The Black Swan

The Book of the Week is “The Black Swan” by Nassim Nicholas Taleb, published in 2010. In this book, the author explains his theory about rare, unexpected events, “Black Swans”– unexpected by those affected, because human traits and uncertain situations cause people to draw the wrong conclusions, formulate the wrong predictions, and make the wrong decisions. “Black Swan events are largely caused by people using measures way over their heads, instilling false confidence based on bogus results.” The author applies his ideas mostly to “experts” who manipulate the financial markets.

While Taleb makes some good points, this blogger suspects that very few readers of this book will come away fully understanding what a Black Swan is. Taleb tries to provide several examples; his illustrations are unclear as to why one event is a Black Swan and why another is not.

One example consists of five trading managers at a European-owned financial institution who wrote a five-year plan. Having neglected to consider all possible adverse future events, they were done in by “the Black Swan of the Russian financial default of 1998 and the accompanying meltdown of the values of Latin American debt markets.” Yet, Taleb writes that the 2008 financial crisis was not a Black Swan. He says such a cluster screw-up will happen again. A Black Swan is a negative or more rarely, a positive occurrence that in general, has never happened before.

One human trait people have is that they are reluctant to attribute events to randomness. But Taleb thinks randomness plays a part in all sorts of events, including long winning streaks of investors. He even generated a computer simulation showing how it would be impossible not to have money managers who beat the market year after year– he says they did so simply by luck alone. Another reason these investors are overrated is that people hear more often about winners rather than losers.

Taleb writes, “We want to be told stories, and there is nothing wrong with that– except that we should check more thoroughly whether the story provides consequential distortions of reality… Just consider that the newspapers try to get impeccable facts, but weave them into a narrative in such a way as to convey the impression of causality (and knowledge).”