I’m happy to have been an early supporter of “The Black Swan.” Not that Nassim Nicholas Taleb’s best-seller of last spring needed my contribution. Taleb explores the human inability to recognize or appreciate the likelihood or impact of extreme events. Since he has stopped giving interviews, we can only imagine his satisfaction at the graphic global demonstration of his hypotheses delivered by the blind herd behaviors during the turmoil in the credit markets that started last spring with a virus in American subprime mortgages and quickly spread worldwide.
Those willing to stand the combination of erudition, authorial attitude and quirkiness will also find his website rewarding -- here .
Book Report: A Meditation on Chance
Originally published in the International Herald Tribune on May 4, 2007
The Black Swan: The Impact of the Highly Improbable By Nassim Nicholas Taleb Random House, 292 pages
A stranger walks into a crowded bar. How does his arrival affect the customer profile?
Because of physical human limits, his presence has a trivial impact on the average age, height or weight of the patrons. But what about wealth? If the guy is Bill Gates, suddenly - on average - everyone in the place is many times a multimillionaire.
For Gates, who could have predicted it? Despite the superior technology of Apple, Microsoft enjoyed the lucky opportunity of an early lead, which it then exploited to market dominance and immense wealth creation.
To explain the serendipity of business success – the same as for casualties of war, damage from natural disasters, action in the stock markets, or even emergence of best-selling books - the traditional tools of the economist and the social scientist are not getting it.
For a meditation on the cognitive shortcomings that cause us to under-appreciate the frequency of randomized, highly improbable but severely consequential events, see Nassim Nicholas Taleb's new book, "The Black Swan." In my neighborhood bookseller it is found on the Science shelf - only because the shop doesn't have separate sections for Uncertainty, Empirical Skepticism or Epistemology.
Taleb, who has taught at the university level in the United States and was once a trader and investment manager, takes his title, and his themes, from the rare bird, unknown in the West until discovered in Australia. No number of white swan observations could disprove the existence of a black swan, although no one had ever seen one, but a single sighting destroys the conventional contention that they did not exist.
Taleb is spreading his own wings after the success of his previous book, "Fooled by Randomness." The new book concentrates on the unexpected frequency and impact of black-swan events in the world of financial markets. Expanding the observation that we are unable to predict or identify events that are exceedingly rare but deeply meaningful, he explores the collection of biases that cause us to misinterpret these events after the fact.
Taleb navigates between the metaphorical landscapes of Mediocristan - a smoothed-down domain, lacking extremes and outliers - and Extremistan, where singular events can impact the whole. Much of life occurs in the former, and Taleb does not argue otherwise. What he does illuminate is our failure to know the difference between the two realms - especially to recognize that the likes of Warren Buffett and Long-Term Capital Management populate the latter, along with 9/11 and Columbine and Virginia Tech.
There are many sources for our lapses, one being the willful ignorance of the "silent evidence," such that much human endeavor will not make an impact: The many garage inventors who, instead of becoming Bill Gates or Steve Jobs, toil forever in obscurity; in sports, the failed Cinderellas whose desperation putts and last-second shots just do not drop; the blown-up brokers and fund managers whose disappearance from the data pools of memory contribute to the inflated egos of the survivors.
Taleb also shows us the impaired vision of the game theoreticians, who seek wisdom about risk-taking from casino games, but miss the basic point: Despite the appealing stories of the occasional lucky weekend punter, the casinos always win. As Taleb points out, casino games are not random in any really interesting way. Rather, the type of risk that really threatens a casino might be that its headline entertainer would be mauled by a tiger - something unthinkable before it happened in 2003 to the illusionist Roy Horn, of Siegfried and Roy, at the Mirage in Las Vegas.
Taleb himself is a beneficiary of a black swan event: the market turmoil of October 1987, which under conventional predictive tools should not have happened. The financial success he had from astute trading strategies freed him to emulate his role models, Voltaire and Montaigne, who retired from the hubbub of commercial and political affairs to the reflective quiet of their libraries and studies.
Taleb's sources extend from the physician and philosopher Sextus Empiricus, in second century Alexandria, to the Yale mathematician Benoit Mandelbrot, guru of the field of fractal geometry, to whom Taleb dedicates his book. The elegance with which Mandelbrot generates highly complex structures out of simple mathematical rules lies at the heart of Taleb's ability to explain the extreme events that lie beyond the smooth bell curves of conventional analysis.
Taleb disavows that "Fooled by Randomness," his earlier work, was intended as a book on business and investing, and his vision for "The Black Swan" is broader still. But anyone who has read this book is unlikely to think the same way about any number of life-shaping decisions, including how resources are deployed and priorities are set, how to invest both time and treasure, what risks to absorb and which to lay off by insurance.
Along Taleb's free-flowing highway of erudition are signposts that are no less useful in the commercial world than anywhere else:
The compulsion to concoct after-the-fact rationalizations out of nearby anecdotes means that daily market analysis is at best meaningless noise.
Market strategies that are designed upon bell-curve models suffer the built-in defect of excluding the potential for wildly extreme events.
If we could predict what we don't know, it wouldn't be unknown. Better the discerning, and humble, recognition of the wide scope of our ignorance.
For these guides to a modern world both more complex and less predictable than we may believe - as well as for welcome relief from the superficiality of the typical business and investing publications - Taleb's book deserves our attention, and our thanks.