Black Swan by Nassim Nicholas Taleb
Extreme events are more likely than we think. Taleb calls these “Black Swans” after the certainty, based on northern hemisphere experience, that all swans were white. Black swan events are high impact, surprising, and post occurrence appear expected.
Many examples he discusses are the start of World War I, the sales of the Harry Potter novels, and a turkey who spends a thousand days being well fed before being killed on the thousand-and-first day, rise of google. Negative black swans occur suddenly and positive relatively far longer. Same as destruction vs construction.
Taleb looks at some of the features of human psychology that make us poor at evaluating uncertainties and risks: confirmation biases, attraction to narrative explanations, epistemic arrogance, and tunneling. Other fundamental difficulties come from silent evidence, the general “problem of induction”, and the nature of historical causation.
Taleb presents his ideas largely through narrative, anecdotes, and even a few fictional stories. This is a reasonable approach to presenting what is essentially a pragmatic way of looking at the world rather than any kind of formal system. One wonders, however, whether Taleb himself hasn’t fallen victim to some of the very problems he raises — confirmation bias, attraction to narrative, and so forth. He also draws on the scientific and philosophical literature, drawing on a range of disciplines and sources, but doesn’t go into any of it in depth.
Taleb is a quantitative analyst or “quant” himself and a hedge-fund manager, but he doesn’t focus on finance in this book. His brief investment suggestion is a “barbell” portfolio, with 85 or 90 percent in Treasury Bills, as a defence against extreme negative events, and the rest spread across highly speculative investments such as small biotech companies, to try to catch a few extreme positive events.I have also learnt that he like to buy put options at the cusp of major changes.
In his opening example of a Black Swan, is the civil war in Lebanon which disrupted his childhood, and most of his other anecdotes are also taken from his own experiences. Taleb has a high opinion of himself and a few other figures such as Hayek, Popper, Montaigne and Sextus Empiricus come in for praise. He loves a lot of people and institutions cop a hammering at his hands, from individual philosophers, bureaucrats and politicians to institutions, governments and academia generally. He dislikes Nobel Prizes and the Nobel Committee.
Taleb has very strong opinions and some people may not like that fact. I would recommend that the book is read for entertainment with learned stories.
The book also covers examples of banks losing out everything they built for the past 100s of years in 1982 due to loans to bankrupt latin american economies, yet again in 1980 to early 1990s in Savings and Loan crisis. We have fresh memories of 2008. In all instances Govt. had to step in with tax payers money. I have personally lost 100% of my equity portfolio in banking crisis, which makes me believe now that Banks are an absolute SUCKERS BUSINESS. With no possibility of forecasting, complex structures, un ascertainable loans. On the face of it banks can grow for 20%+ for very very long periods of time unlike a shoe manufacturer for example, but they can go to Zero any fine day without giving a hint.
Every 10-15 years banks have to be bailed out under too big to fail pretext. You know that ‘too big to fail’ excuse is pulled off since Roman empire. Nevertheless, investors’ memories are very shortlived and they would go back again “when everything is normal”.
In my opinion Black Swan should be a foregone conclusion and a naturally accepted principle as we have neither understood an Atom, nor do we know everything about principles of working of a DNA, or even a small thing like insect. The forces that shape the world, rise and fall of technological landscape based on same fabric should itself be un predictable. Infact what we do know is that rate of change is increasing, therefore we are likely to have more positive and negative Black Swans in the years ahead that in the past. I agree with Taleb on the part the we are blinded with epistemic arrogance, I have heard people talk about ‘We know so much about the body, only brain remains to be explored’. Thats bunkum, absolutely rubbish. I do accept the advancement is being made, will be made more and more in years to come. But in no way can we put a finger on percentage of how much we know, while we are unaware of the scope of unknown. We may be only knowing 0.000000000000001% of all their is to know just in the field of biology but most people may be thinking around 40-80% range.
Person who acknowledges the thought ‘Human race is ignorant, and there is 99.99% unknown and so much more to know, that our knowledge is very limited’, is likely to explore and continue learning. Avoiding big mistakes is the only thing we need to do as successful investors, very little otherwise. Holding slightly above average companies for couple of decades snowballs into a very big fortune. There is no need to read science fiction, when reality itself is so interesting and mysterious.
Videos of Taleb
Taleb angry in 2008