The Black Swan: The Impact of the Highly Improbable

The Black Swan The Impact of the Highly Improbable by Nassim Nicholas Taleb (based on 378 customer reviews)

(Hardcover)
Edition: 1
Author: Nassim Nicholas Taleb
Publisher: Random House

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Most useful review as voted by customers:
906 out of 978 people found the following review helpful.
Review Date: 4/19/07

Lost in Extremistan with nothing but a Bell Curve

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. Whereas the first book is a literary essay on the irrational confidence that pervades financial markets, The Black Swan expands the discussion to all aspects of human life. And if the first was a book about finance, this is a book of serious philosophy.

This book 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, 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 the importance of supposedly crucial "indicators" like housing starts and consumer spending. This is a shockingly 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 be 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 waying 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.

684 out of 762 people found the following review helpful.
Review Date: 4/26/07

Many important ideas, many flaws that detract from the message

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 in particular integrating different material 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 books 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 there 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.

96 out of 106 people found the following review helpful.
Review Date: 7/6/07

serious subject, entertaining writing - a black swan

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.

65 out of 91 people found the following review helpful.
Review Date: 4/18/07

Fun to read. Making the mind working

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 (at least certified by a zillion buyers of "Fooled by randomness") 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.

23 out of 31 people found the following review helpful.
Review Date: 4/22/07

An Improbable and Wonderful Book

Not since Gregory Bateson has a writer elucidated that how we look at the world can cause focus on the wrong things and thus be drawn to irrelevant, incomplete or incorrect conclusions that carry consequences both large and small. For Bateson focus needed to be on 'relata' rather than things. For Taleb, it is studying extremes rather than central tendencies.

For me, both add immeasurably to the discussion as to how the world may actually work. Thank you Mr. Taleb for taking the time and trouble to engage us in explanation and exposition.

23 out of 29 people found the following review helpful.
Review Date: 4/22/07

An Excellent Blend of History,Philosophy,Probability,Economics,Statistics,and Mathematics

Taleb(T)has written an excellent book that should be required reading for every social scientist who bases his theoretical analysis, empirical work,and applied policy recommendations on the presumed use of the normal probability distribution.The use of the Normal distribution ,usually applied by social scientists,especially economists and psychologists, without any type of goodness of fit test, to their time series data,is the major reason for the predictive and forecast failures that occur with regularity in the social sciences.Taleb's message is that accurate and reliable prediction in the social sciences is not possible because of what Schumpeter called the " regular irregularity "problem of not being able to know,due to changing expectations,what the process or mechanism generating the stochastic time series data is.The social data being generated by the interaction of the ever changing mix of relevant social variables over time is not stable,uniform,and homogeneous over time due to constant financial, social,technological,political, and economic innovation and advance(or obsolescence and decay).Taleb's message is practically identical to the one that John Maynard Keynes delivered to Jan Tinbergen in 1939 and 1940 in their exchange in the Economic Journal over the logical(inductive and analogical) foundations of econometrics.Tinbergen sought to use the method of multiple correlation and regression based on least squares.Unfortunately,least squares is based on the assumption of normality( assume a normal probability distribution).Tinbergen,in his lifetime,never provided a goodness of fit test demonstrating that the time series data was, in fact,normally distributed.

At a much deeper philosophical and epistemological level,T explicitly shows how the social sciences ,over the last 130 years, have failed to grasp the limitations imposed on these fields by Hume's problem of induction.All social sciences have the severe problem that the interactions of human beings with each other in their physical environment constantly creates new combinations of possible outcomes that are not predictable or forseeable.T is correct that this problem is enormous and can't be dealt with by assuming some kind of probability distribution a priori,especially when the generating mechanism for the outcomes is constantly being changed by the very interactions of human decision makers with eachother brought about by reactions to previous forecasts or predictions that may have had some degree of reliability in the past.

I have one minor bone to pick with T.This is T's decision not to explicitly make use of the extremely powerful results presented by Keynes in 1921 in his A Treatise on Probability.Keynes spent all of Part III of this book on Hume's problem of induction and his partial solution in terms of an interval based approach to probability combined with his concept of the weight of the evidence,w.w measures the degree of the completeness of the relevant evidence upon which the probabilities are being calculated.Keynes always sought to differentiate between the highly improbable and the highly uncertain(or highly ambiguous a la Daniel Ellsberg).The highly improbable becomes a severe problem in all social sciences precisely because the weight of the evidence in these fields is relatively low in general.w must have a weight of 1(w is defined on the unit interval between 0 and 1,0<=w<=1) in order to support the claim that the probability distribution has a particular shape(i.e.,a bell shape)that will be applicable in the future.The presumption that the shape is bell shaped rules out BOTH the highly improbable(which Mandelbrot has shown for over 50 years occurs much more often than would be predicted by a normal distribution)and the highly uncertain or ambiguous.The use of Keynes's TP would have added support to T's sound conclusions.Perhaps he is planning to write another book in this area which would explicitly take Keynes's work into account.

T has demonstrated that the social sciences,particularly economics and psychology, are a mess.These fields assume continuity,independencs,and stability,as well as the existence and uniqueness of supposed solutions without providing any empirical/experimental support for such claims.The entire foundation for social science must be rethought.The tool kit presently in use is not correctly measuring and/or describing what is actually occurring.Unfortunately,just as Keynes and Mandelbrot have been rejected,so will Taleb.This is because coming to grips with failure requires that the current practitioners realize that their methodology is not working and decide to change.This is precisely what these fields refuse to do and will continue to refuse to do.They will simply continue to catalog an exploding number of anomalies that future researchers will supposedly have to deal with.

22 out of 30 people found the following review helpful.
Review Date: 4/21/07

A beautifully-reasoned and brilliantly-written antidote to epistemic arrogance

In The Black Swan, Taleb uses vivid examples and elegant prose to dispose of many of the assumptions that drive contemporary discussion of subjects as diverse as economics, art and philosophy. The Black Swan is a well-reasoned, engagingly-written and profoundly serious book that practitioners in any discipline would benefit from reading and re-reading. If you prize independent thought and genuine curiosity, buy this learned book.

7 out of 9 people found the following review helpful.
Review Date: 4/21/07

The Highly Unlikely Is Likely

"The Black Swan" has a highly-developed and stunning imagery within its title. The symbolism of the expected white swan and the shock of the unexpected black swan is the summary of the book (which at 400 pages could have used an excellent editor to trim 50-75 pages). Mr. Taleb takes aim at those (especially in the financial markets) who predicts the likely outcome and how, we in society, rarely examine the unpredicted. He argues that knowing the future is unknowable. He has covered this topic before in his 2001 best-seller, "Fooled by Randomness." Overall an interesting book.

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