Thoughts on “The Black Swan” March 8, 2015Posted by Ubi Dubium in Books.
Tags: Black swan, books, Cognitive Biases, economics, Taleb
I’ve finally finished plowing through The Black Swan. No, not the movie about ballet dancers, this is the book by Nassim Nicholas Taleb about the influence of improbable events. I’ve seen mentions in other books that the ideas in this book were influential on other thinkers whose work I really like.
As much as I was hoping that I could recommend this book as a good read, I really can’t. There’s some important ideas in it, enough to fill a longish magazine article, or maybe a much shorter book. But there’s not enough real substance to fill 300-ish pages, and it’s interspersed with digressions and ranting to the point that it interfered with my ability to follow his points, or stay absorbed in reading it. It took me months of picking it up and putting it back down to finally get through it.
One of his main ideas is defining a “black swan” event. The source of the name goes back to when people in Europe knew that all swans were white. The phrase “black swan” was used to mean something extremely unlikely. Once black swans were actually discovered in Australia, this unexpected event changed that certainty. However, Taleb uses “black swan” to mean an unforseeable event that has an unexpectedly large effect on society. Something along the lines of 9/11, or a stock market crash or the rise of the internet. (So, the discovery of black swans wasn’t actually a “black swan” event by his definition!) This kind of event can’t be directly prepared for, since there’s no way to anticipate what the next one will be.
Another good concept he has is separating “mediocristan” from “extremistan”. Mediocristan refers to situations where statistics fall into nice neat bell curves, and outliers are not of great influence. As an example, suppose you were to take a random group of 1000 people, and chart their weight distribution on a histogram. You’d probably get a nice bell curve distribution with only a few outliers. Perhaps you might get one extremely heavy person in your sample, but if you look at the total weight of the group, that person would not represent a substantial fraction of the total weight of the group nor would their addition to the group throw off the averages very much. There’s just limits on how much range of variability there can be for some measurements.
In extremistan that’s not the case. Instead of weight, let’s try charting wealth. Again, take a sample 1000 people and you might get a nice bell curve, with a few poorer people, a few richer ones, and most falling in the middle, with only a few outliers. But suppose that one of those outliers in your sample happened to be Bill Gates. Now if you look at the overall total wealth of the group, or the average wealth, that one outlier has an overwhelming effect on the numbers. Since the range of wealth doesn’t have the same constraints as a variable like weight, the same statistical methods aren’t applicable, because a single unexpected outlier can overshadow everything else. A large part of the book is spent talking about how people, particularly statisticians and economists, act like we live in mediocristan instead of extremistan, and how we are blind to the possibility of unexpected, influential, outlier events.
He also spent a lot of time on logical fallacies and cognitive biases, which was certainly relevant to his subject. Although I have read better discussions of these elsewhere, I was glad to see them included. Understanding that humans are naturally crappy statisticians, and prefer a good story to what the data actually says, helps explain why we are so bad at anticipating black swan events.
OK, good stuff so far. I was hoping there would be a substantial part of the book devoted to “OK, now what?” I wanted some discussion about the author’s proposals for the best ways to approach living in extremistan, and the best ways to structure society’s institutions so as to be able to bounce back from or adapt to the next black swan event. But there was very little of this. He talked about a specific investment strategy that he uses to guard against financial black swans, but otherwise largely ignored this important part of the discussion. (A caveat on this point – I see that in the second edition of the book there is an additional 100-page essay that looks like it may cover these points. That was not included in the e-book edition I read, so I can’t comment on its contents here. It may resolve the problem I have with the lack of “now what?” discussion.)
Instead he spends a lot of the book railing against the economists and financial professionals who do not take his ideas seriously. He calls financial forecasters, or anyone who uses a gaussian bell curve in their analysis, a bunch of dunderheads and idiots. He laments that Nobel prizes in economics are only going to “experts” whose ability to predict market movements is no better than chance. He seems to hold a lot of resentment toward those who are most respected in the field of finance and economics, and he lets it show. He seems more concerned with people recognizing that his ideas are brilliant than he is in having brilliant ideas. With this kind of arrogance in his approach, I’m not surprised that the industry would be slow to pay him much attention. If you are trying to change someone’s mind, starting out by calling them “stupid” is a poor strategy.
Another drawback to the book is the way it jumped around from point to random digression to different point to – hey look, a chicken! Reading this book was like listening to someone with ADD. (And a huge ego!) He would make conclusions that didn’t follow from his premises, use jargon that had yet to be defined, and refer to concepts that wouldn’t be discussed until later chapters. He could really have used a good editor to tighten this up and make it more readable.
There are books I have read and loved, that present innovative ideas and take the reader step by step logically and clearly to the author’s conclusions. I would name On The Origin of Species, Relativity, The Selfish Gene and Thinking Fast and Slow as wonderful books of this type. And there are the few gems that do this while also enthralling and entertaining the reader. Gödel, Escher, Bach is such a treasure of a book. I was hoping that I would be able to add The Black Swan to this collection, but sadly it just doesn’t reach that level.