Tip of the Week #126                   Tip Index

Go to the Prior Tip  Antifragile by Nassim Taleb
Go to the Next Tip    Car Loan Interest Rate
Go to      Tip 094     Fooled by Randomness by Nassim Taleb
Return to
MaxValue Home Page

The Black Swan: the Impact of the Highly Improbable by Nassim Nicholas Taleb,
2007, Random House, New York, 367 p.

I read this book several years ago and failed to write a tip about it. This is largely superseded by Antifragile. However with the abundance of ideas, Black Swan is worth reading as well (or again). He talks extensively about fragility, though he had not yet recognized antifragility (see prior tip).

The theme of the book is our blindness to randomness, particularly where there are large deviations. We focus on small deviations and outcomes and miss the possible large events. Black Swans are extreme, unforeseen events that explain most everything in our world. (Europeans thought black swans were impossible or not to exist until some were discovered in Australia in 1697.) History does not crawl, it jumps! Recent examples: the 9/11 terrorist attack and the 2004 Indonesia and 2011 Fukushima, Japan, tsunamis.

In contrast, most everything studied in social life focuses on the normal, "bell curve," distribution. Extreme outcomes are "noise" to be ignored. The illusion is that we think we know more than we know. Taleb calls this "Great Intellectual Fraud."

Humans suffer from triplets of opacity:

Taleb obtained a PhD from the Wharton School of the University of Pennsylvania, USA. He quickly gravitated to a specialty in rare and unexpected events. Afterward graduation he worked as a trader for an investment bank (Credit Suisse First Boston). "I was convinced that I was totally incompetent in predicting market prices—but that others were generally incompetent also but did not know it, or did not know that they were taking massive risks (p. 19)." So he focused on exploiting opportunities for mispriced derivatives without exposure to the rare event.

This is an engaging book. It will change the way you think about risk

 There is now a 2nd edition in paperback. As of this writing, Amazon's bestseller rankings for the paperback are:
#1,368 in Books
#30 in  Books > Business & Investing > Management & Leadership > Management and
#35 in Books > Politics & Social Sciences > Philosophy

—John Schuyler, Apr 2013

Copyright   2013 by John R. Schuyler. All rights reserved. Permission to copy with reproduction of this notice.