The Black Swan by Nassim Nicholas Taleb
Note: My second post has appeared at Words Without Borders, and my first received a nice mention from Scott Esposito at Conversational Reading.
In the famous phrase by Isaiah Berlin that Nassim Nicholas Taleb quotes in The Black Swan, the fox knows many things while the hedgehog knows one big thing. If Malcolm Gladwell is the hedgehog in the world of Big Idea books, then Taleb is the fox. In his elegant short books, Gladwell takes one idea—the tipping point, the blink-of-an-eye decision—and makes it seem as if it neatly explains everything. (We are currently seeing a Gladwell backlash, with critics taking him to task for oversimplifying and overexplaining.)
Taleb, on the other hand, has his own big ideas, but rather than focusing them he links and radiates in many different directions. The result is a book that is much longer, messier, and quirkier than one of Gladwell’s, but that is likely to set off connections of ideas like strings of firecrackers in the reader’s mind.
A Black Swan, as it’s defined here, 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 than random, and more predictable, than it was.” Like George Soros, Taleb believes in “radical fallibility” (Soros’ term)—the idea that in investing, as in life, we know a lot less than we think we do. Like Soros, he aspires to being a philosopher. But whereas uncertainty brings out the humility in Soros, it brings out the combativeness in Taleb.
Taleb, an expert in chance and probability, is annoyed when people compare his field of study to gambling. Gambling is in fact much more predictable than the rest of life, and casinos generally do a good job of protecting themselves against lucky patrons. As an illustration, he lists the major losses of one big casino. All of them were caused by unpredictable Black Swans, including the loss of $100 million when a trained tiger mauled Roy Horn of Siegfried & Roy.
In a similar way, we are seeing now that stock markets and economies can be devastated by risks that are completely unaccounted for by “sigma, variance, standard deviation, correlation, R square, and the eponymous Sharpe ratio.” These numbers, and the Modern Portfolio Theory that they underlie, are not just useless in Taleb’s view. They are worse than useless, because they create the illusion that we understand the risks we face.
As for the strings of firecrackers: When Taleb says that histories and societies “go from fracture to fracture, with a few vibrations in between,” I thought of Stephen Jay Gould’s theory of punctuated equilibrium, which holds that evolution works in the same way: long periods of stasis punctuated by short periods of rapid change. Taleb discusses the value of cognitive diversity, the idea developed at length by James Surowiecki in The Wisdom of Crowds that solutions are best found when many people approach a problem from independent points of view (not typical in the financial world). He also takes up the findings of Dan Gilbert and other researchers on the concept of happiness, who have found that neither our successes nor our setbacks have as much effect on our happiness as we predict they will. And he agrees with Seth Godin and others that success breeds success, an idea known as cumulative advantage.
