The Black Swan
“The Impact of the Highly Improbable”
By Nassim Nicholas Taleb, Random House, 2008
A black swan is a highly improbable event with three principal characteristics: It is unpredictable; it carries a massive impact; and, afterwards, we concoct an explanation that makes the event appear less random and more predictable than it was. The astonishing success of Google was a black swan and so was 9/11.
For Nassim Nicholas Taleb, black swans underlie almost everything about our world -from the rise of religions to events in our personal lives. But because humans are hardwired tolearn specifics when they should be focused on generalities, we are unable to truly estimate opportunities and are not open enough to rewarding those who improbable event with rewarding those who improbable event with
Why You Need this Book
The revelations in this book explain everything you know about what you don’t know. It offers surprisingly simple tricks for dealing with black swans and benefiting from them.
ON THE PLUMAGE OF BIRDS
Before the discovery of Australia, people in the Old World was convinced that all swans were white – an unassailable belief as it seemed and completely confirmed by empirical evidence.
A Black Swan is referred to as an event with the following three attributes:
First, it is an outlier, because it lies outside the realm of regular expectations and 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 tries to make up or concoct a logical explanation for its occurrence to make the event explainable and predictable.
Black Swan logic makes what you don’t know far more relevant than what you do know. Consider that many Black Swans can be caused and are exacerbated by their being unexpected.
Look into your own personal life for instance. Either your choice of profession, meeting your mate, your exile from your country of origin, the betrayals you faced, or your sudden enrichment or impoverishment. How often did these things occur according to plan?
LIFE IS VERY UNUSUAL
There are two possible ways to approach phenomena.
The first is to rule out the extraordinary and focus on the “normal.” The examiner leaves aside “outliers” and studies ordinary cases.
The second approach is to consider that in order to understand a phenomenon, one needs first to consider the extremes-particularly if, like the Black Swan, they carry an extraordinary cumulative effect.
Almost everything in social life is produced by rare but consequential shocks and jumps. All the while, almost everything studied about social life focuses on the “normal,” particularly with “bell curve” methods of inference that tell you close to nothing.
Why? Because the bell curve ignores large deviations, cannot handle them, and yet makes us confident that we have tamed uncertainty. The nickname for this in this book is GIF - Great Intellectual Fraud.
THE BOTTOM LINE
The beast in this book is not just the bell curve and the self-deceiving statistician, nor the Platonified scholar who needs theories to fool himself with. It is the drive to “focus” on what makes sense to us.
Living on our planet, today, requires a lot more imagination that we are made to have. We lack imagination and repress it in others
HISTORY AND THE TRIPLET OF OPACITY
History is opaque. You see what comes out not as the script that produces events but
the generator of history. There is a fundamental incompleteness in your grasp of such events since you do not see what’s inside the box and how the mechanisms work.
The human mind suffers from three ailments as it comes into contact with history referred to as the triplet of opacity.
They are:
a. The illusion of understanding, or how everyone thinks he knows what is going on in a world that is more complicated (or random) than they realize
b. The retrospective distortion or how we can assess matters only after the event as if they were in a rearview
c. mirror (history seems clearer and more organized in history books than in empirical reality); and
The overvaluing of factual information and the handicap of authoritative and learned people, particularly when they create categories-when they “Platonify.”
THE BEST (WORST) ADVICE
How did career advice lead to such ideas about the nature of uncertainty? Some professions, such as dentists, consultants, or massage professionals, cannot be scaled:
There is a cap on the number of patients or clients you can see in a given period of time. If you are a prostitute, you work by the hour and are (generally) paid by the hour. Furthermore, your service is necessary for the service you provide. If you open a fancy restaurant, you will at best, steadily fill up the room.
In these professions, no matter how highly paid you are, your income is subject to gravity. Your revenue depends on your continuous efforts more than on the quality of your decisions.
Moreover, this kind of work is largely predictable. It will vary not to the point of making the income of a single day more significant than that of the rest of your life. In other words, it will not be Black Swan driven.
So the distinction between a writer and a baker, a speculator and a doctor, a fraud and a prostitute, is a helpful way to look at the world of activities.
It separates those professions in which one can add zeroes of income with no greater labor from those who need to add labor and time (both of which are in limited supply) -in other words, those that are subjected to gravity.
BLINDNESS TO THE BLACK SWAN
Now, there are other themes arising from our blindness to the Black Swan:
We focus on preselected segments of the seen and generalize it to be the unseen: the error of confirmation.
As much as it is ingrained in our habits and conventional wisdom, confirmation can be a dangerous error. Our inferential machinery that we use in daily life is not made for a complicated environment in which, a statement changes remarkably when its wording is slightly modified.
Consider that in a primitive environment there is no consequential difference between the statements “most killers are wild animals” and “most wild animals are killers.” There is definitely an error here but, it is almost inconsequential.
Our statistical intuitions have not evolved for a habitat in which these subtleties can make a big difference.
THE NARRATIVE FALLACY
We fool ourselves with stories that cater to our Platonic thirst for distinct patterns: the narrative fallacy.
We like stories, we like to summarize, and we like to simplify, to reduce the dimension of matters.
The fallacy is associated with our vulnerability to over-interpretation and our predilection for compact stories over raw truths.
It severely distorts our mental representation of the world. It is particularly acute when it comes to the rare event.
The narrative fallacy addresses our limited ability to look at sequences of events without weaving an explanation into them, or, equivalents, forcing a logical link or an arrow of a relationship, upon them.
Explanations bind facts together. They make them all the more easily remembered. They help them make more sense. Where this propensity can go wrong is when it increases our impression of understanding.
There is another, even deeper reason, for our inclination to narrate and it is not psychological. It has something to do with the effect of order on information storage and retrieval in any system, and it’s worth explaining here because of what is considered as the central problems of probability and information theory.
The first problem is that information is costly to obtain.
The second problem is that information is also costly to store -like real estate in New York. The more elderly, less random, patterned, and narrated a series of words or symbols are, the easier it Is to store that series in one’s mind or jot it down in a book so your grandchildren can read it someday.
Finally, information is costly to manipulate and retrieve.
We, members of the human variety of primates, have a hunger for rules because we need to reduce the dimension of matters so they can get into our heads. Or, rather sadly, so we can squeeze then into our heads.
The more random information is, the greater the dimensionality, and thus, the more difficult it would be to summarize. The more you summarize, the more order you put in and the less randomness it becomes. Hence, the same condition that makes us simplify pushes us to think that the world is less random than it actually is.
And the Black Swan is what we leave out of simplification.
Indeed, many severe psychological disorders accompany the feeling of losing control of – being able to “make sense” of -one’s environment.
Platonicity affects us here once again. The very same desire for order, interestingly applies to scientific pursuits – it is just that. Unlike art, the purpose of science is to get to the truth, and not to give you a feeling of organization, or make you feel better. We tend to use knowledge as therapy.
LIVING IN THE ANTECHAMBER OF HOPE
We behave as if the Black Swan does not exist: human nature is not programmed for Black Swans.
Many people labor in life under the impression that they are doing something right, yet they may not show solid results
for a long time.
They need a capacity for continuously adjourned gratification to survive a steady diet of peer cruelty without becoming demoralized. They look like idiots to their cousins, they look like idiots to their peers, and they need courage to continue.
No confirmation comes to them, no validation, no fawning students, no Nobel or Shnobel. Then bang, the lumpy event comes that brings them grand vindication. Or, it may never come.
It is tough to deal with the social consequences of the appearance of continuous failure. We are social animals. Hell is other people.
We favor the sensational and the extremely visible. This affects the way we judge heroes. There is little room in our consciousness for heroes who do not deliver visible results or those heroes who focus on process rather than results.
Even economically, the individual Black Swan hunters are not the ones who make the bucks. Some blindness to the odds or an obsession with their own positive Black Swan is necessary for entrepreneurs to function.
The economist William Baumol calls this “a touch of madness.” The person involved in such gambles is paid in a currency other than material success: hope
SILENT EVIDENCE
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.
The idea is simple yet potent and universal. Silent evidence pervades everything connected to the notion of history.
Silent evidence is what events use to conceal their own randomness, particularly the Black Swan type of randomness.
We have seen several varieties of the silent evidences that cause deformations in our perception of empirical reality, making it appear more explainable (and more stable) than it actually is.
In addition to the confirmation error and the narrative fallacy, the manifestations of silent evidences further distort the role and importance of Black Swans. In fact, they cause a gross overestimation at times and underestimation of others.
THE LUDIC FALLACY OR THE UNCERTAINTY OF THE NERD
We “tunnel”, that is, we focus on a few well-defined sources of uncertainty, on a too specific list of Black Swans (at the expense of the others that do not easily come to mind).
What is the ludic fallacy? Ludic comes from ludus, Latin for games In real life you do not know the odds; you need to discover them, and the sources of uncertainty are not defined.
Economists who do not consider what was discovered by non-economists worthwhile, draw an artificial distinction between “Knightian” risks (which you can compute) and “Knightian” uncertainty (which you cannot compute), after one Frank Knight, who rediscovered the notion of unknown uncertainty and did a lot of thinking but perhaps never took risks, or perhaps lived in the vicinity of a casino.
Had he taken economic or financial risks he would have realized that these “computable” risks are largely absent from real life!
Furthermore, just as we tend to underestimate the role of luck in life in general, we tend to overestimate it in games of chance.
If you want a simple step to a higher form of life, as distant from the animal as you can get, then you may have to “de-narrate” that is, shut down the television set, minimize time spent reading newspapers, and ignore the blogs.
Train your reasoning abilities to control your decisions.
Train yourself to spot the difference between the sensational and the empirical.
This insulation from the toxicity of the world will have an additional benefit – it will improveyourwell-being Also, bear in mind how shallow we are with probability – the mother of all abstract notions. You do not have to do much more in order to gain a deeper understanding of things around you.
Above all, learn to avoid “tunneling.”
To be able to focus is a great virtue if you are a watch repairman, a brain surgeon, or a chess player. But the last thing you need to do when you deal with uncertainty is to “focus”. Prediction, not narration, is the real test of our understanding in the world.
THE SCANDAL OF PREDICTION
At New York’s JFK airport you can find gigantic newsstands with walls full of magazines. They are usually manned by a very polite family from the Indian subcontinent. These walls present you with the entire corpus of what an “informed” person needs in order “to know what’s going on.”
Sadly, all this knowledge would not help the reader to forecast what is to happen tomorrow. Actually, it might decrease his ability to forecast.
There is another aspect to the problem of prediction: its inherent limitations or those that have little to do with human nature but instead arise from the very nature of information itself
“NOBODY KNOWS ANYTHING”
You can actually take advantage of the problem of prediction and epistemic arrogance. Here are the modest tricks. Take note that the more modest they are, the more effective they will be.
a. First, make a distinction between positive contingencies and negative ones.
Learn to distinguish between those human undertakings in which, the lack of predictability can be (or has been) extremely beneficial and, those where the failure to understand the future caused harm. These are both positive and negative Black Swans.
b. Don’t look for the precise and the local. Simply, do not be narrow-minded.
The great discoverer, Pasteur, who came up with the notion that chance favors the prepared, understood that you do not look for something particular every morning but work hard to let contingency enter your working life.
c. Seize any opportunity, or anything that looks like opportunity. They are rare – much rarer than you think.
Remember that positive Black Swans have a necessary first step -you need to be exposed to them.
Many people do not realize that they are getting a lucky break in life when they get it.
Work hard, and do not settle for grunt work, but instead, focus on chasing such opportunities and maximizing exposure to them
d. Beware of precise plans by governments. Let governments predict but do not set your mind to follow everything that they say.
It does not mean that governments are useless, only that you need to keep a vigilant eye on their side effects.
e. Do not waste your time trying to fight forecasters, stock analysts, economists, and social scientists, except to play pranks on them.
If you ever do have to heed a forecast, keep in mind that its accuracy degrades rapidly as you extend it through time
THE END
All this philosophy of induction, all these problems about knowledge, all these wild opportunities and scary possible losses, falls in front of the following metaphysical consideration
We are quick to forget that just being alive is an extraordinary piece of good luck, a remote event, and 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 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
Thanks,
Hanmant
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