BLACK SWAN BOOK REVIEW
PRESENTED BY GROUP 2:
PRATEEK NATH 2018PGP031
ADARSH RAJPUT 2018PGP061
APOORVA BANSAL 2018PGP068
JAYANT SARASWAT 2018PGP078
S PRUDHVI 2018PGP099
ROHIT GARG 2018PGP098
DETAILS ABOUT BOOK & AUTHOR
Author Details
MBA from Wharton School and a Phd. from the University of
Paris
20 years experience as a derivatives trader & quant
Distinguished Professor of Risk Engineering at New York
University’s Polytechnic Institute, a scientific adviser at
Universal Investments and the International Monetary Fund
Release
Released by Random House.in April 2007
Second Edition published in 2010
Theme
Book focuses on the extreme impact of certain kinds of rare
and unpredictable events (outliers) and humans' tendency to
find simplistic explanations for these events retrospectively
CORE CONCEPT OF THE BOOK
Book does not attempt to predict Black Swan events rather it focuses on building robustness to negative ones that occur
and being able to exploit positive ones
Author contends that banks and trading firms are very vulnerable to hazardous Black Swan events and are exposed to
losses beyond those that are predicted by their defective financial models
The sequence of this book follows a simple logic; it flows from what can be labeled purely literary (in subject and
treatment) to what can be deemed entirely scientific (in subject, though not in treatment)
Psychology will be mostly present in Part 1 and in the early part of Part 2 and Business and natural sciences will be dealt
with mostly in the second half of Part 2 and in Part 3
ATTRIBUTES OF BLACK SWAN
it is an outlier, as it lies outside the realm of regular
expectations as nothing in the past can convincingly point
to its possibility
LAYOUT OF THE BOOK
Book's layout follows "a simple logic" moving
from literary subjects in the beginning to
scientific & mathematical subjects in the later
portions
It carries an EXTREME
IMPACT
In spite of its outlier status, human nature makes us
concoct explanations for its occurrence after the fact,
making it explainable and predictable.
RETROSPECTIVE (though not prospective)
PREDICTABILITY
PART-WISE SUMMARY
• Part One: "Umberto Eco's Antilibrary"
It is mostly about how we perceive historical and current events and what distortions are present in such perception
• Part Two: "We Just Can't Predict"
It is about our errors in dealing with the future and the unadvertised limitations of some "sciences"—and what to do
about these limitations
• Part Three: "Those Gray Swans of Extremistan"
It goes deeper into the topic of extreme events, explains how the bell curve (that great intellectual fraud) is
generated, and reviews the ideas in the natural and social sciences loosely lumped under the label "complexity”
REVIEW PART 1
• All concepts of Part 1 underscore the same basic point that human thinking overemphasizes the visible and
discounts that which is not immediately obvious
• It is mostly about how we perceive historical and current events and what distortions are present in such perception
• As per the author, “It is why we do not see Black Swans: we worry about those that happened, not those that may
happen but did not”
CONCEPTS OF PART 1
The Triplet of Opacity
The illusion of understanding
The retrospective distortion
The overvaluation of factual information1
Extremistan
Generators of events produce distributions with very large or very small
extreme values, relatively frequently and those extreme values often
affect the sum of attribute values in a sample distribution, and the
mean value of such distributions.
Mediocristan
In Mediocristan, nothing is scalable, everything is constrained by
boundary conditions, time, the limits of biological variation, the limits
of hourly compensation, etc.
CONCEPTS OF PART 1 CONT…
Round Trip fallacy
The human tendency to conflate two similar-sounding statements that
are in fact conveying very different information. Lack of precedent for
an occurrence is not the same thing as evidence that that thing will not
occur.
Silent Evidence
Silent evidence emphasizes what is not known over what is.
Essentially, silent evidence are those instances which do not produce a
Black Swan and thus do not receive acknowledgement.
Ludic Fallacy
The ludic fallacy refers to the misguided application of classroom
reasoning to a world that is considerably messier and more random the
sterile classroom setting.
A STORY OF RECURSION
• Taleb discusses a neuroscientist named Yevgenia and her book A Story of Recursion
• She published her book on the web and was discovered by a small publishing company; they published her unedited
work and the book became an international bestseller
• The small publishing firm became a big corporation, and Yevgenia became famous
• This incident is described as a Black Swan event. Taleb goes on to admit that the Yevgenia is a work of fiction
• As per the author,” Nonlinear relationships are ubiquitous in life. Linear relationships are truly the exception; we
focus on them in classrooms and textbooks because they are easier to understand”
HOW WE OVERSIGHT BLACK SWAN EVENTS
SYSTEM 1 THINKING: System 1 thinking is suited to practical life
Instinctive, quick & but we base assumptions about the future
automatic. on experiential and anecdotal information
Based on experience rather than on statistical or empirical
information.
We assume that the conclusions we’ve
drawn from our data is the result of
reasoned analysis rather than reflexive
assumptions.
SYSTEM 2 THINKING: This overall increases the likelihood of
certain Black Swans
Slow, Reasoned, better
suited in theory than in
practical life
UNDERSTANDING THE MENTAL
PROCESS
While the previous part focused on our inability to perceive black swans. The next part focuses to
help us in understanding the limitations of our own knowledge which in turn limits our ability to
prepare for the unexpected.
EPISTEMIC ARROGANCE
The difference between what someone thinks they know and what they actually
know is critical
If what they think they know exceeds what they actually know, that is “epistemic
arrogance”
Epistemic arrogance bears a double effect, we overestimate what we know and
underestimate what we don’t know, this leads to compression in the range of
possible outcomes (tunneling)
In the beginner’s mind there are many possibilities but in an expert’s mind there
are few
FUTURE BLINDNESS
The idea that we seem unable to anticipate what the future will feel like, even
when we can predict what will occur and we might have had similar experiences in
the past
The experience of buying a new car and being very excited at the prospect, and
the anticipated joy and happiness that will ensue from the new car experience
But we forget what out last new car experience was like, and, in particular, we
forget that after a very short time, perhaps just a few weeks, we will get used to
our car, take it for granted, and will not experience the initial uplift we felt when
first acquiring it.
If we can train ourselves to mitigate future blindness, then we can be much more
attuned to what the occurrence of Black Swans may mean to us
THE FALLACY OF SILENT EVEIDENCE
The problem of our tendency to view historical evidence with a filter that selects
“the rosier part of the process” while ignoring the parts of the process that don’t
fit our preconceptions
This leads to us not recognizing that there is a part of the historical process that is
inaccessible to us and therefore, silent
Our tendency to view famous authors as uniquely talented, and to attribute their
success to their talent. However, we have no access to the works of the hundreds
of thousands or millions of authors who never have had their books published
So evidence of their talent, or lack of talent is silent, and we cannot evaluate
whether talent explains authorial success or not, and should not therefore infer
that “talent” is the explanation for success based only on our observation that
successful authors are talented.
CONFIRMATION ERROR (OR PLATONIC CONFIRMATION)
One actively looks “for instances that confirm your beliefs . . . and find them,”
without looking for negative evidence that refutes them
In political campaigns candidates do their best to point to facts that suggest they
are the right person for the position they are running for; but they do everything
they can to hide or obscure those parts of their record that suggest otherwise
AUTHOR’S ADVICE
The author offers some practical guidelines for coping with life’s randomness. He
encourages readers to focus on the potential consequences of the unexpected
rather than on the perceived probability of the unexpected occurring.
He advises readers to “[k]now how to rank beliefs not according to their
plausibility but to the harm they may cause.” •
Instead of putting your money in “medium risk” investments, you need to put a
portion, say 85 to 90 percent, in extremely safe instruments, like Treasury bills --
as safe a class of instruments as you can manage to find on this planet.
The remaining 10 to 15 percent you put in extremely speculative bets … preferably
venture capital-style portfolios. That way you do not depend on errors of risk
management; no Black Swan can hurt you at all, beyond your “floor,” the nest egg
that you have in maximally safe investments.
LET’S TAKE AN EXAMPLE
Financial institutions have been merging into a smaller number of very large
banks.
Almost all banks are now interrelated …
When one falls, they all fall.
The increased concentration among banks seems to have the effect of making
financial crisis less likely, but when they happen they are more global in scale and
hit us very hard.
CONT..
Author warns about the practice of applying the bell curve to scenarios that mostly
happen in lives, where we tend to miss out/ignore the outliers
Fractal randomness (statistical measure of pattern repetition at different scales) does not
reduce the likelihood of a dramatic event to outlier status like the bell curve does. It
implies that future events will mimic past ones
By emphasizing what is possible over what is likely, fractal randomness can help us be
better prepared for Black Swans
Author also emphasised on how adoption of Gaussian based model (base measurement
tool) in economics has failed to predict economic turmoil and Black Swans
Author also criticizes the attempts to take models of uncertainty that apply to one domain
on another domain truly understanding the model original purpose in the initial domain
THANK YOU
