Book Review: “Black Swan” by Nassim Nicholas Taleb

In light of recent subprime mortgage disaster that caused many hedge funds to lose lots of money, Taleb is right that most academia are locked into the Bell curve assumption, failing to see the outlier or Black Swan, in the author’s term. Indeed, most people or pundits would like to think that they’re more in control of the environment than they really are. There are simply many factors that can NOT be explained by the models they created. And if they’re successful, it may be due to their luck that a black swan is not lurking in the background.

This book gives me a lot of insight on how to manage the different kinds of risk. There are the Gaussian curve tolerances that we can model the risk on and then there are these outlier risks that seem to come from nowhere because we never expected it. We need to watch out and prepare for it and reduce our exposure to it.

Also, one must not fall into the narrative fallacies. Just because we have the leading story that lead to an event, it does not mean it’s the root cause. In other words, correlation does not mean causal. This is a common warning from well-intentioned statistician. Unfortunately, this is the trap lots of people fall into.

The book was difficult and too long to read for me. Too many references to some philosophical arguments that seems to reduce the impact of the message. There is a lot of self glorification and attacks on other fellow economists in this book. The guy is smart – no doubt about it. But the ideas were so much of a chop suey; it’s hard to follow.

It seems that the more you know about things, the more you know that you don’t know. I guess it’s the central theme of the book. Don’t limit or fool yourself into thinking that you can control the outcome.

At the end, the author really didn’t offer a solution how to overcome the “black swan” effect. Of course, the author would argue that it’s the whole idea – it’s a black swan because we cannot predict it. The author seems to leave the reader dangling for more insight.

The Black Swan