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| The Black Swan: The Impact of the Highly Improbable | 
 enlarge | Author: Nassim Nicholas Taleb
Publisher: Random House
Category: Book
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Avg. Customer Rating:  313 reviews
Sales Rank: 158
Media: Hardcover
Edition: 1
Number Of Items: 1
Pages: 400
Shipping Weight (lbs): 1.5
Dimensions (in): 9.4 x 6.5 x 1.4
ISBN: 1400063515
Dewey Decimal Number: 003.54
EAN: 9781400063512
ASIN: 1400063515
Publication Date: April 17, 2007
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Amazon.com
Bestselling author Nassim Nicholas Taleb continues his exploration of randomness in his fascinating new book, The Black Swan, in which he examines the influence of highly improbable and unpredictable events that have massive impact. Engaging and enlightening, The Black Swan is a book that may change the way you think about the world, a book that Chris Anderson calls, "a delightful romp through history, economics, and the frailties of human nature." See Anderson's entire guest review below.
Guest Reviewer: Chris Anderson
 Chris Anderson is editor-in-chief of Wired magazine and the author of The Long Tail: Why the Future of Business Is Selling Less of More.
Four hundred years ago, Francis Bacon warned that our minds are wired to deceive us. "Beware the fallacies into which undisciplined thinkers most easily fall--they are the real distorting prisms of human nature." Chief among them: "Assuming more order than exists in chaotic nature." Now consider the typical stock market report: "Today investors bid shares down out of concern over Iranian oil production." Sigh. We're still doing it.
Our brains are wired for narrative, not statistical uncertainty. And so we tell ourselves simple stories to explain complex thing we don't--and, most importantly, can't--know. The truth is that we have no idea why stock markets go up or down on any given day, and whatever reason we give is sure to be grossly simplified, if not flat out wrong.
Nassim Nicholas Taleb first made this argument in Fooled by Randomness, an engaging look at the history and reasons for our predilection for self-deception when it comes to statistics. Now, in The Black Swan: the Impact of the Highly Improbable, he focuses on that most dismal of sciences, predicting the future. Forecasting is not just at the heart of Wall Street, but it's something each of us does every time we make an insurance payment or strap on a seat belt.
The problem, Nassim explains, is that we place too much weight on the odds that past events will repeat (diligently trying to follow the path of the "millionaire next door," when unrepeatable chance is a better explanation). Instead, the really important events are rare and unpredictable. He calls them Black Swans, which is a reference to a 17th century philosophical thought experiment. In Europe all anyone had ever seen were white swans; indeed, "all swans are white" had long been used as the standard example of a scientific truth. So what was the chance of seeing a black one? Impossible to calculate, or at least they were until 1697, when explorers found Cygnus atratus in Australia.
Nassim argues that most of the really big events in our world are rare and unpredictable, and thus trying to extract generalizable stories to explain them may be emotionally satisfying, but it's practically useless. September 11th is one such example, and stock market crashes are another. Or, as he puts it, "History does not crawl, it jumps." Our assumptions grow out of the bell-curve predictability of what he calls "Mediocristan," while our world is really shaped by the wild powerlaw swings of "Extremistan."
In full disclosure, I'm a long admirer of Taleb's work and a few of my comments on drafts found their way into the book. I, too, look at the world through the powerlaw lens, and I too find that it reveals how many of our assumptions are wrong. But Taleb takes this to a new level with a delightful romp through history, economics, and the frailties of human nature. --Chris Anderson
Product Description
A black swan is a highly improbable event with three principal characteristics: It is unpredictable; it carries a massive impact; and, after the fact, we concoct an explanation that makes it appear less random, and more predictable, than it was. The astonishing success of Google was a black swan; so was 9/11. For Nassim Nicholas Taleb, black swans underlie almost everything about our world, from the rise of religions to events in our own personal lives.
Why do we not acknowledge the phenomenon of black swans until after they occur? Part of the answer, according to Taleb, is that humans are hardwired to learn specifics when they should be focused on generalities. We concentrate on things we already know and time and time again fail to take into consideration what we don’t know. We are, therefore, unable to truly estimate opportunities, too vulnerable to the impulse to simplify, narrate, and categorize, and not open enough to rewarding those who can imagine the “impossible.”
For years, Taleb has studied how we fool ourselves into thinking we know more than we actually do. We restrict our thinking to the irrelevant and inconsequential, while large events continue to surprise us and shape our world. Now, in this revelatory book, Taleb explains everything we know about what we don’t know. He offers surprisingly simple tricks for dealing with black swans and benefiting from them.
Elegant, startling, and universal in its applications The Black Swan will change the way you look at the world. Taleb is a vastly entertaining writer, with wit, irreverence, and unusual stories to tell. He has a polymathic command of subjects ranging from cognitive science to business to probability theory. The Black Swan is a landmark book–itself a black swan.
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 Lost in Extremistan with nothing but a Bell Curve April 18, 2007
779 out of 897 found this review helpful
If, as Socrates would have it, the only true knowledge is knowledge of one's own ignorance, then Nassim Nicholas Taleb is the world's greatest living teacher. In The Black Swan, Taleb's second book for laypeople, he gives a full treatment to concepts briefly explored in his first book "Fooled by Randomness." The Black Swan is basically a sequel to that book, but much more focused, detailed and scholarly. This is a book of serious philosophy that reads like a stand-up comedy routine. (Think Larry David...)
The Black Swan is probably the strongest statement of enlightened empiricism since Ernst Mach refused to acknowledge the existence of the atom. Of course, in theory, everyone today is supposed to be an empiricist - all right-thinking intellectuals claim to base their views solely on positive scientific observation. But very few sincerely confront the implications of rigorous empiricism. Specifically, few confront "the problem of induction," illustrated here by the story of the black swan.
Briefly: observing an event once does not predict it will occur again in the future. This remains true regardless of the number of observations one adds to the pile. Or, as Taleb, recapitulating David Hume, has it: the observation of even a million white swans does not justify the statement "all swans are white." There is no way to know that somewhere out there a black swan is not hiding, disproving the rule and nullifying our "knowledge" of swans. The problem of induction tells us that we cannot really learn from our experiences. It makes knowledge very problematic, if not impossible. And yet, humans do behave -almost without exception- as though they believe that experience teaches us lessons. This is forgivable; there is no better path to knowledge. But before proceeding, one must account for the limits that the problem of induction places on our claims to knowledge. And humans seem, at every turn, to lack this critical self-awareness.
In one of the many humorous anecdotes that seem to comprise this entire book, Taleb recounts how he learned his extreme skepticism from his first boss, a French gentleman trader who insisted that he should not worry about the fluctuating values of economic indicators. (Indeed, Taleb proudly declares that, to this day, he remains blissfully ignorant of supposedly crucial "indicators" like housing starts and consumer spending. This is a shocking statement from a guy whose day job is managing a hedge fund.) Even if these "common knowledge" indicators are predictive of anything (dubious - see above), they are useless to you because everyone else is already accounting for them. They are "white swans," or common sense. Regardless of their magnitude, white swans are basically irrelevant to the trader - they have already been impounded into the market. In this environment, one can only profitably concern oneself with those bets which others are systematically ignoring - bets on those highly unlikely, but highly consequential events that utterly defy the conventional wisdom. What Taleb ought to worry about, the Frenchman warned, was not the prospect of a quarter-percent rise in interest rates, but a plane hitting the World Trade Center!
Yep, the precise facts of 9-11 were actually presaged by this French gentlemen, as a rogue wave that just might be lurking over the horizon. And, to the contemporary American mind, this is THE quintessential Black Swan. Of course, the Frenchman's insight was just a coincidence - the thing with Black Swans is that they cannot be foreseen.
Taleb explains that conventional social scientists use induction to collect data, which is then plotted on the good old Gaussian bellcurve. With characteristic silliness, Taleb dubs the land of the bellcurve "Mediocristan" - and informs us that it is the natural habitat of the white swan. He contrasts Mediocristan with "Extremistan" - where chaos reigns, the wholly unexpected happens, power laws and fractal geometry apply and the bellcurve does not. Taleb's fictional/metaphorical 'stans' share something with the 'stans' of the real world: very ill-defined borders. Indeed, one can never tell whether one is in the relatively safe territory of Mediocristan or if one has wandered into the lawless tribal regions of Extremistan. The bellcurve can only help you in Mediocristan, but you have no way of knowing whether you have strayed into Extremistan - beyond the bellcurve's jurisdiction. This means that bellcurves are of no reliable use, anywhere. The full implications of this take a while to sink in, and are sure to cause huge controversy. In July, Taleb will debate Charles Murray (author of -what else?- the Bell Curve). I'll let you know who wins.
Taleb frames his whole argument much more entertainingly than I could here, and he bolsters it with an astonishing command of both cutting-edge social science and the entire history of philosophy. This is an astonishing work of serious philosophy, and it reads like pulp fiction. Readers who enjoyed FBR will find here the same dry wit, the same literary erudition, and deep sense of the absurd that made that book so much fun. But this is better, by an order of magnitude - easily the best book I have read in 5 years. I smell a timely pop-science bestseller here to rival Gladwell or Surowiecki, but this is also a classic that will be read for decades to come.
Many important ideas, many flaws that detract from the message April 26, 2007
615 out of 740 found this review helpful
This is an entertaining and enlightening book, and fairly easy to read. It has an important message regarding how the world works; that the world is governed not by the predictable and the average, but by the random, the unknownable, the unpredictable -- big events or discoveries or unusual people that have big consequences. Change comes not uniformly but in unpredictable spurts. These are the Black Swans of the title: completedly unexpected and rare events or novel ideas or technologies that have a huge impact on the world. Indeed, Taleb argues that history itself is primarly driven by these Black Swans.
It is convincing argument, entertainingly presented with plenty of sarcasm, and indeed, anger, by Taleb. For example he rails against the academic community, economists (including specific names), and Nobel Prize committee. Considerable numbers of his arguments "ring true" to me, that is my experience in life confirms that they are more accurate than the traditional approach. Like any important work, 90% of what is in the book is not original; that does not make it less important. Taleb's contribution is in integrating the material together, and showing how these different ideas are tied to the Black Swan.
The themes include: winner-take-all phenonomen, numerous effects of randomness on the world, the invalidity of the Gaussian Bell Curve to most things in world, concepts of scalablity, numerous instabilities in the world, especially the modern world where information travels so quickly, the fallacies about people's inability to predict the future. The importance of these ideas, Taleb's ability to weave them together into a single theory, and the ability of this theory to change the way you look at the world, means the book easily deserves my highest recommendation.
However, the book does have many flaws, unfortunately -- unfortunate because I believe they will take away from the credibility of the message, which is in important one. The are numerous minor flaws such as, for example, the inexplicable invention of a fictional author (disclosed a few pages later), when certainly there must have been some real example that would have worked better. Another example is repeated jabs about the French; these may be amusing but I just don't think they have a place in work like this. There are also diatribes against specific people, including famous economists, which, though amusing, and possibly justified, demonstrate a high level of anger by author and take away from his credibility. Often he also overreaches, for example in saying the usual combination of anti-abortion and pro-death penalty or the opposite combined views of pro-abortion and anti-death penatly cannot be explained logically, when in fact widely known theories such as George Lakoff's (in Moral Politics) have explained hows these groups of views are entirely consistent.
Another flaw is that Taleb seems to go a little toward the extreme of saying that we can predict almost nothing about the future, and though he does not say so explicitly, this seems to imply we have no moral responsibility to the future. This, combined with Taleb's advice to the reader about their behavior based on the "Black Swan" view of world just rubbed me the wrong way, for several reasons. One is that Taleb personally has very little in common with most people; never having as far as I know had a regular career (essentially what he calls non-scalable, e.g. dentist, engineer, baker) he nevertheless recommends that people choose these kinds of careers rather than a scalable career (e.g. financial trader, author, actor which are subject to a few lucky successful people and a lot of failures). This advise is odd first because Taleb is in a non-scalable profession (derivatives trader, then hedge fund manager) -- indeed it appears he is quite wealthy. Even more odd because he says all these types of non-scalable types of work are boring and evens makes sarcastic comments (the book is extremely sarcasm heavy) for example about dentists being able to do well by diligently drilling teeth for 30 years. The second things that bothered me is that Taleb seems be somewhat amoral to me; in this type of book where plenty of his own emotions come through, plenty of his personality, he has plenty of criticism of others for their wrong models and wrong view of the world, and how this has hurt the world, but there remains a lack of moral responsibility to his advice.
Perhaps the best comparison I could make are to other important works that do not suffer from these flaws, for example the Age of Fallibility by George Soros and Irrational Exuberance by Robert Shiller (1st and 2nd editions). But probably Black Swan will sell better than either of these because of it's "edginess," i.e. aggresiveness; I personally have a distaste for this approach.
Despite my criticisms, the main ideas of the book as so important as to merit reading and indeed great consideration.
 Chapters 15 - 17 are excellent. The remainder is mediocre July 30, 2007
251 out of 271 found this review helpful
Starting with the good (chapters 15 - 17), within chapter 15 Taleb explains where the Bell curve works and where it does not. The Bell curve captures well variables that don't deviate much from the mean. Otherwise, it does not work. Taleb suggests we often fool ourselves in believing that correlation, regression coefficients, or standard deviation convey much information. This is because those coefficients are unstable (and can flip sign when possible) depending on the time selected. This is because the underlying variables are often not stationary enough for these coefficients to be stable.
Chapter 16 is excellent as an introduction to Mandelbrot's fractal geometry as an alternative to Gaussian based investment theory. He supports well that these mathematical tools do capture randomness (of non-stationary variables) far better than the Normal distribution. However, he admits that Mandelbrotian models are not predictive. When looking at the same data set, he and numerous colleagues each came up with different underlying parameters to build fractal-like models. And a small difference in such parameters makes a huge difference in outcome. That's why you will not hear much of fractal geometry within the quantitative financial community. Nevertheless, this is a fascinating subject that deserves further exploration. For this purpose, I recommend Mandelbrot's The Misbehavior of Markets
Within Chapter 17, Taleb further elaborates on the flaws of the Normal distribution. He underlines that half of the return of the stock market over the past 50 years was associated with just 10 days with the greatest daily change. This is an example where stock returns have outliers of such magnitude that using the Normal distribution is not appropriate. Taleb describes the run-ins he experienced with the living legends of modern finance including Myron Scholes and Robert Merton due to his rejection of the Normal distribution assumption that underlies all their models.
The remainder of the book is disappointing. Hundreds of pages can be summed up in just stating that we can't predict rare events. Taleb goes way overboard in attributing everything to luck. He thinks MicroSoft beat out Apple just due to luck. Taleb does not consider that MicroSoft open system allowed it to mushroom while Apple locked itself into a proprietary corner. Also, according to Taleb both the rise and fall of Rome were due entirely to luck. But, Rome was best at developing military strategy and transportation networks. However, it eventually suffered from imperial overstretch. Explanations are not always narrative fallacies as Taleb believes. They often beat out ignorance.
When it comes to practical advice, Taleb misfires. His single strategy on how to deal with Black Swans is an asset allocation consisting of 85% risk free investments (T-bill) and the remainder into very high risk investments. I tested this allocation using a small cap index for the high risk component vs a more standard 60%/40% allocation between stock and bond indices respectively. The standard 60%/40% allocation performed way better.
The uneven quality of this book is disappointing given the author's outstanding credentials. Taleb has a Wharton MBA and a Ph.D. in financial mathematics. He was a managing director of derivatives and proprietary trading at several leading Wall Street institutions. And, he was professor in mathematics at several universities. He is also fluent in 9 languages including classical Greek, Latin, and Aramaic. As a result, he has developed into an outstanding polymath. Taleb is an excellent author when he applies himself as in Fooled by Randomness Revision (Not Available in US): The Hidden Role of Chance in the Markets and Life that has become a classic on Wall Street. By comparison, this book is mediocre.
If you find the subject of this book intriguing, let me suggest a few other books that are more rewarding. Scott Plous'sThe Psychology of Judgment and Decision Making explores the flaws in human judgments far more thoroughly and clearly than Taleb in `The Black Swan.' Perry Mehrling's Fischer Black and the Revolutionary Idea of Finance is also an excellent book. Ideally, that may be who Taleb would have liked to become. Fischer Black was brilliant and as skeptical as Taleb regarding much of the body of economics and finance. Yet, he left a great legacy of elegant models that people still use extensively including the famous Black-Scholes option model. Yes those models were often based on Taleb's dreaded Normal distribution. But, with minor modifications those models have remained valuable. Another recommendation is William Poundstone's Fortune's Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street that describes the career of a bright MIT mathematician, Ed Thorp. The latter showed how to successfully deal with uncertainty in gambling and investing. Even Taleb recognized Thorp's unique expertise within `Black Swan.' Finally, if you are looking for something much more pragmatic within the domain of investing I recommend Burton Malkiel's The Random Walk Guide To Investing. This book discloses bunch of simple strategies and investment allocations that are far better than Taleb's 85% T-Bill/15% high risk investment.
Fun to read. Making the mind working April 18, 2007
99 out of 196 found this review helpful
First of all I had fun reading it. I was many times in a non-reading mood, and some of the drafts came to me. I print them out in order to read another time, and suddenly I was finding myself after reading a few pages. Joyful style but with content. Very interesting content. The stuff that make you thinking, thinking, and thinking again.
The principles of the book are quite simple.
The unknown is more frequent than we tend to think.
The effect of unexpected things is rather huge. Much more than we dare to fantasize.
"we know" is in many cases a big illusion. The human mind tends to think it knows, but does not always have solid ground for this dellusion of "I know".
As in the good old medieval days, "experts" are many times empty heads with empty (and expensive) suits. The "truth" behind science, is limited to some areas, and in many areas having a degree and posing scienist, is truth irelevant.
"Narrative falacy" talks about our tendency to build stories around facts. In love it may serve a purpose, but when starting to beleive the stories and accomodating facts to the stories, things become stupid.
Much more is there for the taking.
serious subject, entertaining writing - a black swan July 5, 2007
96 out of 105 found this review helpful
In his new book Nassim Nicholas Taleb uses the term "black swan" to describe unpredictable or improbable events, completely out of the ordinary, completely unexpected. More specifically, for the purposes of the book, in order to qualify as a black swan an event a) must be unexpected, unpredictable, unprecedented, b) must have high impact, in other words important consequences, c) must be retrospective, it must be an event that people analyze, identify the conditions that preceded it, figure out the reasons that caused it "after" the event. By this definition 9/11 was a black swan. So was the demise of the Soviet Union. All of the important historical events were black swans for that matter. On a personal level, all the important decisions (marriage, choice of profession, major moves, etc.) are also black swans.
By their very nature, black swan events are unpredictable. Yet these are the ones that shape history and also our daily lives. The implication is that, our lives are at the mercy of randomness. This is a big claim but Mr. Taleb is very convincing in his argument. A big part of the book consists of the reasons why we as human beings are unable to see that we are at the mercy of randomness.
Part of the problem is our illusion of understanding probabilities, our addiction to listening "scientific" explanations, "expert" opinions, our need to find reasons. To understand the illusion, we have to be aware of two types of randomness. Perhaps it is best to explain with some of his own examples:
Let's hypothesize that a Martian is trying to figure out the average height of humans on Earth and he is choosing people from different parts of the world to make his sampling as random as possible, and he measures their height. For practical purposes, after about 100 such measurement he can safely assume that he found the average and he can predict the height of his next sample within a certain range. Such predictions represent a probability distribution graph in the shape of a bell (Gaussian bell curve). This is the textbook type of randomness. But let's assume that the same Martian is trying to figure out average monetary net worth of human beings. In this case there is a large difference of values and he would need a sample size of much bigger than 100 to even have an "sense" of the average. One sample that is extremely outside of the running average (say someone like Bill Gates being the current sample), has a huge impact and would change the current average considerably. This would be a black swan.
A more realistic example in the book is about casinos. Normal operation of a casino requires calculating and knowing the probabilities of the games to ensure that the casino has an edge over the customers. Any given day, individual gamblers' luck varies randomly but this is the first type of randomness as in the above example. No matter how great is somebody's lucky run, it wouldn't be so great that he would break the casino. And casinos spend a lot of energy in ensuring their edge by setting playing rules, limits on bets, surveillance etc. But there are some real life examples in casino businesses that caused huge losses for casinos, and those losses resulted from unexpected things. One of them is the end of the show "Siegfried and Roy". It was a Las Vegas attraction and a major source of getting the crowds to that particular casino. But after the unexpected accident (it was a show with tigers, one of the tigers, after so many years, attacked the performer) the show was stopped and there was a noticeable drop in the number of customers in the casino as well. The estimated amount of loss is around 100 million dollars! This came as a result of something that nobody expected, and had a huge impact. It was a random occurrence of the second type. It was a black swan.
Any situation of unpredictability in real life involves the second type of randomness. But probability theory in mathematics deal mainly with the first type of randomness. That's why, according to Mr. Taleb, those math experts with their degrees and computer simulations are not to be trusted with their predictions because things that are trying to predict (stock market, economic indicators, political events in the near future etc.) involve the second type of randomness. In fact, these types of scenarios cannot reliably be predicted. Again, this is a big claim but Mr. Taleb supports his view with records of "experts" which show how terribly wrong they were majority of the time.
There is an interesting, and humorous example in the book comparing an expert's thinking to someone with no formal education but became successful in business world and has a practical way of approaching the problems. The author asks these (imaginary) characters this question: "Suppose I have a fair coin (heads and tails have an equal probability). I toss the coin 99 times and in each time a get a tail. When I toss it for the 100th time, what is the probability that I get a head?". The math expert answers "50 percent", which is, mathematically true. The wise guy says "less than 1 percent of course". When he was told that the expert thinks it is 50 percent, he answers in a humorous way, reflecting his lack of respect for the expert, but the important thing is his line of reasoning. He thinks that if the 99 consecutive tosses showed tails, for all practical purposes it is far more likely that the initial assumption about the coin being fair is wrong than the coin delivering 99 heads in 99 tosses! The expert is thinking completely inside the box. Wise guy on the other hand is thinking outside the box!
Mr. Taleb got some criticism about his use of fictitious characters and his ridicule of the experts (as in the above example). True, he has an unorthodox writing style for a book of such important subject and big claims but I believe he did that on purpose. His sense of humor throughout the book makes it more accessible and fun while at the same time keeping the seriousness intact. This is a very difficult balance and as far as I am concerned Mr. Taleb is doing a great job not only in his very detailed and convincing way of presenting his argument, but also keeping the reader's attention and enjoyment alive. It's a unique book in that sense, itself a black swan.
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