Black Swan

I was watching this program on a business channel last week (I rarely commit such a sin, but it was one of those days) the program was on: "How markets will behave in 2010", with great dismay I watch an expert talk (with great authority) that the market will cross 20k in 2010. The market will need a lot of Bull (pun intended) to cross 20k, the man was doing his bit. I am sure you have the same feeling of dismay while you switch to one of those news channels and hear the pundits predict a poll outcome.

I have seen the head of sales and marketing of my company make a series of calls to his contacts at critical client organizations and conclude and report back that we are not going to be severely affected by the slowdown, of course he was wrong, we were not spared and neither were our clients (this was in 2000 - 01). We have seen this happen over and over again, especially in the current globalized economy, Chaos Theory rules. A butterfly flap in New York will crash (or push up) the markets in Tokyo. We have seen many predictions and decisions based on past data/experience going awry in business and in our day to day life. This is the theme of Black Swan, a multimillion copy seller by Nassim Nicholas Taleb.

Nassim Nicholas Taleb is an extremely complex character, he is the grandson and great grandson of former deputy prime ministers of Lebanon (his grandfather and his great grandfather were both deputy prime ministers of Lebanon), he is a mathematician who prefers to call himself a philosopher, had a short career as a trader and investment banker in many leading banks (although, he is very skeptical about the many models used for trading). Later he started Empirica a hedge fund that trades in options and then retired from trading in 2004 (he continues to be an adviser for Empirica) and incidentally Empirica made a few billions during the recent market crash. He is a distinguished professor and of course he is the author of hugely successful books, Fooled by Randomness and later Black Swan. He has sold more than 2.7 million copies in some 31 languages. He never watches television and never reads newspaper! Hope I covered the many facets of Taleb. Here is a write up by Malcolm Gladwell on Taleb (this write up is also a part of the new book by Gladwell titled "What the Dog Saw").

Taleb strongly believes (and I would agree) that we lack the ability to predict events that are rare but have great impact, he states that there is no difference between the person in a position of power ( A deputy prime minister of Lebanon) and his car driver when it comes to knowing the way events are going to play out. Both believed that the Lebanon war would end soon, but it took 15 years when you look at most of our ministers you would readily agree. The difference is that the qualified think that they have some privileged info and the unqualified does not think so and puts the burden on fate/God.

Taleb talks about Inductive Reasoning and why it will fail, the title of the book is a good example of inductive reasoning. Let me explain, since people in Europe had never seen a black swan, they thought all swans were white. In fact there used to be a terms about Black Swans that people used when they wanted to refer something improbable (I would rather see a black swan before I see you coming on time!) and the sighting of a single black swan in Australia blew away the belief held for centuries. Inductive reasoning is generalization, we tend to generalize with specific set of (past) data and when this generalization proves to be wrong, it is often with disastrous results. Mike Gatting had seen many spinners before and Australia is not a country that has produced decent spinners in the past (Rajan to confirm). He would have thought that this is yet another bloke from down under and this first Warne delivery against England (known as the Ball of the Century or the Gatting Ball) was a complete Black Swan, the look on Gatting’s face was priceless.

Black Swans can bring good fortune too; the explosion of IT in India is a Black Swan - at least for the many graduates who passed out after 1991.

Black Swan events are random, hard to predict and rare events that create high-impact (Outliers). Taleb, defines black swans as below:
1. Hard to predict (based on historical information)
2. Has disastrous effect
3. Explained after the occurrence of the event by experts.

This has not been an easy book for me... but it is entertaining never the less and been an information overload and introduced many useful terms for sure : platonicity, narrative fallacy, modernistan, falsifiability; to name a few). I found the style to be contentions, probably a bit too aggressive and egoistic. The (repeated) digs he has at the cost of many economists and statisticians are at times in poor taste, so are his digs at the French.

Taleb also gives 10 points/principles to a Black Swan proof world, can be read here with description. Giving below some that I liked a lot:

• No socialization of losses and privatization of gains.
• People who were driving a school bus blindfolded (and crashed it) should never be given a new bus.
• Counter-balance complexity with simplicity.
• Do not give children sticks of dynamite, even if they come with a warning .
• Only Ponzi schemes should depend on confidence. Governments should never need to “restore confidence”.

In our everyday life we come across many Black Swan events and hence it is important to approach each day with a fresh perspective and leave behind preconceived notions.

Try this (from the book):
All Snoogles are Boogles.
You see a Boogle.
Is that a Snoogle?

Spend a minute and you will get it. I tried this on my daughter and explained here the logic and it was an interesting experience, she thought that I had finally gone crazy completely:-)

The answer is 'may be'.