The Black Swan Theory

Posted by M ws On Friday, July 6, 2012 1 comments
Recently, I wrote a post HERE which might have been befuddling to some. It is unfortunate that due to certain developments, it is safer to write in veiled terms than to make postulations in black and white. The purpose of that post was to emphasize the point that things are not clear-cut in black and white terms. There is no one scenario of A versus B, the good guys versus the not-so-good guys or good triumphing over evil. Whilst idealism can be a motivating factor, it can also blind us from seeing reality as it is. Remember - various combinations of possibilities can arise and the powerful ones have worked these out for their self-preservation. It is only those who have been beguiled by agenda-setting schemes or attempts to shape public opinion and then to have a herd mentality who may be susceptible to oversimplification of events/developments. Hence, there is such a deep need for Malaysians not to be fooled by reports or any form of writing, mine included - even though I try, to the best of my ability, to write as objectively as possible. Most importantly, it is vital that we have a bird'e eye-view of developments and think as far back as even 2001 and see how things have rolled out till now. Find the golden thread to put it all together. Join the dots and then see who is the Master of them all whose plans have been executed to the hilt by those chosen for their talents, network and abilities. To make it easier for us to size up the current situation, consider The Black Swan Theory.

*I wish to express my grateful thanks to UP41 for enlightening me in this area.

Do black swans exist? Well, years ago, people thought all swans must be white just because no one had ever encountered a black swan. In 1697, Dutch explorer Willem de Vlamingh discovered black swans in Western Australia after which the term 'black swan' metamorphosed to connote that a perceived impossibility might later be disproven. As far back as the 19th century, John Stuart Mill used the black swan logical fallacy as a new term to identify falsification.

In the 17th century, writer Francis Bacon warned that our minds are wired to deceive us.

"Beware the fallacies into which undisciplined thinkers most easily fall--they are the real distorting prisms of human nature." 

"Assuming more order than exists in chaotic nature." 

The sad reality is that our brains are wired for narrative, not statistical uncertainty. In order to simplify the world that we live in, we tell ourselves simple stories to explain complex things/people/situations which we do not/cannot understand. Ever so often, it is likely that whatever reason we postulate may be simplified, distorted or wrong.

It was Lebanese-American writer Nassim Nicholas Taleb who first made this argument in Fooled by Randomness (2004), an engaging look at the history and reasons for our predilection for self-deception when it comes to statistics. In 2007, he wrote The Black Swan: the Impact of the Highly Improbable (revised and completed in 2010), about predicting the future.

Nassim explains that the problem exists because  we place too much weight on the odds that past events will repeat (diligently trying to follow the path of the "millionaire next door," when unrepeatable chance is a better explanation).  He highlights that the really important events are rare and unpredictable. He calls such events Black Swans which is in direct reference to a 17th century philosophical thought experiment.

Nassim also argues that it is futile to explain really big events in our world which are rare and unpredictable. Any attempt to explain them may be satisfying but pointless. and thus trying to extract generalizable stories to explain them may be emotionally satisfying, but it's practically useless. His rationale:  "History does not crawl, it jumps." He argues that whatever assumptions we have are developed from the bell-curve predictability of what he calls "Mediocristan." In reality, our world is really shaped by the wild power law swings of "Extremistan."

According to Wikipedia:

The black swan theory or theory of black swan events is a metaphor that describes an event that is a surprise (to the observer), has a major impact, and after the fact is often inappropriately rationalized with the benefit of hindsight.

The theory was developed by Nassim Nicholas Taleb to explain:
  • The disproportionate role of high-impact, 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.

Identifying a black swan event

Based on the author's criteria:

  1. The event is a surprise (to the observer).
  2. The event has a major impact.
  3. After the first recorded instance of the event, it is rationalized by hindsight, as if it could have been expected; that is, the relevant data was available but unaccounted for in risk mitigation programs. The same is true for the personal perception by individuals.

An example Taleb uses to explain his theory is the events of 11 September 2001. 9/11 was a shock to all common observers. Its ramifications continue to be felt in many ways: increased levels of security; "preventive" strikes or wars by Western governments. The coordinated, successful attack on the World Trade Center and The Pentagon using commercial airliners was virtually unthinkable at the time. However, with the benefit of hindsight, it has come to be seen as a predictable incident in the context of the changes in terrorist tactics.

Coping with black swan events

The main idea in Taleb's book is not to attempt to predict black swan events, but to build robustness against negative ones that occur and be able to exploit positive ones. Taleb contends that banks and trading firms are very vulnerable to hazardous black swan events and are exposed to losses beyond those predicted by their defective models. On the subject of business in particular, Taleb is highly critical of the widespread use of the normal distribution model as the basis for calculating risk.

In the second edition of The Black Swan, Taleb provides "Ten Principles for a Black-Swan-Robust Society". Taleb states that a black swan event depends on the observer. For example, what may be a black swan surprise for a turkey is not a black swan surprise to its butcher; hence the objective should be to "avoid being the turkey" by identifying areas of vulnerability in order to "turn the Black Swans white". (Source: HERE)

Here's an excerpt of New York Times review of the book:

A black swan is a highly improbable event with three principal characteristics: It is unpredictable; it carries a massive impact; and, after the fact, we concoct an explanation that makes it appear less random, and more predictable, than it was. The astonishing success of Google was a black swan; so was 9/11. For Nassim Nicholas Taleb, black swans underlie almost everything about our world, from the rise of religions to events in our own personal lives.

Why do we not acknowledge the phenomenon of black swans until after they occur? Part of the answer, according to Taleb, is that humans are hardwired to learn specifics when they should be focused on generalities. We concentrate on things we already know and time and time again fail to take into consideration what we don’t know. We are, therefore, unable to truly estimate opportunities, too vulnerable to the impulse to simplify, narrate, and categorize, and not open enough to rewarding those who can imagine the “impossible.”

For years, Taleb has studied how we fool ourselves into thinking we know more than we actually do. We restrict our thinking to the irrelevant and inconsequential, while large events continue to surprise us and shape our world. In this revelatory book, Taleb explains everything we know about what we don’t know, and this second edition features a new philosophical and empirical essay, “On Robustness and Fragility,” which offers tools to navigate and exploit a Black Swan world.

Elegant, startling, and universal in its applications, The Black Swan will change the way you look at the world. Taleb is a vastly entertaining writer, with wit, irreverence, and unusual stories to tell. He has a polymathic command of subjects ranging from cognitive science to business to probability theory. The Black Swan is a landmark book—itself a black swan. (MORE HERE)

So, please be on guard because:

  • What you read may not be what the writer intended OR
  • What you think (opinions/perceptions) may be what the writer INTENDED but need not reflect the truth because there could be a hidden agenda that can only be understood in the bigger picture
  • What you think may not happen COULD happen
  • What you see is only but a part of the big picture which could be completed in many ways based on the different combinations that the one-in-charge had already foreseen
It just does not make sense that certain things happen the way they have been occurring because there has to be an unknown person/force orchestrating events and making them come true via their puppeteers or social engineers. To be overly optimistic that change can happen is not advisable even though I am all for change. It is because no one can predict the future and we have to be prepared for the 'what-ifs...' for otherwise, we would be wilting in idealistic hopes
Let us not be fooled in just condemning this and that but let us really think:


Why couldn't he/they/she have.....?

As we question before believing any side, may the truth be revealed to us. And at all costs, let us not fall prey to propaganda.

Download the free e-book The Black Swan: the Impact of the Highly Improbable HERE. Read and be enlightened.

1 comments to The Black Swan Theory

  1. says:

    UP41 Nassim N Taleb book on black swan phenomenon is very interesting and difficult to my pea brain. I don't think I understand much what he said but his book prompted me to think about one or two issues facing the country.

    Let us looks at driving as an analogy. If we drive in a traffic jam, there are high chances to knock by other cars or we knock at others' cars. These type of accidents are normally minor. However when one drive in the early morning say 3 or 4 am, on a low traffic highway, there are fewer cars thus chances (probability ) is low of knocking another vehicles but if there is any accident, it could be fatal The jam situation is high probability but low impact whereas the later is low probability but high impact. Of course the probability is lower than the earlier but not that low either. This example helps us to look at SAFTY beyond probability.

    I believe all the experts would have said, the nuclear plant of Fukushima was safe before it was built. Were the experts lying ? No. The probability of a nuclear accidents was so low with so many preventive steps built into the plant thus experts would have said the plant was safe. No experts would say it was 100% safe. It was safe base on low probability & PAST scientific evidences . The nuclear disaster of Fukushima is low probability but with FATAL impacts to the people/country/environment- a black swan event.

    Now let us zoom back to Kuantan, Malaysia and ask the 2 questions : probability and impact. All the government experts said Lynas plant and the wastes are safe although there is no safe method of treating the waste. According to the government experts , the steps to be taken will reduce chances or probability of harmful effects on human to very low level therefore it is safe. ( Low probability does not mean zero,) But what about the impact. We all know the impact if it turn out the other way – thousands will suffer, Kuantan or ANY places storing the waste may be wiped off due to contamination. A “Black Swan” waiting for us ??????????? Should government gamble lives with $$$ ? What if the experts estimate of probability is wrong ? Then , are we facing high probability high impact events ???????????????????????????????

Related Posts with Thumbnails