Bvlletpoint

Author: Nassim Nicholas Taleb

File under: Philosophy, Big Ideas, Strategy

Executive Summary: The Black Swan by Nassim Nicholas Taleb (NNT), is book two in his five volume series called Incerto, which also includes including Fooled by Randomness, The Bed of Procrustes, Antifragile, and Skin in the Game.

This book is probably the most interesting book I have read so far in 2020, and I will be the first to admit that I did not fully understand some of the more complex discussions of statistics in the later chapters. However, that does not take away from the deep quality and thought-provoking ideas that are strung together throughout the book.

The main premise of the book is that people are generally blind to the impact of unforeseen events. In many arenas, but particularly in finance, we are trained to judge the future and estimate risks based on historical information. While this works most of the time, the inherent incompleteness of the historical information means that models will underestimate the likelihood of a major unexpected event.

These events are also more likely to have an extreme impact, both because they are unforeseen and because they lie so far from the norm. NNT, gives the example of a Turkey being weighed daily in the lead up to Thanksgiving. Each day the Turkey increases in weight as it is fed and life is good. If we were asked to esitmate the weight of the Turkey using only the historical information we had available we would not be able to predict that the Turkey would weigh exactly nothing after Thanksgiving.

The book not only expands on this theme in depth, and shows numerous examples of this Black Swan blindness that are pervasive in our society, but NNT also provides some useful and applicable advice for how to survive and thrive in a Black Swan world.

I found this book to be full of big, transformative ideas and its one I will certainly be
re-reading in the future.

B>llets:

• Humans have fooled themselves into thinking that we can use complex statistical measures to provide a level of certainty about the future.
• However, this hubris means we often underestimate the impact of unforeseen events and rarely plan for them. As a result, Black Swan events often have massive impacts.
• Not all Black Swan events are bad, and we can implement a ‘Barbell’ strategy to capitalise on positive Black Swan.
  • A Barbell strategy involves putting the majority of our assets into as close to no-risk investments (such as T-bills) while then also investing the remainder in positive Black Swan exposed industries.
• In some domains there is a disproportionate payoff from the unknown (such as venture capital investing, or scientific research) while the downsides are capped as you generally have little to lose.
• “Maximise the serendipity around you”

External Links:

• Nassim Nicholas Taleb’s Homepage
• Google Scholar Publications list – Nassim Nicholas Taleb
• Nassim Nicholas Taleb on Twitter

Great Read for: Learning, Strategy