The Black Swan: Second Edition: The Impact of the Highly Improbable: With a new section: "On Robustness and Fragility" (Incerto)
The most influential book of the past seventy-five years: a groundbreaking exploration of everything we know about what we don't know, now with a new section called "On Robustness and Fragility." A black swan 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 random, and more predictable, than it was. The astonishing success of Google was a black swan; so was 9/11. For Nassim Nicholas Taleb, black swans underlie almost everything about our world, from the rise of religions to events in our own personal lives. Why do we not acknowledge the phenomenon of black swans until after they occur? Part of the answer, according to Taleb, is that humans are hardwired to learn specifics when they should be focused on generalities. We concentrate on things we already know and time and time again fail to take into consideration what we don't know. We are, therefore, unable to truly estimate opportunities, too vulnerable to the impulse to simplify, narrate, and categorize, and not open enough to rewarding those who can imagine the "impossible." For years, Taleb has studied how we fool ourselves into thinking we know more than we actually do. We restrict our thinking to the irrelevant and inconsequential, while large events continue to surprise us and shape our world. In this revelatory book, Taleb will change the way you look at the world, and this second edition features a new philosophical and empirical essay, "On Robustness and Fragility," which offers tools to navigate and exploit a Black Swan world. Taleb is a vastly entertaining writer, with wit, irreverence, and unusual stories to tell. He has a polymathic command of subjects ranging from cognitive science to business to probability theory. Elegant, startling, and universal in its applications, The Black Swan is a landmark book--itself a black swan.
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Community Reviews
This was an interesting read. I found the ideas about randomness and risk management were interesting. The book challenges many common assumptions about likelihood and risk.
I liked how Nassim Taleb created two different worlds of Extremistan and Mediocristan to talk about different kinds of randomness. He talks about Black Swan events related to different fields such as religion, finance, and technology. I was thinking of real-world events that would qualify as black swans, events that happened after the first edition of this book came out in 2007.
Here's the list I came up with:
1. The 2008 recession - The Great Recession had a significant economic and political impact on the United States. While the recession technically lasted from December 2007 – June 2009, many important economic variables did not regain pre-recession levels until 2011–2016.
2. 2010 - Deepwater Horizon Oil Spill: The largest marine oil spill in history occurs in April 2010 after a surge of natural gas blasts through a concrete core on a rig located in a valley on the continental shelf called the Mississippi Canyon.
3. 2011 – Earthquake and Tsunami in Japan: The magnitude-9 offshore earthquake caused a massive tsunami. Nearly 16,000 die and a level-7 nuclear meltdown at Fukushima Daiichi Nuclear Power Plant sends radioactive chemicals as far as Canada and California.
4. 2012 – Hurricane Sandy ripped through 8 countries, killing hundreds and causing $70 billion in damage
5. 2017 – Hurricane Harvey swept through TX and LA and caused $125 billion in damage
6. 2020 – The COVID pandemic has had a significant global impact in terms of mortality and finance
7. 2022
- Supply chain disruption and rising inflation globally
- Russia/Ukraine War and China/Taiwan tensions
- Flooding in Pakistan: another example of a Climate Change related event
In my work as a Health Actuary, I use statistical models to calculate reserves for a portion of claims that would have a regular/predictable pattern (low severity, high frequency), which I would consider belonging to Mediocristan. And then we use separate methods to estimate reserves for the irregular portion of the claims. The irregular claims do not appear as frequently and have high severity.
I liked the mention of Barbell strategy. NNT mentions the barbell strategy as taking maximum exposure to the positive Black swans while remaining paranoid about the negative ones.
I also liked NNT's take on uncertainty - "The central idea of uncertainty being – in order to make a decision you need to focus on the consequences (which you can know) rather than the probability (which you can’t know)”
I was curious about the use of Fractal distribution in the actuarial field and came across this paper at actuaries.org - https://actuaries.org/EVENTS/Congresses/Cancun/afir_subject/afir_36_clarkson.pdf
It discusses Fractal distribution and financial risk applications.
Overall, I found Nassim Taleb's ideas interesting and will be re-reading this book at some point in the future.
As an aspiring actuary interested in enterprise risk and disruptive events, I am really enjoying this book. Having lived through 9/11, the Great Recession, and now the COVID pandemic, it seems obvious to me that the author is correct about Black Swan events being the most important shapers of history.
I'm only about a third of the way through it, so I am hoping that after he convinces us that there is no way to predict or foresee the next Black Swans, that he will at least give us some advice on how to prepare to weather them, or to take advantage of them.
EDIT: Now that I've finished the book I have a few more observations. Or rather, questions... He takes a dim view of ERM (Enterprise Risk Management). He points out, rightly I think, that ERM quantifies and prepares for everything except the next inevitable Black Swan event. Is he right? Are we wasting our time doing ERM?
I do like his comments on how and why systems need redundancy to be resilient. I think we learned a lesson in this during 2020-2021 with the supply chain issues that happened.
In short, I loved this book. I think it provides a lot of perspective on disasters, on history, and on why we should always expect cataclysmic change.
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