Black Swans Exist

I just finished reading “The Black Swan” by Nassim Nicholas Taleb. It has given me a fresh and frightening way to look at luck, chance, randomness, and the world financial network.

The term Black Swan is used by Taleb to represent those uncommon and unexpected events that have seemingly inordinate impact. Black Swans can have negative or positive results and often have both at the same time. They are seldom expected and are often not predicted by anyone. Some of them are predicted, however, but the predictions usually go unheeded by the majority of those who will be affected by them. Like real black swans, whose existence was deemed impossible for a very long time, Taleb’s Black Swans arise from time to time and help to remind humans that no matter how much planning and preparation are attempted, something can happen that will completely negate our efforts or demolish our constructions.

Several examples of Black Swans are used in the book. The most recent example is the financial debacle of 2008. A series of disastrous decisions by and practices of bankers, major investors, and government regulators caused the entire world’s financial structure to come close to total collapse. Savings and investments vaporized before our eyes, wrecking years of financial planning by the most frugal of us and pushing many of us into extending our working years and delaying, if not completely eliminating, plans for retirement.

Although Black Swans can be of global proportions, they can also affect only a few people at a time. Personal disasters such as health problems and home fires, marital troubles, and scores of other life-changing events are Black Swans to the people who suffer from them. They are often unexpected and have disproportionate impact in our lives. They happen no matter how much we do to avoid them. We cannot avoid them, but, according to Taleb, we can anticipate and prepare for them.

One of the most important of Taleb’s messages is that Black Swans can have such profound and monumental impact. As an example, Taleb refers to a graph showing the growth in value of the S & P 500 stocks over the past 50 years. “In the last fifty years,” Taleb says, “the ten most extreme days in the financial markets represent half the returns. Ten days in fifty years. Meanwhile, we are mired in chitchat.”

That really is difficult to believe, but it’s true. To think that ten days of market movement accounted for half of the total returns is remarkable to say the least. Sudden, unexpected events that seem to well up out of nowhere can redirect the course of human history.

Taleb’s book has caused much controversy in the investment world as well as in academia. Taleb can be funny but he can also be very caustic and disrespectful of people who have been recognized in the past as experts in their fields. He has been successful as a trader and understands much about the structure of the banking and investment business. He is a polymath, having much knowledge across a wide range of subject areas. He rails against the bell curve and its use and overuse  in attempts by “forecasters” to predict distributions of events. He names “experts” whom he disagrees with and does not hide his disdain for those he thinks are sloppy in their work or deceitful in their conclusions. He can be irritating and seems to have a particular affinity for tooting his own horn. He is smart, however, and bears listening to.

I have listened to him and have decided to use his findings to help me fend off financial ruin. I just hope it’s not too late.

If you pick up his book, be sure and read the essay titled “On Robustness and Fragility” that appears after the last chapter. It will prove beneficial to anyone who pays attention.

You’re on your own in this world of Black Swans. Hopefully, for you, the next one will be beneficial.

2 thoughts on “Black Swans Exist

  1. Hey Bruce,

    Thanks for the review of the Black Swan. I thought about reading the book when I first heard about a couple of years ago in NPR. Below are the podcast from NPR, the first link was the first time I heard about the book.

    http://beta.wnyc.org/shows/lopate/2007/jul/09/its-hard-to-predict/

    http://www.thetakeaway.org/2009/jan/13/how-make-capitalism-20-black-swan-proof/

    http://beta.wnyc.org/shows/bl/2010/may/21/black-swan/

  2. Thanks Mo. I thought that NPR had probably covered it but wasn’t sure till now! I’ll check these out.

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