Assignment No.

SUMMARIE S
Submitted by:AKHIL AHOOJA

BRANCH-MBA(M&S) FORM NO:-5018275

Summary:-The Black Swan: The Impact Of Highly Improbable

The Black Swan is among 12 influential books after World War 2. The book is published in 31 Languages with 2.7 million copies all around the world. It was frequently quoted by RBIs top management in speeches.

The author Nassim Nicholas Taleb is Lebanon born essayist. He is a Doctrate in Mathematics of Deriving Pricing and had also served as a Professor of Risk Engineering at Polytechnic Institute of New York University. Earlier books written by him were Fooled by randomness and The Fourth Quarter.

He quoted on Global crisis that we are taking huge risks and massive exposure to rare events. He isolated some areas in which people make bogus claims epistemologically unsound. The Black Swan is a philosophical book but I used banks as a worrisome case of epistemic arrogance and use science to measure the risk of rare events, making society dependent on very spurious measurements. Banking crisis was worse and unavoidable, just as a drunk and incompetent pilot would eventually crash the plane.

Globalization creates interlocking fragility, while reducing the volatility and giving appearance of stability. They have never lived like that before under such a threat of global collapse. Financial Institutions have been merging into a smaller number of very large banks, almost all banks are interrelated. So the financial ecology is swelling into gigantic , bureaucratic banks i.e when one fails , they all fall. We have moved from a diversified ecology of small banks, with varied lending policies to more homogenous framework of firms that all resemble one another.

Until advent of Austrlia, West did not see the Black Swan . It made them believe that all swans are white. However this notion held for centuries together was shattered when it was noticed that swans could be Black in colour. This demonstrates a severe limitations to our learning from observations and fragility of our knowledge. One single statement can invalidate a general statement derived from millions of confirmatory observations. The unforeseen, unimagined and improbable events are called Black Swan Events.

Black Swans Probability is low, based on the past knowledge. Although its probability is low, when it happens it has massive impact .People dont see it coming before the fact, everybody saw it coming. So its propectively unpredictable but retrospectively predictable. Opacity was shown to the Black Swan due to Platonification. Platonification is tendency of simplifying. We are taught to categorize everything, provide pure and well-define forms to everything. There can be an other reason for opacity is that what we didnt read is more important that what we read. We take what we know little more seriously, lack focus on what we dont know. Triplet of opacity can be explained by the following points 1) Illusion of understanding that everybody thinks that he knows what is going in the world. 2) Retrospective Distortion means that how we access matters only after knowing the facts. 3) Oversimplification of factual information it can be termed as Platonification.

The concept is explained in mainly two domains:-

1)Mediocristan Domain:A single observation will not significantly change the total. A single observation with completely different range of value is not going make a huge impact on the total or the average value. Eg. Average height, Average weight.

2) Extremistan Domain :Inequalities are such that the single observation can disproportionately impact the aggregate. A single observation with completely different range of value can make a large change.Eg. Income of Individuals. Both the domains have their own application like if opt for Mediocristan Domain we could stop at few observation but the same cant done in case Extremistan Domain . In this case , we need be

vast and will not stop on few observation and conclude it. In Extremistan, one unit can easily affect the total in a disproportionate way. In this world, you should always be suspicious of the knowledge you derive from data.

Our opacity towards Black Swan is mainly because of problem of induction that we select past instances that corroborate our theory and treat them as evidence. Series of corroborate fact is not necessarily like in turkey problem. History is not going to tell what lies in the future. We go near to the truth by negative instances. Karl Poppers falsification explained that as thousand days cant prove you right but one day can prove you wrong. This can be the asymmetry of knowledge.

The ludic fallacy applies herethe scalability of real-life payoffs compared to lottery ones makes the payoff unlimited or of unknown limit. Secondly, the lottery tickets have known rules and laboratory-style well presented possibilities; here we do not know the rules and can benefit from this additional uncertainty, since it cannot hurt you and can only benefit you. Examples from games do not hold good for real world. The attributes of uncertainties we face real life have little connection to the sterilized one in exams and games. Casinos has nothing to do with uncertainity. Use of probability theorey can be explained by Frequentist and Bayesian. Frequentist is not good for fataul information of uncertainity and unknown.Some efforts by bayesin for interferences and plausibity.Work of E.T Jaynes need to be developed further.VaR is its prefect example.VaR is charlatanism because it tries to estimate , namely the risk of rare events. VaR is charlatanism because it tries to estimate something that is scientifically impossible to estimate, namely the risks of rare events. VaR encourages misdirected people to take risks with shareholders and ultimately tax payers money.VaR essentially frequentist but by stating 99% confident level,poses to be Bayesian is not right. VaR changes when sample data from same data set is changed. Narrative fallacy is also elaborated by the author. We fool ourselves with stories that cater to our Platonic thrist for distinct pattern. We like stories to summarize and simplify and reduce the dimesions of the matter.We are better in explaining tha understanding post hoc rationalizationright brain / left brain. Brain-pattern is more convenient to than raw information. This is the hunger to reduce the dimensions. Same conditions that makes us simplify pushes us to think that world is less random than it actually is. There are two types of Black Swan 1) Narrated people react to low probability when you discuss such events with them (Kahneman-Tvesrky).

2) Nobody Talks about them. Author has compared opacity of swan with behavioral economics. Danny Kahneman and Amos Tversky, early in their heuristics and biases project. It operates as follows. Kahneman and Tversky had their subjects spin a wheel of fortune. The subjects first looked at the number on the wheel, which they knew was random, then they were asked to estimate thenumber of African countries in the United Nations. Those who had a low number on the wheel estimated a low number of African nations; those with a high number produced a higher estimate. In the first system(System 1) they came out with the points of Heuristics, effortless and automatic. In the second system ( System 2) they elaborated cognitive thinking. No difference in outcomes with both the systems. Knowledge doesnt make you prefect. Hedonic happiness is also a part of behavioral economics, the steady flow of happy events matters and we mostly ignore sad events. We can avoid it by understanding the experimentation over storytelling , experience over history and preferring clinical knowledge over theories.

The history hides both Black Swan and Black Swan generating ability. The story of a survived sinking ship victim in which a survivor told that I prayed to the god and he helped me.But there are many others who would have prayed but did not survive. They are not there to tell their story. Severely victimized are likely to be eliminated from the evidence. We cant predict the future although we have become quite modernized with Computer, internet, laser-unplanned, unpredictable and unappreciated. We tend to tunnel while looking into the future. For many people knowledge has power to produce confidence than measurable aptitude. We overestimate what we know and underestimate uncertainty. The longer the odds, larger will be the epistemic arrogance. We treat ideas like possession and hard to part with them. More information is not always better. Longer interval allows information to filter a bit.

On the expert problem Tetlocks studies says that there is no difference whether one is PhD or undergraduate. Almost the right defense is not acceptable and we are the victims of asymmetry. Makridais concluded that statically sophisticated or complex methods do not necessarily provide accurate forecast than simpler one. One should be aware of epistemic arrogance.

While forecasting various problems need to be faced. The crux is too much tunneling. We could plan while keeping in mind more of the limitations. Longer you have waited, longer you expected to wait. Fallacies of forecast without room for error because the variability matters. Dont take projections too seriously. Forecast degrades as the time lengthens. Be aware of random characters.

Some of the inadvertent discoveries like Bird poop accidental discovery leads to revival of Big Bang Theory. Laser: Charles Town was having urge to split light beam leads to Laser. Karl Popper: In order to predict historical events, you need to predict technological innovations. Henry Poincare, mathematician to understand and explain fundamental limits to our equations that leads to Chaos Theory. As you project into future, you need increasing amount of precision, in modeling. Small error could lead to big distortions.

William Goldman was said to have shouted Nobody knows anything! in relation to the prediction of movie sales. He gave his opinions on this: 1) Make distinction between positive and negative ones. 2) Invest in preparedness, not in prediction. 3) Seize any opportunity, or anything that looks like opportunity. 4) Beware of precise plans by governments. All these points have one thing in common i.e Assymetry. So put yourself in situation where favourable consequences are much larger than unfavourable ones. Describing the Gaussian bell curve as a contagious and severe delusion, and it is time to get into that point in some depth. Inequality, on this Sherwin Rosen said Someone mariginally better could win all bets. Preferential attachment on this is mentioned that Big get Bigger and small stays small i.e also a Zipfs Law.

Fractals were used by Mandelbrot, it is the geometry of rough and broken. There is no qualitative change in objects when they self size affinity. This is also the visual approach to extremistan. It helps in preserving numerical measures across scale.It also converts few black swans into grey swans.

Shockingly Bell curve is used by regulators as risks management tool. It helps in introducing equality and removing inequality. It disregards the impact of sharp jump and discontinuity. Bell curve comes from ludic fallacy. Average calculated by this is normal.

The style of the author has being executive and doesnt require very developed frontal lobes rather a combination of charisma, a capacity to sustain boredom and ability to shallowly perform on harrying schedules. Mental Experiments and Interesting stories also makes it enthralling.