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: wonderful
Summary: 5 Stars
The header says all that needs ot be said about this book. Beyond this, also get Nexus: A Neo Novel.Book Review: Good but not as impressive as `Fooled by Randomness'
Summary: 4 Stars
I am a big Fan of NNT having learnt a lot from reading his work. However, this book was a little disappointing compared to his earlier work. I really enjoyed reading `Fooled by Randomness' but for some reason this book was a little wearisome to read. That said there are gems in the book such as the insight that more information can be toxic to your decision making and the division spilt between Ex and Med...
I won't describe the book contents here as that has already been well covered by other reviewers. So just some specific comments.
While most people would agree that Serendipity plays an enormous role in developments, Taleb left me with the feeling he under values the contribution of human ingenuity. Many technologies have been development as a result of efforts of scientists & engineers pushing the limits of technology (as opposed to being pulled along by serendipitous discoveries). As examples, I am thinking about the development of Prozac by Eli Lilly, the early work at Xerox Park in developing `Windows' and the computer mouse, the Manhattan project, the development of CMOS computer chips by intel, the development of antibiotics by Florey at Cambridge and so on......
I am not so sure about Taleb's recommendation to put 90% of your investment funds in a safe entity (therefore low yield) and 10% in high risk ventures. For most people, this would mean they would lose 10% of their capital relatively quickly and also lose purchasing power on the 90% portion slowly via inflation. Even if somebody does hit upon a 10 or 20 bagger investment, with just 1% or 2% portfolio allocation they wont have a sufficient enough stake to make a big difference to their holdings. My own strategy is to keep about 50% in cash & Gold and take concentrated risks with the other 50%. If something is going really well and I have conviction on the trade I then scale in and get a multiper effect. This strategy has worked very well for me though I should say good research is essential.
Book Review: Original thinking (invariably)-caustic writing (frequently)
Summary: 5 Stars
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.
Book Review: Some great ideas but a somewhat flawed book
Summary: 3 Stars
NNT (as he calls himself) has some fascinating points and some interesting turns of phrase, though he does rather go on and on and on.... Leaving aside the long-winded somewhat self-absorbed writing style, NNT makes some interesting points that he illustrates well. He discusses the problems with the fact that humans seek validation for what they think (rather than challenging themselves) and why we cannot predict well in many circumstances. He spends a lot of time discussing the problems inherent with the use of a bell curve to predict things where the impact of extreme events really matter. Finally he spends (too little) time on what to do about all this. I took a few key points away from the book:
- It is better, perhaps, to try and be generally right rather than precisely wrong
- Beware of looking for more rules than really exist
- Watch out for a tendency to prepare for "last war"
- Rare and consequential events can be much more important than the "normal" stuff in the bell curve
- Some things (that he calls "mediocristan") are such that the most typical is average and single instances don't impact the total much
- Others (he calls these "extremistan") are more winner-takes-all kinds of environments where extreme events matter most
- He makes the point that a thousand days cannot prove you right but one can prove you wrong
There's more but it's a very long book and I am not going to attempt to summarize the nuggets spread throughout it here. Be prepared for a slog if you want to get everything you can out of the book - it goes on and on. 3 stars to average out 1 star for length and incoherence in places and 5 stars for some great content.
Book Review: Exposes the Flawed Assumptions of the Bell Curve Nudists, Those Who Always Decide by Using Normal Distribution Models
Summary: 5 Stars
Do you agree that being hit with a tsunami has a totally different effect from a normal high tide? If so, you'll be glad that Professor Taleb has decided to point out that all tsunamis (low probability, high impact events) need special attention, even if they occur infrequently. His advice: Minimize exposure to large potentially harmful events while taking maximum exposure to large potentially helpful events.
I was particularly thrilled to see that Professor Taleb points out the foolishness of economists in preparing theories without checking the data to see if the theories work in practice . . . the greater foolishness of the Nobel committee granting prizes for such work . . . and the greatest foolishness of relying on the advice of such economists.
Why all the fuss? Many phenomena display high predictability and the differences from the average usually don't make all that much difference to you and me (that quality is captured by a statistical display called a bell curve where most cases cluster near the average and vary symmetrically from the average). But in some cases, there are rare events that change the reality so strongly (like a tsunami can do on the negative side or a selection as an Oprah book of the month can do on the positive side) that it would be the height of foolishness to ignore the possibilities.
When it comes to assets, wealth, book sales, athlete pay, and lots of other places where there is lots of competition, there are geometric rewards for a few while the mass do poorly. These are long-tail events (the way statisticians talk about lots of variation from the norm). But almost all human decision making assumes that there is little variation from the norm.
The book concentrates on helping you understand why such a potentially harmful bias exists (brain structure plays a large role). We also assume a continuance of what's in front of us, even when there's obvious evidence to the contrary.
I was pleased to see these descriptions. I constantly run into the same problem with executives who are subject to stalled thinking and don't see opportunities right under their noses to accomplish 20 times as much. I liked Professor Taleb's points about overcoming our ignorance of antiknowledge . . . our tendency to discount what we haven't experienced or measured. I frequently see executives estimate that the best anyone will ever do at a level that someone already exceeded in 1880. In fact, in many important areas such as herbal health remedies, our actual knowledge is receding very rapidly, turning into antiknowledge.
To help break you free of how you think now, he uses a metaphor (a black swan -- is that really a swan?) and new terms (Mediocristan -- where the bell curve is the right way to think about things and Extremistan -- where powerful in effect black swans lurk). I found this tendency to be both helpful and not. It made it clearer to me what he was talking about the first time, and then made things seem muddier after that.
I suspect that for most people, the metaphor itself will be the biggest problem. Do you really care about black swans, per se? I don't. I think Professor Taleb would have done better to use two metaphors (one positive -- perhaps like formation and attraction of wealth to the Bill and Melinda Gates foundation and the foundation's effects on world health, and the other negative -- perhaps like a tsunami) than to focus on one that is mostly about definitions (black swan).
If you agree with Professor Taleb's main points, you will probably want to get lots of advice about how to do so. He's specific only in regard to two areas (wealth management and book publishing opportunities). That's a shame. Perhaps he will write a future book that will go more into solutions.
I was surprised to see that the book pretty much ignores the scenario work that many organizations use to identify the large impact, unlikely occurrence events and to devise strategies that work better under all possibilities. If that subject interests you, I suggest that you read books like The Art of the Long View and Inevitable Surprises by Peter Schwartz, Scenarios by Kees van der Heijdan, and The Irresistible Growth Enterprise by Carol Coles and me.
I was pleased to see that Professor Taleb also feels that many black swans can become "grey swans" by employing new prediction methods (although we cannot predict specifics, we can often predict up or down reasonably well in some situations). That has been my experience is seeing that Modern Portfolio Theory makes no sense in unsettled market conditions while more refined methods built stock-by-stock can be quite predictive over the short run in identifying over and under performers, even during unsettled market periods.
Check your models before you use them each day. Otherwise, you've just checked into work without your brains intact.
Keep your eyes and ears open whenever you are away from bell curves!