My executive summary

Executive Summary

By Kenneth Lim 260301211

The Black Swan: The Impact of the Highly Improbable

By Nassim Nicholas Taleb

The central idea of the book concerns our blindness with respect to randomness, particularly the large deviations. Black Swan logic makes “what you don’t know” far more relevant than “what you do know.” With that being said, the book goes into the absolute foundations of randomness in terms of literature and technicality with illustrations by fictional/realistic cases, stories (like his autobiography) and metaphors. The main points of discussion are that we can never predict when Black Swans will occur and in what exact forms they may take (even if it is possible then it is by luck, not by formula), previous data cannot be used to predict the future and that in reality, we know much less than we think we know. This book is different from others in a sense that the author makes a wonderful balance of seriousness and playfulness in his chapters. In a sense, the entertainment (sarcastic humor) he provides makes the book fun and easier to read. The new idea being brought up is essentially that we have to be prepared for the unpredictable forces (Black Swans) yet to come in life. If we are not prepared, the Black Swans are threats to us but if we are prepared, they then become opportunities for us.

This book is significant for the 21^st century professionals, leaders, societies and the world because it teaches us to be prepared for things which we do not yet know, which will come as well as how to deal with them. We can therefore use this book as a reminder that randomness cannot be controlled by statistics or predicted by past historical events. A few main recommendations for managers is to not be too confident about their ability to predict outcomes, be prepared for anything and not to rely too much on statistics when there is a “randomness” factor in the equation.

Now, I shall briefly go over some key concepts as well as the general narration of the book. To begin with, Black Swans are caused and exacerbated by their being unexpected. For example, in the September 11^th 2001 terrorist attack on the Twin Towers, if the possibility of that event happening was worthy of attention, there would have been more security and then the attack might not have happened with the possibility that something else might have taken place instead. It only became an obvious event after it happened. Thus, we can conclude that a Black Swan is an event with the following three attributes:

1) It is an outlier; lying outside the realm of regular expectations because nothing in the past can convincingly point to its possibility.

2) It carries and extreme impact.

3) In spite of its outlier status, human nature makes us concoct explanations for its occurrences after the fact, making it explainable and predictable.

The author, Nassim Nicholas Taleb, believes that we often learn the precise and not the general stuff; excessive focus on what we do know instead of what we don’t know. The structure of minds suggests that we learn facts but not the rules. Black Swan blindness occurs when there is an unjustly recognition of something or someone due to a black swan event. Nassim also despises the famous “Bell curve” as he says that it ignores large deviations, not being able to handle them and yet making us think that we have tamed uncertainty while we absolutely have not (also nicknamed GIF; great intellectual fraud). Nassim also believes that metaphors and stories are more potent than ideas; easier to remember and fun to read. The ideas come and go but stories stay. Thus, he chose to write his book with short stories to illustrate his points.

Some his main ideas in the book are as followed:

• Show our ability to act upon our opinions. This is his strong personal belief.

• History is opaque. The human mind suffers from three ailments as it comes into contact with history, what he calls the “triplet of opacity” and they are:

a) the illusion of understanding, or how everyone thinks he knows what is going on in a world that is more complicated (or random) than they realize;

b) the retrospective distortion, or how we can assess matters only after the fact, as if they were in the rearview mirror (history seems clearer and more organized in history books than in empirical reality); and

c) the over valuation of factual information and the handicap of authoritative and learned people, particularly when they create categories.

• “Platonification” refers to the curse of learning; most people believe that those with higher authority know more about things then regular people. This is not true.

• Nobody really knows what is exactly going on in the world.

• Most events that happened in the past were unpredictable, yet history tries to make sense out of it. The distortion of truth as quoted by the author: “It struck me, a belief that has never left me since, that we are just a great machine for looking backward, and that humans are great at self-delusion. Every year that goes by increases my belief in this distortion.”

• A statement that is measurable and reasonable is a black swan contradiction. Empirical reality is not measurable and reasonableness not in the same context. Genuine empirical reality is to be reflective as faithfully as possible; to be honorable implies not fearing the appearance and consequences of being outlandish.

• There are two different types of randomness, “Mild and Wild”:

Type one “Mild” randomness; Mediocristan: When sample is large, no single instance will significantly change the aggregate or total (black swans have no effects).

Type two “Wild” randomness; Extremistan: inequalities are such that one single observation can disproportionately impact the aggregate, or total (thus producing black swans).

• There is a black swan problem. How can we know the future, given the knowledge of our past and how can we figure out properties of the (infinite) unknown based on the (finite) known? As quoted in the book, “the history of a process over a thousand days tells you nothing about what is to happen next.” This suggests that things which worked well in the past may not do so in the future, A black swan may occur at any time and what happened before may not always happen again either; thus preparing for something to reoccur (at least in similar location or context) will not prevent the unknown.

• The Black Swan is relative to knowledge as quoted from the book:

The main tragedy of the high impact-low probability event comes from the mismatch between the time taken to compensate someone and the time one needs to be comfortable that he is not making a bet against the rare event. People have an incentive to bet against it, or to game the system since they can be paid a bonus reflecting their yearly performance when in fact all that they are doing is producing illusionary profits that they will lose back in a day. Indeed, the tragedy of capitalism is that since the quality of the returns is not observable from past data, owners of companies, namely shareholders, can be taken for a ride by the managers who show returns and cosmetic profitability but in fact might be taking hidden risks.

• There are both positive as well as negative black swans. Positive black swans take time to show their effects while negative black swans happen quickly. That is because it is easier and faster to destroy then to build something.

• The five themes of “Blindness to Black Swans”:

a) we focus on preselected segments of the seen and generalize from it to the unseen: the error of confirmation.

b) We fool ourselves with stories that cater to our platonic thirst for distinct patterns: narrative fallacy.

c) We behave as if the black swan does not exist: human nature is not programmed for black swans.

d) What we see is not necessarily all that is out there. History hides black swans from us and gives us the mistaken idea about the odds of these events: this is the distortion of silent evidence.

e) We “tunnel”: that is, we focus on the few well defined sources of uncertainty, on too specific a list of black swans (at the expense of the others that do not easily come to mind).

• The larger the role of the black swan, the harder it is to predict it.

• Most people have “Epistemic arrogance” which refers to our pride concerning with the limits of our knowledge (98% perceived chance of being right and 2% perceived chance of being wrong). We overestimate our own knowledge and underestimate the uncertainties (black swans); we think that we know more than we really do.

• Prediction can never be accurate, even with previous information available.

• Information is bad for knowledge; avoid asking “experts” for advice. They often “think” that they know a lot.

• We should avoid “tunneling” which refers to thinking too narrowly. That is because predictions we make are highly overestimated and most discoveries are of by accident.

• Good predictions often come about by dreaming.

• “The Three Body Problem”: adding in a third variable makes it harder to predict outcomes as opposed to just having two variables.

• “Chaos theory”: within chaos, order shall arise.

• A possible way for black swan protection is “Epistemocracy” which refers to holding one’s own knowledge in doubt.

• Avoid large scale, harmful predictions (but the small ones are fine)

• Always be prepared. Being unable to predict accurately does not make it impossible to benefit from unpredictability (black swans).

• Barbell strategy: a method that consists of taking both a defensive attitude and an excessively aggressive one at the same time, by protecting assets from all sources of uncertainty while allocating a small portion for high-risk strategies.

• In conclusion, how can we “get even” with the black swan?

1) Plenty of supporting data cannot confirm but a single instant can disconfirm.

2) Worry less about the small failures and more about the large and destructive ones.

3) Worry more about the “safe” decisions you can make rather than the “aggressive” ones.

4) Worry less about the “obvious” worries.

5) Be aggressive with the positive black swan and conservative with the negative black swan.

6) Do not let the black swan control you. Understand that only you can control what you do (internal factors).

7) “Don’t sweat the small stuff”

8) “Being alive right now, in itself, is very fortunate. Therefore, in this sense, we are all black swans.”