Black Swan

 Black Swan – Nassim Nicholas Taleb

 

What we anticipate, hurts lesser than what comes as a adverse surprise. Black Swan is an attempt to create awareness about the happenings that we’re unaware of.

The platonic fold is the explosive boundary where the platonic mindset enters in contrast 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.

 

The apprenticeship of empirical sceptic

An empirical skeptic is an individual who places more emphasis over empirical evidence rather than drawing conclusions based on anecdotal observations. Nassim Taleb explains the triplet of opacity, which defines the three missteps a human mind makes when approaching history. This includes:

• An illusion with regards to understanding: we think we know what’s going on in the world that’s more complicated(or random) than we can even imagine.
• Distorted outlook: when it comes to retrospection where we tend to assess matters after they have occurred.
• Human tendency to overvalue or platonify a problem – a process that often leads to oversimplification that’s very dangerous.

 

Black swans through Extremistan.

There are two facets to randomness: Mediocristan and Extremistan. In mediocristan the individual happenings in a series of events do not create impact, whereas in the Extremistan they do. One day’s extra meal won’t have a huge impact on the weight that you gain. In mediocristan the largest sample will remain impressive but insignificant to the sum. Another example is of a person working in an organisation. The salary increase can not create a black swan because it is scalable and so mediocristan . The scalable professions do not have a high scope for a spurt in income. There is more money in designing shoes, than in making them. 

Past experience does not always help in predicting future. Black swans can be relative.

A Hen is fed everyday by her master. After say 100^th day the same hands cut her throat. The hen finds it a surprise but the butcher doesn’t. This proves that black swans are relative. 9/11 was a surprise to all except the ones who planned that disaster.

 The human inclination to interpret life as a Mediocristan is common although it’s actually Extremistan. Taleb talks about a fund named Amaranth that lost $7 billion of investors’ money. They issued a statement asking the investors not to worry since they were equipped with 12 risk managers; however, it’s a fact that there would be no difference in the outcome even if they had about 100 risk managers because it’s obvious that you can’t really produce more information than the past can offer. If the model is wrong so will your result be. The risk managers might might recover the losses(though not sure), it will take time. In general positive Black swans take time to occur whereas the negative ones occur abruptly. It’s much easier and faster to destroy than to build. 

Indians were the favourites to win the 2021 World Cup. The forecasters found the Australian team rusty. What happened at the end? Australians won. Forecasting isn’t always easy based on previous data.

·       We focus on preselected segments of the seen and generalise from it to the unseen – The error of confirmation

·       We fool ourselves with stories that cater to our platonic thirst for the distinct patterns – The narrative fallacy

·       What we see is not necessarily all that is there- The distortion of silent evidence.

·       We Tunnel : We focus on few well defined sources of uncertainty.

Round-Trip fallacy

We assign narratives of casualties to random events. For eg. “ There is no evidence of possibility of large events.” It is misunderstood as “There is evidence of no possible large events” or “All terrorists are Muslims” with “All Muslims are terrorists”

 

The narrative fallacy:

Human beings generally assign narratives of casualties to events that are random. Taleb says that we often believe in stories rather understanding facts that are logical. This kind of behaviour is ingrained in us where we condense information in order to make it a unified story. However, Taleb says that this results in a loss where we ignore data that doesn’t support the narrative we have. We do this by tricking ourselves into believing something that might not be true. Due to this fallacy, we ignore the possibilities of Black Swans and usually misinterpret the significance of events whenever they occur. This is the same point that Daniel Kaneman calls cognitive illusion, where we trust the person who is gossiping with us and not the person who is being cursed in the gossip.

 

Primarily, we, as humans, tend to assume things about the future by relying on anecdotal information instead of empirical information. We simply have a hard time understanding the complexity of things and large numbers. For instance, lottery tickets buyers treat 1000 to 1 and 1,000,000 to 1 almost the same. The buyer can visualize the outcome, not the process.

 

Immediate Sensational vs sensational results preceded by perseverance.

Our institutions are not cut out for nonlinearities. In primitive environment process, results were closely related. They aren’t related closely in the modern world. A case where Villagers want to build a bridge in their village. The more work, more is the progress seen. It is not the case in modern times, especially in developed cities where people are surrounded by gadgets in daily work, societal pressure all the time, the daily practices do not show instant progress. As such the modern world has less of such works and more of non-linearities. That brings dissatisfaction. A student studies hard, but the result needs perseverance. You dream to buy a new car, the earning needs continuous efforts. 

Nassim also talks about small but immediate rewards superseding bigger but delayed rewards. For instance, one would be happier earning $1mn immediately instead  of earning $1.2 mn later. Also the fact that small yet continuous rewards bring more happiness than one big reward but only once. $1mn every year for ten years will give bigger happiness than $10mn directly after 10 years,

Taleb points out that the world functions in a non-linear manner where we assume that the function is linear in most cases. He says that the linear progression, platonic idea is not the norm. More the number of hours put in studies more will be the marks? Seems to be!. Taleb asks to think beyond that for a black swan to be seen.

 

Silent Evidence and The Ludic fallacy or the uncertainty of the Nerd

Some people who were returning from a temple visit, survived in a road accident. Conclusion? God saved the worshippers. What about the worshippers who did not survive in the same accident? This information often gets missed and one side story fools other people into believing in miracles.This is the problem of Silent evidence.

The ludic fallacy points out the little connection between real life and sterilised environment such as training centres or classrooms. Taleb says that we humans worry about what’s happened and/or whats told about the happenings but we ignore something that could’ve happened but didn’t.

 

We just  can’t predict. The scandal of predictions 

What are the three recently implemented technologies that  most impact our world today?

The computer, The internet and the Laser. All three were unplanned, unpredicted upon their discovery.They were consequential. They were black swans. Even in our personal lives important achievements are the ones that were unplanned.

Nassim says the we predict unnecessarily more and conveniently ignore the fallacies in the previous predictions. If we see the past record of the missed events, it will shatter us and question the wisdom of the Nerds. 

 

How to look for bird poop?

Nassim refers to serendipity, which is an experience of unexpected and highly positive surprise that gets found when we work on something much smaller. Eg. America was discovered when the real intention was to find a new route to India.

The point is that when we prepare ourselves for something unintended, we open the doors for serendipity that allows us to identify black swans.

 

Matthew effect 

The gospel of st. Matthew states, “For all those who have, more will be given. Roughly two millennia later sociologist Robert Merton inspired by this, coined “Matthew effect”.  It’s a phenomenon where the rich becomes richer, Potent become more powerful. Sort of virtuous cycle.

There can be difference of only one mark between a person who gets qualified for a top college and the other who doesn’t. But few years later there can be a big difference in them and that’s because of Matthew effect. Same applies for sports, other famous personalities, Authors, businessperson etc. Individuals with an initial advantage tend to gain an upper hand because it follows them throughout their lives, thereby allowing them to gain accolades and resources consistently.

 

 

The Bell curve, That great intellectual fraud

Nassim points out the negative side of the Bell shaped curve that is used everywhere in management. Most observations levitate around ordinary and the odds of deviation reduce faster when you’re away from average. 

Average is misunderstood as normal. For eg. Average earnings of an Indian is around Rs.10k per month. This apparently means a person earning Rs.10k per month, earns better than most others. But that’s not the normal earning for that person. If you hear that two authors sold 1mn  books in between the two of them, it’s  almost certain that they didn’t sell 500000 each, but more likely 999000 and 1000 respectively. As with sales and finance, few people have big success and lot of them don’t.

The data of yes/no responses whorls well with the ND curve. But if we are dealing with aggregates where magnitude matters, there’s a problem. Parameters like wealth, ranks, sales et cetera. Here one single number can disrupt the average, one single loss can nullify the profits earned over a century.

 

Half and Half. How to handle the Black Swans?

Half the time I am hyperskeptic ; the other half I hold certainties. Half the time I am intellectual; the other half I am not. All this is because of the follower mentality. We worry less about common fears, more about personal fears. Terrorism or Covid is less fearful than the increasing one’s body disorders. In the end this is a trivial decision.

Taleb encourages people to take charge of their own lives because it offers them a chance to control everything, including their time. 

One should not run to catch a train because it’s painful only if one runs behind it. This is analogous to following someone else’s ideas. Similarly you don’t have to match someone else’s expectations.

 Taleb shows his surprise over people calling a day as miserable or get angry because they feel cheated by a bad meal, cold coffee, social rebuff or a rude reception. 

 

In Black swan terms this means that you are exposed to the improbable only if you let it control you. Try to control what you do and make this your end.

 

Disclaimer

The above write-up is a an attempt to preserve some points that I felt are useful. In doing so I have used my discretion, experience, foresight to land on a point. 

 

Vinay Wagh

Bulls Eye,

Nasik