My learning from "The Black Swan" by Nassim Nicholas Taleb

"In economic life and history more generally, just about everything of consequence comes from black swans; ordinary event have paltry effects in the long term."

- Nassim Nicholas Taleb

The Black Swan: The impact of the Highly Improbable is a book by the essayist, scholar, philosopher, and statistician Nassim Nicholas Taleb, released in April 2007.  "The Black Swan" is an extraordinary, unpredictable event.  It has mainly three attributes: unpredictability, consequence, and retrospectively giving ourselves the illusion of understanding them. The combination of low predictability and large impact makes the Black Swan a great puzzle.

It was widely believed in Europe that all swans were white. Then a Dutch explorer sighted a black swan in Australia. Thus, one sighting of black swan overturned centuries of understanding that all swans are white. One single observation can invalidate a general statement derived from millions of confirmatory observations. Taleb in this book demonstrates that we rely on faulty forecasting and that we are blind to the possibility of the next Black Swan.

The Black Swan events are high impact, rare events that dominate history. They almost impossible to estimate scientifically. It has a very low probability, but when it happens it has a massive impact. We do not see the black swan event coming, but after the event, we tend to be retrospectively predictable for example the financial crises of 2008, this was highly unlikely so one was able to predict it and caused severe consequences that lead to a global recession. But in the hindsight, it is easily explainable.  Development of Google and 9/11 attacks are other examples of the black swan. No discoveries, no technologies came from design and planning. They were all black swans.

Imagine you are a Turkey who is fed daily, taken care of every day for 1000 days. But on the 1001th day, Thanksgiving day, a surprise occurs,  you are not fed, you are murdered and eaten by the people who fed you for 1000 days. The past observation was not able to predict the future for Turkey. For the Turkey, Thanksgiving dinner is a Black Swan event, but for the family who is eating you, there is no surprise as you were fed to be eaten one day. This shows that Black Swan are relative.

My Key Learning from the book:

• Experts cannot predict the socio-economic future, but they can confidently explain the past. Do not listen to economic forecasters. Waste no energy arguing with forecasters, stock analysts or economist.

• Stockbrokers and economist exhibit no more forecasting ability than simple extrapolations. They tend to herd and make a lot of excuses for inaccuracies.

• Story of the survived sinking ship: I prayed to god and he helped me. But there are many others who would have prayed but did not survive, & they are not there to tell their story. 

• The scandal of prediction: We overestimate what we know and underestimate uncertainty. Human being are consistently overconfident about how much they know.

• Statistically sophisticated or complex methods do not necessarily provide accurate forecast than a simpler ones.

• There is a tendency of our brain to seek evidence, the so-called fallacy of confirmation.

• We have a habit of creating stories based on collections of events that occur in our lives, thereby giving a false sense of understanding - Narrative Fallacy. Stories constructed around Black Swan that have recently occurred make people far overestimate the probability of recurrence.

• There is a tendency to give an explanation to largely random successes or failures after the fact. Things always become obvious after the fact. 

• Human beings look for instances that fit their belief - Confirmation Error.

• Invest in preparedness, not in prediction. 

• Worry less about small failures, more about large, potentially terminal ones.

• Worry less about advertised and sensational risks, more about the more vicious hidden ones.

• Aggressively seek exposure to positive Black Swans which would be beneficial to you. Very conservatively avoid exposure to negative Black Swans

Rare events occur much more often than we expect. Our minds are programmed to deal with what we have seen before, to "expect the expected". However, all too often extreme events do indeed take place and have large, and long-lasting effects.  Our tendency to discard rare events happen because people underestimate their ignorance. Human thought processes resist accepting Black Swan. There is a great deal we do not know, but since feeling ignorant is not pleasant, we tend to put it out of our minds. We tend to invent stories where there are none. In other words, after the fact, we like to invent explanations for why things happened the way they did, which is much more comforting than staring at sheer randomness. Black Swan are events that we do not envision and for which we cannot assign probabilities.

This book is highly entertaining and I truly recommend it. It will change the way you look at the world.

'I am sometimes taken aback by how people can have a miserable day, or get angry because they feel cheated by a bad meal, cold coffee, a social rebuff, or a rude reception... 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."

- Nassim Nicholas Taleb