The Black Swan, A Review
The Black Swan, by Nassim Nicholas Taleb, remains one of my favorite reads due to its humorous, philosophical, and skeptical exploration of unlikely, impactful events and the aspects of human behavior that leave us incredibly vulnerable to them. Characterized by their “highly improbable” nature and significant consequences, “Black Swan” events are those that we only see coming in hindsight. By drawing parallels between psychological tendencies and flawed institutional practices, Taleb’s fascinating perspective challenges us to conceptualize randomness and the possibility of the impossible.
As a trader, Taleb describes traditional financial models as narrow, criticizing their inability to take Black Swant into account until after the fact, just as humans do. Our hindsight cognitive bias causes us to fabricate causation of entirely unpredictable events after they occur, as though we “knew-it-all-along.” Our inaccurate perception of our ability to predict, Taleb describes, leads us to make dangerous predictions about the future, thus increasing our predisposition to surprise.
The idea that the past is a poor indicator of the future undermines many of our human tendencies, beliefs, and even institutional practices. Simply put, by only explaining our future with events from our past, we fail to consider any aspects of randomness or change. Although this seems reasonable, it’s extremely counterintuitive in practice. The concept is illustrated perfectly by the Black Swan origin story as follows:
The “Black Swan” name was inspired by the fact that until around 1700, humans believed all swans were white— simply because they had never seen a black one. When a Black Swan was found in Australia, explorers were shocked, as if this outcome was impossible.
This story clearly showcases the illogical ways in which humans rely on confirmation bias, rather than what Taleb calls “de-confirmation bias.” Rather than succumb to our tendencies and confirm constructed narratives, Taleb encourages us to seek counterevidence. By pursuing knowledge that contradicts our perspectives and past experiences, we begin developing resiliency against the Black Swan.
Taleb is able to turn a seemingly simple concept into a compelling exploration of the particular economic vulnerabilities to Black Swan events; whether in terms of underestimating market volatility or our perceptions of risk, our development of history-based narratives create dangerous overconfidence. He explores the way in which financial models and traditional risk assessment methods fail to take improbable events into account, highlighting the issues of predicting market trends solely with past data.
The Black Swan urges us to take on Mendodus’s mildly skeptical approach to the predictive use of history— ”to know history without theorizing from it.” He believes that the “illusions of knowledge,” from our prior experiences are exactly what increase our vulnerability to devastation in extreme situations. Fortunately, by acknowledging randomness and seeking to disprove existing beliefs, we can build up our robustness against them.
In today’s global economy, our exposure to such Black Swan events is higher than ever; one event can send shockwaves through supply chains, markets, and economies around the world. By prioritizing positions of robustness in our financial and political systems, we have the potential to minimize the blows taken by these events. By preparing for the possibility of the unpredictable, individuals and institutions can be better equipped to adapt in times of crisis.