The Black Swan (Taleb, 2007)

The Impact of the HIGHLY IMPROBABLE

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

xvii What we call here a Black Swan (and capitalize it) is an event with the following three attributes.

First, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility. Second, it carries an extreme impact. Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable.

xxi There are so many things we can do if we focus on antiknowledge, or what we do not know... The strategy for the discoverers and entrepreneurs is to rely less on top-down planning and focus on maximum tinkering and recognizing opportunities when they present themselves.

p.28 If you are an idea person, you do not have to work hard, only think intensely.

p.142 There is no effective difference between my guessing a variable that is not random, but for which my information is partial or deficient... and predicting a random one... In this sense, guessing (what I don't know, but what someone else may know) and predicting (what has not taken place yet) are the same thing.

p.144 additional knowledge of the minutiae of daily business can be useless, even actually toxic... The more information you give someone, the more hypotheses they will formulate along the way, and the worse off they will be. They see more random noise and mistake it for information.

p.145 No matter what anyone tells you, it is a good idea to question the error rate of an expert's procedure.

p.147 The problem with experts is that they do not know what they do not know.

p.149 Our predictors may be good at predicting the ordinary, but not the irregular, and this is where they ultimately fail. All you need to do is miss one... move... to have all your subsequent forecasts rendered completely ineffectual

p.164 There is another aspect to the problem of prediction: its inherent limitations, those that... arise from the very nature of information itself. I have said that the Black Swan has three attributes: unpredictability, consequences, and retrospective explainability.

p.206 I suspect that the most successful businesses are precisely those that know how to work around inherent unpredictability and even exploit it.

p.208 The impulse on the part of the military is to devote resources to predicting the next problems. These thinkers [JLJ - friends of Taleb, Andy Marshall and Andrew Mays at the Department of Defense] advocate the opposite: invest in preparedness, not in prediction.

p.208 Seize any opportunity, or anything that looks like an opportunity.

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