The Black Swan: The Impact of the Highly Improbable

From Adaptive Cycle
Jump to: navigation, search

Authors: N. N. Taleb

Publication Year: 2007

Source: http://www.google.com

Title: The Black Swan: The Impact of the Highly Improbable

Categories: Information Management


Abstract

Black Swan is Taleb’s second book, and follows his bestselling first book: Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets. The title Black Swan is derived from the metaphor Taleb uses to describe unexpected or unforeseen happenings or events with extreme impacts. This name is an example of such an event, referring to the discovery of a black swan in a world convinced that only white swans existed. The new discovery surprised biologists all over the world, and meant that a universally accepted truth had been proven to be untrue. The concept of inductive reasoning played a major role here: as long as there were no sightings of swans colored other than white, people believed all swans to be white. Taleb criticizes this type of thinking, among a lot of other types, throughout the book. We will elaborate on this in the following sections. After a black swan has taken place, the people involved tend to look for an explanation, and they often find that there had been many signs that could have made them aware of the black swan. Throughout the book, Taleb stresses that the future is something that is impossible to predict. People look at history and try to find patterns in order to predict the future. Taleb argues this is simply not possible, because one black swan event could change everything. As an illustrative example he tells the story of a Thanksgiving turkey, which is living a happy life. Every day he is being fed by the same hand. However, on a certain moment in time - in this case two days before Thanksgiving - the hand that has been feeding the turkey is holding a cleaver over him and chops of the turkey’s head, all in favor of a nice Thanksgiving dinner. This is a typical example of a black swan, and shows why we cannot predict the future by looking at the past. We could try to learn from the past, in order to avoid even more black swans, but black swans will always be there. They will be there at moments you will not expect them to be.


Critical Reflection

Mediocristan vs. Extremistan Taleb presents two fictional countries to depict two kinds of randomness: Mediocristan and Extremistan. In Mediocristan, when your sample is large, no single instance will significantly change the aggregate or the total. In Extremistan, inequalities are such that one single observation can disproportionately impact the aggregate or the total. In general, inhabitants of Mediocristan are less vulnerable for Black Swans than inhabitants of Extremistan. However, both countries are dealing with black swan events. A distinction can be made between two types of black swan events: scalable (Extremistan) and non-scalable (Mediocristan). Matters concerning Mediocristan can be weight, height, car accidents and IQ. Matters concerning Extremistan can be wealth, income, the economical market and the amount of deaths in a war. According to Taleb, the majority of Black Swans arise almost exclusively from Extremistan scenarios because Mediocristan matters are not significantly affected by outliers. A comparison of the properties of Mediocristan and Extremistan is depicted. What we do not know is bigger than what we do know Taleb stresses that people tend to give too much value to what they know. He argues that what people do not know is much more interesting and of much more value. To illustrate this, he uses the concept anti-library: a library consisting of every book you have not read and therefore all knowledge you do not possess. Taleb describes several facets of the black swan problem. He states that the black swan is mainly produced in the gap between what you know and what you think you know. Therefore it originates from what you do not know, which is more important than what you do know. Taleb describes the confirmation bias. We are often looking for a confirmation rather than falsifying a phenomenon. When doctors declare there is ‘no proof of cancer’, it is often assumed there is no cancer in your body. However, it has never been said that there is ‘proof of no cancer’, which is the only way to be sure there is indeed no cancer in one’s body. Evidence of absence is therefore thought to be of much more importance than absence of evidence. This confirmation bias creates a perfect opportunity for a black swan event, since they are likely to appear when you do not expect them (e.g. if you think there is no cancer in your body, but it suddenly ‘returns’, because there has never been proof of no cancer in your body). Narrative Fallacy After that, Taleb brings forth narrative fallacy. Taleb states that we fool ourselves with stories and anecdotes: we look for explanations and stories to bind facts together. But by making a story of events that happen, we oversimplify them and do not remember every detail of the event. Further on, two systems in our brain are described: system 1 and system 2. System 1 is the experiental system and system 2 the cogitative system. System 1 is fast and effortless, while system 2 is often associated with thinking, which is effortful and slow. Most of our failures in reasoning are caused by using system 1 when we are assuming that we are using system 2. The main property of system 1 is our lack of awareness of using it, which gives the possibility to Black Swans to appear. Tunneling Another cause of the blindness for black swans is tunneling. We focus on well-defined sources of uncertainty; a too specific list of black swans. When looking at the world or working towards a goal, people often tend to ‘tunnel’. They do not keep into account all the unexpected events that could happen. A specific list of black swan events might be taken into account, but other black swan events can still show up because we were not prepared for them. Think about 9/11: Before this event, an Islamic terrorist attack using airplanes deemed likely. After, measures were taken around the world to prevent this from happening again. However, a few years later, in 2004, the Madrid train bombings were another black swan. The world focused too much on attack similar to the one from 9/11, but of course it should have been taken into account that any public crowded place could be a target for Al Qaeda. The Bell Curve Taleb has an aversion to the bell curve, or the ‘normal distribution’, which most people use. Applying this, people exclude outliers and focus only on the majority. In Mediocristanian situations, there is no problem, but with Extremistanian matters, the bell curve has no real value. People tend to rely on it, but once a Black Swan event occurs (which is not uncommon in this sense) the normal-distributed situation has been proven false. How to deal with black swans? In conclusion, Taleb shares with the reader how he deals with the concept of black swans. He says he is conservative in case of a threat of a black swan, but tries to make the most out of a positive black swan situation. However, Taleb is not very clear on how you should behave when a certain black swan event has not yet occurred. Fortunately, this problem would be the focus of his third book: Antifragile, which will be discussed next.