Context: As with the other articles in the ‘Notes from the book’ series, the primary reader I had in mind when writing this is me. I use these notes as an online Journal, with the act of writing a way to learn better, and the act of publishing, a driver to be very clearer in my views and to create an easy to access reference source from wherever I am. You may find some of the quotations longer than a typical book review, and this is by design. The notes are those I highlighted when reading the book using my Amazon Kindle – I outline how I sync these to my publishing workflow in this article.
Introduction
The Black Swan, by Nassim Nicholas Taleb is both a book and a mental model referred to all the time – especially in financial circles. The central idea of the book concerns our blindness with respect to randomness, particularly large deviations – due in part to a very human bias to imagine the world in an easy to predict rules-based manner.
It wasn’t a quick or easy read – parts were a little too academic for me – but hopefully i have distilled the key points below. It has changed the way I think about the world, so I think it’s worth the effort.
What Is a Black Swan?
Intro to the black swan concept
Before the discovery of Australia, people in the Old World were convinced that all swans were white, an unassailable belief as it seemed completely confirmed by empirical evidence. The sighting of the first black swan might have been an interesting surprise for a few ornithologists (and others extremely concerned with the coloring of birds), but that is not where the significance of the story lies. It illustrates a severe limitation to our learning from observations or experience and the fragility of our knowledge. One single observation can invalidate a general statement derived from millennia of confirmatory sightings of millions of white swans. All you need is one single (and, I am told, quite ugly) black bird.
A Black Swan event is defined by three key attributes:
- Rarity: It lies outside the realm of regular expectations, meaning nothing in the past convincingly points to its possibility. “First, it is an outlier, as it lies outside the realm of regular expectations.”
- Extreme Impact: It has disproportionately large consequences. “Second, it carries an extreme impact.”
- Retrospective Predictability: After it occurs, we concoct explanations to make it seem predictable in hindsight. “Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact.”
A turkey before and after Christmas (or thanks giving) example
From the standpoint of the turkey, the nonfeeding of the one thousand and first day is a Black Swan. For the butcher, it is not, since its occurrence is not unexpected. So you can see here that the Black Swan is a sucker’s problem. In other words, it occurs relative to your expectation.
Mediocristan vs. Extremistan: Where Black Swans Live
Taleb introduces two conceptual worlds to explain where Black Swans occur:
- Mediocristan:
- Outcomes are mild and predictable (e.g., human height).
- No single observation significantly affects the total outcome.
- Events follow a normal (Gaussian) distribution, where most outcomes cluster around the mean.“When your sample is large, no single instance will significantly change the aggregate or the total.”
- Extremistan:
- Outcomes are wild and dominated by rare, extreme events (e.g., wealth distribution).
- One observation can disproportionately impact the total outcome.
- Events follow fat-tailed distributions, where rare outliers dominate.“In Extremistan, inequalities are such that one single observation can disproportionately impact the aggregate.”
Detailed characteristics of Mediocristan and Extremistan from the book
| Mediocristan | Extremistan |
|---|---|
| Nonscalable | Scalable |
| Mild or type 1 randomness | Wild (even superwild) or type 2 randomness |
| The most typical member is mediocre | The most “typical” is either giant or dwarf, i.e., there is no typical member |
| Winners get a small segment of the total pie | Winner-take-almost-all effects |
| Example: audience of an opera singer before the gramophone | Today’s audience for an artist |
| Impervious to the Black Swan | Vulnerable to the Black Swan |
| Subject to gravity | There are no physical constraints on what a number can be |
| Corresponds (generally) to physical quantities, i.e., height | Corresponds to numbers, say, wealth |
| As close to utopian equality as reality can spontaneously deliver | Dominated by extreme winner-take-all inequality |
| Total is not determined by a single instance or observation | Total will be determined by a small number of extreme events |
| When you observe for a while you can get to know what’s going on | It takes a long time to know what’s going on |
| Tyranny of the collective | Tyranny of the accidental |
| Easy to predict from what you see and extend to what you do not see | Hard to predict from past information |
| History crawls | History makes jumps |
| Events are distributed* according to the “bell curve” (the GIF) or its variations | The distribution is either Mandelbrotian “gray” Swans (tractable scientifically) or totally intractable Black Swans |
The Fallacy of Normal Distributions
Taleb critiques our reliance on normal distributions in fields like finance, economics, and risk management:
- Normal distributions underestimate the likelihood and impact of extreme events.
- They assume a world of “white swans” where randomness is mild and outcomes are predictable.
- In reality, many domains are governed by fat-tailed distributions where extreme events dominate outcomes.
“Extrapolating using statistics based on observations of past events is not helpful for predicting black swans.”
“When I ask people to name three recently implemented technologies that most impact our world today, they usually propose the computer, the Internet, and the laser. All three were unplanned, unpredicted, and unappreciated upon their discovery, and remained unappreciated well after their initial use. They were consequential. They were Black Swans. “
The Pitfalls of Platonic Thought
Taleb critiques our tendency to oversimplify reality through abstract categories and models – a phenomenon he calls “Platonification” (after Plato):
- Platonification: The desire to impose neat structures on messy reality leads us to mistake models for reality. “Platonicity: ‘The desire to cut reality into crisp shapes.’ Our tendency to mistake the map for the territory.”
- The Platonic Fold: This is where idealized models break down when confronted with real-world complexity. It’s at this boundary that Black Swans emerge. “The Platonic fold is the explosive boundary where the Platonic mind-set enters in contact with messy reality, where the gap between what you know and what you think you know becomes dangerously wide. It is here that the Black Swan is produced.”
Cognitive Biases That Blind Us to Black Swans
Taleb identifies several mental traps that distort our understanding of randomness:
- Narrative Fallacy: We create stories to explain random events, increasing our illusion of understanding. “The narrative fallacy addresses our limited ability to look at sequences of facts without weaving an explanation into them.”
- Confirmation Bias: We seek evidence that supports our beliefs while ignoring contradictory data. “Cognitive scientists have studied our natural tendency to look only for corroboration; they call this vulnerability to the corroboration error the confirmation bias.”
- Silent Evidence: We ignore what is absent or unseen when interpreting outcomes (e.g., success stories without accounting for failures). *”History hides both Black Swans and its Black Swan–generating ability from us.” “*Does crime pay? Newspapers report on the criminals who get caught. There is no section in The New York Times recording the stories of those who committed crimes but have not been caught.”
The cure to some of these biases are as follows:
- Narrative fallacy – understanding the difference between system 1 and system 2 thinking as researched by Daniel Kahneman and set out in my notes on his book ‘thinking, fast and slow’ here. Misunderstanding of the Black Swan can be largely attributed to our using System 1 thinking, i.e., falling for narratives, and the sensational – as well as the emotional – which imposes on us a wrong map of the likelihood of events.
- Confirmation bias – Karl Popper introduced the mechanism of conjectures and refutations, which works as follows: you formulate a (bold) conjecture and you start looking for the observation that would prove you wrong – otherwise known as falsification. This is the alternative to our search for confirmatory instances.
- Make predictions and keep a tally of your predictions.
Strategies for Navigating Uncertainty
To thrive in a world shaped by Black Swans:
- Focus on Robustness Over Prediction:
- Build systems that can withstand negative Black Swans while benefiting from positive ones (become ‘Antifragile’).
- Example: Diversify investments instead of relying on precise forecasts.
- Embrace Tinkering:
- Experimentation and adaptation are more effective than rigid planning. “The strategy for discoverers and entrepreneurs is to rely less on top-down planning and focus on maximum tinkering.”
- Denarrate Your Life:
- Minimize exposure to sensationalism (e.g., news) and focus on empirical evidence. “Shut down the television set… Train yourself to spot the difference between the sensational and the empirical.”
- Beware Overconfidence in Models:
- Acknowledge model limitations and avoid mistaking them for reality. “Making a naïve observation of the past as something definitive or representative of the future is… why we fail to understand Black Swans.” “Plans fail because of what we have called tunneling, the neglect of sources of uncertainty outside the plan itself.”
- Barbell strategy
- Dual allocation: Invest or plan with extreme caution on one side (ultra-safe assets or strategies) and a small, aggressive portion on the other (high-upside, speculative bets). “You clip your downside to protect against extreme harm and let the upside—the positive Black Swans—take care of itself.”
Final Thoughts
Taleb’s central message is that rare, high-impact events – Black Swans – shape history far more than incremental changes or predictable trends. By recognizing cognitive biases, rejecting over-reliance on normal distributions, and embracing uncertainty, we can better navigate a world governed by unpredictability.
“We tend to ‘tunnel’ while looking into the future… when in fact there is nothing usual about the future.”
