Thursday, February 14, 2013

The Black Swan, by Nassim Nicholas Taleb

Staff Review by Chris Saliba

In Nassim Nicholas Taleb’s modern classic the philosopher-trader warns that the world is full of unpredictability, despite so called experts and their inclination to distil life into easily managed statistical models and optimistic bell curves. 

Perhaps the quickest way to summarise the basic premise behind The Black Swan is the well-known saying attributed to Socrates: I know one thing, and that’s that I know nothing. The term ‘black swan’ actually refers to the once common belief that black swans didn’t exist, until of course they were discovered in Australia. Prior to that, a common expression for something that was deemed impossible was to call it a ‘black swan’. The lesson to be drawn is not so much to expect the unexpected, but rather to not categorically rule it out.

Taleb’s book is of course more nuanced than that, and he teases out the notion of outliers or unexpected events in fine detail. He warns that complicated societies are more prone to black swans, that is, completely unpredictable events. This would be fine if as a society we were prepared to accept uncertainty, but the opposite is the case. We rely on too many experts and professionals (both in business and government) that think they have the power to model the future upon predictable lines. Taleb is at his most trenchant when criticising these technocrats and heroes of the business world.

The reason we slip into this mode of thinking is because it is appealing to create statistically cheerful models based on positive events that happened in the past. We believe that if the economy has been good in the last six months, it will continue to be good indefinitely. No one ever sees a crash coming during the good times. Hence what happened yesterday is not necessarily a good predictor of what will happen tomorrow. Writ large, this means societies are planned with blinkers on, not taking into account outliers or unknown events. We think inside a cosy bubble, fooling ourselves that we are omniscient, blinding ourselves to the very notion of surprise events. When these ‘black swans’ do hit, no one is prepared for them.

On the flipside, there are also positive black swans, like a bestseller book that was rejected by all major publishers then published by the author at their own expense. My own example came to me when watching (briefly, I’m no big fan) a documentary on the English band Queen. The song ‘Another One Bites the Dust’ barely made it onto their album Play the Game. The band’s drummer even hated the song and didn’t want it released as a single. No one ever thought it would be a single, let alone a hit. But at the urging of Michael Jackson (a friend of Freddie Mercury) it was released and went on to become a monster hit. No one saw it coming (except of course for Michael Jackson): a positive black swan!

Another main theme of the book is how we like to create a narrative out of random events. For example, we think the CEO got to his or her position through hard work and intelligence. Taleb begs to differ, and says luck has a lot more to do with it. We like to read history as following a rational, straight line. Taleb says history is messy, with major events happening in fits and starts. Our brains are hard wired to search out meaningful stories in the randomness that is everyday life.

What’s the take-away? Taleb styles himself part philosopher and part real world practitioner (he worked as a trader). His book calls on us to accept that the world is full of unpredictability. The experts and technocrats with all their models, statistics and bell curves think they can safely map out the future and eliminate risk. Taleb says Baloney! The truly brave person is the one who can admit that they don’t know.

The Black Swan: The Impact of the Highly Improbably, by Nassim Nicholas Taleb. Published by Penguin. ISBN: 9780141034591 RRP: $26.95