Book Review: “The Black Swan” – Nassim Nicholas Taleb

Until someone saw a black swan, everyone believed swans were all white.  But an explorer discovered a white swan, and then the idea of what a swan looks like was changed forever.

This is the simple idea behind Taleb’s “Black Swan”.

Taleb wants us to understand that life is not lived in a straight line.  There are constant unpredictable events that shape our world, some for the good and some for the bad.  And with the increasing speed of knowledge, technology and interconnectedness of the world today, the black swan will change more of our future.

Taleb describes three reasons why we don’t see the black swan coming…

1) narrative fallacy – we try to explain events so that we feel better.  The stock market reporters are terrible about this, saying things like “the market jumped 20 points today on news of war in Israel”.   While the war may have certainly had some impact, explaining things in such a way is a gross oversimplification of a complex system.  In our own lives, we try to explain away complex things like a breakup of a relationship with simple answers as well.  Obviously, the more complex the problem, the less the simple explanation works.

2) ludic fallacy – using games to try to explain real life situations.  he uses a simple story involving a coin that was flipped 49 times, and asks the reader to project the 50th.  On a statistics exam, the odds would be 50/50.  But in real life, it is far more likely that the coin is rigged in some way, a la Two Face’s coin in the Batman movies.  Taleb explains that games operate under set rules and life does not.  In life, we can never know all the answers and small things can have a tremendous effect on outcomes (butterfly effect).

3) illusion of expertise – educated people are no more skilled at predicting the Black Swan than an Average Joe (the Plumber).  Unfortunately, they are just as prone, if not more to being caught by negative black swans as they base their data on 1 and 2 without realizing #3.  Risk management experts tend to be highly educated.  Fannie Mae had a ton of risk management experts, as Taleb mentions in the book.  Enough said.

Taleb is funny and engaging.  While explaining pretty technical data, he uses stories and humor to lighten the reading.

At heart, Taleb is a trader and investor.  Those with a weakness for the stock market (me) and a desire to learn and think will love this book.  Taleb advocates an investment strategy that avoids negative black swans while increasing exposure to positive ones.  In his mind, this is 90% of investments in treasury bonds and 10% in highly speculative companies with multiplier growth potential.  I’m not sure that I agree with the T-bonds, as the current stock market collapse has dealt a major blow to the growth potential of T-bonds.  I might keep your money in a high interest savings account at a bank you trust instead.  If you’re invested in some sort of IRA though, the Treasury bonds might be the place to be.