This book is no ordinary compilation. It is a revelation. It shakes the fundamentals of the theory of “Laws of Averages” and radicalizes the “Gaussian Methods” in a deft and iconoclastic manner. Taleb is irreverent of the great philosophers but he does it with concrete evidences, which he brings to the fore of our understanding. The author repeatedly states in the book that the knowledge of the human species is limited and the gap between “what we know and what we think we know” is fairly wide and it is in this interval of unknowingness that we fall prey to extreme events which lie outside our systemized knowingness. NNT describes ways of how not to be a sucker to the events that impact us massively but whose chances of occurrences are low and therefore manage to skip past our radar of knowledge. But mostly, the book deals with the erratic Gaussian methods (After the German mathematician and physicist, Carl Friedrich Gauss, 1777-1855) that expose us to the phenomenon of Black Swan, which hits us with extreme prejudice, while we are blinded by the knowledge, based on the normalized bell curve. It is a very difficult book to reproduce objectively but I will try to deduce the teachings which I found extremely interesting and insightful.
According to Taleb, the Black Swan is a “Low probability and High impact” event and the book, if looked at, in the briefest of the ways emphasizes that “We cannot predict” and in an attempt to prognosticate, we tend to trap ourselves under the shroud of the Black Swan. Over to Taleb.
1. How to Learn from the Goat
Taleb introduces a toxic variant of a surprise jolt in his illustration of what people in his line of business (Trading) call the “Problem of Induction” or “Problem of Inductive Knowledge”. He states that this is the Mother of all the problems in life. He questions vehemently that how is it possible to logically go from specific instances to reach general conclusions? How do we know what we know? And how do we know that what we have observed from given objects and events suffices to enable to figure out their other properties? Taleb proceeds further to dwell into the traps that are built into any kind of knowledge gained from observation.
The experiential thought that Taleb lets us conduct has the goat as the central figure. Consider that the goat is fed every day. Every single feeding will firm up the goat’s belief that it is general rule of life to be fed every day by friendly members of the human race. On the afternoon of the auspicious day of Bakra Id (The Festival of Sacrifice), something unexpected will happen to the goat. It will incur a revision of belief*. This single day impacts the goat in such extreme manner, that it never recovers from the eventuality. The goat should treat this day as the “Black Swan” event in his life. An event which had never occurred before in the goat’s life and which was lying outside the realm of the Inductive Knowledge the goat had reaped over many days through observation before the D-day struck.
Taleb generalizes the goat problem to fit to any situation where the same hand that feeds you, can be the one that wrings your neck. The Black Swan is just around the corner.
* Taleb has used the example of the turkey and the Thanksgiving Day. A local adaptation is presented in this post for better coherence.
2. Narrative Fallacy
Taleb blames our inherent ability to explain the event in retrospection as the reason for our strong belief that we understand mostly everything. Every event that has happened is equated with a reason. It is very difficult for human species to say that we do not know, as to why such a thing has happened. The story telling capability is ingrained within us which has duped us on many an occasion without we knowing about it. This phenomenon is addressed as the Narrative Fallacy by the author.
The narrative fallacy addresses our limited ability to look at sequences of facts without weaving an explanation into them, or, equivalently, forcing a logical link, an arrow of relationship, upon them. Explanations bind facts together. They make them all the more easily remembered, they help them make more sense. Where this propensity can go wrong is when it increases our impression of understanding.
The problem of the induction earlier mentioned examines what could be inferred about the unseen, what lies outside our information set. While narrative fallacy, looks at the seen, what lies within the information set and thus we can examine the distortions in the act of processing it. Narrativity’s simplification of the world around us, imposes detrimental effects on our perception of the Black Swan and its wild and horrid impacts. Once an improbable event (in reality with minute probability) has occurred, we attach it with a narration and the event looks much more probable in retrospection. This is the adverse natured effect narration (fallacy) has on the Black Swan problem, thus luring us to defer the protective robust cover (which we would otherwise had taken in the absence of narrative fallacy) against the future Black Swans events.
3. We Just Can’t Predict (Related article on Inventions and Serendipity)
Taleb states that the three recently implemented technologies that have tremendously impacted our world today are the Computer, the Internet and the Laser. All three were unplanned, unpredicted and unappreciated upon their discovery and remained unappreciated well after their initial use. They were consequential. They were Black Swans. Of course, we do have a retrospective illusion of their partaking in some master plan.
“It is tough to make predictions, especially about the future”
Yogi Berra
The world is far, far more complicated than we think it is, which is not a problem, except when most of us think it to be narratively simple. We tend to “tunnel” while looking into the future, making it business as usual, Black Swan free, when in fact there is nothing usual about the future. Taleb reiterates that we are very good at narrating backwards and at inventing stories that convince us that we understand the past. He finds it scandalous that in spite of the poor empirical record, we continue to project into the future as if we were good at it, using tools and methods that exclude rare events – The Black Swans
4. The Bell Curve, that Great Intellectual Fraud
Taleb goes on to decimate the calculations based on the Bell curve by injecting that measures of uncertainty that are based on the bell curve simply disregard the possibility, and the impact, of the sharp jumps or discontinuities and are therefore inapplicable in the Extremistan (An environment which deals to extremes as opposed to Mediocristan – mediocre or lying in the middle majority of the normalized curve). Using them is like focusing on the grass and missing out on the (gigantic) trees. Although unpredictable large deviations are rare, they cannot be dismissed as outliers because, cumulatively, their impact is so dramatic.
The traditional Gaussian way of looking at the world begins by focussing on the ordinary and then deals with the exceptions or so-called outliers as ancillaries. But there is a second way, which takes the exceptional as a starting point and treats the ordinary as subordinate. Taleb says that we can make good use of the Gaussian approach in variables for which there is a rational reason for the largest not to be too far away from the average. It means that even in the Gaussian philosophy, the extremes are present but they are so rare that they do not play a significant role in the total and hence their impact is negligible. The effect of such extremes is pitifully small and decreases as your population gets larger. Gaussian methods are perfect for the academics as per Taleb, but when it comes to real world problems, the bell curve rolls itself as an intellectual fraud since the outliers, the extremes in reality have an impact so huge that they are not accounted for under the bell curve by virtue of them being ignored. And that is exactly where the outliers – The Black Swans – hit us the hardest since they were never kept as part of the equation. Gaussian curves sucks randomness out of life – which is why it is popular. We like it because it allows certainties! But life as we know it, is hardly certain. Hence treating Black Swan problem with extreme caution becomes highly imperative.
Note: In this book Taleb has explicitly indicated his fears that the world might be gripped under a virus threat from which respite will be difficult (This pandemic “Coronavirus” is a “Black Swan”). Taleb refutes the claim of Thomas Freidman that Globalization is the way ahead to build a Global society. A Global society is prone to imminent pandemic strikes, which are highly impactful but have low probability, thus a Black Swan as per NNT (Related Synopsis of the book “The Lexus and the Olive tree” by Thomas Friedman).
This is the core message that I received from the book The Black Swan. It is a great read and I strongly recommend you to read it.
Thanks for reading.
