The Black Swan
About the Author
Nassim Nicholas
Taleb is a Lebanese born American writer, statistician, former trader, and risk
analyst. His works deal with the implication of probability and uncertainty in
the world. Taleb wrote 'The Black Swan' in 2007. This book is considered to be
one of the most influential books since World War II. He is also the author of
'Fooled by Randomness', another bestseller.
What to Expect?
Expect the unexpected!
The
Black Swan focuses on events which are impossible to predict, and which change
the course of history. No past data can indicate their occurrence, however, due
to retrospective rationalization, we find simple explanations for such events
after they have happened. Could anyone
have predicted the invention of the internet, and how it is going to change the
world? Did people anticipate Google's success? Had anyone in their farthest
imagination, ever thought that someone would fly a plane into the WTC towers
one day? The answer is no. These events were black swan events because they
were completely unanticipated, and changed the world in different ways. Looking
back, we can always say, that with the algorithm that Google had developed,
they were bound to succeed, or with the growing menace of Al Qaida and some
sporadic intelligence reports, the United States should have anticipated the
September 11 attacks, however, hindsight always has 20/20 vision!
What you will learn in
this book:
1)
What is a Black Swan.
2)
Why are statistical models overrated
3)
Why to know what you don't know is
important.
4)
Why uncertainty can give meaning to your
life.
You can't see me! The black swan.
Often,
our opinions and beliefs are formed based on our experiences and observations,
which we proclaim to be "evidences" for the truth. Before Australia
was discovered, you would be looked at with dismissive incredulity, if you said
that Swans can be black. After all, no one had ever seen a black swan. But
after spotting black swans down under, the "truth" was turned on its
head. It didn't matter if there were a million observations of white swans,
just one observation of a black one, was enough to change the truth. These
outliers, or outside the norm observations are the ones which may have extreme
impact. Taleb defines black swan events as those which are extremely improbable,
have a disruptive impact, and are explainable only in retrospect. Since these
events can only be explained while looking back post facto, our 'predictive
models' which base their predictions on past data are useless in such cases.
Social
scientists have operated under the assumption that black swans don’t exist, with
many developing false tools to measure uncertainty, under the guise of ‘risk
models’. The truth is that our focus on the pennies and not the dollars of
possibly significant events or phenomena, in spite of the obvious evidence of
their huge impact, results in blindness with respect to large deviations.
"It ain't what you don't know that gets you in to
trouble. It's what you know for sure, that just ain't so"!
Had
the risk of a terror attack been reasonably conceivable before September 11,
2011, the 9/11 attack would not have taken place, because perhaps, fighter
planes would have been circling the sky above the twin towers, or other
security measures would have been in place. The Same can be said for the
November 2008 terror attacks in Mumbai. The government and hotel establishments
were caught unawares, and were ill prepared for an attack by terrorists who
came in by the sea and wreaked havoc in the city. No hotel had robust security
measures for such an attack. Even the law enforcement agencies were ill
prepared for such an attack, simply because such an event was inconceivable,
despite post facto emergence of some prior intelligence reports indicative of such
a possibility. The beefing up of security infrastructure post the attacks has
ensured better preparedness for such audacious attacks.
Even
in the business world, ideas which lie far outside the normal range of focus,
are generally the ones which disrupt the industry and change the world. Who
would have thought earlier that the largest taxi Company in the world would not
own a single taxi! How many people had bet on Google, when it was just a search
engine, albeit driven by an exceptional and efficient algorithm? The more
unexpected the success of such a venture, the smaller the number of competitors,
and the more successful and impactful the entrepreneurs who implement the idea.
"Bias and impartiality is in the eye of the
beholder". How our experiences can mislead!
The
need for an answer, where none exists, has held Humanity in good stead over
thousands of years. The evolutionary processes have made our brain quick to
categorize information and make judgements based on them. Our perception is
driven by linear modes. It is hard for us to think in non-linear terms, and
this is dangerous in today's complex world. Often our predisposition to 'linear
narratives', presents an over simplistic picture of the truth. The narratives
formed in our minds, discount and ignore a lot of information which is not
considered to be important by the brain, and lead to a 'narrative fallacy'. The
urge to find causality in a chain of events works in a retrospective mode, and
often small and insignificant events which we ignore play a big role in the
final outcome. The narrative fallacy emerges from a process of 'reverse
engineering' from the final outcome. In reality, the causal chain of events
which we ascribe to as the causes which lead to the final outcome, are at best,
anybody's guess!
The
importance of narrative becomes easy to understand with an example of a goat up
for being butchered on Eid. While the goat is fed and taken care off all year
round, it has no reason to believe based on the narrative in its own mind, that
the day of 'butchering' would be any different. But when the day comes, to its
unpleasant surprise, it is killed and consumed, falling prey to the false
narrative of its own mind!
Biases
also exist in the way we seek information. If you believe that God exists, you
would discount any information or evidence which presents views to the
contrary. You would discount strong arguments by 'atheists' by resorting to the
argument of 'faith', and even seek out information which confirms your own bias.
You may google "strong arguments against atheism" to find articles
and information which confirm what you already believe.
Summarizing Statistics. The limitations of the Bell
Curve!
All
of us would have heard of the bell curve, especially during one's appraisal
process at work. But is the application of this approach beneficial in all
situations? The Gaussian bell curve employs normal distribution of data, and
implies that most observations center around the mean, or the average. The
outliers have a very small probability of occurrence and thus do not have any
significant impact on the overall data. For certain data sets which have
physical limitations or scalability challenges, for example height and weight
of people, a bell curve would be an appropriate application, since the
observations would lie in a small range, with most observations being centered
around the mean. Even if there are a few people over 7 feet tall, or those who
weigh more than 300 kilograms, they would not be able to skew the mean
significantly. How many people can you find who are 100 feet tall, and weigh 10000
kilograms? The answer is none, because there are physical limits to what a
human being can grow to. However, for certain data sets which are scalable,
normal distribution may not be correct, since a single data point maybe so
overwhelmingly deviated from the normal, it can skew the average significantly
and misrepresent the true picture. Take the example movie ticket grosses. A
single movie can gross many times more than all the movies released during a
particular period of time. Thus, the bell curve distribution in this case would
not represent a true picture of the movie business, since one data point is
large enough to skew the entire curve. In these cases, the bell curve ignores
the massive implications of the occurrence of outlying events.
Fractal
mathematics can show us a better picture of the truth in situations and
environments where outlying events can cause significant disruption. Fractal
maths can create models which factor in uncertainty, and allow for large
deviations from the norm. This helps in preserving the robustness of the model
across various types of data sets. Adopting this approach rather than a
Gaussian one, can help us in focusing on the possible rather than the likely.
If
Black swans are a matter of when, what then do we do? The meaning of life
Since
black swans are prospectively impossible to predict with extant models, and
carry a big impact, we need to build robust mechanisms to be able to absorb
their impacts. In doing so, we need to set ourselves up to collect 'positive'
black swans. Positive black swans are those events which have been beneficial
for humankind. For example, the 'invention' of the internet, which led to
unprecedented access to information via the world wide web, is such an event.
While the 'negativity' or 'positivity' of a black swan event is a matter of
perspective, in hindsight whichever black swan event has changed things for
good and ushered in a new era, can be considered as a positive black swan.
Indeed, the inability to predict outliers implies the inability to predict the
course of history, and excessive focus on what we already know, only leads to
more precise information of that which we already know, not that which we do
not know or which we have not focused on! The French, after the Great War,
built a wall along the previous German invasion route to prevent reinvasion,
but Hitler simply and almost effortlessly went around the wall and invaded them
anyway. The lesson here is that while the French had learned from the first
invasion, they reacted by building the wall as a measure of avoiding a
re-invasion. However, they were too focused on the previous mode of invasion,
and did not think of other possibilities.
While
we may not be able to predict events because of the inherent uncertainty of
things, but this is not an argument for being nihilistic or depressed. You will
be mentally impacted by the unlikely only if you let yourself be dictated by
circumstance, so by 'choosing' to focus on the positive, you would be able to
look at things like a missed opportunity with stoic disdain. By not worrying
about small insignificant failures compared to the big terminal ones, we can
have a sense of control over things, and still appreciate the beauty of
uncertainty. In fact, all of us have a strong reason to be happy, because the
odds were stacked against us when we emerged as a species. The odds of life
itself emerging may be extremely miniscule, and hence, all of us are little
black swans ourselves! Each one of us can embrace uncertainty in our lives and
by doing so, become above the impact of events which occur.
Final
Summary
The central idea
presented in this book is that our methods of 'predicting' are flawed, and do
not apply to scalable data. Our reliance on past data, coupled with our
cognitive and other biases, is futile in predicting Black Swan events, since
these events can only be explained in retrospect. Identifying what one doesn't
know, helps in creating better risk models so to speak, in all fields. By only
focusing on the known knowns, we discount the disruptive power of the unknowns,
and thus, we must develop an approach to at least establish what one doesn't
know. While our lack of understanding of what randomness or uncertainty
implies, is a roadblock for creating predictive models even in our own brain,
this should not restrain us from leading a more satisfied and happy life. It
should be noted that randomness, though sometimes bad, can also produces great
life experiences and positive accidents make us appreciate the beauty of
uncertainty. By focusing on the positive swans and learning from them, and just
being aware of the unknowns, we can lead a more fruitful life.
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