The Black Swan: The Impact of the Highly Improbable

Taleb has been bewildered and perhaps embittered by his experience of growing up in a seemingly civilised society that suddenly and permanently found it self in turmoil and war. And who can blame him? His message is that for some classes of systems, such as the Christmas turkey, past experience is no use in forecasting the future. The stock market is one such system, therefore mathematics and the bell curve, of which the normal distribution and standard deviation is an example, are entirely useless.The swan's colour; black is, coincidentally perhaps, associated with negativity. The author does seem more concerned with negative consequences than positive ones. This leads him to offer certain financial advice to the reader without knowing her personal circumstances or attitude to risk. The advice (page 205 Barbell strategy) is to adopt either of two strategies. One strategy is for her to invest all her funds in high risk companies in order to benefit form positive black swans, whilst at the same time hedging against a drop in the value of their combined assets of more than 15%. This does not sound financially practicable. Is it not like trying to have your cake and eat it too? The other strategy is for her to keep all her money except 10-15% in extremely safe investments (treasury bills) and to put the rest into a range of highly speculative investments, again in order to benefit from positive black swans. He even suggests gearing the latter through the option market. All very well, but options are worthless after a given time and what happens if and when the 15% disappears. Does she grit her teeth and invest 15% of the remainder? His very premise that small high risk companies are more likely to turn into positive black swans than larger companies is based on past history and therefore `narrative', which he devotes Chapter 6 to rubbishing! The approach is a bit similar to the way some pension funds are now managed and, in my opinion, could result in returns that are even less than inflation. In any case most `real world' people have much of their money tied up in and leveraged in real estate. It may have been more helpful to suggest hedging that.Like most American books, I think that it would have had more impact if it had been half as long. This may also have enabled the author to be a bit more careful about his manuscript. He seems to assume that the reader has a similar background to himself. I, for one, found many of his asides impossible to comprehend without further reading. A few glaring errors detracted from the credibility of the book. For example page 76 paragraph 3 second sentence "Now, if instead you many cases of lung cancer" (word `how' missing) and page 83 "-we humans have the largest cortex followed by bank executives, dolphins and...".That said, I think that the book contains valuable and subtle ideas and is well worth reading. He admits that he is controversial and gets the backs up of financial people. I would humbly ask him whether financial markets could operate at all unless people at least pretended to believe in the bell curve. For example, how could the options he traded in be otherwise valued?

The author is very bright, erudite, original and incisive in his thinking and engaging, entertaining and caustic in his writing.He was born in Lebanon to a patrician family and grew in a highly cultured environment. His remarkable abilities were honed through attending the prestigious and highly competitive Wharton School of Management.His professional life is devoted to problems of luck, uncertainty, probability and knowledge. Part literary essayist, part empiricist, part no-nonsense trader, he is currently the Dean's Professor in the Sciences of Uncertainty at the University of Massachusetts at Amherst.The gist of the book comprise the ecologies of 'Mediocristan' and 'Extremistan' and vey particularly the latter.'Mediocristan' does not attract much the attention of the author because in this area the bell curve is admirably suited; this area includes for example biological variability such as the variation in the height and weight of people which fit excellently in the bell curve.The author reserves his wrath, scorn and irony when the bell curve is incorrectly used in 'Extremistan' that is in the area of SocioEconomics, inhabited occasionally by a Black Swan that is a highly improbable event with three principal characteristics:its unpredictability;its massive impact;and, after it has happened, our desire to make it appear less random and more predictable than it was.If there is a certainty in the author, this is his belief that it is impossible to have mathematically predictive models in Economics and it is in this sense that he characterizes the bell curve that great intellectual fraud. He has certainly a convincing point when he argues that if the world of finance were Gaussian (bell curved) then an episode such as the 1987 crash (more than twenty standard deviations)would take place once every several billion life times of the Universe.He is scornful of the Nobel prize laureates in Economics, developers of the Modern Portfolio Theory who subsequently founded the now defunct Long Term Capital Management.I found reading the book compelling and irresistible and despite its apparent informality, meticulously written complete with Glossary, Notes, impressively comprehensive Bibliography and Index.

Taleb's life story is so improbable, his practical adherence to Popperian philosophy so unfashionable, and his style so quirky, that most people will ignore his ranting about fatal bias as the squeaking of a hobby horse ridden by a crank. He is probably better described as a contrarian among contrarians. And boy does he know it.Still, we should be grateful that Taleb's taste for fame exceeds his avidity. For in exposing the inadequacy of how we model the non-material world, Taleb risks the erosion of the causal blindness arbitrage opportunities from which he claims to have made a living.The good news is that people are just as stubborn when they are wrong, so there is plenty of time to exploit to your advantage the insights Taleb is offering you here - although an uncharitable reading is that he is simply arguing for a wider use of insurance.Taleb's Popperian probabilism will eventually enter the mainstream, whereupon it will all seem rather obvious, and you (and he) will be assailed by bores who claim to have been Talebistes all along, just like the traders and pundits Taleb lampoons for triumphantly predicting the past.If you are content to live life inside one standard deviation, you therefore don't need to read this book - just wait for all this to become 'best practice'.Incidentally, there is a lot of overlap between this and Fooled by Randomness - you don't really need both, and the latter is more readable.