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Black Swan Magnet
The Black Swan by Nassim Nicholas Taleb is a very important book. Unfortunately, the author’s style leaves much to be desired; I’d call it sandpapery, pretentious, avuncular, sarcastic, unsexy, erudite. But it’s so brilliant that none of that matters…
EXPLICITLY NERDY STUFF
Taleb’s main point is that we suck at predicting the future. We cannot be 100% sure of ANYTHING that will happen.
Social scientists (e.g. economists) model the world with Gaussian curves – normal distributions – however, Taleb argues that this practice is fundamentally fucked because in the real world, the “outliers” (“Black Swans”… most swans are white) account for the vast majority of long-term changes and therefore cannot be discounted. I always intuited that something was up with these suspect curves, and am glad to have the explicit explanation! Taleb classifies the wider class of errors in which models of games do not truly reflect real-life situations as the “Ludic fallacy”.
Although Black Swans appear to be random, that’s only appearances. There’s no such thing as random. Taleb articulates it perfectly when he says that the appearance of randomness simply results from lack of information!
Small variables can have a huge impact; the world is also chaotic and non-linear, making modeling the future a real bitch (incidentally, I was reading Chaos by James Gleick when my friend Matthew interjected and demanded I read The Black Swan). But look: Taleb says we’re also way too arrogant (he calls this “epistemic arrogance”) when we ascribe causality as much as we do. He says we have no idea why things happened in the past the way they did – we have no way of verifying our hypotheses by experimenting against equal set of conditions in the future. Taleb brings back old-school skepticism and empiricism, and thinks that proofs by induction are impossible in the real world. Instead, we must rely on proofs by counter-example (contradiction), using negative space in order to shape our understanding.
In my opinion, this means that the only way to know if you really understand something is if you can repeat results in the future.
Examples of Black Swans: any stock market crash; most world wars; scientists believing formula equivalently healthy to breast milk; the Internet; Twitter; YouTube.
PRACTICAL LESSONS
Sure, Black Swans seem to come out of nowhere, but they can be both positive and negative. We want to minimize our exposure to negative swans but maximize our exposure to positive swans. In the stock market, NNT favors a highly aggressive-highly conservative strategy. This might mean that we should avoid blue chips (that could be easily disrupted by a Black Swan (BS) stock market crash), and instead put the majority of our money into treasury bills, and a little bit into high-risk bets that could blow big (like a Biotech company that could stumble upon a blockbuster drug). The startup seed fund YCombinator is a magnet for Black Swans: they invest a little bit of money into a many startups, hoping to have randomly included the next Google in their portfolio.
I adopt a similar strategy when it comes to my own entrepreneurship: over the past 5 years, I have started at least six significant web application projects. Out of these, four were essentially failures, one was a success (acquisition), and one I am currently working on (though we’re “pivoting”). It’s incredibly difficult to perceive what will be succeed and what won’t; the only way to find out is to put it out there and see how people vote with their attention and wallets.
One more thing I’d like to share: Taleb also admonishes against the “narrative fallacy”, which is our tendency to describe chaotic and complicated events with cohesive stories. He believes that when we do so, we over-emphasize details of little importance and neglect bits that actually had a salient impact. Unfortunately, narrative stories provide a “schema” and enhance understanding as well as encoding of memory, and narratives are more likely to spread because they are so digestible. Just as you can tweak the viral loop for internet properties by trying to make it easy for people to spread your content (adding in an invitation widget), I wonder how you can prepackage your stories to make them more readily digestible by the human mind and increase the likelihood of a meme. Perhaps I should read Made To Stick by Chip Heath.
Anyway, if you want to delve into greater depth on these ideas, check out The Black Swan by Taleb. (N.B. I would call him pretentious if he weren’t so damned accomplished. He made a fortune by betting against the swans in various financial crises; he was close enough with Benoit Mandelbrot to call him up at 2am; etc.) If you want to see how we are bad at predicting our own happiness, you can read my review of Stumbling on Happiness by Dan Gilbert. If you want a more thorough overview of fallacious thinking, I highly endorse the very awesome and very readable Predictably Irrational by Dan Ariely.
I’ll follow-up with a post “Making A Black Swan Trap”, complete with blueprints.
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