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  • Nassim Nicholas Taleb’s ‘The Black Swan’


    by Shariq
    13th October, 2008 at 11:07 am    

    I wanted to read ‘The Black Swan’ because I thought it would provide some interesting insights into how we got into this financial meltdown. Enjoyably, the scope of the book extends well beyond finance. In fact it is one of those books which can change the way you think about the world in all sorts of ways.

    The idea of the Black Swan comes from the fact that before Europeans went to Australia, they had only seen white swans so thought that swans had to be white. The idea of a black swan was unimaginable. The key point which Taleb wants you to get from this and other illustrations is just how limited human knowledge is. He points out that while everyone is quick to rationalise key moments in history after the event, people almost never see them coming beforehand.

    He particularly dislikes economists and other social scientists. To give an example a friend of mine used, as soon as the Asian financial crisis happened, economists could tell you the reasons why it happened despite the fact that none of them had seen it coming. They hadn’t fathomed the black swan. From Taleb’s own experiences, the extent of the war in Lebanon which people had initially assumed would only last for a few months was also a black swan.

    The importance of ‘The Black Swan’ is that in an increasingly complex world the likelihood of black swans emerging are greater than ever. One of the reasons he had been described as ‘wall street’s principal dissident’ was because he saw that despite what the statistics said, the risks which banks were taking on were unsustainable because they were wide open to being hit by a black swan. (His own hedge fund follows an investment strategy based on his theory, so you can’t accuse him of not putting his money where his mouth is). A classic example of this which Taleb frequently reminds us of is the collapse of the ironically named Long Term Capital Management which was supposed to provide Nobel-fortified investment strategies.

    For those wanting a simple critique of markets, this is not the right place to go. For instance Taleb is in many ways a libertarian. In particular he endorses Hayek’s views on the limitations of planning. A necessary part of the black swan idea is that planning very rarely gets us where we want it to go. Therefore in order to achieve technical innovation and progress, society has to have a system in which failure is not stigmatised and people are encouraged to engage in ‘rigorous trial and error’.

    Instead, ‘The Black Swan’ is a brilliant development of a fascinating thesis and provides insights on topics ranging from human psychology to the role of luck in modern economic systems. If you don’t feel like reading it right now, at least check out Bryan Appleyard’s profile of Taleb in The Times and Taleb’s own website, fooledbyrandomness.com.


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    1. shariq — on 13th October, 2008 at 8:50 pm  

      Just out of curiosity did anyone even read this? I don’t mind people not commenting but just for my information it would be useful to know. Also, if you didn’t read it, was the excerpt too short or were you just not interested. Any feedback would be appreciated.

    2. douglas clark — on 13th October, 2008 at 9:33 pm  

      shariq,

      Sorry, I just missed it :-( !

      Having read it, it does rather reinforce my own thoughts ( or prejudices ) about the social sciences in that they have little or no predictive value.

    3. soru — on 14th October, 2008 at 1:37 am  

      ‘despite what the statistics said, the risks which banks were taking on were unsustainable because they were wide open to being hit by a black swan’

      Given that a joke exists that some pundits have predicted 16 of the last 4 crashes, surely the credit crunch is the precise opposite of a black swan?

      More like a grey pigeon - ubiquitous, annoying and unpleasant, but you have to be a bit sceptical about anyone who claims they have a foolproof plan to get rid of them.

    4. Shariq — on 14th October, 2008 at 11:48 am  

      Douglas, thanks for dropping a comment. Soru, I don’t think Taleb has a foolproof plan to get rid of black swans. In fact his main argument is to acknowledge the risk of black swans when taking risks. Interestingly he also talks about trying to be exposed to as many positive black swans as possible i.e those events such as new inventions, books, music which have the potential to become huge.

      Anyways, both of you should definitely check out the Appleyard profile.

    5. soru — on 14th October, 2008 at 2:05 pm  

      ‘In fact his main argument is to acknowledge the risk of black swans when taking risks’

      Which is all very well, and I appreciate he has a book to sell so needs to pretend whatever he wrote ~3 years ago is a reaction to this weeks headlines, but that really lets the bankers off the hook way too much.

      You wouldn’t accept that excuse from a local council: ‘yes, we planned for every forseeable contingency with lots of margins, but then in a completely unpredictable black swan event, suddenly all this white stuff started falling from ths sky…’

      Or ‘yes, I planned to make it home on time, darling, but in a completely unpredictable black swan event, I met my mates down the pub, got bladdered and went to a strip club…’

      9/11 was a genuine black swan, something pretty much unprecedented (an order of magnitude bigger than any previous terrorism-style attack) that challenged existing theories. This wasn’t, it’s just a recession, not an Excession.

      Handing out massive amounts of self-certified 100%+ mortgages in a housing bubble would hardly count as unpredictable the first time it happened. Given that the same scenario, with minor variations, has panned out about every decade or so all the way back to the South Sea bubble and Tulipmania, you’d have to be a goldfish with a 7 second memory to plausibly claim surprise as you trousered the last 9 years bonuses you got for betting it wouldn’t happen _that_ year.

    6. Riz — on 15th October, 2008 at 1:26 am  

      Nice overview Shariq. Taleb is a great independent thinker and his books, or at least his freely available articles and interviews are essential for broadening one’s mind. He suffers from accusations of arrogance but I don’t think his books suffered for it - read Black Swan a few months ago and am currently reading Fooled By Randomness. As you say, Taleb changes the way you think, and that his ideas are not necessarily new (as many critics like to point out) is not the point. It is that they are important ideas and who better to promote them than someone who is willing to stand on the top of a mountain and keep on shouting and shouting until people pay attention. I heard his fund has had some rough times in the past, but this year has been pretty good (up 50% http://www.bloomberg.com/apps/news?pid=20601103&sid=aDVgqxiT9RSg&refer=us).

      You can see his interview on Newsnight on Youtube. It’s pretty funny because no one is really listening to Taleb seriously, and he end up doing what he loathes: giving a ‘forecast’ of where he thinks we are in the crisis, although I’m sure he doesn’t believe one bit in his own answer.

    7. shariq — on 16th October, 2008 at 11:10 pm  

      Soru, I agree with what you said. Taleb does talk about the incentives for Bankers to continue to continue to take these risks because their yearly bonuses were determined by annual profits rather than the possibility of huge losses. Also, the Chris Dillow post that Matt Yglesias links too makes an interesting point about what Taleb is saying isn’t necessarily that profound but bankers are really that stupid/greedy.

      Riz, I saw that newsnight clip after someone I had recommended the book to said they had seen him on Newsnight. As you say, he’s clearly reluctant to make predictions. Do you think its still worth reading fooled by randomness having read the black swan first?

    8. djb-PhD — on 20th November, 2008 at 2:15 am  

      You know, I am in the middle of reading this book, in order to recognize a black swan (so as to protect yourself or company) I find it to be common sense to have a backup plan. Example when your auto breaksdown, where do you go to fix it? heart attack where do you go? If I did not read books or newspapers how would I know of these things. How do you think the author found out all this information, did he not read books and question? I think we are giving him too much credit. To me intelligence is always to question and to look at the entire picture.
      In our nation right now we realized we are greedy and selfish and this is our result. Our inner ego’s got in the way and now eveyrone is scrambling to blame others for all the mistakes. Wake up and smell the coffee. Let’s fix it and stop blamming everyone, grow up.

    9. otomatik kapi — on 21st November, 2008 at 12:22 pm  

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