Thursday, January 6, 2011

There is no such thing as a Black Swan!?

I've been reading a fascinating book titled The Black Swan by Nassim Nicholas Taleb. The author introduces the subject in this way:
"Before the discovery of Australia, people in the Old World were convinced that all swans were white, an unassailable belief as it seemed completely confirmed by empirical evidence. The sighting of the first black swan might have been an interesting surprise for a few ornithologists (and others extremely concerned with the coloring of birds), but that is not where the significance of the story lies. 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. All you need is one single (and, I am told, quite ugly) black bird." 
Taleb's point is that extreme events have huge roles in life. The book is not as concerned about the possibility of the exception, (the Black Swan) as it is about the role of the exceptional event. Black Swans are things that are unexpected, but they can also be the highly expected things that for some reason do not happen. Black Swans are things like:
  • The 9/11 attacks - they were a Black Swan for us, but they were not such for the terrorists.
  • The untimely death of a close relative.
  • The unplanned meeting of your future mate.
  • The invention of the microwave.
Taleb says that Black Swan logic "makes what you don't know far more relevant than what you do know." What you know can be inconsequential - the surprise and the disruption come from the things that you don't know, that you don't anticipate. If you protect against threats a-z, what's to say that the Black Swan won't be a 1,2 or 3? You might never have considered that a number might be a threat, and therein lies the impact.

 
Prevention (in the case of a negative Black Swan like 9/11) probably won't drive your name into the history books. If you succed in preventing a negative occurence the absence of the negative event will make you un-newsworthy. Ironic, isn't it? The crisis handlers get far more attention and acclaim than do the crisis averters.
 
On the positive, beneficial side of the Black Swan,

 
"almost no discovery, no technologies of note, came from design and planning - they were just Black Swans. The strategy for the discoverers and entrepreneurs is to rely less on top-down planning and focus on maximum tinkering and recognizing opportunities when they present themselves."
Taleb goes on to say that the strategy is to tinker as much as possible and try to collect as many Black Swan opportunities as you can. The reason free markets work is because they allow people to be lucky thanks to aggressive trial and error.

 
It may seem counter-intuitive not to want to know too much about a given topic. But Taleb says that when we learn we tend to deepen our grasp of what we already know - the Black Swans, the big changes, are coming from some other direction. By definition they are surprises with big impacts. So it follows that if you are investing time in thinking, more is gained by taking time to think about what you might not yet know.

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