Ride a Black Swan

Nicholas Nassim Taleb makes it easy on us. At the beginning of his book The Black Swan he goes ahead and tells us exactly what its all about:

To summarize: in this (personal) essay, I stick my neck out and make a claim, against many o four habits af thought, that our world is dominated by the extreme, the unknown, and the very improbable (improbable according to our current knowledge)–and all the while we spend our time engaged in small talk, foocusing on the known, and the repeated. This implies the need to use the extreme event as a strating point and not treat it as an exception to be pushed under th erug. I also make the bolder (and more annoying) claim that in spite of our progress and the growth in knowledge, or perhaps because of such progress and growth, the future will be increasingly less predictable, while both human nature and social “sciences” seem to conspire to hide the idea from us.

Taleb’s book was published in 2007. So what? Well I’ll tell you what. His basic contention, that we live in a fundamentally unpredictable world (at least as it concerns the socially constructed parts of it, which means pretty much all of it), does not exclude economics, or the markets. In fact, he goes to great lengths to show that all the hedging, and risk management, and portfolio building that goes on in finance–from your neighborhood stock broker up to the high-flyers on Wall Street–is pretty much bullsh*t and setting everyone up for a big surprise one day.

Well, that day came w/ this whole mortgage-backed-economic debacle we are in now, and this book (published in 2007) basically predicted it.

But the author, who spent most of his working life as a trader on Wall Street, certainly wouldn’t take credit for the prediction. But he probably would take credit for being prepared. That’s kind of the crux of the book.

The Black Swan is rife w/ concepts which form a fairly coherent philisophical view that just may change the way you live.

At the heart are two worlds. On the one hand, we have Mediocristan, a predictable place described by common notions of probability and statistics. Unusual things happen, but they don’t affect average conditions. The natural sciences tend to study these phenomena and build physical laws  out of them. On the  other hand we have Extremistan, where the “black swan” lives. The black swan is an improbable event with outsizes impact. Its onset really shakes things up, even to the extent that it alter the world. The result is that, in Extremistan, the way things are now are no good indicator for the way things might be, since one never knows when a black swan might swoop down and change it all.

For better or worse, humans don’t really live their lives in Mediocristan (though some features of our day-to-day share some of its features); we live in Extremistan. As Taleb puts it:

Note that before the advent of modern technology, wars used to belong to Mediocristan. It is hard to kill many poeople if you need to slaughter them one at a time. Today, with tools of mass destruction, all it takes is a button, a nutcase, or a small error to wipe out the planet.

The problem with living in Extremistan is that Donald Rumsfeld was right.

There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don’t know. But there are also unknown unknowns. There are things we don’t know we don’t know.

But as Taleb shows, we tend to forget about the unknown unknowns, or pretend they don’t exist. We mis-use mathematics and and theories and history to give our selves the false sense of knowing what’s going on in our social world (examples include the effects of natural disasters on our built environment, the fate of financial markets, social trends, deaths from terrorism, the evolution of technologies), when we really don’t, and probably can’t. When black swans arrive we are caught unawares , often with disastrous consequences.

There are two reasons to read the book. One: for the rush of discovering in detail how the way everyone thinks about the world is a little bit wrong. Two: for some tips for how to deal w/ a life dominated by lurking uncertainty. One example is to avoid specialization. Another is “barbell strategy,” or being hyperconservative and hyperaggressive, instead of mildly agressive or conservative. There are more, but you can read.

Okay, there’s one more reason to read this book. Unlike nearly every other non-fiction book I’ve ever read, the author mixes in the facts at hand with autobiography, fictional vignettes, philosophical speculations, and humors asides — all with a entertaining self-righteous irreverence–that almost puts the book in the same company as wild post-modern novels.

It’s not boring. And its a little scary.

But don’t worry, afterward you can retreat into the fantasy of Mediocristan, with the very not-mediocre  “Ride a White Swan” as your soundtrack, courtesy of the even less mediocre Marc Bolan & T-Rex: