The Impact of Black Swans

The last 10 or so books that I have read were finished in around 2 weeks on average.

I recently picked up The Black Swan by Nassim Nicholas Taleb and it took almost 2 months. This one was special.

Taleb focus’s on the impact of the highly improbable. He defines a Black Swan event like so. “Is so rare that even the possibility that it might occur is unknown. Has a catastrophic impact when it does occur. Is explained in hindsight as if it were actually predictable.”

Black Swans can be positive or negative.

For many, we often ignore the possibility.

In this newsletter we will use Taleb’s key concepts to get a better understanding.

(Some of the concepts are vey high level, I will do my best to understand and relay)

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The Reality of Black Swans

Toward the beginning of the book, Taleb uses an analogy saying that “History does not crawl, it jumps.”

He describes two different worlds in which history takes place.

1. Mediocristan- history crawls; when your sample is large, no single instance will significantly change the aggregate total

2. Extremistan- history jumps; inequalities are such that one single observation can disproportionately impact the aggregate, or the total

Oftentimes we find ourselves living in Mediocristan, when in reality we live in Extremistan. This is where we should be accounting for the “unknown unknowns”.

For example, the rise of the internet would be a Black Swan that only lives in Extremistan. If you take a broad look at technology, there is a long history of minimal to no innovation. The rise of the internet was unpredictable and unaccounted for even if you sampled all of history.

Have you ever told a story to someone and changed it slightly to make it more logical? The answer is probably yes. For that reason, Taleb remarks that this makes history seem more explainable than it really is. History is a set of recordings and stories made by us. If you follow a timeline you may look back and say “well, the 2008 run on the banks was predictable and made sense.” In reality that was no where near the truth. If that were true, it would not have taken the air out of the lungs of our economy.

The Anatomy of Gambling

Everyone who gambles starts lucky right? That’s what it seems like. Or maybe it is just because the losers drop off and all you have left is the lucky beginner. A lot of things do not have a good explanation because they are random. However, some things are more understandable when you take away the narrative we attach to them. Just because you hit it big gambling one time, it does not mean you should keep doing it. Taleb says that we got to where we are by accident and this does not mean we should take the same risks.

Let’s look at another Black Swan example.

Casinos spend most of their time and money on risk management for gamblers. The thought process is, we must account for where money is potentially lost. What is unaccounted for is the show tiger who attacks someone in the circus connected to the casino. As we can see, all of these losses come from outside the models. When it is all said and done, you tell yourself that you were playing a different game than you actually were.

Forecasting As A Job

If forecasting plays a role in your job, Taleb says you should get a new one. While this may be extreme, there may be something to be said here. Weathermen are often wrong. Economists are often wrong. Political Forecasters are often wrong. The reason being there is no way to tell with certainty what happens in the future. Even with some “good” statistical models, black swans cannot be predicted. Taleb says, “To understand the future to the point of being able to predict it, you need to incorporate elements from this future itself.” Not to mention, forecasting with a minor imperfection results in a wildly different outcome. In addition, incorrect forecasts can be harmful, especially on a large scale.

Principles to Take With You

Now that we have looked at some of Taleb’s key points about Black Swan’s, let’s look at some things you can keep in mind going forward. These are quotes and pieces I pulled out of the book that I feel are the most actionable for life.

1. Be a fool in the right places

2. Avoid large scale harmful predictions like the economic outlook for 2059; focus on predicting minor things like whether it will be wet at your picnic

3. Be prepared for all relevant eventualities

4. Seize opportunity or anything that looks like it. If the opportunity is in front of you, then it’s reality. Taleb says to collect “Non-Lottery Tickets”

5. Optimize asymmetrical outcomes by putting yourself in situations where favorable consequences are much larger than unfavorable ones

6. If you bet on the long run, you assume nothing new will emerge. Focus on the what happens before the long run

7. Missing one number in computing small probability means you miss the whole thing. Variance, Standard Deviation, Outliers, all become bullshit.

8. It is much more sound to take risks you can measure than to measure the risks you are taking

9. Discovery is searching for something you know and finding out something you didn’t

That takes us to the end! I hope you learned something and if you have not read The Black Swan yet, I highly recommend. Remember, the world is unpredictable and a Black Swan is ALWAYS a possibility.

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