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The Black Swan Theory

Black swan theory

The black swan theory or theory of black swan events is a metaphor that describes an event that comes as a surprise, has a major effect, and is often inappropriately rationalized after the fact with the benefit of hindsight.

The theory was developed by Nassim Nicholas Taleb to explain:

The disproportionate role of high-profile, hard-to-predict, and rare events that are beyond the realm of normal expectations in history, science, finance, and technology
The non-computability of the probability of the consequential rare events using scientific methods (owing to the very nature of small probabilities)
The psychological biases that make people individually and collectively blind to uncertainty and unaware of the massive role of the rare event in historical affairs
Unlike the earlier philosophical “black swan problem,” the “black swan theory” refers only to unexpected events of large magnitude and consequence and their dominant role in history. Such events, considered extreme outliers, collectively play vastly larger roles than regular occurrences.[1] More technically, in the scientific monograph Lectures on Probability and Risk in the Real World: Fat Tails (Volume 1), Taleb mathematically defines the black swan problem as “stemming from the use of degenerate metaprobability”.

Grab a copy now

This is an entertaining and enlightening book, and fairly easy to read. It has an important message regarding how the world works; that the world is governed not by the predictable and the average, but by the random, the unknownable, the unpredictable — big events or discoveries or unusual people that have big consequences. Change comes not uniformly but in unpredictable spurts. These are the Black Swans of the title: completely unexpected and rare events or novel ideas or technologies that have a huge impact on the world. Indeed, Taleb argues that history itself is primarily driven by these Black Swans.

It is convincing argument, entertainingly presented with plenty of sarcasm, and indeed, anger, by Taleb. For example he rails against the academic community, economists (including specific names), and Nobel Prize committee. Considerable numbers of his arguments “ring true” to me, that is my experience in life confirms that they are more accurate than the traditional approach. Like any important work, 90% of what is in the book is not original; that does not make it less important. Taleb’s contribution is in integrating the material together, and showing how these different ideas are tied to the Black Swan.

The themes include: winner-take-all phenomenon, numerous effects of randomness on the world, the invalidity of the Gaussian Bell Curve to most things in world, concepts of scalablity, numerous instabilities in the world, especially the modern world where information travels so quickly, the fallacies about people’s inability to predict the future. The importance of these ideas, Taleb’s ability to weave them together into a single theory, and the ability of this theory to change the way you look at the world, means the book easily deserves my highest recommendation.

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