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The Black Swan The Impact of the Highly Improbable specifications:

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1,099 of 1,183 people found the following review helpful:

5.0 out of five stars
Lost in Extremistan with nothing but a Bell Curve,
April 18, 2007

By&nbsp,The Dilettante “Dilly!” See all my reviews
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This review is from: The Black Swan: The affect of the greatly Improbable Hardcover

If, as Socrates could have it, the only true knowledge is knowledge of one’s own ignorance, then Nassim Nicholas Taleb is the world’s greatest living teacher. In The Black Swan, Taleb’s second book for laypeople, he gives a full treatment to notions shortly explored in his 1st book “Fooled by Randomness.” The Black Swan is just a sequel to that book, but more focused, in depth and scholarly. This is a book of serious philosophy that reads like a stand up comedy routine. Think Larry David.

The Black Swan is most likely the strongest declaration of enlightened empiricism since Ernst Mach refused to acknowledge the existence of the atom. Of course, in hypothesis, everyone today is supposed to be an empiricist all right thinking intellectuals assert to base their views Exclusively on positive scientific observation. But not many sincerely confront the implications of rigorous empiricism. Exactly, not many confront “the problem of induction,” illustrated here by the story of the black swan.

Briefly: observing an event once doesn’t predict it’ll happen again at some point. This remains true despite of the number of observations one adds to the pile. Or, as Taleb, recapitulating David Hume, has it: the observation of a million white swans doesn’t justify the declaration “all swans are white.” there’s no way to know that someplace out there a black swan isn’t hiding, refuting the rule and nullifying our “knowledge” of swans. The problem of induction tells us that we can not really learn from our experiences. It makes knowledge problematic, if not impossible. And still, humans do behave almost without exception as though they believe that experience teaches us lessons. This is forgivable, there’s no better path to knowledge. But before proceeding, one must account for the limitations that the problem of induction places on our claims to knowledge. And humans seem, at every turn, to lack this important self awareness.

In one of the many funny anecdotes that seem to comprise this complete book, Taleb recounts how he learned his extreme doubt from his 1st boss, a French gentleman trader who insisted that he shouldn’t worry about the fluctuating values of economic indicators. Indeed, Taleb proudly declares that, to this day, he remains blissfully ignorant of supposedly crucial “indicators” like housing starts and buyer spending. This is a shocking declaration from a man whose day job is managing a hedge fund. If these “common knowledge” indicators are predictive of anything dubious see above, they’re useless to you because everyone else is already accounting for them. They’re “white swans,” or common sense. Despite of their magnitude, white swans are just irrelevant to the trader they have already been impounded into the market. In this environment, one can only profitably concern oneself with those bets which others are systematically ignoring bets on those greatly not likely, but greatly consequential events that utterly defy the regular wisdom. What Taleb ought to worry about, the Frenchman warned, wasn’t the prospect of a quarter percent rise in interest rates, but a plane hitting the World Trade Center!

Yep, the exact facts of 9 11 were really presaged by this French gentlemen, as a rogue wave that just may be lurking over the horizon. And, to the modern American mind, this is THE quintessential Black Swan. Of course, the Frenchman’s insight was just a coincidence the thing with Black Swans is that they can not be foreseen.

Taleb explains that regular social scientists use induction to gather data, which is then plotted on the good old Gaussian bellcurve. With feature silliness, Taleb dubs the land of the bellcurve “Mediocristan” and informs us that it’s the natural habitat of the white swan. He contrasts Mediocristan with “Extremistan” where chaos reigns, the wholly unexpected happens, power laws and fractal geometry apply and the bellcurve doesn’t. Taleb’s fictional/metaphorical ’stans’ share something with the ’stans’ of the real world: ill defined borders. Indeed, one can never tell if one is in the comparatively safe territory of Mediocristan or if one wandered into the lawless tribal regions of Extremistan. The bellcurve can only assist you in Mediocristan, but you dont have way of knowing if you strayed into Extremistan beyond the bellcurve’s authority. That means that bellcurves are of no dependable use, anywhere. The full implications of this take a while to sink in, and are sure to produce big controversy. In July, Taleb will debate Charles Murray author of what else? The Bell Curve. I will let you know who wins.

Taleb frames his whole argument more entertainingly than I could here, and he bolsters it with an astounding command of both cutting edge social science and the complete history of philosophy. This is an astounding work of serious philosophy, and it reads like pulp fiction. Readers who enjoyed FBR will find here the same dry wit, the same literary erudition, and deep sense of the absurd that made that book so much fun. But this is better, by an order of magnitude easily the best book I have read in five years. I smell a timely pop science bestseller here to rival Gladwell or Surowiecki, but this is a classic that will be read for decades to come.

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560 of 603 people found the following review helpful:

2.0 out of five stars
Chapters 15 17 are excellent. The remainder is OK.,
July 30, 2007

By&nbsp,Gaetan Lion See all my reviews
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This review is from: The Black Swan: The affect of the greatly Improbable Hardcover

Starting with the good chapters 15 17, inside chapter 15 Taleb explains where the Bell curve works and where it doesn’t. The Bell curve captures well variables that do not deviate much from the mean. Otherwise, it doesn’t work. Taleb suggests we frequently fool ourselves in believing that correlation, regression coefficients, or standard deviation convey much info. This is because those coefficients are unstable and can flip sign when possible based on the time selected. This is because the fundamental variables are frequently not stationary enough for these coefficients to be stable.

Chapter 16 is excellent as an introduction to Mandelbrot’s fractal geometry as an alternative to Gaussian established investment hypothesis. He supports well that these mathematical tools do catch randomness of non stationary variables far better than the Normal distribution. But, he acknowledges that Mandelbrotian models aren’t predictive. When looking at the same data set, he and many colleagues each came up with different fundamental parameters to build fractal like models. And a small difference in such parameters makes a big difference in result. That is why you won’t hear most of fractal geometry inside the quantitative financial community. Still, this is a fascinating subject that deserves more exploration. For this function, I recommend Mandelbrot’s The Misbehavior of Markets

Within Chapter 17, Taleb more elaborates on the faults of the Normal distribution. He underlines that half of the return of the stock market over the past 50 years was related with just ten days with the greatest daily change. This is an example where stock returns have outliers of such magnitude that using the Normal distribution isn’t proper. Taleb describes the run ins he experienced with the living legends of modern finance as well as Myron Scholes and Robert Merton caused by his rejection of the Normal distribution assumption that underlies all their models.

The remainder of the book isn’t almost as good. Hundreds of pages may be summed up in just stating that we can not predict rare events. Taleb goes way overboard in attributing everything to luck. He thinks MicroSoft beat out Apple just caused by luck. Taleb doesn’t think about that MicroSoft open system allowed it to mushroom while Apple locked itself into a proprietary corner. As well, as indicated by Taleb both the rise and fall of Rome were due completely to luck. But, Rome was best at developing military approach and transportation networks. But, it sooner or later suffered from imperial overstretch. Explanations aren’t generally narrative fallacies as Taleb believes. They frequently beat out ignorance.

When it comes to advice, Taleb’s recommendation is interesting. It consists in an asset allocation of 85 risk free investments T bill and the 15 remainder into purchasing way out of the money Calls and Puts. By doing he positions his portfolio to catch the sporadic mispriced Black Swans.

This book is somewhat uneven in quality and isn’t almost as good as his 1st book: Fooled by Randomness alteration Not Available in US: The Hidden Role of Chance in the Markets and Life that became a classic on Wall Street. Otherwise, it still is an interesting reading.

If you find the subject of this book intriguing, let me propose some other books that are more rewarding. Scott Plous’sThe Psychology of Judgment and choice Making explores the faults in human judgments far more completely and obviously than Taleb in The Black Swan.’ Perry Mehrling’s Fischer Black and the Revolutionary Idea of Finance is an excellent book. Ideally, that can be who Taleb could liked to become. Fischer Black was smart and as cynical as Taleb about most of the body of economics and finance. Still, he left a great legacy of elegant models that people still use greatly as well as the famous Black Scholes choice model. Yes those models were frequently depending on Taleb’s dreaded Normal distribution. But, with minor mods those models have stayed valuable. Another recommendation is William Poundstone’s Fortune’s Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street that describes the career of a bright MIT mathematician, Ed Thorp. The latter showed how to effectively deal with doubt in gambling and investing. Taleb recognized Thorp’s distinctive specialty inside Black Swan.’

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773 of 858 people found the following review helpful:

5.0 out of five stars
Many vital ideas, many faults that detract from the message,
April 25, 2007

By&nbsp,Eo Gilbert, AZ United States See all my reviews

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