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The Black Swan: The Impact of the Highly Improbable (Incerto) Hardcover – April 17, 2007
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Bestselling author Nassim Nicholas Taleb continues his exploration of randomness in his fascinating new book, The Black Swan, in which he examines the influence of highly improbable and unpredictable events that have massive impact. Engaging and enlightening, The Black Swan is a book that may change the way you think about the world, a book that Chris Anderson calls, "a delightful romp through history, economics, and the frailties of human nature." See Anderson's entire guest review below.
Guest Reviewer: Chris Anderson
Chris Anderson is editor-in-chief of Wired magazine and the author of The Long Tail: Why the Future of Business Is Selling Less of More.
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 its 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
In business and government, major money is spent on prediction. Uselessly, according to Taleb, who administers a severe thrashing to MBA- and Nobel Prize-credentialed experts who make their living from economic forecasting. A financial trader and current rebel with a cause, Taleb is mathematically oriented and alludes to statistical concepts that underlie models of prediction, while his expressive energy is expended on roller-coaster passages, bordering on gleeful diatribes, on why experts are wrong. They neglect Taleb's metaphor of "the black swan," whose discovery invalidated the theory that all swans are white. Taleb rides this manifestation of the unpredicted event into a range of phenomena, such as why a book becomes a best-seller or how an entrepreneur becomes a billionaire, taking pit stops with philosophers who have addressed the meaning of the unexpected and confounding. Taleb projects a strong presence here that will tempt outside-the-box thinkers into giving him a look. Gilbert Taylor
Copyright © American Library Association. All rights reserved
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Our brains are unable to accept unpredictability. We make up explanations for past events, in the false hope that we can then understand the future, though important things happen mostly outside the narrow corridor of normality. Like the turkey, who has been fed for so many days and projects a positive trend on a linear straight line. Thanksgiving is the turkey's Black Swan.
Taleb is a proper Popperian, which is certainly a good thing in my book. He is also to be praised for his aversion to Platonification. He admires Mandelbrot, which means less to me, but that is surely my fault. And he says he owes more to Kahneman than to anybody else in the world. I believe that and consider it a recommendation.
I do dislike his snotty comments on the Enlightenment and on operas, though. On the other hand, he has the originality to praise both Keynes and Hayek as true thinkers, while the likes of Samuelson turned economics into fraud with their pseudo mathematics and rational man models. I am particularly pleased with Taleb for this rant, since that was exactly my opinion when I was a student of economics. Looong ago.
The author recommends not to read newspapers and not to watch TV for information and interpretation. (I hope he doesn't oppose football news and the Sopranos.) Those details and facts cloud our understanding, and everyone else knows them anyway. He suggests to go to parties and pick up chance information from small talk.
For all his insights, the author is able and likely to make silly judgmental statements.
What about this one: he mocks people who use an elevator to go to the gym, where they use the stair master. Mr. Taleb, have you no practical sense? Don't you sweat if or when you work out?
Another one: he claims that loss of manufacturing jobs can go along with a general rise of living standards. Possibly so, but we are not told where that is happening. Certainly not in the US.
This book will not bore you, but it may annoy you a few times. I revisit it for the second edition and like it much better this time than last time. The new edition adds a lengthy essay and more footnotes, but keeps the original main text body intact.
For instance, in the case of the US financial crisis of 2007, a major focus of Taleb's, I have read several books that claim to explain and to have predicted the crisis, all coming from what I consider to be unfounded, and politically motivated, models of financial market competition and its regulation by the Securities and Exchange commission. However, this is surely not part of "human nature" because if you read the economics journals and many other books, the claims of "explanation" are tentative and muted, and there are no claims of "predictability." My own view is that the bursting of the housing bubble was completely predictable, its impact on the series of banking crises is explainable in hindsight, and if we had the information in 2006 that we have now (especially about auditing irregularities and the marketing practices surrounding the selling of subprime mortgages) we might have predicted the possibility of bank failures.
Taleb supports the validity of the "predictable' part of (c) by providing, at best, anecdotes. But the plural of anecdote, so the saying goes, is not data. I, for one, do not believe that there is a failing of human nature that propels to see predictability in hindsight where predictability prior to the event was absent.
"It is easy to see," says Taleb, "that life is the cumulative effect of a handful of significant shocks....The inability to predict outliers implies the inability to predict the course of history, given the share of these events in the dynamics of events." This is of course quite true, and I know of no one who has ever doubted this. However, Taleb goes on to say "But we act as though we are able to predict historical events, or, even worse, as if we are able to change the course of history." In fact, very few of the serious scholars I have known or known about has claimed the ability to predict the course of history. Moreover, we "act as though we are able to change the course of history" because we in fact can, through both individual and collective action.
Consider for example Taleb's treatment of the terrorist bombing of the World Trade Center in 2002. "What did people learn from the 9/11 episode? Did they learn that some events, owing to their dynamics, stand largely outside the realm of the predictable? No. Did they learn the built-in defect of conventional wisdom? No. What did they figure out? They learned precise rules for avoiding Islamic prototerrorists and tall buildings."
This is, of course, exactly wrong. The United States and other threatened countries reacted to the 9/11 episode by overthrowing the Taliban in Afghanistan, which had supported the training operations of Al Qaida. The Saudi's attacked and destroyed Al Qaida at home, and the US armed services began long-term planning for counterinsurgency operations around the world. The current regime in the US has mounted a quite successful attack on the international Islamist terrorism network. No one sane person claims to have "predicted" 9/11, and most involved researchers do not think we have even "explained" the rise of Islamist terrorism. But there has been strong reaction to parts (a) and (b) of the Black Swan trilogy, contrary to Taleb's argument.
Another of Taleb's claims is that social scientists have an incorrect and falsely optimistic model of risk. Almost all social scientists, he claims "for over a century, have operated under the false belief that their tools could measure uncertainty. For the applications of the sciences of uncertainty to real-world problems has had ridiculous effects; I have been privileged to see it in finance and economics....This problem is endemic in social matters." I believe that standard financial economics suffers precisely from such an incorrect model, but I do not know of any other important examples in the social sciences. Most important, this is not a failure of economic theory in general, but of a particular branch of economic theory---indeed, one that not even taught in economics departments (although it clearly should be, and will in coming years).
Taleb's distorted sense of social science leads him to make absolute absurd claims concerning the value of analytical modeling. For example, I have in my house ...a wall full of books on statistics and the history of statistics, books I never had the fortitude to burn or throw away; though I find them largely useless outside of their academic applications ...I cannot use them in class because I promised myself never to teach trash, even if dying of starvation." This is a completely incorrect assessment of the role of statistics in the social sciences. Statistical reasoning is quite central to all of social theory and the evaluation of evidence for and against particular social science models, including the evaluation of pharmaceuticals, modeling the demographics of disease, testing products for beneficial and harmful effects, and a host of others. Taleb's generalization from the weakness of standard financial economics to the whole of mathematical discipline is quite unwarranted. However, he does not stop there. All of academia is tarred with his brush of hypocrisy and irrelevance. "...almost all academic papers," he claims, "are made to bore, impress, provide credibility, intimidate even, be presented at meetings, but not to be read except by suckers (or detractors) or, even worse, graduate students." Note that he claims not simply that academic papers "bore," but that is what they are made for! And he claims that academic papers "are not to be read except by suckers"! Taleb's writing is filled with unsubstantiated and improbable statements of this type.
To his credit, Taleb offers "Ten Principles for a Black Swan Robust Society." Some of them are quite reasonable, and are indeed part of the solution to preventing financial crises in the future, although their relevance to other improbable event scenarios is questionable. Principle 2 says that there should be no "socialization of losses" and "privatization of gains", Principle 4 says people in sensitive positions should have the proper incentives to carry out the duties, Principle 6 says that ordinary citizens should have simple and useful financial instruments at their disposal, and ". Complex financial products need to be banned because nobody understands them, and few are rational enough to know it. We need to protect citizens from themselves, from bankers selling them "hedging" products, and from gullible regulators who listen to economic theorists." Principle 7 says that Ponzi schemes should be outlawed and Principle 8 says that we must legislate against the tendency of financial institutions becomes overleveraged.
Most of Taleb's suggestions are quite reasonable, but they do not depend on the Black Swan syndrome. Most economists would certainly subscribe to Taleb's principles, although a couple are quite difficult to implement, such as Principle 1, which says that. "Nothing should ever become too big to fail."
I did not like this book at all. Taleb is pompous and arrogant, making wild accusations that cannot possibly be supported by the fact. Moreover, there is nothing new here, although if you have not thought before about the vagaries of history, you might find many eye-opening episodes described here.