The Black Swan – Nassim Nicholas Taleb

Black swans are not insignificant occurrences, but rather a significant phenomenon that shapes the world we live in. Many historical events that drastically impacted our societies and lives were actually “black swan” events. These include the 2 world wars, the fall of the Berlin Wall, the 9/11 terrorist attacks, the rise of the Internet, or the 2019-2020 COVID pandemic. 

In all these cases, no one could have predicted the events in advance.

What are Black Swans and why are they important

A “Black Swan” event is a term used to describe the occurrence of a seemingly impossible or highly unlikely event. This event is unpredictable not because it is random, but because our outlook on what is possible is too narrow. For example, prior to the discovery of black swans in Australia in 1697, it was widely believed that all swans were white. The term “Black Swan” has since been used to describe events that challenge our assumptions and disrupt our understanding of the world.

Three lessons

Taleb identifies three key features of black swans:

• Rarity: Black swans are outliers that can’t be reasonably expected to happen based on past events.

• They have a profound impact on our society and the world.

• Retrospective predictability: Although the events are unpredictable, humans tend to explain them in hindsight as if they could be perfectly understood and predicted.

Extremistan environments

In Extremistan environments, on the other hand, there is no limit to the amount of deviation from the average. This means that a few outliers can have a disproportionate impact on outcomes. For example, in a stock market, a few very successful companies can have a much larger impact on the overall market than a large number of smaller, less successful companies.

Significant Impact

• Black Swan events are rare and have a profound impact on society or the world. For example, the discovery that the sun is the center of the universe, rather than the earth, had a major impact on society and our understanding of the world. Similarly, the attacks on 9/11 and the landing on the moon were Black Swan events that had a significant impact on the world.
• Although Black Swan events are unpredictable, humans tend to explain them in hindsight as if they could have been perfectly understood and predicted. This is known as retrospective predictability. This tendency can lead us to overestimate our ability to predict the future and to underestimate the impact of unexpected events.

Uncertainty Is Reality

• Be aware of the role of confirmation bias in shaping our understanding of the world. Confirmation bias is the tendency to seek out and interpret information in a way that confirms our preexisting beliefs and assumptions. This can lead us to overlook or dismiss evidence that challenges those beliefs and to overestimate the likelihood of certain events happening.
• Embrace uncertainty and be willing to adapt to changing circumstances. This means being open to new ideas and approaches, even if they challenge our existing beliefs, and being willing to revise our plans and goals as needed. It also means being flexible and adaptable, and being able to think on your feet in the face of unexpected events.

The Past Isn’t The Future

To better prepare for the unexpected, it’s important to be aware that unexpected events can happen and not to rely solely on our past experiences to explain the future. This is especially important in situations where the consequences of being wrong could be significant, such as when making investment decisions.

Mediocristan environments

When assessing risk in the real world, it’s important to be aware of the difference between Mediocristan and Extremistan environments.

In Mediocristan environments, there is a limit to the amount of randomness or deviation from the average. This means that inequalities exist, but they are mild or controlled. There are usually some physical constraints, such as height, weight, or running speed, which limit the amount of variability. For example, if you add the tallest or heaviest man in history to a sample size of 1,000 people, the outlier won’t make a significant difference to the average. Examples of Mediocristan environments include height distribution in a population, stock market returns over a short period of time, or the number of times a person is hit by a car in their lifetime.

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