Your Input Needed: Hunting the Black Swan

“Ferreting out antilogics is an exhilarating activity.”

Do you agree with the above sentence? If so, you will probably enjoy the writing of Nassim Nicholas Taleb, a polymathic gentleman whose new book is called The Black Swan: The Impact of the Highly Improbable. Here’s how its dust jacket succinctly describes the thesis: “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.”

I am about a third of the way through The Black Swan, and am finding it to be one of the most fun and challenging books I’ve read in a long time. It barrels its way through history, psychology, philosophy, statistics, etc. You find yourself arguing Taleb every third sentence or so — but, to me, that is part of the great fun. He is a brash, stubborn, entertaining, opinionated, curious, cajoling writer and thinker. I also very much liked his previous book, Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets. The two books have similar worldviews but it is worth reading both of them. (FWIW, based on what he’s written, I think he would probably hate Freakonomics, and he explicitly hates the financial end of economics.)

I’m sure that some of you have already read The Black Swan, since it is a New York Times best-seller. If not, you can learn quite a bit about Taleb from his home page, as well as from this very good profile that Malcolm Gladwell wrote a few years back.

I e-mailed Taleb the other day and asked if he’d be willing to answer a Q&A to be posted on this blog. He agreed. So here’s what I’d like to propose:

Since so many of you had such good suggestions for questions to ask Bill Clinton (an opportunity that, alas, fell apart), I thought you might want to submit questions for Taleb. Please do so in the comments below. Then we’ll turn the questions over to Taleb and let him give us some answers. Be nice, have fun, think hard.

Addendum: You can find the answers to these questions here.


Matt W

Has the hedge fund he runs, described in the Gladwell article, done well since then?

Caitlin

Black swans are the default setting for swans in Australia (they're a native bird)- I wonder if he'll have to rename his book for publication Down Under?!

williamperkins

I'm not sure he would hate Freakononmics - it seems like Freakonomics is mainly concerned with activities that are not affected by Black Swans: names, crime statistics etc.

my question:
In Fooled By Randomness, you write about using a Monte Carlo simulator to do experiments and make trading decisions. How can you do that without having to assign probabilites to rare events, or if you do assign such probabilites, how do you avoid the very Black Swan problems you write about?

egretman

Ok, it's hard to argue with a definition. Right? But after you study his three facts that make up his Black Swan definition(unpredictable, massive impact, after-the-fact explanations of its predictablility), I yearn to ask what would he have us do?

Would he NOT have every venture capital firm in the world try to duplicate Google's success? Would he NOT have ever country in the world trying to prevent another 9/11?

Once a Black Swan occurs does it not now become predictably possible from now on?

And is he not confusing our desire to explain such Black Swans with our desire to replicate or prevent them from occuring in the future?

In other words, wouldn't it be a completely illogical world if we did NOT analyse and attempt to explain our Black Swans?

egretman

Ok, it's hard to argue with a definition. Right? But after you study his three facts that make up his Black Swann definition(unpredictable, massive impact, after-the-fact explanations of its predictablility), I yearn to ask what would he have us do?

Would he NOT have every venture capital firm in the world try to duplicate Google's success? Would he NOT have ever country in the world trying to prevent another 9/11?

Once a Black Swan occurs does it not now become predictably possible from now on?

And is he not confusing our desire to explain such Black Swans with our desire to replicate or prevent them from occuring in the future?

In other words, wouldn't it be a completely illogical world if we did NOT analyse and attempt to explain our Black Swans?

SamT

My question: Why are you so compulsively obsessed with Plato?

volterra

Could Taleb please explain again why when the time scale shrinks, noise rises compared to meaning (what he calls "The scaling property of randomness)? I didn't understand it from the dentist example (Philostratus in Monte Carlo - Fooled by Randomness)

MikeH

Do I understand him correctly? The success of Google is random? 9/11 was random?
Maybe I'm a simpleton (I only have an undergrad degree in economics) but these sentiments seem, not only silly, but elitist, condescending, and...wrong.
9/ll was an act perpetrated by thinking individuals; it was calculated. 9/11 is no more random an event than my getting up in the morning to drive to work.
Google's success is due to it's providing a superior product compared with it's competitors. Once again, an act done by thinking, calculating individuals. If this were a random event than the success of any human endeavor must be a random event. The success of this blog, of the book to which it owes its name...all of it random?
I doubt it. But maybe I'm being to harsh or I'm way off base with misunderstanding of his thesis.
Either he must be joking or I'm completely missing the point.
Can anyone tell me if I've misunderstood what this man is saying?

Read more...

MikeH

Wow. I should have proof read that. I can see a couple of typos. Sorry ladies and gents.

JamesDMiller

Doesn't the stability and importance of Moore's Law somewhat cut against your book's thesis?

fmb

An alternative review is here:

http://mahalanobis.twoday.net/stories/3628077/#3665775

[I haven't read the book myself.]

pparkman

I'm really unqualified to ask any questions as I haven't read either of his books, but from the Gladwell article, I am inspired to ask what Taleb thinks about quantum mechanics. If quantum mechanics postulates that everything that happens is a product of random processes aggregated in massive numbers, does the fact that Newtonian physics is undeniably predictable indicate that financial events could be aggregated in a similarly predictive way?

asparagus

I really enjoyed "Fooled By Randomness."

My question: How best should a firm incorporate the possibility of large random events in its planning? I work at a large oil company whose revenues are the price of oil, which in the last decade has been $10/bbl and $80/bbl.

There are always expensive consultants calling to offer to run Monte Carlo simulations. But since there require a distribution, which I don't believe they know any better than I do (and I don't know at all), I have always turned them down. If not probabalistic, stick with deterministic? what else?

frankenduf

ask him if god plays dice
to MikeH- I think the 9/11 reference is probably sensationalistic to sell books, rather than a tight analogy (lest we forget that the WTC was bombed in the 80s)- but I think there's something to his point that we are driven to integrate outliers- this goes against the wisdom in knowing our limitations

egretman

9/ll was an act perpetrated by thinking individuals; it was calculated. 9/11 is no more random an event than my getting up in the morning to drive to work.

No, no MikeH. You've fallen into his trap. Think of 9/10. Would anyone have predicted 9/11? The fact that it now seems logical still doesn't make it predictable before the fact. Not to the particulars at any least.

This is also part and parcel to the fact that if you are willing to take any Black Swan that comes along, then they are really not that rare. Someone said on this blog a while back that miracles happen every 20 minutes. (I think that was the saying) But you will never predict what Black Swan/miracle is coming next. (If you do then it's not a Black Swan or a miracle, by definition. But that's another point for later)

But I still think the existence of Black Swans is not the interesting point. It's what to do about them.

We know what to do with the quantumly random decay of an uranium atom. Don't we know what to do with the Black Swan of 9/11?

Read more...

egretman

I humbly offer this to Mr Taleb for his next book jacket. May I suggest the inside back cover.

Some day soon a random event
Will shake your beliefs anchored in cement
You can make of it anything you represent
Either a phenomenon of extraordinary rare extent
Or a familiar old argument of known intent
But I'm readily sure one hundred and ten percent
That you will never win a bet before hand on it's content

(This poem, if you want call it that, is CopyLefted. Free to reproduce with proper citation. And half the royalties of course)

snubgodtoh

asparagus: great call not hiring a consultant who claims he needs a known distribution to conduct a monte carlo simulation--that's the whole point.

I miss RandyFromCanada, how bittersweet. If you're lurking, please grace us with one of your gems, Randy. Please.

conor

(note, only through half of Black Swan, but read Fooled by Randomness)

Mr. Taleb,

Like most people, I am going to live my life in Mediocristan. I work in a scalable job.

As I understand it, your strategy is to pay a small amount in the form of bets on a Black Swan occurring and then reap a large win when it does come, recouping the small, continuous losses.

To me, this sounds like a form of insurance. Could something resembling your fund be available to the masses, or the govt to provide a safety net? Or would that defeat the ability to benefit from the Black Swan?

-Conor Granahan

MikeH

egretman, I see your point but I think you might be missing mine. Perhaps I'm just childishly splitting hairs here, but let me see if I can further explain myself.
9/11 was calculated. A group of men decided to fly airplanes into buildings; the planes didn't randomly hit the buildings. Just because we wouldn't have predicted it on 9/10 doesn't mean that the event was random. Random is where the rain hits the concrete; there is no rhyme or reason to it. I guess the point I'm trying to make is that THINGS are random, and when you are dealing with RATIONAL PEOPLE "random" flys out the window.
Maybe I'm taking him too literally. When I think "random" I think of something that is arbitrary; like a random number generator on a graphing calculator.

Thoughts egretman?