Book Review: The Black Swan

Nassim Nicholas Taleb’s (@nntaleb) 2007 bestseller details how popular statistical and economic theories expose us to large amounts of risk while never even acknowledging that they exist. Taleb argues that a combination of evolutionary human nature, academic theory that should not be applied in ‘the real world’, and post-event storytelling deludes us into believing that we have predictive ability over ‘black swan’ events.

Mediocristan

The author asserts that certain qualities of the world we live in exist in a domain that can be mostly measured by the standard bell curve of Gaussian statistics, a domain he calls Mediocristan. A quality such as the height or weight of people exists in Mediocristan, and is represented well on the bell-curve (You’re not likely to see someone 15ft tall, or 2 inches tall for example). In Mediocristan, you can observe things for a while and then make generalizations about how the system works, and the more data you receive the more accurate your predictions will become.

Extremistan

Extremistan is another matter entirely. In Extremistan, things are dominated by one or two very large outliers – take the example of the number of books sold by an author; One JK Rowling or Dan Brown completely overshadows the sales of just about every other author producing literature. Bill Gates’ fortune can barely be compared to the earnings of most entrepreneurs. Where problems arise is that conventional experts attempt to apply Mediocristan’s models to an area where it is not only completely unsuitable, but actively dangerous as it leads to a false sense of security. In Mediocristan, the systems are so complex, intertwined, and dependent on pure chance that predictions are impossible.

The Nature of Humans

While I can’t even touch on all of the great ideas in this book, the sociological implications of his theories are very interesting. While it might be obvious to some that we lie to ourselves in some way or another throughout our lives, the author categorizes the mechanisms we use in interesting ways:

  • Narrative Fallacy – Explaining an extreme event after it’s happened in a way that makes it appear obvious. “Of course the Irish housing bubble was going to crash, here are all the reasons…“. This rationalization after the fact hides the obvious truth that at the time, nobody believed that anything extreme was happening.
  • Luddic Fallacy – Academic theories of economics, game theory, and general psychology are often based on the premise of the “rational actor” or “market forces” – that somehow people or systems will come to a balanced path based on perfect information. The author argues that these theoretical models are entirely useless in the uncertainty of the real world.
  • Confirmation Bias – It is human nature to try to find evidence that confirms our stories, to take past instances that corroborate our theories and treat them as evidence. The problem is, it’s pretty easy to find evidence that will confirm just about any theory. The author suggests that ‘negative empiricism’ – looking for conflicting evidence that disproves a theory is more useful. I found this particularly useful in the context of Customer Development and Lean Startups – Don’t just go out looking to prove your assumptions, look for the instances where your assumption fails and rethink it.

I’m sure I’ve been guilty of these logical traps in the past, and it’s interesting to try and catch yourself in the act.

Benefiting from Black Swans

Taleb gives an insight into his investment style which he believes will give positive exposure to Black Swans – Keeping a high percentage of ones wealth in safe investments such as Treasury Bonds, and a small (10 – 15%) percentage in risky investments such as venture capital and equity investments in startups. A portion of startups will fail, a portion will break even, but there may be that one eBay or Google in the mix that results in a huge multiplicative return on your money. A very interesting theory and one I’m already practicing. I love when someone far smarter than I tells me I’m doing something right almost as often as when they tell me I’m wrong.

Writing Style

Taleb’s argument style is highly confrontational – he has no problems calling Nobel prize winners or captains of industry morons. This makes for a really enjoyable read! He believes what he’s writing is true, and holds little respect for people clinging unwaveringly to their sacred cows. His assertion that in certain fields (economics, politics, psychology) there are no experts, only opinions rang very true for me.  His ideas resonate with my own beliefs that for all the learning and theory and rationalization, a lot of the time success is going to come via keeping yourself open to the chance encounters of pure dumb luck. This was probably one of my favorite books I’ve read this year, and I think I’m going to give it another read in a few months.

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