The Black Swan - A Review of Nassim Taleb's Book


The Black Swan - The Impact of the Highly Improbable, by Nassim Nicholas Taleb - Random House 2007

This is really more of a book about philosophy and sociology than about investing or money, but because Taleb made his millions as a trader using his radical theories, the markets provide the setting.

A black swan was thought not to exist for centuries, because all that Europeans saw was white ones. We can't always know what we don't know, so finding the first black swans was quite a surprise to many. Life is full of such surprises according to Taleb.

In his theorizing, a black swan is a highly improbable event with three important aspects:

1. It is unpredictable.

2. It has massive implications or impact.

3. After the fact it seems more predictable and and less random than it was. After a random earth-shattering event that no one predicted, we easily see the necessity of it having happened and easily explain why it did.

This is a fascinating book with great stories, but for the purpose of this website I will point out a few of the money-related aspects. Taleb shows how we underestimate the occurrence of black swans. Things that--according to the odds--are supposed to happen only every thousand years, like huge market crashes, are happening much more often than that. Although profiting from that fact is not the primary point of the book, Taleb did make his first large fortune betting on the market crash of 1987.

Actually, let me restate that: He made his money from the crash, but he did not predict it. He doesn't believe in prediction, and in fact devotes many pages to dispelling the idea that anyone can predict the markets effectively. His strategy then, and with the funds he ran later, was not to predict big moves, but to bet on them because those taking the other side of the bet consistently underestimate their occurrence. For example, they sell put options (bets on a stock going down) too cheaply, because stocks nose-dive in price more often than they think. Taleb's funds buy those options, losing money daily until the big move brings it all back and then some.

I am at a loss as to how to do justice to his ideas in one page, but I should mention that there is a way to use them. We cannot predict, but we can know that unpredictable things happen often for both good and bad, and there are ways to bet on that. For example, I have noted that the success of our websites (we have 40 or more) is random to a larger degree than I would like. I pour time and energy into one I am passionate about, and it does nothing. I build one about how to remove carpet stains, and with little additional work it grows to produce an income that pays all the bills. So I cannot predict, but I can create a higher probability of such "positive black swans" by building more websites.

After reading Taleb's book, I even hatched a plan to write a book each year, with the idea that most would make almost nothing, but by the time enough were out there (ten years, I hoped), one would catch the attention of a traditional publisher and do very well. I was working on the third book when I was approached by one of the largest publishers in the country to write a book for them.

In The Black Swan, Taleb makes it clear that we continually deceive ourselves about how much we know and can predict. The large events that have the most impact on our personal lives and the world are mostly unforeseen. But that doesn't mean we can't arrange our lives in ways that takes our ignorance into account, and ways that help us benefit from those big black swans.

Great book--one of the best I have read in years.

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