“The Black Swan”

by Nassim Nicholas Taleb (Allen Lane 2007)

This book is written at two levels (at least!). One is a maddeningly self indulgent apologia for the author’s extreme views, supported by the systematic demolition of conventional wisdom (“Platonicity”) i.e inspired by Plato,and of those associated with it. The second level is a perceptive exploration of the limits of mathematics and of the world of serendipity. “The Black Swan” is a symbol of the impact of the unexpected on human affairs – a reference to the discovery by Tasman of black swans in Western Australia when the Netherlands Academy of Sciences had pronounced that all swans were white! The Black Swan is an “outlier” (outside normal expectations); it has an extreme impact and is fully predictable and explainable after it occurs. The Asian Crisis of 1997, the demise of Long Term Capital Management, the start of World War I and the 2004 tsunami are seen to be Black Swans – not believable until they occurred.

The key message of “The Black Swan” is that forecasting is rarely possible. Forecasts are based on historic data and are developed through a mindset shaped by experience, and often prejudice. Human nature seeks certainty and reassurance, hence the sustained appeal of religion and the reassurance of conformity. One of Taleb’s most impactful images is that of Umberto Eco’s library; a limitless repository of knowledge which can never be comprehended. This makes all human decisions subject to “unknown unknowns”, based on imperfect knowledge. The problem is compounded by randomness which makes prediction perilous. Taleb attacks “Platonicity” as creating an illusion of control through formulae, models and “narrative fallacy” (an over interpretation of history based on limited evidence). He also attacks “ludic fallacy” – the illusion that the randomness of lotteries can be tamed by formulae.

Taleb describes two domains in which human activity occurs; “Mediocristan“ (symbolised by the bell curve) and “Extremistan” (the realm of surprise and contingency). Most people act as though they live in Mediocristan, seeking certainty and seeking to eliminate risk. Mediocristan is linear, Extremistan is non-linear in operation and full of serendipity. To prosper in Extremistan it is essential to accept uncertainty with boldness and to prepare the mind for surprises. In the words of Pasteur “Fortune favours the prepared mind”. It does not favour the closed mind.

In 2001 Taleb wrote “Fooled by Randomness” which was named as “one of the smartest books of all time” by Fortune magazine. That book is based on Taleb’s experiences as an options trader and exposes the deficiencies of financial institutions in attempting to mitigate risk formulaically. It is an insightful and sober book. “The Black Swan” attempts to build on the success of “Fooled by Randomness” and roams more widely and with less self control. It does, however, reinforce the core message that the future is not forecastable and is full of risks. As a good trader, Taleb knows it is also full of opportunities – Black Swans are not all dangerous, they just seem improbable until they reveal themselves.

Adrian Davies - 2nd July 2007