The Black Swan Theory is used by Nassim Nicholas Taleb to explain the existence and occurrence of high-impact, hard-to-predict, and rare events that are beyond the realm of normal expectations.
I found this a fascinating and stimulating book and hard for me to sum up so I have used the author’s words.
Writing in the New York Times, Taleb asserted:
“What we call here a Black Swan (and capitalize it) is an event with the following three attributes.
First, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility.
Second, it carries an extreme impact.
Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable.
I stop and summarize the triplet: rarity, extreme impact, and retrospective (though not prospective) predictability. A small number of Black Swans explain almost everything in our world, from the success of ideas and religions, to the dynamics of historical events, to elements of our own personal lives.”
And I thought you may be interested in the following:
Taleb enumerates ten principles for building systems that are robust to Black Swan Events.
1. What is fragile should break early while it is still small. Nothing should ever become Too Big to Fail.
2. No socialization of losses and privatization of gains.
3. People who were driving a school bus blindfolded (and crashed it) should never be given a new bus.
4. Do not let someone making an "incentive" bonus manage a nuclear plant – or your financial risks.
5. Counter-balance complexity with simplicity.
6. Do not give children sticks of dynamite, even if they come with a warning.
7. Only Ponzi schemes should depend on confidence. Governments should never need to "restore confidence".
8. Do not give an addict more drugs if he has withdrawal pains.
9. Citizens should not depend on financial assets or fallible "expert" advice for their retirement.
10. Make an omelette with the broken eggs.
A really challenging book to read; full of complex ideas but well worth it if only for the fact that you have to “think” about stuff. I have a feeling after reading this that we are on the verge of a couple of economic and geopolitical Black Swans!!
Highly recommended.
