The Black Swan – Nassim Taleb

The Black Swan: The Impact of the Highly Improbable – by Nassim Taleb
Date read: 1/28/18. Recommendation: 9/10.

A strong case could be made that Nassim Taleb is one of the most original minds of our time. It's well worth reading every book of his Incerto series, which includes: Antifragile, The Black Swan, The Bed of Procrustes, and Fooled by Randomness. Taleb defines Black Swans as events with the following three attributes: rarity, extreme impact, and retrospective (though not prospective) predictability. He discusses how the root of our inability to understand Black Swans lies in mistaking a naive observation of the past to be representative of the future. The book details specific themes that arise from our blindness to the Black Swan, including: confirmation bias, narrative fallacy, human nature, silent evidence, and tunneling. Taleb sets out to make us more aware of the biases in our logic as it relates to Black Swans so that we might better embrace our own humanity (that's part of it!) and avoid large-scale harmful predictions that might hurt our future. He advocates the "barbell" strategy and positioning ourselves to take advantage of positive Black Swans (lose small to win big) and situations where favorable consequences are much larger than unfavorable ones.

See my notes below or Amazon for details and reviews.

 

My Notes:

Black Swan–an event with the following three attributes: rarity, extreme impact, and retrospective (though not prospective) predictability.

The reason free markets work is because they allow people to be lucky, thanks to aggressive trial and error, not by giving rewards or "incentives" for skill.

The problem lies in the structure of our minds: we don't learn rules, just facts, and only facts. Metarules (such as the rule that we have a tendency to not learn rules) we don't seem to be good at getting.

The bell curve ignores large deviations, cannot handle them, yet makes us confident that we have tamed uncertainty. Its nickname in this book is GIF, Great Intellectual Fraud.

History is opaque. You see what comes out, not the script that produces events, the generator of history.

Financial distress could be more demoralizing than war (just consider that financial problems and the accompanying humiliations can lead to suicide, but war doesn't appear to do so directly).

"F*** you money" is a psychological buffer: the capital is not so large as to make you spoiled-rich, but large enough to give you the freedom to choose a new occupation without excessive consideration of the financial rewards. It shields you from prostituting your mind and frees you from outside authority.

It is hard for us to accept that people do not fall in love with works of art for their own sake, but also in order to feel that they belong to a community. By imitating, we get closer to others–that is, other imitators. It fights solitude.

There are traps built into any kind of knowledge gained from observation. A turkey before and after Thanksgiving. The history of a process over a thousand days tells you nothing about what is to happen next. This naive projection of the future from the past can be applied to anything.

Mistaking a naive observation of the past as something definitive or representative of the future is the one and only cause of our inability to understand the black swan.

Other themes arising from our blindness to the Black Swan:
-Error of confirmation: focus on the seen and generalize to the unseen
-Narrative fallacy: thirst for distinct patterns
-Behave as if the Black Swan does not exist: human nature is not programmed for Black Swans
-Distortion of silent evident: history hides Black Swans
-Tunnel: focus on a few well-defined sources of uncertainty

The sources of Black Swans today have multiplied beyond measurability. In the primitive environment they were limited to newly encountered wild animals, new enemies, and abrupt weather changes. These events were repeatable enough for us to have built an innate fear of them.

Narrative fallacy: vulnerability to over-interpretation and our predilection for compact stories over raw truths. It severely distorts our mental representation of the world; it is particularly acute when it comes to the rare event.

The more random information is, the greater the dimensionality, and thus the more difficult to summarize. The more you summarize, the more order you put in, the less randomness. Hence the same condition that makes us simplify pushes us to think that the world is less random than it actually is.

Myths impart order to the disorder of human perception and the perceived "chaos of human experience."

We continuously renarrate past events in the light of what appears to make what we think of as logical sense after these events occur.

Events that are nonrepeatable are ignored before their occurrence, and overestimated after (for a while).

The way to avoid the ills of the narrative fallacy is to favor experimentation over storytelling, experience over history, and clinical knowledge over theories.

Our intuitions are not cut out for nonlinearities...We think that if, say, two variables are casually linked, than a stead input in one variable should always yield a result in the other one. Our emotional apparatus is designed for linear causality.

In a primitive environment, the relevant is the sensational...Somehow the guidance system has gone wrong in the process of our coevolution with our habitat–it was transplanted into a world in which the relevant is often boring, nonsensational.

The nonlinear relationships are ubiquitous in life. Linear relationships are truly the exception; we only focus on them in classrooms and textbooks because they are easier to understand.

The problem of silent evidence: tablets with portraits of worshippers who prayed then survived a shipwreck. Where were the pictures of those who prayed, then drowned? They would have a lot of trouble advertising their experiences from the bottom of the sea. This can fool the casual observer into believing in miracles.

My biggest problem with the educational system lies precisely in that it forces students to squeeze explanations out of subject matters and shames them for withholding judgment, for uttering the "I don't know." Why did the Cold War end? Why did the Persians lose the battle of Salamis?

I am not saying causes do not exist; do not use this argument to avoid trying to learn from history. All I am saying is that it is not so simple; be suspicious of the "because" and handle it with care–particularly in situations where you suspect silent evidence.

Gambling = sterilized and domesticated uncertainty.

In real life you do not know the odds; you need to discover them, and the sources of uncertainty are not defined.

Train your reasoning abilities to control your decisions; nudge System 1 (the heuristic or experiential system) out of the important ones.

Our human race is affected by a chronic underestimation of the possibility of the future straying from the course initially envisioned.

The more information you give someone, the more hypotheses they will formulate along the way, and the worse off they will be. They see more random noise and mistake it for information...Once we produce a theory, we are not likely to change our minds–so those who delay developing their theories are better off.

Remember that we are swayed by the sensational. Listening to the news on the radio every hour is far worse for you than reading a weekly magazine, because the longer interval allows information to be filtered a bit.

We attribute our successes to our skills, and our failures to external events outside our control, namely to randomness. We feel responsible for the good stuff, but not for the bad.

Anchoring: lower your anxiety about uncertainty by producing a number, then you "anchor" on it, like an object to hold on to in the middle of a vacuum.

Epistemic arrogance: tendency to tunnel and think "narrowly."

Forecasting by bureaucrats tends to be used for anxiety relief rather than for adequate policy making.

In order to predict historical events you need to predict technological innovation, itself fundamentally unpredictable. (Karl Raimund Popper's central argument)

Someone with a low degree of epistemic arrogance is not too visible, like a shy person at a cocktail party. We are not predisposed to respect humble people, those who try to suspend judgment.

Prediction error: buy a new car but do not anticipate that the effect of the new car will eventually wane and that you will revert to the initial condition, as you did last time. If you had expected this, you probably would not have bought it. You are about to commit a prediction error that you have already made. Yet it would cost so little to introspect!

Overestimate the effects of both pleasant and unpleasant future events.

We cannot teach people to withhold judgment; judgements are embedded in the way we view objects. I do not see a "tree"; I see a pleasant or an ugly tree. It is not possible without great, paralyzing effort to strip these small values we attach to matters. Likewise, it is not possible to hold a situation in one's head without some element of bias.

Be human! Accept that being human involves some amount of epistemic arrogance in running your affairs.

What you should avoid is unnecessary dependence on large-scale harmful predictions. Avoid the big subjects that may hurt your future: be fooled in small matters, not the large. Do not listen to economic forecasters or to predictors in social science (they are mere entertainers), but do make your own forecast for the picnic.

American culture encourages the process of failure, unlike the cultures of Europe and Asia where failure is met with stigma and embarrassment.

"Barbell" strategy: be as hyperconservative and hyperagressive as you can be instead of being mildly aggressive or conservative.
-85-90% in extremely safe investments
-10-15% in extremely speculative bets (venture-capital style)

Negative Black Swan businesses: military, insurance, homeland security–face only downside.
Positive Black Swan businesses: movies, publishing, scientific research, venture capital–lose small to make big.

Seize any opportunity, or anything that looks like an opportunity. They are rare, much rarer than you think.

Put yourself in situations where favorable consequences are much larger than unfavorable ones.

The 80/20 rule is only metaphorical...in the U.S. book business, the proportions are more like 97/20.

Although unpredictable large deviations are rare, they cannot be dismissed as outliers because, cumulatively, their impact is so dramatic.

I worry less about advertised and sensational risks, more about the vicious and hidden ones. I worry less about terrorism than about diabetes.

You have far more control over you life if you decide on your criterion by yourself...It is more difficult to be a loser in a game you set up yourself. In Black Swan terms, this means that you are exposed to the improbable only if you let it control you. You always control what you do; so make this your end.

We are quick to forget that just being alive is an extraordinary piece of good luck, a remote event, a chance occurrence of monstrous proportions...So stop sweating the small stuff. Don't be like the ingrate who got a castle as a present and worried about the mildew in the bathroom.

Reducing volatility and ordinary randomness increases exposure to Black Swans–it creates an artificial quiet.

Living organisms need variability and randomness...Organisms need, to use the metaphor of Marcus Aurelius, to turn obstacles into fuel–just as fire does.

Black Swan events are largely caused by people using measures way over their heads, instilling false confidence based on bogus results.

A Black Swan for the turkey is not a Black Swan for the butcher.

Do not confuse absence of volatility with absence of risk. Trend towards lower volatility but greater risk of big jumps. It has fooled entire banking system and will fool again.

Using leverage to cure the problems of too much leverage is not homeopathy, it's denial. The debt crisis is not a temporary problem, it's a structural one. We need rehab.

For Seneca, Stoicism is about dealing with loss, and finding ways to overcome our loss aversion–how to become less dependent on what you have.

The man had reached the Stoic self-sufficiency, the robustness to adverse events, called apatheia in Stoic jargon. In other words, nothing that might be taken from him did he consider to be a good.

Seneca ended his essays with vale. It has the same root as "value" and "valor" and means both "be strong (i.e., robust)" and "be worthy."