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The Black Swan

Black SwanA professor of mine once said, “Literature has three lives. The first is when you read it, the second is when you think about it, and the third is when you re-read it.”

If that’s true, all three of Nassim Taleb’s The Black Swan’s lives have enriched my life and opened my eyes. It’s the second book in Taleb’s trilogy on randomness, risk, and probabilities, and the most well-known.

Taleb is the kind of writer you’ll either love or hate. To say he’s straightforward and direct is like referring to a hurricane as a strong wind—it’s fairly accurate, but vastly understated. I’ve grown to enjoy his combative style, but have talked to a number of people who had difficulty getting past his brashness.

The book, named after the black swan phenomenon, contains so many big ideas that the difficulty in deciding where to start with this review was only eclipsed by figuring out what to exclude. I’ll briefly touch upon what I feel to be his most important ideas.See my in-depth review here.

Extremistan vs. Mediocristan

Taleb states we’re living in two different worlds. The first world, Mediocristan, is where events that occur are not significant individually, only collectively, and will not affect the aggregate or total to any significant degree. The second world, Extremistan, is where the inequalities are such that one single observation (such as discovering one black swan when it was believed all swans were white) can disproportionately impact the aggregate or total in a very substantial way.

If we took the average height of 1,000 people, adding the height of the tallest man alive wouldn’t increase this average very much, as he’s likely not even twice as tall as the original average. A similar type of result would be found measuring other averages such as weight, IQ, shoe size, and life span. These are all in the realm of Mediocristan, due to the fairly unremarkable difference between average and possible extremes. Our instincts are generally accurate in Mediocristan, but even when they’re not, an unexpected event will not blindside you or society.

However, measuring our group’s average net worth, then adding Bill Gates’ net worth would increase the average by hundreds, possibly thousands of times over. This is what can happen in Extremistan. Rare events can be so asymmetrical they completely dominate the influence of the vast majority of other events in the realm. Extremistan events can be found in economics, stock market movements, war, earthquakes, and book and music sales.

Bell Curve BS

Given that the range of outcomes is limited in Mediocristan, tools that work well in these situations, such as the bell curve, don’t work at all in Extremistan.

It’s dangerous to use the bell curve in Extremistan, as the mathematical properties give the false illusion of precision. In reality, the calculations are limited to what has been observed in the past, which can be hundreds or even thousands of insignificant events. Significant events in Extremistan are rare, but occur far more often than the bell curve predicts and are far more severe. Power laws, or scaling laws, can be used as loose guidelines in Extremistan.

What is average anyway?

The term “average” both is and isn’t as simple as it seems. For example, if you found out you had a disease in which the average life expectancy was four years, you’d likely assume you only have about three to five years to live. This is very different from finding out that half of the people with that disease died within months, but those that lived at least a year, could expect to live another 20 years.

Not learning from history

I’ve always been a big proponent of learning history, and learning from history. However, one of the things I learned from The Black Swan is the danger of learning history too well. As mentioned earlier, just because something has never happened doesn’t mean it can’t happen in the future. It’s also human nature to explain why an event occurred. Even if we don’t have access to everything, we’re likely to make assumptions. It’s often easier to work your way forward than backward. But historians are forced to do the latter, which can obviously lead to a number of imperfect assumptions. This limitation affects other fields such as economics, finance, psychology, and sociology.

Survival bias

Survival bias is presenting a result or solution without including (whether known or not) situations in which that solution failed. The mutual and hedge fund industries brag that the average returns of their funds are better than the indexes they track. Although they are correct, what they won’t mention is that the returns they are touting don’t include the funds that have been closed in previous years. Fund companies almost never close funds with good performance. By including these, you’d find well over 75% of funds underperform the index they track over a five-year period.

Luck

Possibly the hardest thing for me to come to grips with in the past few years is the role luck plays in our lives. However, after reading The Black Swanand Thinking, Fast and Slow by Daniel Khanman, I’ve given into the ample research that supports their thesis. Although we know luck is random, many of us solely attribute a combination of skill, hard work, and determination to people’s success. These attributes will of course vastly improve the odds of success, but it’s important to remember that most successful people that have succeeded had Lady Luck smile upon them at opportune times. On the flipside, others with similar skill, work ethic, and grit were never heard from again due to their bad luck.

To reiterate, skill and grit make a huge difference, but aspects like the genes you inherit, the family you are raised by, and the economy you live through all have an impact on your life’s path. To use a biking analogy, luck is like the unknown road ahead; your future speed will be affected by whether it is up or downhill. Undoubtedly, you will go faster and farther the better shape you are in, however, you could lose a race to someone in worse shape than you if their road is downhill while yours is uphill.

The Life of a Turkey

One of the best analogies in the book is of the turkey and the farmer. For 1,000 days or so the turkey thinks the farmer is on his side. The farmer feeds him, keeps him safe, and takes care of him. But then Thanksgiving rolls around and the turkey discovers everything he ever knew about the farmer was wrong. We all need to figure out what can hurt us and either avoid it or protect ourselves. In otherwords...Don’t be a turkey!

The Black Swan has not only changed the way I see the world, but has convinced me I need to expand and enhance my knowledge in a number of areas. I highly encourage you to read this book, and read it again. You won’t regret it!