The Black Swan: The Impact of the Highly Improbable

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

Read the First Chapter at New York Times. Throw out the Gaussian! In with the Power Law??
The central idea of this book concerns our blindness with respect to randomness, particularly the large deviations: Why do we, scientists or nonscientists, hotshots or regular Joes, tend to see the pennies instead of the dollars?

The book is written in a very confrontational style, as if the author was emailing text or posting on Usenet, very harsh tone at times towards economists, and others, and a very professorial tone in laying traps that the author uses to berate reviewers on missing his clues! But taken with a hint of humor (which may have been the original intent) it is quite entertaining. Ignoring all such exclamations, and the times when it seems that the author is taking things to the extreme to make a point (are people really that taken with the Gaussian?) the technical parts of the book are very illuminating, and the central premise of the existence of Black Swans is certainly important. The author certainly is an interesting character, in another article, the simple question of Street Charity is turned into long winded response bordering on the incomprehensible, in this Freakonomics - Street Charity Quorum!

The book will introduce you to Taleb's Extremistan, Mediocristan, and talk at length about skeptical empiricism. He talks about Platonic fallacy, a blindness that leads to distortions such as the Narrative Fallacy: creating a story post-hoc so that an event will seem to have a cause, our need to fit a story or pattern to a series of connected or disconnected facts. He talks about the statistical regress fallacy: believing that the probability of future events is predictable by examining occurrences of past events. These fallacies are so evident in action in the world today, and they are tragic when they occur at large scales - just look at the follow on actions to recent human-made disasters and natural disasters. People are expending great amount of resources to futile and stupid ends.

The skeptical empiricist is suspicious of models explaining the future; far more important to be largely right than be precise and end up being precisely wrong.

Of course, there is little one can do about Black Swans - how does one prepare for the totally unanticipated? The trick is to be conservative in most things, but set aside some resources - not only money, but also your efforts and energies - to grab the advantage when a positive Black Swan event happens. These resources should be totally riskable, i.e., be prepared to lose it all in these ventures. Since only a small percentage is allocated, the overall risk becomes quite low.

While he talks of finance and social behavior, it could be quite instructive to see how applicable skeptical empiricism would be to the Software Industry as opposed to the Platonic focus of using models to predict the future. So many people think that existing models, based on past projects, can and should be used to predict how a completely new, hence never done before effort, will roll out. A dose of skeptical empiricism would be such a fresh air to the world of software project management.

There is of course danger in too much reliance on skeptical empiricism - don't spend your life waiting for the Black Swan that will deliver a fortune so you can quit your day job. One point not made in the book is this: since one cannot prepare for all possible highly improbable events and one has to make choices, it is quite likely that a lifetime could be spent preparing and never being able to savor the satisfaction of being in the right place at the right time. C'est la vie! This book is not a how to get rich or how to get what you always wanted book.

The book is an enjoyable read (I actually listened to it first). But I have to admit I cannot claim to have understood all the points being made in the book, there seemed to be sections that started with promising statements that were never satisfactorily tied up and points where conclusions were stretched a bit thin. Some of the advice could be equally supported in opposing viewpoints - like in the short two page section in the end devoted to the the main question that most people might be asking on reading this book - how to handle the impact of improbable events - he remarks at one point that it is not worth running for bus. Why not? Because that way instead of destiny in control, you are in control, you make your own destiny. But one can snub destiny even better by snatching an earlier ride and whiling away the time, as the author himself says, embarrassment is not something to worry about, so run for the bus, and don't worry even if you miss it. The positive feelings on having done something "lucky" sure outweigh the negatives here.
Other advice can be summarized as the classic "Don't sweat the small stuff", and the key point made throughout the whole book regarding what is real risk and what is pointless to worry about. Most of the time we may be biased to confuse one with the other and have to be mindful of these biases and the fallacies that lead us to mistaken conclusions.