The Black Swan: The Impact of the Highly Improbable by Nassim Nicholas Taleb Summary and Reviews
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Book Reviews of The Black Swan: The Impact of the Highly Improbable
Book Review: Not as clever as he thinks he is
Summary: 1 Stars
My main gripe with this book is the narrative voice. The concept of the black swan is a hotch-potch of borrowed ideas that relies very heavily on the work of Mandlebrot, who noticed decades ago that Gaussian distributions are pretty useless for modelling market behaviour (this is risk management 101 in business schools these days). And yet the intellectual arrogance he displays in recycling these ideas is astounding. I have rarely been more irritated by an author's sense of self-importance. Book Review: Quirky and/or Confused?
Summary: 3 Stars
This can be a struggle and all rather mixed up. That could be the fault of me. I too have read and enjoyed more - dealing with Dawkins (God Delusion) and better still Hitchens on God (God is not Great). The style of Black Swan is somewhat conceited...and does not help. Wider puzzles of philosophy and religious belief I found far more accessible in Cave's Can a Robot be Human? There's far more entertainment and without the preening confidence which I seem to find in Taleb. It could be that I need to get into it more.
Book Review: World of Unknown Unknowns
Summary: 3 Stars
NNT's use of a "narrative" strategy based on a questionable premise (did the sighting of the first black swan in Australia really impact the world?) to attract readers has paid dividends and his book has attained Grey Swan status among Amazon's Business & Investing bestsellers. The author, as he admits, has clearly enjoyed the writing experience which, besides dealing with the Impact of the Highly Improbable, has enabled him to sideswipe individuals and groups he sees mired in a world of Gaussian illusion.
On reading the book for the second time I kept asking myself "is this new to me?" and, if it is, "what is its relevance to me?". On reviewing one's own life to date, as the author recommends, it is clear that much of it has indeed been determined by high-impact unforeseeable events. This does not come as a great surprise - but then Taleb says that it never does, in retrospect! This contrasts with the chilling realization that there are almost certainly more such occurrences ahead. It is interesting to read explanations for why humans "don't know they don't know" they live in an extreme world but many, without realizing it, will already be familiar with psychological phenomena such as "platonism", "tunnelling", "confirmation bias" and the "narrative fallacy".
Interestingly, Taleb seems to miss what could well be the main reason why individuals "don't know they don't know": they just don't want to know they don't know they don't know! It seems to be a natural human reaction to put one's head in the sand when faced with the possibility of unforeseeable, high impact, possibly negative, events - particularly when they believe they can do nothing about them.
What, perhaps, is newer and more relevant to many is the fact that the professionals apparently rely on defective tools for analysing their particular piece of reality. Having some knowledge of the financial world and its questionable mathematical models, I can readily believe that many professionals - and even Nobel Prize winners - are led astray by the humble Bell Curve, as Taleb suggests. In fact the reasonably experienced small investor already has little faith in market "experts". On the other hand this same investor does not automatically transfer his scepticism to experts in other important fields, such as the social sciences, economics, environmental studies and military planning, where predictive errors can be far deadlier.
Besides peppering his text with the names and contributions of important thinkers - apparently a deliberate technique to achieve greater credibility - Taleb gives us some fascinating theory in the shape of non-linear relationships, the limitations of the Gaussian distribution, and the ability of so-called "power laws" to turn some Black Swans into Grey Swans. However this review stops a long way from demonstrating that life is largely determined by full-blooded (i.e. totally unpredictable) Black Swans.
Although I don't think that Taleb will make us see our lives in a totally new light it is important that he reminds us - in case 24-hour world news ever allows us to forget - that day-to-day affairs can be subject to unforeseen, and potentially devastating, modification. He also offers us the flip side: some ideas on how we can take advantage of positive Black Swans. It may be due to a lack of imagination but, not being a venture capitalist or a "quant", I couldn't immediately see measures of easy application in this area. Defence against Black Swans seems easier, namely diversification across very disparate fields. Taleb himself suggests a portfolio composed of up to 90% of extremely safe financial instruments (like Treasury bills) and as little as 10% in leveraged speculative bets like options (ideally involving "venture-capital style portfolios"). His general advise is more homely: learn to recognise undertakings exposed to positive and negative Black Swans, don't be narrow minded, seize opportunities, be wary of government plans, go to parties, etc.
Many interested in the impact of randomness will find the book a good, if fairly demanding, read. In the end, however, it is not entirely satisfactory. This has something to do with the fact that rather than be carried long by a limpid river of reasoning we are subjected to an avalanche of opinionative observations, some relevant, some less so. Some readers might also find many of the chapter and section headings irritating: "The Vagueness of Catherine's Lover Count", "How many Wittgenstein's can dance on the head of a pin?", etc. I suppose its all part of the relatively successful effort to make randomness fun. But although we'd enjoy seeing pompous academics and self-satisfied hedge-fund partners squirming with mice down their necks is it really necessary to rub the long-suffering French up the wrong way?
Book Review: Questionable advice
Summary: 3 Stars
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?
Book Review: Save your money
Summary: 1 Stars
No doubt I'm headed for "1 of 48 people found your review useful" but, really, this book is tripe on so many levels. It's hard to believe the author is completely unaware of Bayesian statistics, but the book is certainly written as if this were the case. There are also a couple of historical howlers, a misunderstanding of the anthropic principle, he has a tendency to invent words (eg "narrativity", "mathematize") and he apparently professes the superior virtue of ignorance to knowledge ("an unread book is worth more than a read one"). Worst of all is simply that the book is just so badly written. Taleb himself admits that those "with formal statistical training" will likely find the book mediocre. Anyone considering a popular work on statistics would do far better to look at Stephen Senn's "Dicing With Death".