The Black Swan: The Impact of the Highly Improbable
by Nassim Nicholas Taleb
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There are great uncertainties when trying to predict the future, even using our accumulated knowledge of the past. Some examples of these unpredictable “black swan events” are World War I, Black Monday, and the 9/11 attacks. One suggestion for investors who want to hedge against black swan events is to put most of their money in extremely conservative investments such as Treasury bills, with a small percentage of their money in aggressive investments such as options and/or angel investments.
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The author explains the definition of a black swan, an event which is extremely hard to predict based on prior information. Some examples of black swans are the necktie, Harry Potter, the 9/11 attacks, and the computer, all events of “low predictability” and “high consequence.” He discusses something he calls “retrospective distortion”; that is, the mistaken feeling we tend to have, after a black swan event, that “we saw it coming” in spite of its unpredictability.
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The author explains three common systems: fragile, robust, and antifragile. Fragile systems are vulnerable to shocks and disruptions and tend to fall apart in the face of problems. Robust systems are designed to maintain their integrity, like a person with a fantastic immune system. Antifragile systems actually benefit from volatility and disruption, having the capacity to adapt, evolve, and grow even stronger in the face of challenges. Because black swan events are unpredictable, businesses and financial systems should aim to be not simply robust but antifragile.
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Explaining that there is no such thing as “too big to fail,” the author discusses scaling using the example of a village. When you double the size of a village, he says, you change the biological effect of human interactions. A politician making bad decisions and misusing taxpayer money in Washington does not have to look his victims in the eye. However, the leader of a village sees his constituents at church on Sunday, has to make eye contact with them, and will feel shame.
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Nassim Nicholas Taleb, a Lebanese-American former derivatives trader and mathematical finance practitioner, is now an essayist and scholar specializing in randomness, probability, and uncertainty. Taleb has served as a Distinguished Professor of Risk Engineering at NYU's School of Engineering since September 2008. He holds a PhD from the University of Paris and an MBA from the Wharton School.
Other books by Nassim Nicholas Taleb
Publications
The Guardian: The new sage of Wall Street
The New York Times: Possibly Maybe
Forbes: How To Apply The 'Black Swan' Theory In A Technology Startup
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