Customer Reviews

The Blank Swan: The End of Probability

5 star:		(10)
4 star:		(2)
3 star:		(3)
2 star:		(1)
1 star:		(6)

 

 

I am relieved to finally find a book that deals with Black Swan Events in a new way. Ayache brings a reverse-probabilistic perspective: instead of considering that a price is the result of probabilistically derived expectation, he reverses the issues and investigates these artificial constructs as "probabilities" and "expectations" as secondary, derived, fictitious concepts that we bring about to explain prices, decisions, and other things.
This, of course, is just the beginning, so one has to be understanding about the speculative aspect of the effort --so view this as a gutsy look at the "end of probability" and how we will need to envision the world once we get rid of this artificial, antiquated tool.
I am also glad to see that those of us trained in the trading of options can have views original enough to influence the philosophy of probability and the philosophical understanding of contingency.

Nassim Nicholas Taleb, author The Black Swan

This book it's a joke. It's written in a pseudo-philosophical jargon that completely obscures the poverty of ideas it conveys and that for the most part are bad rumination of other books. As an example of the voidness of this book please read the ridiculous section in which he tries to summarize a Tintin comics (Vol 714 pour Sydney).
If you are a philosopher and desire a good philosophy book read "Sein und Zeit" by Heidegger; if you are a quant and want something new have a look at "Path integrals in quantum mechanics and financial markets" by Kleinert; if you are an investor take "Security analysis, 2nd Edition" by Graham and Dodd; if you are trader maybe you'll find more useful to re-read the "Truth of the stock tape" by Gann. But if you like comics read Hergè by yourself.
The author wrote in some blog that his "ideas" are so advanced that it will take years for people to understand them (I quote literally: "I don't expect my writings to make sense to you immediately; they probably won't before a few years"). He is clearly a modest guy.
I think that all clever readers have already realized what is here to be understood. Nothing, unfortunately.

Before I write my review, know that I'm not some tenured professor of postmodern/continental philosophy or sipper of ultra-super-duper, non-fat, double-soy-mocha cappi-latte thingies in some Parisian cafe with other quasi-intellectuals. I'm a shockingly lazy 20-year-old full-time student (Spanish and Arabic major) who works two hourly-wage jobs and spends waaaay too much of his very limited supply of money on books. Everyone complaining about the difficulty of this book merely didn't give the patience the book deserves. I'll try to help these childish "mature grown-ups" a bit.

After a very odd sequence of events, a sequence of "Black Swan" events in my life, I was lead to Taleb's 'The Black Swan: The Impact of the Highly Improbable.' I loved it. I read Taleb's other two non-technical books. Loved them. I'm a HUGE fan of Taleb. The dude's my hero in more than one context, and having met plenty of celebrities and Rock stars, all of them boring and none worth my time, Taleb is one of the few "celebrities" I would actually gush over if I met him. Having said that, when I found Ayache's book, I flipped out, probably squealed like a little girl, and immediately ran home and started reading. Oh. My. God. Hard reading, but holy shiznit this book is awesome.

The book's writing style is a bit difficult before you know how to read it, I admit, but having since had little chats with the author, I find the language is unavoidable. To help you out a bit, here are a few inadequate translations of terms:

"Debt" = Belief in possibility, being bound to the past. Also goes by "ruins" and other names in the book, depending on which of the four parts of the book you're reading. I suggest reading Part 4 first.

"Equity" = Mediation of contingency, looking to the future. Also goes by (sort of) "writing," among other names. Equity and writing aren't necessarily synonyms, but until you see how they're used in the book, you can treat them similarly (due to their relationship) until you discover their relationship's dynamics.

"Conversion" = Going from debt to equity, from looking to the past to writing the future. The point of this book is the conversion.

"The market" = Loosely speaking, it means "reality," or perhaps our way of perceiving it. This is the hardest term to simplify or "translate," but how it's used in context of the book makes the term easy to understand.

"Price" = Again, loosely speaking, let's call it "effect of contingency on 'the market'." Let's call it the impact of the Black Swan event, for simplicity's sake.

These are only a few of the book's terms, but the ones used the most. My overly simple translations are only to help those get started, and giving more adequate explanations would require me to write the entire BLANK Swan in this review, like Pierre Menard wrote the Quixote, right? The fact that I have to even (inadequately) simplify those terms is sad.

Okay, so imagine some Black Swan event happens, the Black Swan being some context-changing event. The Black Swan causes us to panic, searching for the new context, the new way to understand reality and our role in it. Let's look at the market (the market-market, not Ayache's "the market" yet). The very job of the market-maker, the writer of options, is to be shoved into the correct (market-related) context by that event, by contingency. When something happens, he has to evaluate and reevaluate the prices of new options, a process that absolutely must be founded on the writing/publishing of "exotic" option prices, those of an order of complexity above the simple "vanilla" options whose prices he's trying to find. Basically, he has to write/create/publish the price of a not-yet-traded complicated option in order to find the correct price of the simpler option. So, in the crazy, "unexpected," high-impact event, the market-maker's writing is what shoves him into the right context, instead of running around like a chicken with his head cut off like everyone else does. Now look at this process in a broader philosophical context, and you'll start to get this book. This explanation is WAY simplified and therefore inadequate and unfaithful to the book, but if you understand this paragraph to some extent, then you can enjoy this book.

The true genius of the book really hits you at the end, when Ayache explains that the market-maker's role, and you see that the whole book, the whole of 'The BLANK Swan: The End of Probability' IS the writing of the "exotic," the more complex. Let's call Taleb's 'The Black Swan' a Black Swan event, the ideas presented being the simple vanilla options needing a price. Ayache's 'The BLANK Swan' is the publishing of the more complex, not-yet-"traded" exotic options, the foundation against which we build this whole edifice of mediating contingency. THE BOOK IS AN EXAMPLE OF WHAT THE BOOK IS ABOUT. It's really, really quite clever. Like. Really clever. Really.

Now, I'm purty smart, sure. And my life's pretty good, being that I had the time to give this book some patience. I know three or so languages; I have two steady sources of income, my own health insurance; I know plenty about plenty in subjects like philosophy, linguistics, psychology, economics and markets, medicine, mathematics, even quantum physics; I play a few musical instruments; I have zero debt; pay my own bills (-I'm in college, so this is kinda impressive); got a cool car (GK Tiburon -very proud); I have no specialty in skill or knowledge, and I'm very comfortable in time and (mostly so in) finances (at least, for an easily bored college student). I had no experience in abstract postmodern/continental philosophy, Deleuze or Hegel or Massui or whoever, but I still got this book. To those who opened this book, got confused, and wrote that it's the author's fault, are you REALLY going to accept that you're dumber than a 20-year-old smart/\$$ who works two crappy hourly-wage jobs and drives an 8-year-old Hyundai? Of course not, so go pick up the book and BE PATIENT. Geez. The reviews of this book drive me nuts. It's like reading complaints dictated by toddlers.

I wrote his at Ayache's request; he wanted someone who had the patience to understand the book help drown out the noise of impatient toddlers (my words, not his). But having got here and read the reviews, I ended writing this not for Ayache's sake, but rather for the sake of his book. It deserves the patience required, trust me. It's genius and, perhaps (to me) more importantly, really very clever.

I love the books "The Black Swan", "Fooled by Randomness", and "Against the Gods". Those are great books, insightful, and easy to read.

However, since I have only average intelligence, I have to read each sentence in this book two or three times, and then think about it. So this is a very slow read for me. I'll illustrate what I mean. For example, on page 5 we have the sentence, "Contingency is the writing/trading thread that we keep pursuing despite the fact that the context has been saturated by replication." That's a great sentence. Unfortunately, it took me two days of thinking before I understood it. This is an interesting book, but it is not a leisurely read for the average Joe.

On page 196, the author has a quote: "I, too, seek an unreadable book ... a book incapable of being read straight through, even, to bring reading to stop" That this quote should so absolutely summarize this book, cannot be by chance. Trying to read The Blank Swan straight through is a frustrating experience and needlessly so in my view which is the reason I rated it 3 stars. As it stands, it is a book that needs to read in small quantities and not in chronological order, but I believe this is how the author intended it. Further too this point, there are a few aspects of this book that make it very tiresome to read. First, it is highly repetitive. On a banal level, the author refers to "the last part of the book" about 50 or more times in the first two parts of the book (there are four parts). In some cases, the author will start a paragraph saying "As will be shown in the last part of the book", only to finish the paragraph "(see the last part)". These are are not word for word quotes, but capture the meaning. The book is also repetitive in that it addresses the same topic from a very slightly different point of view multiple times. This means you have to read essentially the same thing over and over again, only at the end to get 90% of the same message. As a historical process, it's clear to see why the book feels so repetitive, because many of the chapters were published separately before coming together as a book.

To continue to the content of the book, I think the effort is worthwhile, for those predisposed, to understand what is being written. It is mostly a book on philosophy and not the markets or derivatives. But it does make a few points about the market which can help someone gain insight into its behavior. To speak to the philosophy, the book borrows most of its foundation from Gilles Deleuze and to a lesser extent Quentin Meillassoux and Alain Badiou. The author may say the latter are more important to his work, but to the user of this philosophy rather than the creator, the work of Deleuze in my view is more important. A problem with the book arises here because the philosophical concepts are not well explained. They assume a knowledge not only of Deleuze et al themselves, but also of philosophy in general. This means the book inhabits a nebulous middle ground in terms of its intended audience.

The meaning in all this is that a reader of this book should expect to have to read several other books in order to really understand what the author is talking about. Herein lies my biggest criticism of the content of this book. If you take the time to read Deleuze, Meillassoux, Badiou; and to add one to the list, Bergson; and also to read a few of their popularizers such as De Landa, your time will have been better spent than reading this book. There just isn't enough synthesis here to make the whole of The Blank Swan, better than the sum of its parts which is these philosophical works.

In light of the above criticisms, I have still given the book three stars. The reason is that there is a lot here and forming a full picture of it could in fact take a year or more at my pace. I fault the author for making the reader really assemble the concepts in the book themself, but better to have what is here than nothing at all.

In need of summary, let me end the review with a few comments. This is not a simplistic book, it will take much mental effort and time to get anything out of it. In addition, it can be tiresome to read because it is needlessly repetitious. Certain investor types will get something out of it, but not a specific formula for a particular investment strategy. On the other hand, this book with change my portfolio and what more can be said? I hope this helps a little in judging whether to read the book. It's probably some time before a full review of this book can be written, at least by me.

I initially wrote much longer version of this review, but then decided (unlike this book) that it was better to get to the point. Reading The Blank Swan is a truly painful and masochistic experience. The fundamental ideas are made nearly impenetrable by a combination of excessively long, convoluted sentences, willfully obscure vocabulary, and just plain bad writing. If the ideas were worthwhile, it might be worth the trouble but there are few here that rise to that level.

The overall point appears to be that complex systems can never be precisely modeled using standard statistical methods and mathematical constructs. This is not news, and it hardly justifies nearly 500 pages to explore the idea poorly. To make matters worse, the author offers no obvious conclusions or recommendations.

I have a German tongue and I am not a philosopher. How can I write a review?
I have read this book with the eye of a quant finance mathematician.
In short, it is a must-read book for quant finance people (change or even influence the way we think about derivatives) and an enjoyable-read for people who like unconventional highly original thinking and writing styles. Some might say, not for holiday reading, but I am not so sure. For reading books that I could not write, I often chose a "beach".
Yes the thoughts behind this book are challenging.

My compilation of the utilities I "take": in this book Dr. Ayache gives deep insight into the materialization of contingency as a price. A contingent claim (derivative) is not a contingent claim, if it is not dynamically replicable (this has much to say about , say, CDOs being not a contingent claim).
Probability is not a theory for predictive modeling but explanation and its incarnation in a model (like Black Scholes) is a guide (I would even say it was a game rule unmasked 1987 as unreliable in its innocent form). Looking back requires recalibration. I let speak Ayache here: " ..... It is only because the dynamic trader has to be hedging continuously his position in the option and therefore is following the option continuously; it is only because of this that he is basically entitled to compute something we call implied volatility - and implied volatility is the simplest instance of recalibration ... recalibrating the BS model to the option market price ...."
So, if price is the absolute, everything else is about inverting. And inverse problems often are ill-posed and challenging for mathematicians.

But I also have read chapters as nice-to-have: especially the Sidney chapters, flying with thoughts.

EA believes he possesses the instinct of a scientific revolutionaire, when all he is doing is to fiddle with the concept that probabilities change over time. Really sad to see such a thick book on such a thin topic. The style is arrogant. Read Nobel Prize Engle if you want to look at dynamic correlations, don't waste a penny for this man who thrives on the thought that some people might think he is a genius. The quant finance community is not so stupid as you believe Mr EA!

I just started reading it and found it very interesting. I am a big fan of Taleb and his endorsement made me buy this.

The basic premise of the book is that Price of stock or an option cannot be based on probabilities but based on contexts. So probabilities are meaningless since contexts keep changing.

So in lay man terms if a stock is at $50 based all the available information creates a unique context and assigning probabilities is only valid for that context.

Now macro or micro economic variables change then we have new contexts created and original probabilities are meaningless then you need to create a new set of probabilities to model the new scenario.

These contexts keep changing a lot then these probabilities keep changing hence becomes meaningless thus the name blank swan.


But the writing style is very difficult and need to read to few times to sink in.

It may be difficult to read but the pay-off is big, and coming back to it is always refreshing. I agree with the author that the impact of his ideas will be felt only with the passage of time but that time will come surely. Highly recommended.