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