The Black Swan

Rating: 10/10

Best Line #1: I am going to be blunt.

Best Line #2: When we think about tomorrow, we just project it as another yesterday.

The very idea of uncertainty is foreign to many people. It isn’t solely about ignorance. There is much that we recognize we do not know. It isn’t solely about prediction, either, in the measured sense of error rates and Vegas odds. Uncertainty also includes a large, consuming body of reality that we can simply call “unknown unknowns”. As Taleb writes,

What is called ontological uncertainty, as opposed to epistemic, is the type of randomness where the future is not implied by the past (or not even implied by anything). It is created every minute by the complexity of our actions.

Unknown Unknowns

That quote from Taleb can be hard to digest. So again: think of it as “unknown unknowns”. Donald Rumsfeld said it best and it’s at the heart of what The Black Swan is all about.

You might remember this one. In December of 2012, as the nation was wrapped in a debate over the presence of weapons of mass destruction in Iraq, Donald Rumsfeld was asked a question. It came from a reporter during a press briefing at the Pentagon. Video is below but here’s Rumsfeld’s response (emphasis added):

“Reports that say that something hasn’t happened are always interesting to me, because as we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know.”

But there are also unknown unknowns – the ones we don’t know we don’t know. And if one looks throughout the history of our country and other free countries, it is the latter category that tend to be the difficult ones.”

When it comes to Black Swans, this is a great explanation. The key here is that unknown unknowns are things we cannot expect because there has been no prior experience. For countless decades, the western world was convinced that there were no black swans. They had no basis to think otherwise. Until they did.

What flipped this? Information. The discovery of black swans in Western Australia in 1697 obliterated all certainty and the world stood corrected. Prior to that discovery, I wonder what would have happened if a wealthy noble had wagered his entire estate to refute the existence of such creatures? There’s no black swans in the world! I’ll bet my farm on it!

As Taleb writes:

How do we know what we know? How do we know that what we have observed from given objects and events suffices to enable us to figure out their other properties? There are traps built into any kind of knowledge gained from observation.

This comes early in the book and is followed by The Greatest Line Graph ever created. Consider the Thanksgiving Turkey and it’s regression-based prediction model. Over the course of several months, a flock of domestic turkeys have observed a delightful and regular increase in food allotments from their caretakers. It appears, by all indications, that this trend will simply continue as the turkeys eat more, enjoy themselves, and experience an ever-improving quality of life. From now until, well, forever, they will enjoy the most wonderful state of heavenly well-fed bliss. That’s what the data shows.

Such confidence! Such clarity! Until, of course, Thanksgiving arrives.

From A North Investments

An Arrogant Defense of Humility

That’s effectively what happens every time we make bold proclamations with absolute certainty. Which is why folks like Rumsfeld, in positions like Secretary of Defense, rarely made such claims. And that’s why reading this book has been so important to me.

Many of us would like to have a deeper understanding of the world and a better ability to predict. Taleb’s work taught me how we should mistrust that knowledge, even as we cultivate it. He also helped me see not only how we can improve our predictions but where we can improve them. Predictions in one area of uncertainty (Mediocristan) are wholly separate from another area (Extremistan).

Finally, The Black Swan helped me build a deep, healthy mistrust for modernity. Whether the result of marketing or engineering mindsets, we’ve developed a cognitive ease for certainty and control. We push towards systems in order to squeeze all uncertainty out of the world. The ideal I always imagine is some kind of dashboard that has a variety of stock tickers, each with little percentage measures of the odds we’ll encounter in every decision. Isn’t that what Big Data is going to give us? Total omniscience?

This drives Taleb crazy. His flagrant writing style is the result. It’s fun to read. Taleb mixes his academic’s command of concepts with the attitude of a Brooklyn cabbie. As an example:

Assuming that “randomness” is not epistemic and subjective, or making a big deal about the distinction between “ontological randomness” and “epistemic randomness,” implies some scientific autism, that desire to systematize and a fundamental lack of understanding of randomness itself. It assumes that an observer can reach omniscience and can compute odds with perfect realism.

That’s most people’s single mic drop moment at the conclusion of their book. Taleb writes passages like that on nearly every page. It’s entertaining if nothing else to see such an arrogant defense of humility. As if he said to his straw man: You can’t control everything, you moron!

We Worry Too Late

The 2008 financial crisis is one of those fantastic teachable events that can crystallize just about any concept. One example is the notion of ex post worry. In markets as well as life, we can be easily romanced by a sense of control (Everything’s going my way!) and swept up in financial euphoria (Housing values will keep climbing!). In doing so, we might start to take on more debt, abandon worry about margin calls, widen our risk tolerance, or—even worse—completely misperceive a risk as a non-risk.  

Then something happens. Something “unforeseen”.

After this unfortunate event, we tend to become hyper-cognizant of pending doom on all fronts. We start to really worry about a lot more things. This irrational worry can lengthen some components of a recession just as irrational confidence can lengthen a bubble period. It points to a strange aspect of human behavior: we never feel the appropriate amount of worry until afterward and yet, afterward, there is little left to worry about.

It’s a reverse example of the Thanksgiving turkey. Another case of mistaking past events as a indication of future events. “It was bad yesterday … therefore it will continue to be bad tomorrow.” Somehow we get over it. And then we veer yet again into overconfidence with new overtures of a bubble bursting as soon as this year (2019).

Dealing With Black Swans

Frequently, when I talk with others about these ideas, I get flustered responses. People will gladly acknowledge that this is very interesting stuff, these black swans and all, but what are they supposed to do about it? There are a few fundamental ideas that I think help here.

First, when considering a future venture, it makes sense to forecast your probable outcomes. Even so, plan and protect against the worst case scenario over the forecasted outcome. This is similar to the idea of protecting the “ideal minimum” that I wrote about in this article. It also makes you more capable of dealing with a black swan. Not impervious. But more capable.

Best of all, it is matter of mindset. Such deliberate work lowers your expectations. As Taleb writes below, this is what helps against the worst of uncertainty:

You can see here that the Black Swan is a sucker’s problem. In other words, it occurs relative to your expectation.

So you really have to undermine your own confidence. That way, you can stick to a responsible (albeit conservative) attitude. This is the stuff of the Barbell Strategy that was covered in yesterday’s article.

This will lead us to the concepts behind Taleb’s final, and best, book: Antifragile.

Ultimately, black swans are generated from faulty expectations, narrative fallacies, stubbornness brought about through confirmation bias, and a natural tendency towards whatever happens to be the prevailing (popular) perceptual contagion of the day.

They are, in fact, an absolute product of perception. Case in point, the aforementioned 2008 recession. To millions of Americans, this wasn’t a Black Swan. They never even knew about it. Millions of Americans on rural farms or in untouched public sectors of employment or the growing tech world knew there was a recession of some kind but they didn’t know the explosive, “unforeseen” nature of credit default swaps and Bear Stearns and AIG’s near-death experience.

A terrible event you can foresee is just that: a terrible event. The ones you can’t are the ones where we’ve been fooled. Taleb doesn’t want us to get fooled.

So again: define and protect your acceptable minimum, play a barbell strategy with all of life, brush your teeth, workout, read, make friends, love your loved ones, and you’ll be robust against uncertainty and, perhaps, even a bit antifragile.  

Conclusion

The Black Swan is the second book by Taleb and the first instance where I’ve featured two books from a single author. This will only happen with one other author. Such is the effect Taleb has had on me. He’s a bit of an acquired taste and he attracts all kinds of challenges from softer-spoken counterparts. I love it, though. I love that he has the courage to write so strongly from such a solid base of knowledge. It helps that he can point to the financial scoreboard and say he’s at least been right a few times when it comes to risk, finance, and investing.

All the same, he never had to write these books. So why did he? Because he is a genuine philosopher. He is a truth-seeking missile who, for better or worse, will never take anyone else’s word for it. By “it”, I mean anything.

He’s an incorrigible skeptic who is as honest as he is argumentative. We should strive for the same. Though we would be wise to temper that with some social grace. There is only so much room for Talebs of the world.   

His book can be found at this link.

Other articles from this week’s study are listed below:

How To Make A Lot Of Money

The Tortured Way We Try To Normalize Everything

The Best Way To Play With Risk: Be Extreme

Mental Models and Principles

Mediocristan and Extremistan

Thanksgiving Turkey graph

Ex post worry

Positive black swans take time; negative ones happen quickly

Tunnelling effect: we focus on a few well-defined sources of uncertainty, on too specific a list of

Black Swans. Plans fail because we neglect to see sources of uncertainty outside the plan itself.

Falsification: we get closer to the truth by negative instances, not by verification

Conjecture and refutation: formulate a bold conjecture and look for observations that prove you wrong.

Avoid the narrative fallacy by using experimentation instead of storytelling, experience over history, and clinical knowledge over theories.

Gaussian vs Mandelbrotian (Power Law) Distributions

We treat ideas like possessions – loss aversion and endowment effects still apply.

Focus on the worst case scenario over the forecasted outcome.

To understand the future to the point of being able to predict it, you need to incorporate elements from this future itself.

The relationship between the past and the future does not learn from the relationship between the past and the past previous to it. When we think about tomorrow, we just project it as another yesterday.

A gray swan concerns modelable extreme events, a black swan is about unknown unknowns.

It is contagion [popularity] that determines the fate of a theory in social science, not its validity.

Be broadly right rather than precisely wrong.

Barbell strategy – hyperaggressive, hyperconservative

Ergodic systems

Nature doesn’t like anything too big

Nature likes redundancies

The burden of the proof is not on the ecological conservationist but on someone disrupting an old system.

Doing nothing is better than doing something potentially harmful.

Subjective probability versus empirical probability

To assume a long run in a complex system, you need to also assume that nothing new will emerge.

Asymptote vs preasymptotics

Iatrogenics – interventions and cures that actually worsen a condition

Beliefs without decisions are just sterile