The Black Swan: The Impact Of The Highly Improbable
By Nassim Taleb
Black Swans are the extraordinary outlier.
For centuries Europeans insisted that there did not exist any black swans. All they saw were white swans in their day to day lives. It wasn’t until a Dutchmen gazed upon Australia’s glorious West Coast that Europeans saw their first ever black swan.
There is no limit to the number of white swan sightings that can prove there does not exist a black swan. But all it takes is one sighting of a black swan to disprove the rule.
“There are great inconsistencies at trying to predict the future given knowledge of the past”
As much as we think we can, we are incompetent at predicting future events.
People are pricing oil seasons in advance as a heuristic variable to an investment. Meanwhile, in reality we consistently can’t even get tomorrow mornings price right.
The point of the Black Swan is realising that just because something has never happened is not evidence that it can never happen.
If you lived in New York on the 10th of September 2001, you had no idea how much your life was going to change the following day.
The Black Swan is the extreme outlier. It is the unforeseen event not priced in to your equation of the future.
The Three Qualifications For A Black Swan
- They are an extreme event. 9/11, Coronavirus, 2004 Indonesian Tsunami…
- They have an extreme impact. Global Financial Crisis, the Spanish Colonisation of Latin America, the invention of Penicillin…
- They are only explicable after the fact. The election of Donald Trump, the catalyst of WW1 (28/7-1914)…
How are we expected to know the properties of what is infinite and unknown – the future – based off the evidence of what is finite and known – the past?
This is the Black Swan problem. Our evidence for predicting the future is distorted by Survivorship Bias.
Don’t Be A Turkey
Imagine you are the President’s turkey on the eve of Thanksgiving. You go to bed on the 25th of November fat and happy. You’re living the good life.
You have always been given lots of attention, given any food you like, they probably even fattened you with beer. You are a fat, well fed and happy Turkey…. unaware of the Black Swan to befall you the next morning.
We think along the lines of linear progression. The Turkey is predicting his future based off the experience of his past. You cannot predict the Black Swan. All you can do is prepare for it. Become Antifragile to it.
When the Turkey wakes up fat and happy on Thanksgiving morning he is taken completely off guard and met with his black swan. He is slaughtered. It is an extreme outlier, It has significant impact and is only explicable (to him) after the fact.
If you have survived until this point then you can infer two completely opposite conclusions based off your experience. A) You are immortal. B) You are closer to death… you cannot predict the future based off the past.
Mediocristan Vs Extremistan
Nassim speaks about two fictional countries and their differences concerning each owns predictive abilities.
In Mediocristan, land of the average, observing the first 100 outcomes will provide analysts a good indication for the next 10,000. In Extremistan, quite the opposite. Observing the first 100 outcomes provides no insight into predicting the next 10, let alone the next 10,000.
Think of how domain specific outliers influence different distributions.
If you average the weight of 100 random people, there is no person (alive) who can be added to the sample and weigh enough to significantly alter the average. If the average weight of 100 people is 75KG, an outlier weighing 200KG is barely going to move the needle. The same is true for calorie consumption. There is no day where you can eat enough calories to make you fat, nor is there one day where you can eat so insufficient a number of calories to make you skinny. These are domains of Mediocristan.
Now imagine we take a sample of 100 people and calculate their average net worth. There are outliers alive (Jeff Bezos or Cristiano Ronaldo) who can totally distort your average making everyone else’s combined net worth look like a rounding error.
There are domains subject to an outlier so extreme that it can completely distort the game for the rest. These domains are wealth, income, subscribers, deaths, size of planets, viruses, etc.
‘You Can’t Lose A Ton Of Weight In One Day, But You Can Lose A Ton Of Money’
The problem of the Black Swan is that we think we live in Mediocristan and are able to predict the future based on the past. We can safely predict that the next person added to our average weight cannot weigh more than 500KG. However we live in Extremistan and are exposed to its domains. All of the world’s USD can be wiped clean tomorrow should a Black Swan event so significant occur.
We live in Extremistan.
The problem is, we think we live in Mediocristan.
Example Of Black Swan Events
The Boy Wizard
Who could have predicted that a single mother on welfare writing a teen fantasy book about a magical boy with a funky birthmark would manage eclipse the Queen in riches?
Book sales – a domain of Extremistan – are unpredictable. The success of J.K Rowling is a Black Swan. All other fictional fantasies exempt a few can boast total book sales equivalent to J.K Rowlings worst day.
The Tiger And The Casino
Despite the casino spending millions of dollars on surveillance technology and gambling theory. In the early 2000’s, The Mirage Hotel lost over a hundred million dollars as consequence of un-calculated risk.
The marquee performers, Siegfried and Roy, were attacked by the star tiger they reared from birth. Performances came to a halt, and the casino suffered a considerable slump in visitors.
The casino’s insured risk was so comprehensive it even included the possibility of the tiger attacking someone in the crowd. But so unlikely was the tiger to attack its performer (after all, it had never happened before) that the likelihood fell outside of the realm of possibility.
The Coronavirus, Covid-19
A virus, equivalent to that of the common cold, managed to bring the global economy to a standstill. A war can barely do as much damage.
You can predict that a virus will spread, but the specifics you cannot. You cannot predict where and when it will show its ugly head. Taleb may as well have written the Black Swan as an explanation for Covid-19 and the way it is being handled. (I write this on 16/03/2020).
It’s unpredictable, it is having an extreme impact, and it’s only explicable after the event. Covid-19 also tests the populous to their robustness and ability to handle the Black Swan.
People going nuts over toilet paper and cleaning the shelves of pasta, yet still catching the crowded bus to work and standing in line for a concert. These people are completely inept to manage the outcome of a Black Swan.
Expose Yourself To Positive Black Swans. Hedge Against The Negative
Black Swans are not all bad.
They are extreme and highly impactful, but need not always sing a story of sorrow. Was Chris Hemsworth’s casting as Thor a case of ‘he was the only man for the job’ or more likely that, ‘he was in the right place at the right time’? Who would Chris Hemsworth be if Thor was a box office failure? On the pie chart of his success, how big is the randomness slice?
Nassim Taleb quite reductively instructs us to ‘go to parties’. Brilliant advice, yes, but too simplified. He means to maximsie your chance at experiencing the upside of a Black Swan, you need to reap the upside and downside of multiple random experiences.
How To Survive A Black Swan
- Expose yourself too many different experiences.
- Learn whatever you can.
- Don’t burn bridges.
- Follow your own tastes.
- Keep 90% of your wealth in the safest, lowest risk vehicle available, and frivolously spend the rest on high risk pursuits.
- Have your ideas and knowledge tested.
- Ultimately – Do more failing, do less averaging, stress the body and the mind.
The most important takeaway from this is to acknowledge the existence of Black Swans. Acknowledge that we live in Extremistan, and there is – by definition – no way in predicting when the next Black Swan will occur. The only way to profit and not die from the Black Swan is to become Antifragile. So go to parties, get your finances in order and do more, because another Black Swan is around the corner, and who knows what it will be?
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