Nassim Nicholas Taleb -The Black Swan: overview main ideas and quotes


Briefly about the author – Nassim Nicholas Taleb

Насим Николас Талеб

Nassim Nicholas Taleb – Lebanese-born American essayist, writer, trader and risk manager. Received a Master of Business Administration (MBA) from the Wharton School of Business and defended his doctoral dissertation (PhD) at the University of Paris-Dauphin. He worked on the stock exchange and held senior positions in brokerage firms in London and New York. After that, he founded the hedge fund “Empirica LLC”, specializing in futures and option sales. After the 2009 crisis, he made enough money to do what he really likes. He began to develop his own philosophical ideas. However, he is currently listed as a scientific advisor at the Universa Investments hedge fund.

Nassim Nicholas Taleb is the author of a five-volume philosophical essay on the uncertainty of Incerto, published between 2001 and 2018.
1. Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets – 2001.
2. The Black Swan. The Impact of the Highly Improbable -2007.
3. The Bed of Procrustes: Philosophical and Practical Aphorisms – 2010.
4. Antifragile: Things That Gain from Disorder – 2012.
5. Skin in the Game: Hidden Asymmetries in Daily Life –2018.

Author’s best seller –“The Black Swan. The Impact of the Highly Improbable” translated into 32 languages, 3 million copies sold in the digital age. This book was described in The Sunday Times as one of the twelve most influential books of World War II.

Main book ideas “The Black Swan: The Impact of the Highly Improbable”

The Black Swan The Impact of the Highly Improbable

1. Black Swan – this event, which has three qualities: unpredictability, the presence of serious consequences, retrospective explainability. If it is clear with unpredictability and consequences, then a retrospective explainability is worth disclosing. When you look after the fact, you think that such a course of circumstances is natural. Reading history books, the outbreak of World War 1 or 2 seems obvious, but for the inhabitants of that time it was the “Black Swan”. Try to draw an analogy with your life. Could you imagine in childhood that there would be cordless phones without buttons or gyro scooters. But, for example, an air skateboard, predicted in the film “Back to the Future – 2” (1989), did not appear on the streets.
Black swans shocked the world because no one was waiting. The author tells a story about a turkey fed by a farmer thanksgiving. Based on past data, a turkey cannot predict the ending. As the author says, “The black swan is a problem of a sucker.” In other words, its availability depends on expectations.

2. Human consciousness suffers from three problems when it tries to embrace history, Nassim Nicolas Taleb calls them the triplet of opacity :

1). The illusion of understanding. That is, everyone thinks they know what is happening in a world that is actually more complex (or random) than they think.

2). Retrospective distortion – event assessment is already ex post. The story seems clearer and more organized in history books than in reality.

3). The tendency to exaggerate the significance of fact, exacerbated by the harmful influence of scientists, especially when they create theoretical models.

The following conclusion suggests itself: human consciousness interprets any phenomenon and does not want to believe in uncertainty. In support of this thought, the following experiment is demonstrated. Women were given a choice of 12 pairs of identical stockings. But when choosing a particular pair, they gave a clear logical explanation of why this pair is better than others. Therefore, one of the most difficult tasks is to learn to perceive facts without interpreting or explaining them.

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3. The author introduces the concept of the two countries Extremistan and Mediocristan and clearly explains the difference between them. Many physical quantities belong to Mediocristan: height, weight, foot length, etc. The value of one value cannot be tens of times different from the average. In them, you can use the normal distribution (Gaussian) for justification or calculations. It is a completely different matter in Extremistan, there are more likely social values: monetary wealth, price movement on the exchange, popularity (subscribers), book sales, etc. Any of the above values can be tens, or even thousands of times different from the average, so you should not use the Gaussian distribution for the calculation. The author suggests using the distribution with “thick tails”.

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4. Scalability – Injustice . All professions that scale are unfair. A non-scalable profession is a lawyer, a doctor, etc. when providing services, the presence of a specialist is required. Therefore, income is limited by the number of working hours. Scalable professions – any movie stars, sports music, writers, bloggers, etc. They need to spend as much time as a thousand or a million to get one fan, reader. Moreover, a “good” specialist in any of these professions differs from a “best” one only by a small amount. But the “good” average fees, which are likely less than in non-scalable professions, and the “best” hundreds of times more. An example is the channels on YouTube or on Instagram. Many people make such content, sometimes “stars” do even worse than small not very popular channels, however, it is the stars that get almost the entire part of the pie, leaving the crumbs of slightly less successful competitors. The author is of the opinion that people are superficial and not fair. And it’s hard to disagree.

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5. The author makes you think about the direct and reverse-engineering problem. Sometimes we don’t understand direct processes, what can we say about reverse processes. An example is an ice cube and the formation of puddles after it. How to determine by a puddle what an ice cube was? Was it a cube or a ball of ice? Or maybe a puddle formed for another reason? Therefore, it is difficult to find out the real reasons for what happened. And then, based on these reasons, to draw conclusions for the future is a meaningless undertaking. The more data a person possesses about empirical reality, the more garbage that he takes for important information. Therefore, you need to think with your own head and filter other people’s ideas, which we perceive as property, which is always difficult to part with. This is a disease of humanity – a chronic underestimation of the likelihood that the future will deviate from the predicted course.

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6. The problem of hidden evidence when reviewing information. We only know about successful “surviving” ideas, but we don’t know anything about those ideas that perished. There were thousands of companies during the dot-com boom, including Amazon, Facebook and Google, and many others. Some people think that if I invested in them in the 2000s I would become a millionaire. In those years, there were thousands of such firms, among them the “surviving” companies did not stand out. And we can’t assess the real chance of “surviving,” because only lucky ones, not extinct ones, enter the history.

7. Error margin is more important than the result itself. A simple example is the weather. In which of these cases will you get more information that tomorrow there will be + 20 ° C ± 40 or ± 5 on the street. In this case, it is more important to get the limit at which it will fluctuate than the concrete value itself.

The longer the length of time, the more difficult it is to give an accurate forecast. Let us examine this in the experiment of Edward Norton Lorenz with the weather. The weather forecasting model is based on mathematical equations describing aero- and thermodynamic processes in the atmosphere. They are calculated using modern computers. However, once to speed up the calculations, Lorenz did not start the program first, but entered data from the middle of the previous calculation into it. He noted that the results of such a launch quickly began to deviate from those already received, forming a completely different forecast. It turned out that Lorentz did not enter the exact results of past calculations, but rounded up to 3 digits. The slightest difference in the input data led to a strong discrepancy between the results, over time, the so-called “butterfly effect”. People still do not predict the weather for a long time, not because they cannot calculate it, but because it is impossible to obtain absolutely accurate data. Each device has its own error, as a result, the inaccuracy accumulates and after 5 days a completely different forecast is made.

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8. The ludic fallacy . Describing this fallacy in the book, Nassim Nicholas Taleb asks two fictional characters the question: “If I tossed a coin of perfect shape 99 times, and every time an eagle fell out, what is the probability that the tails will drop out for the hundredth time?”. Dr. John replies that the probability will be 50/50. Fat Tony says that it is not more than 1%, since a coin of perfect shape simply cannot fall one side up 99 times in a row. According to Nassim Taleb, Dr. John made a ludic fallacy by transferring the ideal mathematical model to real life. And Fat Tony believes that 2 is a 99 degree rare event that will not continue further.

9. Barbell strategy . Nassim Nicholas Taleb used the Barbell strategy as a trader. Forecasting errors can be expensive, and risk assessment methods are imperfect, therefore, a strategy that is extremely conservative or extremely daring is needed. You should not invest in projects “with an average level of risk” (how do you know that it is average? Believe the opinion of experts?) It is better to invest 85–90% of the capital in the safest assets, such as government bonds, nothing is more stable. And invest 10-15% in something risky, preferably in a venture company. Just try to make as many of these “micro-investments” as possible; do not follow up on the one and only project you like. The more small investments, the higher the chances that one of them will pay off and meet a good “Black Swan”.

Instead of the general “average risk level”, you have high risks on the one hand and no risk on the other. In total, the same “average risk level” comes out, but with chances to catch the happy “Black Swans”.

10. Matthew effect – cumulative advantage. In other words, “The rich get richer, the poor get poorer.” The rich have money that they invest in different projects and make a profit, the poor spend all their money on the minimum necessary things and are not able to increase their free money because of their absence. Another example is that it’s easier for a well-known channel or blogger to increase the number of subscribers than a small one. The only thing that can change this injustice is a chance – a meeting with the happy “Black Swan”. Any person can become famous or rich at one moment and take a place on the podium. Therefore, it is important to be able to recognize the chance and grab it.

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In this book, Nassim Nicholas Taleb teaches one thing – how to avoid crossing the street blindfolded. Our world is full of chance and the unknown, learn to perceive it as it is, and not as it is convenient to perceive. Then many Black Swans will turn gray, and some of the “bad” ones will become “good”. The author shares his beliefs that it is preferable to lose than to miss a chance. The fact is that it is psychologically and intellectually difficult to embark on the path of trial and error and measure that strips of minor failures are an integral part of life. In the end, this is a trivial decision-making rule: insolence when there is the prospect of catching a happy “Black Swan” (failure means little), and extreme caution when there is a threat to run into evil. Do not let yourself be fooled by lengthy forecasts. To make decisions, they should focus on the consequences (which you can know), and not on the probability of an event (the degree of which you cannot know) – this is the main rule of the idea of uncertainty.

Of course, Nassim Nicholas Taleb is associated primarily with the book “The Black Swan. The Impact of the Highly Improbable”, which has become a bestseller. But in the book “Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets”, the mechanism of the appearance of the “Black Swan” effect is more seriously and professionally laid out.