The Black Swan: The Impact of the Highly Improbable


The Black Swan: The Impact of the Highly Improbable
Series: Incerto
Publisher: Random House
Published: 5/15/2007
A black swan is a highly improbable event with three principal characteristics: It is unpredictable; it carries a massive impact; and, after the fact, we concoct an explanation that makes it appear less random, and more predictable, than it was. The astonishing success of Google was a black swan; so was 9/11. For Nassim Nicholas Taleb, black swans underlie almost everything about our world, from the rise of religions to events in our own personal…

Book Summary - The Black Swan: The Impact of the Highly Improbable by Nassim Nicholas Taleb

Key Insights

The events that shift the course of history for an economy, a country, or the whole planet are known as “black swans.” They cannot be predicted, although you can explain them in retrospect.

Humans don’t generally do well with chaos, randomness, and unpredictability, but the things that make the biggest impact are not the ones we see coming. Our brains try to make sense of the information and trick us into seeing patterns and causality where they don’t exist.

Black swans aren’t necessarily bad, but the things that rock the world (think 9/11, World War II, pandemics) cannot be predicted. It may be hard to accept that you can’t see the big, terrible things coming.

You have to learn to live with the unknown unless you want to delude yourself. Look for good black swans and appreciate the beauty of the randomness around us.

Key Points

Not all swans are white, even if that’s the only kind you know.

So, why are these unpredictable events called black swans? For a long time, Europeans were taught that swans are white birds. It makes sense because this is all they knew. If you only see birds with white plumage, it would be reasonable to conclude that that’s what they all look like.

Then, in 1697, the European view of swans changed. Willem de Vlamingh, a Dutch explorer, landed in Australia. Many of the animals there were unlike the ones seen in Europe. Kangaroos, koalas, and duck-billed platypuses are unique to the Land Down Under. Then, there was a bird that looked just like a swan. Except, it had dark feathers.

These black swans were never imagined by Europeans. It seemed improbable that a creature identical to those around them but with different colored feathers. Of course, once you know they exist, it is easy to explain why the black swans are there.

You don’t have to see a black swan for it to exist.

The metaphorical black swan is unpredictable, consequential, and explainable only in retrospect.

Like its avian counterpart, a black swan event can exist even if you don’t see it coming. In fact, that is one of the hallmarks of a black swan. They are unpredictable. They are not likely or probable events, and they may not even seem like real possibilities. But they happen.

And when they happen, they’re a big deal. Consequences are also a key component of black swans. When there’s a black swan, it is impactful. Think about the terrorist attacks on September 11th. The tragedy of that day was hugely impactful on its own, but there were also large changes to the world after ranging from international conflict, the way we travel, and more.

Finally, black swans can be explained after the fact, but that’s with the benefit of hindsight. Take a stock market crash. Yes, they happen from time to time. However, they do not come on a predictable schedule. After one happens, you could analyze the circumstances leading up to the crash to explain it. But, until the crash happens, you can’t predict that it’s coming.

Just because something feels random doesn’t mean it is a black swan.

Taleb describes two fictional lands: Mediocristan and Extremistan. Depending on what environment you’re in, you could see ordinary randomness or the extraordinary randomness of black swans.

Mediocristan has predictability. Events and probabilities can be presented using traditional statistical modeling like a bell curve (also known as the Gaussian distribution). Even where something seems extraordinary or random, the bell curve captures it. These seemingly extreme occurrences in Mediocristan are just outliers on the edges of the bell curve.

Extremistan defies the bell curve and traditional modeling. In that world, an extraordinary event or person would completely alter the distribution. Describing the average or median is meaningless when you have such extremes.

To understand the difference between Mediocristan and Extremistan, it comes down to where natural limits occur.

Take, for example, height. A 7-foot-tall person may seem like an anomaly, but they are not a black swan. There is a Gaussian distribution that captures height and really tall and really short people are just outliers. Average or median height is an accurate representation of the population.

Now, consider wealth or income. There may be some subsets of the population where the average is an accurate representation. But if you throw in someone like Bill Gates, the entire curve is distorted. Imagine two people: a typical, non-wealthy person and Bill Gates. The average wealth of the group is around $25 billion. But that doesn’t tell you anything except that Bill Gates is extremely rich.

Height is in Mediocristan. Bill Gates is in Extremistan.

Our brains try to impose order on chaos.

These days, the amount of information that comes at us may feel like an assault. Fortunately, our brains are adept at simplifying the complex into something we can process and understand more easily.

Our brain mechanisms are the product of evolution. We come from the hunter-gatherer societies living on the African savannah hundreds of thousands of years ago. In order to survive, the brain is able to simplify large amounts of information and only focus on the necessary pieces.

While the byproducts of evolution can be great for avoiding overload, our brains aren’t ideal for all cognitive functioning. The shortcuts that we take without realizing it can result in misleading or inaccurate conclusions, especially when thinking about black swans.

No matter how you spin the story, it may have just come down to luck.

One of the reasons we don’t see black swans is because of the way in which they are explained in retrospect. Known as the narrative fallacy, the story told about something crazy or impressive that happened is often connected to specific moments. Rarely does a narrative acknowledge that it could have been luck.

Think about the stories of someone successful. The profile in a business magazine wouldn’t be a compelling narrative if it just said, “he got lucky.” Instead, the profile tells you about his humble roots or ambitious parents, the tragedies or hardships, and the stroke of genius and effort it took to build his empire.

The issue is that this ignores the presence of luck. If you want to know if chance was involved, compare the successful person to others. Are people with similar backgrounds and qualities in similar positions? If not, then chance was involved in the success story.

To not fall into the narrative fallacy, you need to understand that the retrospective explanation cannot predict how things will turn out in the future.

People generally seek out evidence that supports their theories.

Another shortcut our brains take creates a confirmation bias, which means we naturally seek out evidence that confirms what we already believe.

You don’t see a black swan’s randomness if you’re only looking for proof that conforms with what you already believe. If you’re analyzing history, you may jump to just the pieces that fit your theory of what happened. Once you take into account all the information that doesn’t fit your theory, it becomes more clear how random everything is.

“Experts” are just nerds and herds. Nobody can predict the future.

People look to experts for help, doubling down on the fallacies that keep us from seeing the world as chaotic chance all around.

If you think of the world in terms of the tools and models that you know, you’re a nerd according to Taleb. You know bell curves, so you see bell curves everywhere. It is easy to write off everything that doesn’t fit the bell as an outlier.

Herds have some sort of knowledge or advanced skills, but that doesn’t help with the extreme phenomena of black swans. In some fields, it matters. You probably want your brain surgeon to be an expert in his line of work. But a herd of people that all studied the same things are just prepared for that work and not the extraordinary black swan.

Statistical models are tempting. The predictions look like they’re rooted in facts and figures, drawing logical connections. But statistical models cannot fit every situation. They may have what looks like a forecast, but even the best nerds and herds can’t see the black swans coming.

For example, when investing in the stock market, it is undeniable that there is a lot left up to chance. Still, people look to experts for their insights on what the next big stocks might be or to warn them of the drops. Nobody knows what is coming, they can only guess based on what happened before. And the further out in the future you try to predict, the more likely you are to be wrong.

Overall, the big gains and losses come from black swans. If you’ve got money in the stock market, you’re likely going to be affected by these events. No “expert” can warn you about a black swan. And these are hugely influential.

Social perceptions and cultural influence may mean possible black swans.

Okay, we know that black swans are unpredictable. But there are also certain realms in which you might see them. That was the world of Extremistan.

When there is a social feedback loop that can influence future behavior, it is hard to predict what will take off and what won’t. That’s because initial success or failure gets amplified through things like social media.

Movie tickets are a good example of this. You might know that certain types of movies do well at certain times of the year. Action movies over the summer, romance around Valentine’s, and horror around Halloween. But you never know when something will be an extraordinary, unpredictable, defies modeling, breakout success you never saw coming.

Things that have a cultural component are like this. There’s nothing specific in a book about a young wizard that indicates it will make a struggling single mother richer than the Queen of England. Still, that’s what happened with Harry Potter.

If the same work can render extremely different results because of how much people like it, then you might be in Extremistan.

Accept that there is no real order to the world and learn to live with black swans.

Humans like order. It is hard to accept or believe that there isn’t a purpose or control over what happens. But, you just don’t have control over the big things.

Look for possible black swans. It is easier to adjust to the things that reshape the world if you can see them for what they are. This means you have to be open to new beliefs. You can’t stick to the same Gaussian model you learned in your first statistics course. You also have to try just as hard to disprove your theories as you do to prove them.

Black swans can be good. You can position yourself to be more likely to run into the positive black swans. Try to have a diverse social circle or live in a city where more lucky breaks or connections can be made.

You can also appreciate how much luck got you to where you are now. This world, your life, whatever good fortune you’ve already had. Don’t think of it as a purposeful narrative, but just enjoy the random chance that brought you to this moment.

The Main Take-away

Our lives and society are filled with randomness. The most extreme form of randomness is the black swan.

Black swans are unpredictable. Because of their extreme nature, you don’t see them coming until they’re already there. Black swans are consequential. They have a widespread impact or a curve-breaking magnitude. Black swans are explainable. But this is only in retrospect once you have the benefit of hindsight.

Some randomness is not that impactful and you don’t really have to worry. You can control and predict to a certain degree in these areas free of black swans. This is the world of Mediocristan.

If you’re in Extremistan, you have to be willing to challenge your beliefs and look for evidence contrary to your theories. There are opportunities for success like J.K. Rowling and Bill Gates, but there is also the potential for mass devastation through war, terrorism, and pandemics.

It is hard to grapple with the unknown, especially because it can change everything so quickly. But you have to accept this truth to be as prepared as possible while also appreciating what you have.

About the Author

Nassim Nicholas Taleb is a statistician and an academic. Born in Lebanon, he first attended a French school in Beirut before getting degrees from the University of Paris. He then got his MBA from the University of Pennsylvania’s Wharton School before returning to the University of Paris for his Ph.D. in Management Science.

Taleb’s career started in the finance world. He worked as a hedge fund manager, options trader, risk analyst, and derivatives trader. Taleb also created an investment strategy to protect against black swans. His statistics and investment knowledge have set him up to be independently wealthy.

Stepping away from an active investment role, Taleb moved into academia. Working at major institutions around the world, including NYU, Oxford, and London Business School.

Taleb has been controversial in his writings and public positions. He has called for the cancelation of the Nobel Prize in Economics and applauded the collapse of Lehman Brothers.

Black Swan is the second book of Taleb’s group of philosophical works addressing uncertainty. This group is collectively known as Incerto. He has also had several other works in the field of statistics.

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