Book of the Week: The Black Swan

17 Mar 2013

This week, I read The Black Swan, by Nassim Nicholas Taleb. As I started reading the book, I got the feeling that the author is a guy that likes to hear himself talk. Not to say it is a bad thing, but I was trying to read the book as fast as I could to extract the gold nuggets. If I had more time and education, I would probably enjoy reading more about history and philosophy. What is a Black Swan?

A Black Swan is a highly improbably event with three principal characteristics: It is unpredictable; it carries a massive impact; and, after the fact, we concoct and explanation that makes it appear less random, and more predictable, than it was. - Nassim Nicholas Taleb, The Black Swan

To describe the effects of a Black Swan, Nassim uses two countries: Mediocristan and Extremistan. Individual properties in Mediocristan are described well by their collective properties, like height of individuals and average height. However in Extremistan, individual properties are not described well by their average, like wealth distribution. There’s a popular youtube video illustrating inequality wealth in the United States. [youtube http://www.youtube.com/watch?v=QPKKQnijnsM&w;=560&h;=315] Another example is venture capital. Most companies will fail, but the few that succeed determine the worth of the portfolio.

So I disagree with the followers of Marx and those of Adam Smith: the reason free markets work is because they allow people to be lucky, thanks to aggressive trial and error, not by giving rewards or “incentives” for skill. - Nassim Nicholas Taleb, The Black Swan

Black Swans live in Extremistan. Why Do We Fool Ourselves? Turkey Problem related to “bust-out” fraud. Confirmation Bias, ask questions only to confirm our belief Narrative Fallacy, explain away things Believe perseverance, tendency to not reverse opinions even though presented with evidence to the contrary. What Can We Do About It? Expose yourself to good Black Swans, reduce exposure to bad Black Swans.

We build toys. Some of those toys change the world. - Nassim Nicholas Taleb, The Black Swan

Purchase The Black Swan on Amazon.com or check it out from your local library.