BLACK SWAN – Nassim Taleb
Taleb was a successful mathematical trader and is now a Professor of Uncertainty.
This is a book about prediction and forecasting.
Taleb believes that unpredictable events in the modern world are likely to become increasingly extreme. This is because both business and finance are highly connected through computer systems, plus faster transport and the internet. We are also pushing up against resource and environmental limits. Taleb says we live in Extremistan not Mediocristan.
Taleb believes that most major developments in human history came about as a result of what he calls “Black Swans”. “Black Swans” are, as their name implies, extremely rare events which cannot be predicted.
He gives many examples of discoveries which have changed the world in ways which their inventors never imagined or intended – e.g. the laser, the computer, viagra etc. He points out that historians are forever making up stories which “explain” historical events while there is no evidence at the time that people understood what was happening (e.g. the fall of the Soviet Union). Humans almost always try to rationalise events ex post. He gives the example of research which asked a panel of women to chose the nicest stockings from a selection of 12 and then to explain their reasons. They give lucid explanations about texture, colour etc. when in fact all the stockings were identical.
In fact Taleb believes that “luck” is responsible for almost all significant change – including the success of individuals and companies.
More than this, he believes that the conventional reliance of statisticians on the Gaussian bell curve distribution leads to very serious mistakes because “real life” does not behave in such a convenient way. Taleb draws an important distinction between processes that are “scalable” compared to those that may be affected by “Black Swans”. Real life is dominated by Black Swans.
Taleb gives many anecdotes and research finding which support his conclusions. One result in particular is important for managers. Research shows again and again that people (particularly experts) always seriously under-estimate what they don't know. He cites the example of the Sidney opera house where the experts initial estimate of the cost of construction was $7million while the unforeseen complications led to the final cost being 20 times greater. Taleb says the only profession which takes great care to try to understand what they don't know are the military.
Taleb urges his readers to ignore the predictions of conventional economists and statisticians. He likes the work of Karl Popper, Poincare and Hayek.
The book points out some of the common misunderstandings about “chance”. For example Taleb cites the case when the roulette wheel in Montecarlo landed on black 20 time in a row – gamblers lost fortunes putting money on red as they assumed the probability of more blacks was becoming infinity small. In fact the probability of red was still 50/50. Chance is not concerned with what has gone before.
The general feeling after reading this book is that we live in quite a dynamic and dangerous world where the opinions of experts are to be regarded with great scepticism. “Be prepared” seems to be the conclusion.