The Black Swan

Black swanI just finished reading Nassim Nicholas Taleb’s The Black Swan: The Impact of the Highly Improbable. I enjoyed Fooled by Randomness by the same author, and Black Swan has a few references to his previous work. In the previous title Taleb discusses a typical human mistake of taking the result of a random outcome for skill or deserved result. In Black Swan, Taleb discusses traditional models for forecasting anything (financial markets, political scenarios, weather), and theory of chaos, which basically says that systems with high entropy cannot provide any degree of predictability.

Political analysts of the late 80s did not predict the collapse of the Soviet Union, financial markets of the 21st century did not predict Russian default with subsequent sweep on Asian markets, and security analysts did not predict two planes flying into the towers of World Trade Center. However, in the retrospect, we tend to exhibit surprising hindsight, stating that all those events were inevitable, due to [insert a variety of geopolitical arguments here].

Taleb insists that the human mind frequenty:

  1. Overestimates the odds of success when applied to oneself. Everybody buying a lottery ticket mentally assumes a much better probability of winning than reality usually presents.
  2. Attributes random events in the past as contributing to success/failure. Survivors of the shipwreck would tell the story of how they all prayed for their lives, and thus got saved. While some religious groups would tend to pick up the story as the proof of whatever agenda they’re pitching, nobody generally listens to the stories of those who prayed, but still drowned. Business journalists (with CBS MarketWatch being the worst) frequently abuse this by pitching headlines like Stocks down after Congress increasing military spending in the morning, and Stocks up as Congress approves larger military budget in the afternoon.
  3. Looks for order and sequence where it doesn’t exist. Business book writers made a cottage industry out of this by surveying the life stories of prominent individuals, and then reselling those as recipes for success. The quirkier the trait, the better it suits the public. Peter Thiel wakes up early and runs in the morning – I see, so that’s a secret recipe for running a successful hedge fund.
  4. Listens to the experts that don’t know any better. There’s a whole bunch of occupations, where expertise is learned, and re-learning it requires significant time investments. Mechanics, doctors, and foreign language interpreters all have such skills. Other kinds of expertise involve looking back at what happened and trying to draw the line of correlation among discordant and random events. Such experts involve financial analysts and government economists.
  5. Hungs up on small things without seeing the big picture. If you have significant money in savings accounts, you’re probably busy looking for a better rate. However, the bigger picture, the Black Swan of the US banking industry, is significant asset consolidation among major banks. If one of them gets hit, all of them get hit significantly. The possibility of over-exposure to subprime loans and possible collapse of the banking industry generally escapes the model that your financial analyst presented.

The book is pretty interesting, but hardly coherent. Nevertheless, it’s full of interesting anecdotes and personal observations, that make the book somewhat witty. After reading it I went around reading some other reviews – NYT seemed to not like it, Fool.com did a pretty comprehensive review of the points presented, Slate reviewer seemed to like it. There’s also author’s interview on Colbert report.

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  • Douglas Christopher

    Interesting that this swan song caught so much attention in a crowd seeking not to be a crowd but certainly seeking “something” to fill their void – that still exists. There’s nothing new here. New words for old thoughts. First, financial principles rather than correlation make money. It is really that simple – time value of money with reasonable assumptions – looking forward (not back) but using the facts of history (what really happens) works consistently. Point two is simply headlines, so don’t read the papers, you’ll save tome for other things. Third, there is order but it exists where the human spirit allows God to work within them. People have wanted to be something they are not through history. But that does not disporove order, it enhances it. Discipline and endurance are difficult, but not random and clearly orderly. Again, ther are expert actors seeking fifteen minutes or more of fame and there are experts. Any expert anlayst or economist that looks back at only random events can’t last long. History teaches lessons of triumph and error. Leave God out and, of course you fail…duh. Point five – without the help of MTM and government sponsoed events, banks neither fail nor are they coerced into taking part in TARP. All swans are created by God. If you dismiss that…then I guess things do look random.