The Black Swan: Second Edition: The Impact of the Highly Improbable: With a new section: "On Robustness and Fragility" [Import] [ペーパーバック]

Taleb's central premise is that we delude ourselves with popular stories, false knowledge, myths, overvalued facts, and the appearance of science. He calls this the narrative fallacy, and counsels, "The way to avoid the ills of the narrative fallacy is to favor experimentation over storytelling, experience over history, and clinical knowledge over theories." Good advice.

Given this push for what David Brooks calls "epistemological modesty," you may expect a humble book, -- and if so, you would be disappointed. Taleb lambasts the hubris of Wall Street, yet he is a product of this culture; and the book shows it. His belief in uncertainty combined with his sharp views is broadly ironic. Some reviewers call it arrogant.

I put the bravado aside, and even found it entertaining at times, for Taleb's case is well put, and the book is brisling with thoughtful aphorisms and vivid stories. Here are a few of my favorite lines:

- Luck is more important than skill.
- Risk is the most when you feel the safest.
- Look for evidence that proves your ideas wrong.
- There are no experts of things that move.
- Too much information becomes toxic.
- The wise plead ignorance to world events.
- We cannot compare current reality with an alternative.
- Our highest currency is respect.
- "Randomness" is unknowledge.
- Be prepared for multiple contingencies.
- "I don't know," is a sign of intelligence.
- We are swayed by the sensational.
- Seize every opportunity, for they are rare.
- Go to parties -- chitchat leads to breakthroughs.

These are thoughtful nuggets to consider. And despite the pride that occasionally dances on the pages, Taleb is a good writer and an even better philosopher. The book is part memoir, part postmodern treatise on skepticism, part rant. It is an idiosyncratic, fresh and fascinating narrative.

This book is also a full frontal assault on the Wall Street establishment that uses statistics, bell curves and Black-Scholes theory to sell portfolio allocation. For investors, Taleb advocates a "barbell strategy" where you put 85-90% of your money in cash or equivalents, and the remainder in extremely risky investments that are scalable. He goes on at some length to talk about the dynamics of scalable investments and scalable careers such as sales, venture capital, and entrepreneurial ventures. In the end, he recommends against entering scalable professions due to the many risks involved. More irony.

For those who do hit it big and make what Taleb calls FU money, he recommends a dedication to scholarship, for he sees the pursuit of money and material goods as a nightmare. And he warns that scalable success may not come for a long time, or it may never come, and sojourners in scalable professions will have to endure the cruelty of critics. This line of thinking feels balanced and wise.

I was fascinated when I read this book in the winter of 2008, partly because Taleb had correctly forecast a major stock market crash, and partly because I had recent experience working as a marketing consultant for a large Wall Street investment firm (which no longer exists). That consulting experience and this book have left an imprint on my mind.

I have not studied Edmond Burke or David Hume, so currently, Nassim Nicholas Taleb my favorite skeptic, and The Black Swan is one of my favorite books.

When Taleb was Tweeting, he praised "Straw Dogs" by the contemporary British philosopher, David Gray. Gray's book takes skepticism to new and brilliant heights, and in my option it flies over the top. Perhaps some day I will review Straw Dogs as well, but for now I'll stick with Black Swans.

Straw Dogs: Thoughts on Humans and Other Animals

To get to the substance of "The Black Swan," you must first get beyond the author's overweening self-regard. But when you have done that--if indeed you can--you find there is very little substance after all. Much of the book is little more than the author's confession of worldliness and refinement. We are guided to understand that he is at once immersed in man's strife-torn existence ("This is not an autobiography, so I will skip the scenes of war") and steeped in les belles lettres ("My point, I repeat, is not that Balzac is untalented, but that he is less uniquely talented than we think"). What arguments he makes regarding "black swans"--rare events with outsized impact--are mostly arguments of assertion rather than demonstration, and what insights he provides into the nature of these events are far from profound. In most cases they are but a short distance removed from common sense.

Nonetheless, some readers may enjoy the spectacle of a grown man displaying the sort of braggadocio not normally seen in males above age fourteen. It is lowbrow entertainment to watch the pompous make asses of themselves, but it is still entertainment. And pomposity is in every chapter of the book. Do you have any idea how many world cities Nassim Nicholas Taleb sips coffee in? No? Voila, he will tell you! New York, Beirut, Lugano, Rome, Paris, Athens, Venice, Sydney, and many more! "I was transiting through the Frankfurt airport on my way from Oslo to Zurich. I had time to kill and it was a great opportunity for me to buy dark European chocolate...."

Or, do you know how many languages Nassim Nicholas Taleb speaks? No? Voici, he will tell you this too! French, Arabic, English.... Alas, his Italian is weak, so he augments it with hand gestures. And Latin: "I am carrying Seneca on all my travels, in the original, as I relearned Latin--reading him in English did not feel right. It would be equivalent to reading Yeats in Swahili." The author's only nod to modesty here is that he did not then claim to have actually read Yeats in Swahili.

Taleb's erudition in language is at the heart of one of the most egotistically comical paragraphs of the book. During a meeting with his close friend, Benoit Mandelbrot, Taleb recounts that,

"Mandelbrot mentioned one of his friends, the aristocratic mathematician Marcel-Paul Schutzenberger [who] insisted on the clear cut distinction in the French language between `hasard' and `fortuit.' We went to the Petit Robert dictionary. `Fortuit' seems to correspond to my epistemic opacity, `l'imprevu et non quantifiable'; `hasard' to the more ludic type of uncertainty that was proposed by the Chevalier de Mere in the early gambling literature. Remarkably, the Arabs may have introduced another word ...."

If you had a Petit Robert yourself, you might be tempted to look up "poseur."

Oh, yes, the substance. These "black swans" are statistical outliers, and thus invite a discussion of statistical modeling and its application to the real world. This the author provides, sort of, in chapters 15-17. Here he proposes to be technical ("The nontechnical reader can skip this chapter...," he helpfully cautions), maybe even mathematical. But beyond the not very surprising demonstration that the tail of a bell curve becomes miniscule more quickly than that of a power-law curve of modest degree, there is little in here that passes for analysis. There is a discursion into the fractal geometry of Mandelbrot, however, and a none-too-clear assertion that power-law distributions are scalable (true) and therefore "Mandelbrotian" (I suppose so). All this might make sense on some level, but it is not a demonstration of the superiority of power laws or the inferiority of the bell curve. It seems rather to be a flattering tribute to his friend Mandlebrot.

In chapter 17 the knives come out. Here Taleb takes on "Locke's Madmen," those benighted economists who at some point foolishly used the bell curve in their modeling and analysis. These include Paul Samuelson. Of him and three other notables Taleb says, "All four were Nobeled. All four were in a delusional state under the effect of mathematics...." I'm quite certain that Taleb knows more about economics than I do. I am even more certain that Samuelson does. To me this is an intra-disciplinary feud, which, at bottom, seems to be the reason for the book. It is the rant of an iconoclast against orthodoxy.

The book is not without value. There are very sensible observations on the inability of most gamblers to realistically imagine the odds against them, for example, the unintended consequences of government regulation, and the wisdom of not permitting economic entities to become "too big to fail." There are practical illustrations of statistics that do not fit the bell curve: distribution of income, for example. There are also a number of bons mots scattered throughout the book: calling egalitarianism "the glorification of mediocrity," and observing that "Forecasting by bureaucrats tends to be used for anxiety relief rather than for adequate policy making." But it is doubtful that the discovery of these baubles, whatever their value as wisdom or amusement, is worth wading through the rest of Mediocristan.

Why do I give a book I call "Vastly Entertaining" only one star? Taleb likes to demonstrate his contempt for journalists by calling them mere entertainers. This is one of his best insights. I'm often reminded when I see the "body language" expert on Bill O'Reilly's show of Sybil The Soothsayer from the prophetic movie "Network". Taleb himself is an entertainer although he might dispute such a characterization. He likes to portray himself the one wise man in a sea of fools. He fashions himself a deep thinker who is cultured and sophisticated unlike the boring MBAs he has to deal with. He is "a legend in his own mind".

In the first book "Fooled by Randomness" he argues that too much editing by book publishers spoils the author's unique style and cadence. The consequence of this opinion is that that book is very poorly written. The Black Swan is better written or better edited. It is much easier to follow. The first book had very few ideas and not many citations. It was personal. We learned a lot about Taleeb - not so much about randomness. The first book is personal. It reads like musings by a man who thought a lot about math and the way it is used in commerce. This second book is rather different. I reads like an issue of "Psychology Today". It is a compilation of research anecdotes from the literature. These stories are mostly entertaining. Taleeb the journalist.

What I learned from Taleeb is that a good living can be made from being a pop guru. He admires Alfred Korzybski and Malcolm Gladwell both of whom wrote this kind of pseudo scientific bestseller that appeals to the reader's vanity. Gladwell you may remember is the genius who assures his readers that they could have been as rich as Gates or as influential as Mozart if they had just practiced more. Korzibski wrote that war, discord and mental illness were just bad grammar.

The great joy of reading this book is to uncover for yourself all the errors. I will confine myself to three examples. Taleeb at one point illustrates some point or other by invoking the Maginot Line. He says the Line showed the stupidity of the French because the clever Germans just went around it. The French indeed made mistakes but the Maginot Line did exactly what it was supposed to do - make the Germans go around. The French never expected the fixed fortification to completely block the Germans - that would have been very stupid. The Line was supposed to channel the expected German tank led invasion to the west where they could oppose them on more favorable ground. The French tanks at the time were more numerous and advanced than the German. The Maginot Line worked as intended it was the French tank doctrine that failed. This is a shocking missunderstanding of history from someone who tells us on every page how much smarter he is than everyone else.

The second example is all the puffery about the normal distribution. He thinks it's evil or at least a major source of man's suffering on this earth. He refers to it as another example of Platonism. Apparently the "ideal form" of the normal curve has seduced many into error. How silly. How Platonic.

He claims that people who have never taken a course in statistics are better off for not having been mislead by the Gaussian distribution. Notice that this is an assertion about the external world but he makes no effort to demonstrate it empirically. Taleeb is an empiricist only to the extent that it allows him to disparage others. It never occurs to him to actually test any of his own assertions. I guess he doesn't watch "Mythbusters" on TV.

All he really does is demonstrate that if you use the wrong math tool you get into trouble. What a revelation! The normal curve is found in frequency distributions. Taleeb mostly uses examples from times series analysis. If someone confuses these two very different analysis domains he will indeed usually be wrong. Taleeb knows all this very well. One wonders if he's being sincer or if he's just engaging in hyperbole to sell books.

All his exhortations about learning statistics makes very little sense. Beginning stat students come to the first class armed with knowledge of how to multiply, add, subtract and divide. They all know about percentages even if they can't calculate them very well. The only real analytical tool they have is the ability to calculate an average. If they are attentive at the end of the class they will learn that the arithmetic mean is sometimes the wrong tool. They will learn that differences between two results may or may not be meaningful. They may learn correlation isn't causation. All these insights are useful but elementary. MBA students enter their first stat class not knowing much math and leave it knowing only a little bit more. That's the reality. Taleeb doesn't want to cure the ignorance he wants to exploit it. Exploitation of ignorance is fine with me as a trading strategy. But Taleeb no longer trades. He quit trading and went into the guru business.

My final example is with his strategy for trading. He prides himself with his deep thinking. He lectures businesspeople about how much randomness and unpredictability there is in the market. At one point he tells us how his lecture attendees often ask him for his sophisticated trading strategy that he developed in the light of his understanding of randomness. He says with ill conceived contempt - they didn't really understand me if they asked such a question. Of course from the attendees viewpoint they want to know what is the payoff for enduring this blowhard's bloviation. When they find out that he has no formula and no worthwhile advice for making money they get mad.

In the first book he tells a long story about how his neighbor across the street made much more money than he did but eventually lost everything in an unexpected market downturn. He hints at how his superior knowledge and appreciation of randomness saved him from a similar fate. In his second book - The Black Swan - he divulges his formula. He doesn't bet all his money every time. He keeps a lot of his working funds in treasury bonds. So he can lose all his "play" money and still pay his mortgage when a Black Swan event happens. Maybe I should have issued a spoiler alert. That's it. That's the punchline. Don't bet more than you can afford to lose.

His neighbor seemed to bet all his funds every time. When his luck was rolling his way he got rich. When his luck turned bad he lost everything. Taleeb has no insight into how to see a Black Swan coming - he makes it clear that that is impossible. And his only advice is to not commit everything you have. He survived the Black Swan turn down because he never used all his funds. Limiting your risk exposure isn't bad advice but readers and lecture attendees expect a whole lot more.

Taleeb believes that there is no way beat randomness except by refusing to be exposed to it. He lives his own advice. He played in the market long enough to benefit from good luck but quit before the bad luck had a chance to wipe him out. Now he writes books and gives lectures. But I already knew that gambling led to trouble. It's called "Gambler's Ruin".