumsfeld, was an unknown unknown.
Although we are vulnerable to Black Swans (due to cognitive biases and flawed risk measurements) we tend to construct retrospective narratives and find causal links to explain them, as if we predicted the event all along. Historians often remark on the “escalating tensions” that preceded World War I, yet an analysis of the price of government bonds, which reflects trust in governments’ ability to repay debts, from the time reveals that no one anticipated a war to end all wars.
On a final, separate, note, one thought that struck me while reading The Black Swan was how neatly and naturally black swan theory dovetails with stoicism, so I was delighted when the last three pages of the book finished with a stoic exposition. The only way to be truly robust to an unpredictable world is to refuse to treat defeats as such.
“This is my plan B. I kept looking at the position of my own grave. A Black Swan cannot so easily destroy a man who has an idea of his final destination.”
– Nassim Taleb, The Black Swan
> Use a barbell strategy for investing. This entails a simultaneously hyperconservative and hyperaggressive approach. 85-90% of your portfolio should be in extremely safe instruments like Treasury bonds, with the remaining 10-15% invested in incredibly speculative stocks. This prevents a negative Black Swan which could befall a portfolio full of mildly risky investments while exposing you to the potential for a positive Black Swan in the speculative stocks. Taleb specifically mentions the biotech startup space as an area that could be ripe for positive Swans.
> When it comes to human projects, the longer you wait for completion, the longer you will be expected to wait. Enter Taleb: “Let’s say a project is expected to terminate in 79 days…On the 79th day, if the project is not finished, it will be expected to take another 25 days to complete. But on the 90th day, if the project is still not completed, it should have about 58 days to go. On the 100th, it should have 89 days to go. On the 119th, it should have an extra 149 days. On day 600, if the project is not done, you will be expected to need an extra 1, 590 days.” This effect, while counter-intuitive, applies to anything with scalable variables, such as wars, refugees waiting to return home, fans waiting for a response to a letter sent to an author. The idea is mentioned in passing on page 159 of the book, to partly explain the problems with prediction errors, but to my mind, it is one of the most profound insights therein. My consequent advice if you have an aspiration or a project you’ve been mulling for a while: if you want to get it EVER done, get it done now.