The Black Swan: The Impact of the Highly Improbable by Nassim Nicholas Taleb

(New York: Random House, 2007), 379

General

Black Swans are

  • rare
  • have extreme impact
  • are predictable only in retrospect
  • technical name: the problem of induction (27)

Summary / Themes

  • "Small bets on tail risk are an excellent insurance policy on the standard financial model" (Cory, 4/25/2020)
  • Mediocristan vs Extremistan

Thinkers Taleb Respects

  • Benoît Mandelbrot
  • Niall Ferguson (historian, 14)
  • Pierre-Daniel Huet (French bishop and writer on skepticism, 48)
  • Karl Popper (57)
  • Montaigne & Francis Bacon (101)
  • Frédéric Bastiat & Pierre Bayle (111)
  • Henri Poincaré (174)
  • Sextus Empiricus (182)
  • Daniel Kahneman (307) "toward whom I (and my ideas) have more debt than toward anyone else on this planet"
  • Nouriel Roubini (309) "to my knowledge the only professional economist who really predicted the crisis of 2008)"

Thinkers He Does Not

  • Marx (xxv)
  • Adam Smith (xxv)
  • Steven Pinker

Anecdotes & Life Lessons

  • "You can afford to be compassionate, lax, and courteous if, once in a while, when it is least expected of you, but completely justified, you sue someone, or savage an enemy, just to show that you can walk the walk." (7)
  • Don't read newspapers or watch TV (17)
  • "The Good Life" for him is "f* you money" enabling this: "So I stayed in the quant and trading businesses (I'm still here), but organized myself to do minimal but intense (and entertaining) work, focus only on the most technical aspects, never attend business 'meetings', avoid the company of 'achievers' and people in suits who don't read books, and take a sabbatical year for every three on average to fill up gaps in my scientific and philosophical culture." (21)
  • Erudition: "Erudition is important to me. It signals genuine intellectual curiosity. It accompanies an open mind and the desire to probe the ideas of others. Above all, an erudite can be dissatisfied with his own knowledge, and such dissatisfaction is a wonderful shield against Platonicity, the simplifications of the five-minute manager, or the philistinism of the overspecialized scholar." (48)
  • "heoroes focus on process rather than results" (89)
  • Business psychology insight (98)
  • Quote on 133, including: don't watch TV, read newspapers/blogs; train your brain to use System 2
    • read a weekly magazine over daily news (144)
  • "the ultimate test of whether you like an author is if you've reread him" (198)
  • An ad homenin attack against an intellectual, not against an idea, is highly flattering. It indicates that the person does not have anything intelligent to say about your message. (280)

Funny

  • The business world is "inelegant, dull, pompous, greedy, unintellectual, selfish, and boring" (17)
  • "Scientists may be in the business of laughing at their predecessors, but owing to an array of human mental dispositions, few realize that someone will laugh at their beliefs in the (disappointingly near) future." (39)
  • "Looking busy can help you claim responsibility for the results in a random environment" (143)
  • "Being an executive does not require very developed frontal lobes, but rather a combination of charisma, a capacity to sustain boredom, and the ability to shallowly perform on harrying schedules." (166)

Prologue

  • Black Swans are (xxii):
    • rare
    • have extreme impact
    • are predictable only in retrospect
  • Free markets work because they allow people to be lucky—tinker as much as possible and try to collect Black Swan opportunities (xxv)
  • Platonicity: what makes us think that we understand more than we actually do (xxx)
  • Platonic Fold: where our representation of reality ceases to apply, where Black Swans happen (19)

Part One: Umberto Eco's Antilibrary, or How We Seek Validation

The writer Umberto Eco belongs to that small class of scholars who are encyclopedic, insightful, and nondull. He is the owner of a large personal library (containing thirty thousand books), and separates visitors into two categories: those who react with "Wow! Signore professore dottore Eco, what a library you have! How many of these books have you read?" and the others—a very small minority—who get the point that a private library is not an ego-boosting appendage but a research tool. Read books are far less valuable than unread ones. The library should contain as much of what you do not know as your financial means, mortgage rates, and the currently tight real-estate market allow you to put there. You will accumulate more knowledge and more books as you grow older; and the growing number of unread books on the shelves will look at you menacingly. Indeed, the more you know, the larger the rows of unread books. Let us call this collection of unread books an antilibrary.

We tend to treat our knowledge as personal property to be protected and defended. It is an ornament that allows us to rise in the pecking order. So this tendency to offend Eco's library sensibility by focusing on the known is a human bias that extends to our mental operations. People don't walk around with anti-résumés telling you what they have not studied or experienced (it's the job of their competitors to do that), but it Would be nice if they did. Just as we need to stand library logic on its head, We will work on standing knowledge itself on its head.

Chapter 1: The Apprenticeship of an Empirical Skeptic

  • Triplet of Opacity (issues with our minds coming up against history, 8):
    • illusion of understanding
    • retrospective distortion
    • the overvaluation of factual information, i.e. "Platonification"
  • history unfolds in bursts (like Thomas Kuhn says about scientific revolutions, 11), and isn't predictable
  • "Both the philosophy of history and epistemology (the philosophy of knowledge" seemed inseparable from the empirical study of times series data" (20)

Chapter 2: Yevgenia's Black Swan

  • fictional story about a book that unexpectedly took off

Chapter 3: The Speculator and the Prostitute

  • "To be genuenely empirical is to reflect reality as faithfully as possible" (27)
  • Scalable profession advice led him to the problem of induction: aka the turkey problem; technical name for the Black Swan
    • a scalable profession is good only if you are successful: few win and a lot lose
  • Mediocristan: when your sample is large, no single instance will significantly change the total (physical measurements like body size, etc.)
    • Type 1 randomness
  • Extremistan: inequalities are such that one single observation can disproportionately impact the total (social measurements wealth, book sales, etc.)
    • Type 2 randomness
    • this is where Black Swans occur

Chapter 4: One Thousand and One Days, or How Not to Be a Sucker

  • The turkey illustrates the danger of predicting the future from past data: it was fine for 1000 days until it got its head chopped off (41)
  • The turkey problem = the problem of induction = Hume's problem = the problem of generalizing from available information

Chapter 5: Confirmation Shmonfirmation!

  • we naturally look to confirm our story—confirmation bias—"but disconfirming instances are far more powerful in establishing truth" (58)
  • Karl Popper: "understanding how to act under conditions of incomplete information is the highest and most urgent human pursuit"
    • form a bold conjecture, and look for what would prove you wrong

Chapter 6: The Narrative Fallacy

  • Narrative fallacy: our need to fit a story to a series of events
    • Avoid the narrative fallacy by favoring experimentation over storytelling, experience over history, and clinical knowledge over theories (84)
  • a) as humans we need to summarize information, and b) more random is more difficult to summarize: "the same condition that makes us simplify pushes us to think that the world is less random that it actually is" (69)
    • "Myths impart order to the disorder of human perception and the perceived 'chaos of human experience'"
  • Kahneman & Tversky: most of our mistakes in reasoning (and missing Black Swans) come from using System 1 when we think we are using System 2 (81-82)
    • System 1: heuristics and biases
    • System 2: thinking

Chapter 7: Living in the Antechamber of Hope (Linearity)

  • Linear relationships are the exception but we are not wired to think non-linearly
  • Happiness: lump negative and spread positive (91)

Chapter 8: Giacomo Casanova's Unfailing Luck: The Problem of Silent Evidence

  • that we got here by accident does not mean that we should continue to take the same risks (116)
  • Taleb argues that this negates the cosmological argument (117-118)
  • Don't compute odds from the winners but from all those in the cohort (119)
    • Also don't read self-help books written by winners that neglect all the failures
  • "be suspicious of the 'because' and handle it with care—particularly in situations where you suspect silent evidence" (121)

Chapter 9: The Lucid Fallacy, or the Uncertainty of the Nerd

  • Lucid fallacy: thinking that all real-life randomness is Gaussian, when in fact it is not
  • military people deal with randomness well because people's lives are on the line; unknown unknown (126-7)

Part Two: We Just Can't Predict

Chapter 10: The Scandal of Prediction

  • "What matters is not how often you are right but what your cumulative errors are" (149)
  • Tunneling: neglecting sources of uncertainty outside the plan itself (156)
  • The ease of spreadsheets leads to overly confident long term forecasts (158)
  • Variability matters: don't cross a river that is on avg 4 feet deep (160)
  • Don't forecast for your job, and recognize that you can't forecast (163)

Chapter 11: How to Look for Bird Poop (cosmic microwave background)

  • Popper's argument: to predict historical events you need to predict technological innovation which is impossible (171)
    • to understand the future to the point of being able to predict it, you need to incorporate elements from this future itself (172)
  • "You can think rigorously, but you cannot use numbers." (179)
  • "If you believe in free will you can't truly believe in social science and economic projection" (184)c0

Chapter 12: Epistemocracy, A Dream

  • Montaigne fully accepted human weakness
  • Taleb's utopia is an epistemocracy
  • "While in theory randomness is an intrinsic property, in practice, randomness is incomplete information" (198)

Chapter 13: Appelles the Painter, or What Do You Do if You Cannot Predict?

  • Know how to rank beliefs not according to their plausibility but by the harm they may cause (203)
  • Maximize the serendipity around you
  • Barbell strategy: 85-90% in T-bills, 10-15% in extremely speculative and highly leveraged (options) bets
  • Distinguish between positive contingencies and negative contingencies
  • Seize any opportunity
  • Asymmetry: put yourself in situations where favorable consequences are much larger than unfavorable ones
  • Apply Paschal's wager in places of life other than theology (think in consequences instead of probability)

Part Three: Those Gray Swans of Extremistan

Chapter 14: From Mediocristan to Extremistan, and Back

  • "Capitalism is the revitalization of the world thanks to the opportunity to be lucky. Luck is the grand equalizer." (222)
  • Globalism it not all good: interlocking fragility (225)

Chapter 15: The Bell Curve, That Great Intellectual Fraud

  • Beware certainties and statistical significance: they include the assumption that the errors are Gaussian (which they very well may not be) (240)

Chapter 16: The Aesthetics of Randomness

  • Benoît Mandelbrot's fractals allow us to account for a few Black Swans

Chapter 17: Locke's Madmen, or Bell Curves in the Wrong Places

  • "I want to be broadly right rather than precisely wrong." (285)

Chapter 18: The Uncertainty of the Phony

  • Don't be a sucker

Part Four: The End

Chapter 19: Half and Half, or How to Get Even with the Black Swan

  • Worry about things you can do something about (296)
  • Aggressively gain exposure to positive Black Swans and be very conservative with negative Black Swans

Epilogue: Yevgenia's White Swans

Postscript Essay: On Robustness and Fragility, Deeper Philosophical and Empirical Reflections

One: Learning from Mother Nature, the Oldest and the Wisest

Two: Why I Do All This Walking, or How Systems Become Fragile

Three: Margaritas Ante Porcos (Pearls before swine)

Four: Asperger and the Ontological Black Swan

Five: (Perhaps) the Most Useful Problem in the History of Modern Philosophy

Six: The Fourth Quadrant, the Solution to That Most Useful of Problems

Seven: What to Do With the Fourth Quadrant

Eight: The Ten Principles for a Black-Swan-Robust Society

Nine: Amor Fati: How to Become Indestructible (love of fate)

Topic: Probability

Source:

Bibliography

  • Berlin Diary by William L. Shirer (history as it is taking place, 12-13)
  • Aversos Mathematicos by Sextus
  • Il deserto dei tartari by Dino Buzzati (92)
  • Essays by Montaigne (101)
  • Lost Illusions by Lucien Chardon (104)
  • The Hedgehog and the Fox by Isiah Berlin (153) (be a fox with an open mind)
  • Plutarch, Livy, Suetonius, Diodorus, Siculus, Gibbon, Carlyle, Renan, Michelet (198)

Created: 2020-05-12
Updated: 2023-01-04-Wed