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

★★★☆☆ (3/5)

A selection of my favourite passages from the book

Introduction to the Black Swan

  • It illustrates a severe limitation to our learning from observations or experience and the fragility of our knowledge. One single observation can invalidate a general statement derived from millennia of confirmatory sightings of millions of white swans.
  • First, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility. Second, it carries an extreme impact (unlike the bird). Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable.
  • Someone who took too many philosophy classes in college (or perhaps not enough) might object that the sighting of a Black Swan does not invalidate the theory that all swans are white since such a black bird is not technically a swan since whiteness to him may be the essential property of a swan.
  • In general, positive Black Swans take time to show their effect while negative ones happen very quickly—it is much easier and much faster to destroy than to build.
  • A life saved is a statistic; a person hurt is an anecdote. Statistics are invisible; anecdotes are salient. Likewise, the risk of a Black Swan is invisible.
  • The Black Swan has three attributes: unpredictability, consequences, and retrospective explainability.
  • We will have fewer but more severe crises. The rarer the event, the less we know about its odds. It means that we know less and less about the possibility of a crisis.
  • Of course the September 11 attack was a Black Swan to those victims who died in it; otherwise, they would not have exposed themselves to the risk. But it was certainly not a Black Swan to the terrorists who planned and carried out the attack. I have spent considerable time away from the weight-lifting room repeating that a Black Swan for the turkey is not a Black Swan for the butcher.

Important Terminologies

  • Platonicity is what makes us think that we understand more than we actually do.
  • The Platonic fold is the explosive boundary where the Platonic mind-set enters in contact with messy reality, where the gap between what you know and what you think you know becomes dangerously wide. It is here that the Black Swan is produced.
  • Naïve empiricism—successions of anecdotes selected to fit a story do not constitute evidence.
  • Mediocristan: When your sample is large, no single instance will significantly change the aggregate or the total. The largest observation will remain impressive, but eventually insignificant, to the sum.
  • In Extremistan, inequalities are such that one single observation can disproportionately impact the aggregate, or the total.
  • Mediocristan is where we must endure the tyranny of the collective, the routine, the obvious, and the predicted; Extremistan is where we are subjected to the tyranny of the singular, the accidental, the unseen, and the unpredicted.
  • Law of iterated knowledge – to understand the future to the point of being able to predict it, you need to incorporate elements from this future itself. [Hence] We do not know what we will know.
  • We overestimate the effects of both kinds of future events on our lives. We seem to be in a psychological predicament that makes us do so. This predicament is called “anticipated utility” by Danny Kahneman and “affective forecasting” by Dan Gilbert. The point is not so much that we tend to mispredict our future happiness, but rather that we do not learn recursively from past experiences.
  • Epistemic arrogance: Measure the difference between what someone actually knows and how much he thinks he knows. An excess will imply arrogance, a deficit humility. An epistemocrat is someone of epistemic humility, who holds his own knowledge in greatest suspicion.

Three facets of the Black Swan problem:

  1. The error of confirmation, or how we are likely to undeservedly scorn the virgin part of the library – the tendency to look at what confirms our knowledge, not our ignorance
  2. the narrative fallacy, or how we fool ourselves with stories and anecdotes
  3. How emotions get in the way of our inference
  4. the problem of silent evidence, or the tricks history uses to hide Black Swans from us.

Black Swans in Market World

  • So I disagree with the followers of Marx and those of Adam Smith: the reason free markets work is because they allow people to be lucky, thanks to aggressive trial and error, not by giving rewards or “incentives” for skill.
  • Stability and absence of crises encourage risk taking, complacency, and lowered awareness of the possibility of problems. Then a crisis occurs, resulting in people being shell-shocked and scared of investing their resources.
  • Capitalism is, among other things, the revitalization of the world thanks to the opportunity to be lucky. Luck is the grand equalizer, because almost everyone can benefit from it. The socialist governments protected their monsters and, by doing so, killed potential newcomers in the womb.
  • The inequality among the superrich is the same as the inequality among the simply rich—it does not slow down.

On Blurred Histories

  • History is opaque. You see what comes out, not the script that produces events, the generator of history. There is a fundamental incompleteness in your grasp of such events, since you do not see what’s inside the box, how the mechanisms work.
  • Much of what took place would have been deemed completely crazy with respect to the past. Yet it did not seem that crazy after the events. This retrospective plausibility causes a discounting of the rarity and conceivability of the event.
  • Events present themselves to us in a distorted way. Consider the nature of information: of the millions, maybe even trillions, of small facts that prevail before an event occurs, only a few will turn out to be relevant later to your understanding of what happened. Because your memory is limited and filtered, you will be inclined to remember those data that subsequently match the facts
  • While we have a highly unstable memory, a diary provides indelible facts recorded more or less immediately; it thus allows the fixation of an unrevised perception and enables us to later study events in their own context.
  • Another fallacy in the way we understand events is that of silent evidence. History hides both Black Swans and its Black Swan–generating ability from us.
  • The problems in projecting from the past can be even worse than what we have already learned, because the same past data can confirm a theory and also its exact opposite! If you survive until tomorrow, it could mean that either a) you are more likely to be immortal or b) that you are closer to death. Both conclusions rely on the exact same data.
  • There is a blind spot: when we think of tomorrow we do not frame it in terms of what we thought about yesterday on the day before yesterday. Because of this introspective defect we fail to learn about the difference between our past predictions and the subsequent outcomes. When we think of tomorrow, we just project it as another yesterday.

On Globalization

  • I separated the “idea” person, who sells an intellectual product in the form of a transaction or a piece of work, from the “labor” person, who sells you his work.
  • If you are an idea person, you do not have to work hard, only think intensely. You do the same work whether you produce a hundred units or a thousand.
  • And globalization has allowed the United States to specialize in the creative aspect of things, the production of concepts and ideas, that is, the scalable part of the products, and, increasingly, by exporting jobs, separate the less scalable components and assign them to those happy to be paid by the hour. There is more money in designing a shoe than in actually making it: Nike, Dell, and Boeing can get paid for just thinking, organizing, and leveraging their know-how and ideas while subcontracted factories in developing countries do the grunt work and engineers in cultured and mathematical states do the noncreative technical grind.
  • I spoke about globalization…it is here, but it is not all for the good: it creates interlocking fragility, while reducing volatility and giving the appearance of stability. In other words it creates devastating Black Swans. We have never lived before under the threat of a global collapse.

Black Swans of Emotions

  • Your happiness depends far more on the number of instances of positive feelings, what psychologists call “positive affect,” than on their intensity when they hit.
  • The same property in reverse applies to our unhappiness. It is better to lump all your pain into a brief period rather than have it spread out over a longer one.
  • The hippocampus takes the insult of chronic stress seriously, incurring irreversible atrophy. Contrary to popular belief, these small, seemingly harmless stressors do not strengthen you; they can amputate part of your self.
  • It is much easier to signal self-confidence if you are exceedingly polite and friendly; you can control people without having to offend their sensitivity.

On Randomness of Information

  • Randomness is fundamentally incomplete information.
  • You subsequently derive solely from past data a few conclusions concerning the properties of the pattern with projections for the next thousand, even five thousand, days. On the one thousand and first day—boom! A big change takes place that is completely unprepared for by the past.
  • We can get closer to the truth by negative instances, not by verification! It is misleading to build a general rule from observed facts. Contrary to conventional wisdom, our body of knowledge does not increase from a series of confirmatory observations,
  • You know what is wrong with a lot more confidence than you know what is right. All pieces of information are not equal in importance.
  • The more random information is, the greater the dimensionality, and thus the more difficult to summarize. The more you summarize, the more order you put in, the less randomness. Hence the same condition that makes us simplify pushes us to think that the world is less random than it actually is.
  • Memory is more of a self-serving dynamic revision machine: you remember the last time you remembered the event and, without realizing it, change the story at every subsequent remembrance.
  • I came out of the meeting realizing that only military people deal with randomness with genuine, introspective intellectual honesty—unlike academics and corporate executives using other people’s money.
  • For many people, knowledge has the remarkable power of producing confidence instead of measurable aptitude. Another problem: the focus on the (inconsequential) regular, the Platonification that makes the forecasting “inside the box.”

On Randomness of Events

  • Just as we tend to underestimate the role of luck in life in general, we tend to overestimate it in games of chance.
  • When you are employed, hence dependent on other people’s judgment, looking busy can help you claim responsibility for the results in a random environment.
  • We humans are the victims of an asymmetry in the perception of random events. We attribute our successes to our skills, and our failures to external events outside our control, namely to randomness.
  • The policies we need to make decisions on should depend far more on the range of possible outcomes than on the expected final number.
  • There is actually a law in statistics called the law of iterated expectations, which I outline here in its strong form: if I expect to expect something at some date in the future, then I already expect that something at present.
  • As the initial imprecision in the angle is multiplied, every additional bounce will be further magnified. This causes a severe multiplicative effect where the error grows out disproportionately.

Key Takeaways

On the Nature of Biases Towards Survival

  • There is a vicious attribute to the bias: it can hide best when its impact is largest.
  • This brings us to gravest of all manifestations of silent evidence, the illusion of stability. The bias lowers our perception of the risks we incurred in the past, particularly for those of us who were lucky to have survived them. Your life came under a serious threat but, having survived it, you retrospectively underestimate how risky the situation actually was.
  • This bias causes the survivor to be an unqualified witness of the process. Unsettling? The fact that you survived is a condition that may weaken your interpretation of the properties of the survival, including the shallow notion of “cause.”
  • Whenever your survival is in play, don’t immediately look for causes and effects. The main identifiable reason for our survival of such diseases might simply be inaccessible to us: we are here since, Casanova-style, the “rosy” scenario played out, and if it seems too hard to understand it is because we are too brainwashed by notions of causality and we think that it is smarter to say because than to accept randomness.

On Domain-Specificity

  • By domain-specific I mean that our reactions, our mode of thinking, our intuitions, depend on the context in which the matter is presented, what evolutionary psychologists call the “domain” of the object or the event.
  • We react to a piece of information not on its logical merit, but on the basis of which framework surrounds it, and how it registers with our social-emotional system.
  • But modern reality rarely gives us the privilege of a satisfying, linear, positive progression: you may think about a problem for a year and learn nothing; then, unless you are disheartened by the emptiness of the results and give up, something will come to you in a flash.

A Few Lessons by the Author

  • The way to avoid the ills of the narrative fallacy is to favor experimentation over storytelling, experience over history, and clinical knowledge over theories.
  • The lesson for the small is: be human! Accept that being human involves some amount of epistemic arrogance in running your affairs. Do not be ashamed of that. Do not try to always withhold judgment—opinions are the stuff of life. Do not try to avoid predicting—yes, after this diatribe about prediction I am not urging you to stop being a fool. Just be a fool in the right places.
  • The bottom line: be prepared! Narrow-minded prediction has an analgesic or therapeutic effect. Be aware of the numbing effect of magic numbers. Be prepared for all relevant eventualities.
  • First, make a distinction between positive contingencies and negative ones. Learn to distinguish between those human undertakings in which the lack of predictability can be (or has been) extremely beneficial and those where the failure to understand the future caused harm. There are both positive and negative Black Swans.
  • Do not try to predict precise Black Swans—it tends to make you more vulnerable to the ones you did not predict.
  • Invest in preparedness, not in prediction.
  • You cannot go from books to problems, but the reverse, from problems to books. This approach incapacitates much of that career-building verbiage. A scholar should not be a library’s tool for making another library,

On Truths about Mother Nature

  • Mother Nature does not like anything too big…a certain class of unforeseen errors and random shocks hurts large organisms vastly more than smaller ones.
  • Mother Nature does not like too much connectivity and globalization—(biological, cultural, or economic)…larger environments are more scalable than smaller ones—allowing the biggest to get even bigger, at the expense of the smallest, through the mechanism of preferential attachment
  • regular events can predict regular events, but that extreme events, perhaps because they are more acute when people are unprepared, are almost never predicted from narrow reliance on the past.

Principles for a Black-Swan-Robust Society

  1. What is fragile should break early, while it’s still small. Nothing should ever become too big to fail.
  2. No socialization of losses and privatization of gains. Whatever may need to be bailed out should be nationalized; whatever does not need a bailout should be free, small, and risk-bearing.
  3. People who were driving a school bus blindfolded (and crashed it) should never be given a new bus.
  4. Don’t let someone making an “incentive” bonus manage a nuclear plant—or your financial risks…Odds are he would cut every corner on safety to show “profits” from these savings
  5. Compensate complexity with simplicity. Complexity from globalization and highly networked economic life needs to be countered by simplicity in financial products…Complex systems survive thanks to slack and redundancy, not debt and optimization.
  6. Do not give children dynamite sticks, even if they come with a warning label. Complex financial products need to be banned because nobody understands them, and few are rational enough to know it.
  7. Only Ponzi schemes should depend on confidence. Governments should never need to “restore confidence.”
  8. Do not give an addict more drugs if he has withdrawal pains…The debt crisis is not a temporary problem, it’s a structural one.
  9. Citizens should not depend on financial assets as a repository of value and should not rely on fallible “expert” advice for their retirement. Economic life should be definancialized. We should learn not to use markets as warehouses of value: they do not harbor the certainties that normal citizens can require, in spite of “expert” opinions. Investments should be for entertainment.

Points to Contemplate

  • We do not spontaneously learn that we don’t learn that we don’t learn. The problem lies in the structure of our minds: we don’t learn rules, just facts, and only facts. Metarules (such as the rule that we have a tendency to not learn rules) we don’t seem to be good at getting. We scorn the abstract; we scorn it with passion.
  • Evidence shows that we do much less thinking than we believe we do—except, of course, when we think about it.
  • Nobody knew anything, but elite thinkers thought that they knew more than the rest because they were elite thinkers, and if you’re a member of the elite, you automatically know more than the nonelite.
  • An acronym used in the medical literature is NED, which stands for No Evidence of Disease. There is no such thing as END, Evidence of No Disease.
  • This nationality business helps you make a great story and satisfies your hunger for ascription of causes. It seems to be the dump site where all explanations go until one can ferret out a more obvious one (such as, say, some evolutionary argument that “makes sense”).
  • The überpsychologist Danny Kahneman has given us evidence that we generally take risks not out of bravado but out of ignorance and blindness to probability!
  • The problem is that our ideas are sticky: once we produce a theory, we are not likely to change our minds—so those who delay developing their theories are better off. When you develop your opinions on the basis of weak evidence, you will have difficulty interpreting subsequent information that contradicts these opinions, even if this new information is obviously more accurate.
  • No philosophy could be effective unless it took into account our deeply ingrained imperfections, the limitations of our rationality, the flaws that make us human.
  • Book reviewers anchor on other reviews and reveals powerful mutual influence, even in their wording.
  • The more you use a word, the less effortful you will find it to use that word again, so you borrow words from your private dictionary in proportion to their past use. This explains why out of the sixty thousand main words in English, only a few hundred constitute the bulk of what is used in writings, and even fewer appear regularly in conversation.
  • I have said that nobody is safe in Extremistan. This has a converse: nobody is threatened with complete extinction either. Our current environment allows the little guy to bide his time in the antechamber of success—as long as there is life, there is hope.
  • If I told you that two authors sold a total of a million copies of their books, the most likely combination is 993,000 copies sold for one and 7,000 for the other. This is far more likely than that the books each sold 500,000 copies. For any large total, the breakdown will be more and more asymmetric.

Beautifully Constructed Sentences

  • I feared a Pyrrhic victory: I had been vindicated intellectually, but I was afraid of being too right and seeing the system crumble under my feet. I did not really want to be that right.
  • “Writing well” seemed to mean obeying arbitrary rules that had grown into gospel, with the confirmatory reinforcement of what we call “experience.” The writers she met were learning to retrofit what was deemed successful
  • To be genuinely empirical is to reflect reality as faithfully as possible; to be honorable implies not fearing the appearance and consequences of being outlandish.
  • Erudition is important to me. It signals genuine intellectual curiosity. It accompanies an open mind and the desire to probe the ideas of others. Above all, an erudite can be dissatisfied with his own knowledge, and such dissatisfaction is a wonderful shield against Platonicity, the simplifications of the five-minute manager, or the philistinism of the overspecialized scholar. Indeed, scholarship without erudition can lead to disasters.
  • The French have a word for this, flambeur, which means a mixture of extravagant bon vivant, wild speculator, and risk taker, all the while bearing considerable personal charm; a word that does not seem to be available in Anglo-Saxon cultures.
  • We can already see the difference between “know-how” and “know-what.” The Greeks made a distinction between technē and epistēmē. The empirical school of medicine of Menodotus of Nicomedia and Heraclites of Tarentum wanted its practitioners to stay closest to technē (i.e., “craft”), and away from epistēmē (i.e., “knowledge,” “science”).
  • We are quick to forget that just being alive is an extraordinary piece of good luck, a remote event, a chance occurrence of monstrous proportions.

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