Nassim Nicholas Taleb: The Black Swan - The Impact Of The Highly Improbable
A Black Swan is an event with 3 attributes:
- It is an outlier, as it lies beyond the realm of regular expectations, because nothing in the past can point to its possibility.
- 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 seem explainable and predictable.
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 personal lives.
Extremes - particularly like the Black Swan, carry an extraordinary cumulative effect.
If you want to get an idea of a friend's temperament, ethics, and personal elegance, you need to look at him under the tests if severe circumstances, not under the regular rosy glow of daily life.
The bell curve ignores large deviations, cannot handle them, yet makes us confident that we have tamed uncertainty.
Platonicity - our tendency to mistake the map for the territory, to focus on pure and well-defined "forms," whether objects, like triangles, or social notions, like utopias, even nationalities.
When these ideas and crisp constructs inhabit our minds, we privilege them over other less elegant objects, those with messier and less tractable structures.
Platonicity is what makes us think that we understand more than we do.
The Platonic fold is the explosive boundary where the Platonic mindset enters in contact with messy reality, where the gap between what you know and what you think you know becomes dangerously wide.
It is here that the Black Swan is produced.
You need a story to displace a story.
Ideas come and go, stories stay.
Read books are far less valuable than unread ones.
Your library should contain as much of what you do not know as your financial means, mortgage rate, and the currently tight real-estate market allow you to put there.
You will accumulate more knowledge and more books as you grow older, and the growing number of unread books should grow disproportionately.
Indeed, the more you know, the larger the rows of unread books.
Let us call this collection of unread books an antilibrary.
Get a profession that is scalable.
One which you are not paid by the hour and can leverage your abilities.
In quant trading, the same amount of work is involved in buying a hundred shares as in buying a million. It is the same computation, the same legal document, the same expenditure of brain cells, the same phone call.
A writer of a book expends the same effort to write a book to attract a single reader as she would to capture several hundred million.
BEWARE the scalable...
They are competitive, produce monstrous inequalities, and are far more random.
There are only giants and dwarves, no middle income-earners.
There is more money in designing the shoe than in actually making it: Nike, Dell, and Boeing can get paid for just thinking, organizing, and leveraging their know-how and ideas while subcontracted factories in developing countries do the grunt work and engineers in cultured and mathematical states do the noncreative technical grind.
Interesting: your caloric consumption...
Look how much you consume per year - if you are classified as a human, close to eight hundred thousand calories.
No single day, not even Thanksgiving at your great-aunt's, will represent a large share of that.
Even if you tried to kill yourself by eating, that day's calories would not seriously affect your yearly consumption.
This = Mediocristan
VS
1,000 people lined up in a stadium. Add Bill Gates. Look at their net worth (AVG = 3 mil). Worth $80 Billion, his wealth represents over 99.9 percent.
All the others would represent no more than a rounding error for his net worth.
This = Extremistan
Mediocristan contains things like weight, height, and calorie consumption.
Extremistan has things like wealth, company size, and number of website visits (i.e. not physical).
Note that before the advent of modern technology, we used to live in Mediocristan.
It was hard to kill many people if you need to impale them one at a time with a sword.
Today, with tools of mass destruction, all it takes is a button or a nutcase to wipe out an entire population.
Now we live in Extremistan, where a few occurrences can have huge influences.
These few instances are Black Swans.
If you are dealing with quantities from Mediocristan, you can be comfortable wth what you measured.
You can get close to the average height after surveying 100 humans, there is no point to keep counting.
In Extremistan, you will have trouble figuring out the average from any sample since it can depend so much on one single observation.
In this world, you should always be suspicious of the knowledge you derive from the data.
In Mediocristan, more data means more observations, and closer to the truth.
In Extremistan, more uncertainty is added at a disproportionate rate with the addition of data.
The tragedy of capitalism is that since the quality of returns is not observable from past data, owners of companies, namely shareholders, can be taken for a ride by the managers who show returns and cosmetic profitability when in fact all they are doing is producing illusory profits that they will lose back one day.
The problem of induction (AKA the turkey problem):
Consider that a turkey is fed every single day.
Every feeding will firm up the bird's belief that it is the general rule of life to be fed every day.
On the afternoon of the Wednesday before Thanksgiving, something unexpected will happen to the turkey.
How can we know the future given our knowledge of the past?
How can we figure out properties of the infinite unknown based on the finite known?
What can a turkey learn from what is in store tomorrow from the events past? A lot, perhaps, but certainly a little less than it thinks, and it is that "little less" that makes all the difference.
Consider that the feeling of safety reached its maximum when the risk was at its highest!
Similar to what we learned in statistics...
It is easier to say YES than NO.
For example, it only takes 1 cell to bring back a positive result when testing for cancer.
But, if you surveyed 10 million cells, you couldn't yet say that you were cancer-free.
Confirmation bias - we look for information which is consistent with out hypotheses and ideas.
Once your mind is inhabited with a certain view of the world, you tend to only view instances proving you right.
Paradoxically, the more information you have, the more justified you will feel in your views.
We very rarely look for disconfirming evidence.
Chess grand masters focus on where a speculative move might be weak; rookies, by comparison, look for how the move would be strong.
To be at the top, like a grand master, or like George Soros, you must look for instances that prove your initial theory wrong.
Post hoc rationalization.
We supply post hoc, or after the fact, rationalizations.
We justify logically, and usually after the fact.
Mental availability affects the assessed probability.
Ex. Cancer from smoking seems more likely than cancer without a cause attached to it - an unspecified cause means no cause at all (in our minds).
The statement without a reason, being broader, can accommodate more cases and a multitude of causes, but our brain does not account for this.
You bet that the Black Swan will happen or that it will never happen.
You can gamble dollars to win a succession of pennies while appearing to win all the time, or you can risk pennies to win a succession of dollars.
The former and the latter require completely different mindsets.
"Bleed" strategy - You lose steadily, daily, for a long time, except when some event takes place for which you get paid disproportionately well.
Humans will believe anything you say provided you do not exhibit the smallest shadow of diffidence; like animals, they can detect the smallest crack in your confidence before you express it.
It is much easier to signal self-confidence if you are exceedingly polite and friendly.
It is not what you are telling people, it is how you say it.
Ludic fallacy - The attributes of the uncertainty we face in real life have little connection to the sterilized ones we encounter in exams and games.
Epistemic Arrogance = our hubris concerning the limits of our knowledge
Show two groups of people a blurry image of a fire hydrant, blurry enough for them not to recognize what it is.
For one group, increase the resolution slowly, in 10 steps.
For the second, increase it faster, in 5 steps.
Stop at a point that both groups have been presented identical images.
The members of the group that saw fewer intermediate steps are likely to recognize the hydrant much faster.
Why?
The more information we give someone, the more hypotheses they will form along the way, and the worse off they will be.
They see more random noise and mistake it for information.
Uncertainty matters with forecasting.
You would take a different set of clothes on your trip to some remote destination if I told you that the temperature was expected to be 70 degrees Fahrenheit, with an expected error rate of forty degrees than if I told you the margin of error was 5 degrees.
Don't ask the barber if you need a haircut - and don't ask an academic if his work is relevant.
I. e. Always be aware of bias when seeking answers.
Say your HS teacher asks you to extend a series of dots.
If you have a linear model in mind, there is only one single straight line you can draw.
If you draw a curve instead, there are an infinite number of future projections possible.
The fact that a number has risen steadily 1,000 days could make you confident that it will rise at the same steady rate in the future.
But if you have a nonlinear model in mind, the 1,000 days steadily increasing only creates increasing evidence that the number should decline on day 1,001.
If you survive until tomorrow, it could either mean that (a) you are more likely to be immortal or (b) you are closer to death.
If projecting is so useless, why do we do it?
It lets us cheat evolution.
We can use projection instead of our more visceral reactions, which frees us from immediate, first-order natural selection.
Maximize the serendipity around you.
Chance favors the prepared.
Chance favors the hard-working.
How to capitalize on black swans?
Put a portion, say 85-90 percent, in extremely safe instruments, like Treasury bills.
The remaining 10-15 percent you put in extremely speculative bets, as leveraged as possible (like options), preferably venture capital-style portfolios.
Positive black-Swan businesses:
Publishing a book, scientific research, venture capital.
In these cases, you lose small to win big.
Living in big cities is invaluable because you increase the odds of serendipitous encounters.
Although unpredictable large deviations are rare, they cannot be dismissed as outliers because, cumulatively, their impact is so dramatic.
An ad hominem attack against an intellectual, not against an idea, is highly flattering. It indicates that a person does not have anything intelligent to say about your message.
Imagine a speck of dust next to a planet a billion times the size of the earth. The speck of dust represents the odds in favor of your being born; the gargantuan planet would be the odds against it.
Remember that you are a Black Swan.
Apelles-style strategy - a strategy seeking gains by accepting small losses and maximizing exposure to “good black swans”