By Nassim Taleb

Synopsis

A black swan is a highly improbable event with three principal characteristics: It is unpredictable; it carries a massive impact; and, after the fact, we concoct an explanation that makes it appear less random, and more predictable, than it was. The astonishing success of Google was a black swan; so was 9/11. For Nassim Nicholas Taleb, black swans underlie almost everything about our world, from the rise of religions to events in our own personal lives.

Why do we not acknowledge the phenomenon of black swans until after they occur? Part of the answer, according to Taleb, is that humans are hardwired to learn specifics when they should be focused on generalities. We concentrate on things we already know and time and time again fail to take into consideration what we don’t know. We are, therefore, unable to truly estimate opportunities, too vulnerable to the impulse to simplify, narrate, and categorize, and not open enough to rewarding those who can imagine the “impossible.”

For years, Taleb has studied how we fool ourselves into thinking we know more than we actually do. We restrict our thinking to the irrelevant and inconsequential, while large events continue to surprise us and shape our world. Now, in this revelatory book, Taleb explains everything we know about what we don’t know. He offers surprisingly simple tricks for dealing with black swans and benefiting from them.

Elegant, startling, and universal in its applications The Black Swan will change the way you look at the world. Taleb is a vastly entertaining writer, with wit, irreverence, and unusual stories to tell. He has a polymathic command of subjects ranging fromcognitive science to business to probability theory. The Black Swan is a landmark book–itself a black swan.

41 Responses to “The Black Swan”

  1. Dave Ingram Says:

    And to link the thoughts together, there is a Gresham’s law effect. Those with the bad or incomplete risk models will drive those with the best models out of the market. And in fact, those with the bad models that understate risk will drive everyone else away. That is why there is little benefit to precisely modeling risks where your view of that the risk is that the risk is larger than the market view. Better to write a book.

  2. David Ingram Says:

    When you say it that way, I can easily agree.

    We should try to create models that represent things as best we can.

    But I definitely am having trouble deciding whether I think that sub prime is a block swan or not.

    So lets say that half of the market looked at sub prime and saw that it was underpriced risk and declined to participate. One (and probably more who just have failed to brag publicly) saw that and shorted.

    The rest of the market did not see a problem there. Because half the market is a very large portion and because the emergence of the sub prime problem has had extreme impact on liquidity and counterparty confidence, and because the impact of the blow up of sub prime on the other 80+% of real estate market, the problem has become much bigger than the sub prime market.

    So after that thinking out loud, perhaps I would suggest that the sub prime defaults should not themself be cosidered a black swan, the other impacts mentioned above are a black swan.

    Those effects have helped to drive sub prime security prices far below a reasonable expectation of residual value of the securities.

    I would not consider the basic problems with the sub prime itself to be a black swan. If a large part of the market decided tomorrow to ignore gravity in their trading strategies, that would not make gravity a black swan when it persists on pulling things toward the ground.

    Back to models. I think that modelers need to be especially careful when they build and use models that model only output of a complex system, rather than process. The output only models seem to brilliantly strip away the extraneous details of a system and hone in on the true key variables. But, an output only model of a sine curve would come up with a straight line for long periods of time. The process models suffer from excess complexity and more difficulty to fit to reality. But they may have a better chance of showing the bends in the sine curves.

    In situations like sub prime, or the tech bubble, output side models informed the bubble participants. It was much more difficult to develop a process based model that could reproduce valuations with even slightly believable assumptions. That is the signal.

  3. Nick Albicelli Says:

    Let me try to convince you in another way. Let us take as a given that the subprime crisis qualifies as a Black Swan event. As you point out, many did use models for which this was not a surprise; it was expected. Since the models worked (for them), is this still a Black Swan event? If it is not a Black Swan event, then what would qualify as one?

    We can and should expand the reach of our models such that events which are unexpected in a lesser model are accounted for in the improved one. While you can never be certain of which is a better model a priori, nor will you ever have the perfect, all-encompassing model, you can strive to improve your models to deal with more, and more varied, unexpected events than you could before.

    Taleb would argue that such things are forever beyond our reach, and the additional resources deployed in such an effort wasted. I believe that without our models (both quantitative and qualitative), almost everything is a Black Swan event, and we are at the mercy of incomprehensible forces (cf. Against the Gods).

    While we should always be humble in our use of models, we should also recognize their value. Specifically, we should note the fact that the use and improvement of (imperfect) models can do much to reduce the incidence (and severity) of large-impact, hard to predict, and rare “black swan” events, while the general critique that there exist times when models do not work well (in the absence of a recommendation of any specific or quantifiable augmentation) cannot.

  4. Dave Ingram Says:

    I have to say that your example of the sub prime situation clearly confirms my point. You ignore the many, many market participants who saw issues with sub primes and stayed away from the market. Instead you have fallen for the press version of the story that ignores the facts that do not make for a story that sells or that make it too complicated.

    Dave Ingram

  5. Nick Albicelli Says:

    I disagree with your direction of causality. It is not the case that the predominant models work/(do not work) because we are in mediocristan/(extremistan). Rather, we call what we are in “mediocristan”/(“extremistan”) because the predominant models work/(do not work).

    Further, since different people will use different models, what is extremistan to one person may be mediocristan to another. That is, events may be perfectly consistent with one model but inconsistent with another. So last summer’s subprime meltdown was outside of the models for most banks, but it was well within the expectations of GS, who took the appropriate precautions (shorting ABX) while times were still “normal” because their model had a better “reach.” Clearly it was worth it to them to figure out how to model the black swan which was 2007. So last summer was “medicristan” to those two traders at GS…

    Taleb is prescient in the same way that Nostradamus or a horoscope is. He makes vague predictions of the sort that at some time, some thing will happen which is not incorporated into models. Since the map is not the territory, you can make this prediction until the cows come home and when such things happen from time to time, your point will be proven true. That does not mean that Taleb is a fraud. But he is definitely not prescient.

    But the vagueness involved means that nothing Taleb says is directly useful to improving your model. And if it leads you to not even try to model black swans – events outside of your current modeling capabilities (as you have concluded above) – then it is even worse because he has lulled you into a false sense of “security” with your current model that can mean the difference between being BSC or GS.

  6. Dave Ingram Says:

    I would suggest that Taleb is neither an angel nor a fraud. Most often people who say things that have long been true, but that have recently been ignored, they are treated first as bomb throwing radicals and eventually as trivial sayers of the obvious.

    I personally have not, nor am I likely to ever read most of the sources that Taleb quotes. The history of these ideas is not of particular concern to me. What I am interested in is the future of the ideas. So I find Taleb’s discussion of those ideas to be valuable to me.

    To restate my understanding of Taleb’s idea in non-math terms, it seems that many people tend to live in the periods between Black Swans as if there will never be another Black Swan. That seems to be what most people think of as normal. (not Gaussian normal) When a Black Swan event occurs, many people act like turtles and wait for things to “get back to normal”. Few people live their lives with the prospect of future Black Swans in mind.

    In the past 10 years or so, financial institutions have used models more and more to drive financial decision making. There is very strong evidence that in general, these models work just as the above paragraph describes. They work very well in “normal” (not necessarily Guassian) times and fail to anticipate or provide for the possibility of Black Swan events.

    I would suggest that during “normal” times, there is very little value in trying to incorporate Black Swans into a model, since the result in most cases will be to drop out of the activity that uses that model because it will seem that the market does not pay for risk. (Unless you follow Taleb’s path and keep shorting things.) And as we see now, in the middle of an event, there is not good enough information to really model the risk. Finally, after the event, everyone decides to stay away from that bad risk and therefore need not model. So I conclude that it is never valuable to try to model Black Swans.

    So Taleb’s message seems radical (or unnecessarily pessimistic) in “normal” times. But as we are now living in the middle of unresolved tumolt, they seem exceptionally prescient. And as the tumolt continues, the insights become common knowledge and therefore trivial. Which is true?

  7. Nick Albicelli Says:

    Is Taleb the angel of a new paradigm?

    This is exactly the kind of over-the-top hagiography that drives some of us up a wall. I found a good critique of Taleb here which I recommend.

    (Some) Models are useful, none are correct. Building useful models is hard work, and requires getting into the details. The model that Taleb proposes avoids details entirely, as he merely takes somebody else’s useful model, and attaches to it the statement “but be careful when using this model because for cases where this model does not work, this model does not work.” This was an iconoclastic philosophical idea, oh, about a hundred years ago. And the above quote about “iconoclastic philosophical ideas” being a good rule of thumb, today, this idea is simply…common.

    Taleb conflates the issue by talking about the shortcomings of Gaussian-type methodologies, and attributes to those who use such Gaussian-type methodologies an Enlightenment-era confusion between the map and the territory when they are totally separate issues. Even modelers who erroneously believe in the predictive powers of the Gaussian distribution (yes, unfortunately, there are still some out there) don’t believe that their models are anything more than a (potentially) useful approximation of reality.

    So Taleb’s technical argument, that Gaussian-based models don’t generally have predictive power is valid, but well-known within the modeling community, which constantly strives to deal with this shortcoming, and his epistemological argument, that the map is not the territory, has already permeated the culture to such an extent that it hardly bears repeating. He may take credit for being the first to put the two together, but that is only because they have nothing to do with each other.

  8. Ioannis Chatzivasiloglou Says:

    Is the plethora of posts (33) in one month (about 1 post per day) a Black Swan ? or maybe is their sudden cessation?

    Nevertheless, I tried to follow Taleb’s advice regarding how to read a book (don’t read a book if you don’t know how it ends). I have already read it once and I know how it ends.

    Having said that, it gives me the chance to say that Taleb has done a great job in trying to bring philosophical ideas (e.g. of Popper, Kuhn, Wittgenstein) of the 20th century (which were developed in parallel to the currently used scientific ideas e.g. portfolio theory, option pricing) to the reality of every day life and in trying to make us use these ideas on how we face the routine.
    This makes me recall the words of Malevitsis (a Greek philosopher of the previous century) who was kept saying that iconoclastic philosophical ideas of a certain period become the common ideas of the next century.

    Is Taleb the angel of a new paradigm? I think his book is Black Swan.

    (Remark: “Angel” is a Greek word for the man who brings the new, the one who tells the forthcoming)

  9. Marc Slutzky Says:

    I am Marc Slutzky and I am a consulting actuary with Milliman. I consult with insurance companies in the areas of Emerging Risk Identification, Economic Capital, and other areas of ERM. I began reading The Black Swan last September and got about 1/3 of the way through. I will pick it up again and get my reading and comments up-to-date.

  10. David Ingram Says:

    Frank, I really like the idea of the Devil’s Advocate. I would think that very large organizations could get some benefit. I would imagine that it is very unlikely that smaller companies would want to devote that much resources to dissent. In my personal experience working in smaller companies, management tries to manage its expenses to a level that is comparable to its larger competitors by being very efficient. That meant that everyone had to very quickly align with accomplishing corporate objectives and there were often just one person per function involved in total on even the most major project. So smaller companies would have to very carefully choose the situations where this role would have the most powerful benefit, such as as a stage of strategic planning.

  11. Frank Ashe Says:

    Evelyn,

    Response to 26 and 29. I agree with getting a diversity of opinion. Sometimes this means you have to appoint someone to a committee as a Devil’s Advocate – in the strict Roman Catholic usage of the term, as someone who sits on a saint’s canonisation committee and is given the task of finding reasons why they shouldn’t be canonised.

  12. Frank Ashe Says:

    Evelyn,

    It’s very much Taleb’s style in the first four chapters that I object to. I agree completely with his ideas and they’ve been in the course that I teach on Financial Risk Management for quite a few years; including references to much of the work that Taleb quotes, such as Tetlock’s work, which is an excellent book.

  13. Evelyn Meierholzner Says:

    David, I agree that it has to be a conscious and formally directed process esecially in Risk Management; what I meant to say is that if a particular individual conscious of his/her particular bias in perception arrives at some conclusion and seeks to discuss with somebody with a complementing bias – a generalizing strategist with a more detail-oriented perhaps more cautious person for example- there is added value but it may not come natural to seek out people who potentially disturb your way of seeing something, this too has to be a conscious process. Often there is a tendency to surround yourself with people thinking along the same lines and being biased the same way which – apart from tight formal company cultures – creates group think indeed.

    My view of collective knowledge goes a bit further. There are mathematical concepts for example that somebody intuitively recognizes as being correct yet they remain unproven until all intermediate tools and techniques are created often independently and for a different purpose and at some time in the future and then somebody else comes along who is able to pull all this information together and to apply it to the problem at hand in the right form. Along the same lines when thinking about potential black swans in one area, an idea, an event, an information coming from a completely different area may initialize an idea of a Black Swan one did not see before. This was very much so with Mandelbrot’s work in Finance. Obviously I am not saying that Risk Management should be based on these types of random insights only. But every formal and directed process also has a potential to keep your thinking within a certain framework while looking at the same issues from a more random point of view – working the right side of the brain- provides new insights. And what is random to some of us may not be random at all to a person having a particular perception but rather correspond to an ability to see structure and connection where nobody else did before. I remember reading that Mandelbrot when he was young and in school recalls to have seen only pictures in mathematics and this particular geometric view of things enabled him to see the fractal laws.

  14. Dave Ingram Says:

    Evelyn, an interesting idea, that collective thinking might identify Black Swans. I would think that would have to be a very conscious and possibly formally directed activity. I have heard of it being done effectively.

    I would think that without the directed formal process the more likely outcome would be to reduce the perception of outliers, since normal human group process is to confirm the views of the strongest voices in the group. Groupthink. I have seen it in a number of cases with tight company management groups who have convinced themselves of something that is pretty far outside of the mainstream, most often that there is much less risk to some activity than everyone else thinks.

  15. Dave Ingram Says:

    Nick, Here are comments from Amazon.com that give an interesting spin on your complaint.

    From AudioFile
    Taleb is overly reliant on heavy irony, but, happily, David Chandlers narration rescues the authors repetitive discussion of his theory of randomness and the potential impact of random events. Using his own life to examine the actual impact of unexpected and unpredictable events, Taleb recounts the story of his childhood and rise as a Wall Street financer. Chandlers delivery of sardonic lines is often tongue-in-cheek, a tone that is less grating on listeners than the smug tone of the authors words. Chandler infuses Talebs theory of the Black Swan with an energy that propels listeners to learn more, rather than focusing on Talebs verbosity. Even if Talebs theory doesnt interest, Chandlers delivery manages to enhance this production. M.R. © AudioFile 2008, Portland, Maine– Copyright © AudioFile, Portland, Maine –This text refers to the Audio CD edition.

  16. Evelyn Meierholzner Says:

    Is the writing style irritating or is it rather what he is saying?

    True enough, we all have a perception bias and filter things out/deny them. I don’t perceive filtering things out as entirely negative since it also enables us to deal with a world fundamentally inpredictable.

    On an individual level this may prevent us from seeing future events coming but what I miss so far in the book is the collective view. Even if we have the same tendencies to filter, narrate etc our perceptions are not all biased the same way so
    relating the same information to a group in which individual biases complement each other is likely to yield a better insight into the future. Given a level of collective knowledge and a sufficient information flow among individuals eventually somebody with the right key of perception and intuition comes along and makes it happen. Collectively, a lot is known what is unknown to individuals so individually focusing on what is unknown can really mean rising closer to collective knowledge.

    To me getting rid of filtering is not only a question of individual training of the mind and some techniques but also of exposure to an extensive information flow, other persons’ filters and an awareness of the process of filtering in everybody.

  17. Nick Albicelli Says:

    I don’t know about you, but his writing style continues to irritate. I don’t remember FBR being this bad, but maybe that’s just because it is shorter…like Frank, it was bad enough that it kept me from reading the book for a while. Is anyone here not bothered by the style (anyone actually *like* it?)?

    Also, since I forgot to introduce myself, I am a risk manager for a credit derivatives product company and I’m reading the book because Fooled by Randomness is one of my guilty pleasures (in spite of the style) and I wanted to see what else NNT might have to say.

  18. riskviews Says:

    PLEASE NOTE

    We are just learning how to use this Blog facility. For example, when there are many comments as above, it takes a while to scroll down to the bottom of the stack.

    So, you can feel free to keep posting comments here on this page, but to try to make this more convenient, we have added a sub page for discussion of chapters 1 – 4 and will add more pages for subsequent chapters.

    In addition, you can sign up to be notified of new posts to the site via email. First you must register with wordpress at http://www.wordpress.com. Then go to the blog page ermbooks.wordpress.com Then run your cursor over the words blog info at the top right hand corner of the page above and click on subscribe to the blog. That will tell you where and what has been posted and you can go directly to that post to comment further.

  19. Beverly Barney Says:

    I agree with Frank that this is a difficult book to read. What kept me going was wanting to know if Taleb was going to make any recommendations at the end of the book or just say that models are useless.

    *** Spoiler Alert *** Do not read on if you don’t want to know the end of the book. (This is reminiscent of the publication of the 7th Harry Potter book.)

    What he says at the end of the book is just as Dave states..he says not to stop trying to figure out what might happen in the future, but be aware of the filtering we do, the silent evidence that is easy to not see.
    This book has certainly made me think.

  20. Frank Ashe Says:

    I’ve just started reading Black Swan, I’m up to Chapter 5 and I’m finding it hard to keep going. As I said in an earlier post, I agree with Taleb’s ideas, which is why I had put off buying the book. It’s his style that gets to me, and sampling later chapters I can’t see it getting any better.

    So here’s my thoughts so far (extremely abbreviated) garnered from discussions, extracts from the book, and from Taleb’s articles that I’ve read.

    Drawing on the insights of behavioural and evolutionary psychology, there’s a good reason for our default mode of thinking to be based on the gaussian Bell curve, in nature there’s a lot of averaging going on and the CLT kicks in. This gets us through most situations. But nature is also driven by fractal laws and occasionaly we’ll get something out of the ordinary. Because it is out of the ordinary there can’t evolve a sophisticated response; but a generic response like panic works enough times to get into our genes.

    Now, how much of each response should we have? How much of a threshold should we have to pass in order to kick in the panic response? From a population point of view it most probably makes sense to have this variable within a group – some people will panic infrequently, some will panic at the drop of a hat.

    In social situations, and the market is a social phenomenon, we will treat things, by default, as being gaussian. Panic will be triggered when the non-gaussian events occur. Whether panic will drive action depends on the temperament and training of the person – this is one of our main differences from other animals, we can control the incipient panic.

    My point? We have to work hard to keep us focussed on the possibility that black swans can occur (I hate that term, and as an Australian I grew up with black swans being natural, white swans are weird). Taleb’s work doesn’t seem to give anything new on this problem. In his Table 4, where he shows two ways of approaching randomness, all the ideas from the his skeptical, a-platonic column come straight out any decent book on how to apply behavioural psychology to decision making.

    One big area where he’s wrong in this column is where he says don’t be inspired by any science; an application of evolutionary dynamics and other biological models can be used to underlay his preferred column. We tend to try to use Newtonian physics in economics because the maths is relatively easy – the maths underlying biology is much harder (in the sense in which mathematicians use the term “hard”).

    I also realise I didn’t give a 2 sentence description of myself earlier, as requested. I spend 40% of my time as a Professor teaching risk management at the Applied Finance Centre, Macquarie University, and 60% of my time as a risk and investment consultant.

  21. David Ingram Says:

    I believe that is Taleb’s objective with the book – to get people to reduce the amount of filtering that they do. Mostly by pointing out that it exists.

  22. Ioannis Chatzivasiloglou Says:

    I read David’s phrase “There is usually unconscious filtering of information that does not fit your organizing theory.” and then Beverly’s phrase “we don’t see what we don’t expect” and I found them very interesting.

    Interpreting them, can we say that black swans were not black from the beginning? Did we make them turn into black by filtering out all the info that did not fit to our theory?

    If the answer is yes, then how can we modify our filtering mechanisms to identify swans that could be turned into black?

    If, on the other hand, the answer is no, are we hopeless in front of the fact that our models are destined to fail?

  23. David Ingram Says:

    I think that a fairly high proportion of these positive black swans have been anticipated in speculative (science) fiction. For example, I have a book “Earth” by David Brin that was published in 1990 was so full of “predictions” that have come true that there is a website devoted to discussing those predictions: http://earthbydavidbrin.pbwiki.com/Predictions

    Science fiction talks about many of the negative black swans as well. One line that I saw while tracking down that Earth website was something to the effect that George Orwell’s 1984 (published in 1949) may have helped to prevent the scenario that it depicted!

  24. Beverly Barney Says:

    In an interesting conversation with someone here who had read The Black Swan, he posited that real black swans are only the positive surprises, that negative events can be seen coming.

    In the book, Predictable Surprises, the authors talk about the terrorist attacks on 9/11. At that time, our intelligence agencies were collecting reports on suspicious activity from all over the world. An agent in Arizona sent in a report about many “persons of investigable interest” attending US flight schools. That report was overshadowed by many thousands of reports about such activity outside of the US, and the report was overlooked.

    In support of the black swan theory, that incident could be interpreted as we don’t see what we don’t expect. Or, perhaps they needed more resources to run down every report. Or, their system of prioritization failed (but that could take us back to not acting on what we don’t expect).

    On the other hand, could anyone have predicted the advent of computers, cell phones, etc.??

  25. Paul Braithwaite Says:

    I have been interested in reading this book for a while, and the reading group inspired me to finally purchase a copy. I look forward to an interesting exchange of comments.

  26. David Ingram Says:

    I think that is a key point that really ties several issues together – that any single number will be misleading.

    On another point from Ioannis, about rules vs. facts… perhaps it would be an interesting creative thought exercize to look at all of the things that you know about a topic and see if you can concoct an alternative organizing theory about the underlying situation? Than when the next fact comes up, see if it fits better with the original or alternate view?

    There is usually unconscious filtering of information that does not fit your organizing theory.

  27. Nick Albicelli Says:

    A little off topic, but I agree that scalability is an interesting topic. In that regard, check out the “network representations of complex systems may exhibit scalablility” of Barabasi
    as being somewhat preferable to the “let’s try fitting fBm to various time series and see what fits” of
    Peters
    and
    Mandelbrot

    Back on thread, agreed that accounting models are some of the worst culprits in the current environment. But I would say that the issue is more with the accountants than with the modelers. I think most modelers know that valuations (especially) are inherently tricky things because it forces one to collapse a ton of uncertainty into a single number.

    If you asked a modeler for something better, they could probably pretty easily give you a sensitivity analysis to the various key assumptions, likely incorporating potential fire-sale scenarios in incomplete markets. And in the end, they would say the range looks like X, the likely results are Y and Z, etc. But then the accountants would throw all that work away (or at best allow it into a footnote) and put a single number on the balance sheet. So yes, a bad model is a bad model, but how much better can a decent model get if the end result still has to be one-dimensional?

  28. Ioannis Chatzivasiloglou Says:

    …therefore, we are left only contemplating the qualitative impact of risk, without actually taking quantitative steps (maybe a recognition to this phenomenon is the new requirement of Solvency II the insurance companies to undertake ORSA (Own Risk Solvency Assessment) which is more qualitative than quantitative).

    Nevertheless, reading so far this book, I would recognize the traces of older philosophical ideas as follows:

    1. The emphasis on what we do not know seems like the Socratic point of view (the motto of his philosophy is “One thing I know: that I do know nothing”). This is presented in one of his earliest dialogues “The Euthyphro”.

    2. The proposition that “the source of the problem is in the structure of our minds: we do not learn rules, just facts” (page xxi of the prologue), which overwhelms Taleb’s book makes me recall Hubert Dreyfus (professor of philosophy in Berkeley). In his paper “From Socrates to Expert Systems: The limits and dangers of calculative rationality”

    http://socrates.berkeley.edu/~hdreyfus/html/paper_socrates.html

    the reconciliation of the Socratic view (in point 1. above) with the way humans learn (rules vs fact) is achieved. A more comprehensive analysis is presented in his book “Mind over machine, The power of Human Intuition and Expertise in the Era of Computer”

    3. The whole concept that things do not evolve in a smoothed way, but rather “life is the cumulative effect of a handful of significant shocks” (page xix), even though it does not seem to follow the letter (the topic is different), it does seem to follow the rational and the spirit of Thomas Kuhn in the “The Structure of Scientific Revolutions”.
    Synopsis of Kuhn’s ideas are presented by Professor Frank Pajares, Emory University at

    http://www.des.emory.edu/mfp/Kuhn.html

    Maybe some of my above thoughts are premature or maybe the origins of Taleb’s ideas are far from the aforementioned text. However Taleb is not the first with these ideas.

  29. Dave Ingram Says:

    Everyone’s risk models seem to fail on occasion. We recalibrate and go forward.

    The question that Taleb poses is whether the way that we all do that makes any sense or not. (The problem of the 1/1000 year loss event that takes place every few years.)

    I do not know who originated the ideas he is posing. He does seem to be deliberately caustic. Maybe that sells books.

    I do not think that he gets to a point where he proposes a particular “model” he just points out what is missing in the model that we all use.

    I am not optimistic that there is a model that is practical to use to solve the problem that Taleb points out.

    If you incorporate into your risk model the idea that there can be loss events that are larger than anything supported by the historical record, and evaluate market prices with that model, then you will find that in many cases the market prices are inadequate, so you will not participate.

    But we can use the point of view to help us. It just doesn’t translate into a useful quantitative exercize.

    For example, think of the grey swan problem faced by life & health insurers of an influenza pandemic. If the insurer assumes a large enough pandemic with high enough frequency, then they cannot make rates that would be competitive.

  30. Ioannis Chatzivasiloglou Says:

    According to my understanding, Taleb sets a dividing line.
    From the one side of the line, he sets black swans: rare, extreme impact, retrospectively only predictable evens. What he calls “antiknowledge”.
    From the other side, he sets all events which do not belong to the 1st side. This makes all the swans with colors running the gamut from Grey to White to be set to this 2nd side.
    I understand it to be like the VaR measure used to determine capital requirements, which also draws a dividing line. All scenarios above a certain level are excluded as improbable (the Taleb’s black swans), and the rest scenarios (below that level) are used to develop strategies, calculate policy reserves etc (the grey to white swans).

    All I want to say is that setting ideas in a two-dimensional world (black vs white) is not the invention of Taleb. It more of a human impediment. See examples from maths (linear models), derivatives (delta hedging), ALM (duration matching), modeling (binomial model)etc. Taleb cannot escape from this way of think.
    The questions should be how effective this representation is, how simple it is, what level of complexity can reach. Maybe, one way of answering the above questions is to recognize the fact that all Taleb is trying to do is to “model” the way humans cope with the emerging phenomena in real life. This makes Taleb a modeler and his book a real model which has to overcome the same problem that all other models face: A process which is modeled becomes expected and as black swans are prospectively unpredictable, the human behavior the book describes should be categorized to white swans.

  31. David Ingram Says:

    Too bad. Those simple models used for accounting have really been doing alot of damage.

    Or maybe not as much really is known. I would bet that someone would have come forward by now if they really did know how to value things better.

    Anyway, I particularly liked the idea of scalable work and the anti library. I have not figured out how to move into scalable work yet, but I have bought alot of books and not read them.

  32. Nick Albicelli Says:

    I respectfully disagree with Dave’s point above. The reason why people with a trading risk management point of view get offended by Taleb is not because they disagree vehemently with what he has to say. Rather, it is because what he says is pretty basic and already known to the modelers that he rails against, and yet he pompously declares his views as though he was the first and only person to think them. He sets up that quants view everything in black and white terms as a straw man, and they are (justifiably, in my opinion) upset about being treated unfairly in his books.

    In 2008, everyone knows that the B-S world is applicable only when using unrealistic assumptions like complete markets, full liquidity, etc. To the extent that the models that everyone knows about are easily picked apart as poor models, it is only because most risk management models that are made public are more for marketing and accounting purposes.

  33. Dave Ingram Says:

    I agree with both of your points Bev.

    Taleb does tend to demonize those with other points of view from his. My interpretation of that is that his context is the financial engineering world, where everything does seem to have been cast in black and white terms. THere is much disdain in that world for the vast unwashed masses who do not understand their brand of magic. They tend to be religious fanatics about their point of view. You would have experienced this if you ever tried to have a conversation with someone with a trading risk modeling background about the pros and cons of using market consistent models. They consider that to be as debatable as talking about the pros and cons of child molestation.

    So in that world, Taleb’s message is much more inflamatory than in the world that actuaries have inhabited. (THough I know that Taleb would throw bombs our way as well.)

    Think about it, if everything you do revolves around models that all harken back to Black Scholes which is Gaussian based, then this is real herasy.

    On your second point, again he is thinking of the folks in the market, who are very much herding beasts. (Read “Deamon of our own design” to understand the driver to the herding instincts in the markets) The problem with identifying and avoiding a problem is that it is rarely widely noticed. Blowing up makes the news. Failing to blow up does not. That is the story that is never told. With the internet boom & crash, some folks sold out at or near the peak, but you have never heard that part of the story. My guess will be that it has happened in every disaster.

    But after 9-11, living and working in the NYC area, I heard over and over from folks how they were so lucky that they were not at the WTC that day. They worked there and selpt in. They were caught in traffic. One person left an early appointment there and went home right before the first plane. I have not heard anyone who was not totally surprised.

    Taleb calls those that some can see Grey Swans.

    Dave Ingram

  34. Beverly Barney Says:

    It seems like we are having a hard time getting started on a discussion, so I thught I would try to get one started. As I read this book, it seems to me that the author presents ideas at one extreme or the other (bankers are “eveil”; the bell shaped curve is a fraud, etc.)I find this particularly interesting in that he has chosen black and white swans to represent his ideas. In any case, I wonder what this tendency to ignore circumstances will do to the credibility of his ideas. Any thoughts on that?

    Also, does everyone see a black swan the same way, that is, are some people completely surprised by an event where others might legitimately seen it coming? What is the implication of that?

    Hope to hear from other readers…

  35. Dave Ingram Says:

    Hello, I am Dave Ingram. I work at Standard & Poor’s where I am involved in reviewing insurer ERM programs for the credit rating process.

    I read this book last year and found that every few pages I encountered an idea that forced me to put the book down, stop reading and contemplate the implications at length. I am looking forward to discussing some of those points to find out others’ reactions.

  36. Frank Ashe Says:

    I’m Frank Ashe. I’ve noted Taleb’s work for a few years but as I agreed with most of what he seemed to be saying I didn’t bother reading his books. But enough people have recommended this book that I thought I should read it – especially as I saw a cheap paperback edition.

  37. Evelyn Meierholzner Says:

    My name is Evelyn Meierholzner, I am a member of the German Actuarial Association with a background in Reinsurance and Life Insurance and an additional training as
    certified Financial Risk Manager.

    I have chosen the Black Swan because I want to get challenged in my thinking about Risk and opportunities. I look forward to discussions and sharing ideas with you.

  38. Ioannis Chatzivasiloglou Says:

    My name is Ioannis Chatzivasiloglou and I work for the Greek Private Insurance Supervisory Committee (PISC) being head of the actuarial department.
    I think that man can, by walking, go around the earth many times. However, he cannot jump upwards but only a couple of meters.
    By walking, you go far and you never return; by jumping you do not go far and you always return to the same spot. That is why science always evolves but modern philosophers reiterate the same jump that philosophers, over the last 3000 years, have attempted. And this is the tragedy of mankind. We are all convicted to walk horizontally and not upwards. This is mandated by the iron law of gravity; a law that mankind fights hopelessly.
    Taleb’s book, according to my opinion, having only read the prologue, refers to the problems of jumping and not the problems of walking; that is what makes this book worth reading. That is why I have chosen this book.

  39. Beverly Barney Says:

    In response to Dave’s request for a 2 sentence introduction, I am Bev Barney, work at Prudential and am working on processes to identify and manage emerging risks. I have chosen The Black Swan because, although I don’t agree with everything the author says, I do find some of his thoughts fascinating…and want to know what others think, also. I look forward to our discussions.

  40. riskviews Says:

    The Contingencies magazine of the American Academy of Actuaries has recently published this article that talks extensively about Taleb’s book.

    http://www.contingencies.org/mayjun08/swan.pdf

    In this article, the author states:

    The Black Swan doesn’t qualify as required or highly recommended
    reading or the one book you must read this year. Rather, it should
    be banned by actuarial organizations. Just as Galileo’s Dialogue
    Concerning the Two Chief World Systems was denounced by the Roman
    Catholic Church four centuries ago, Taleb’s writings should be
    primus inter pares on the list of forbidden works among actuaries.
    Ideally, The Black Swan would have an immediate and permanent
    place on the Society of Actuaries exam syllabus. But the resulting
    cognitive dissonance could be too great for most actuaries.

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