The Black Swan: The Impact of the Highly Improbable
by Nassim Nicholas Taleb
911 was a Black Swan. For a Thanksgiving (or Christmas) turkey, the day his keepers stop feeding him and making him comfortable, and instead chop his head off, is a Black Swan. And, of course, the 2008 global financial meltdown was a Black Swan – although author Nassim Taleb, with a considerable background in the financial markets, would argue it should not have been.
Taleb’s book – The Black Swan – is about high impact, unpredictable events, so called because until the continent of Australia was discovered all swans were believed to be white. Anyone from the Old World, on being asked to contemplate a black swan prior to that time, would have said: “impossible”. British philosopher John Stuart Mill is believed to have coined the term and philosophers certainly people Taleb’s work in even greater abundance than swans.
A solid background in philosophy, statistics and financial trading would ensure a more complete understanding of The Black Swan which is a highly intellectual tome, yet Taleb’s enthusiastic and often-humorous style ensures that those with little background can battle through (and will want to) while picking up some gems along the way.
In the end, the simple distillation of the message is that we should not be fooled by randomness (the title of Taleb’s previous work) nor by Black Swan events. To the Black Swan formula of high-impact unpredictable event the reader will learn to add Taleb’s qualifier – should have seen it coming. The rest of this piece focuses on that message, and its implications, rather than the actual content of The Black Swan.
So it was with 911 (should have seen it coming), which was eminently telegraphed by the box-cutter wielding terrorists’ attempts to learn to fly (but not land), the previous attack on the World Trade Center and myriad other warnings fielded by the various security agencies. Taleb’s leaning is more towards economics – his area of expertise – where, again, the idea of huge lending taking place, to people who could not afford it, should have had everyone in financial circles watching their back. As for the turkey, maybe he could not be expected to have the benefit of hindsight?
Yet Black Swans, of all sizes and impacts, are happening every day. When a man died outside a Hong Kong hospital, because the response to a request for assistance was badly bungled, a Black Swan event had occurred. Who would have thought it possible?
There are good Black Swans and bad ones (or positive and negative if you like). The movie industry is a good example of this, as is the racehorse breeding industry. With the movies many a US$100-million-plus production has failed to fill theaters, while quite a few of the low-budget efforts have reaped huge rewards. Even industry experts find this hard to predict accurately.
In horse racing, another multi-million dollar industry, many a million-dollar yearling purchase has been unable to get out of its own road on the racetrack, while some apparent “flea bags” have become champions. (The legendary Seabiscuit in the United States and the champion Australian sprinter Takeover Target – purchased for a couple of thousand Aussie dollars by a taxi driver – spring to mind).
But back to Taleb. He introduces the reader to the provinces of Mediocristan and Extremistan which recur through the book. The former is a mythical county where nothing much happens outside the norm and the latter is a place where Black Swans might appear. He also makes the point that we don’t learn from the past and, if we did, many Black Swans might be anticipated – again the financial collapse and 911 are prime examples of the past being ignored by those who should have known better.
From the alphaeight institute’s point of view, the Black Swan theory provides further endorsement of the immense value of developing Right Mind thinking. Left Mind (logical) thinking focuses on a narrow field and on detail such as some trees in a forest, Right Mind (creative) thinking focuses on the big picture e.g. the entire forest.
Right Mind thinkers are much more likely to see (even anticipate) the Black Swan event such as a fire on the outskirts of our forest – Left Mind thinkers will never see it coming.
All of those derivative traders sitting in the offices of Lehman Brothers were totally focused on the detail of their derivative product, the likely returns for their customers and, of course, their potential annual bonuses. The “fire” came out of the fact that the whole structure on which their product was built (derived) – high risk mortgages held by people who could not afford them – was always likely to burn down the derivative forest. History told us so. People like Warren Buffett and George Soros – with a long, successful history of investment behind them – saw it coming a mile off. Yet the Black Swan still hit the majority of the financial industry.
Nassim Taleb is a highly interesting intellectual, but be prepared to read his books with a dictionary on one side and Google on the other – it will be a long night!