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Contents
Articles
Nassim Nicholas Taleb The Black Swan (2007 book) Black swan theory Ludic fallacy Fooled by Randomness 1 12 17 20 22
References
Article Sources and Contributors Image Sources, Licenses and Contributors 24 25
Article Licenses
License 26
Born
1960 (age5253) Amioun, Lebanon United States, United Kingdom, Lebanon Lebanese, American Lebanese randomness, probability and uncertainty [1]
Polytechnic Institute of New York University (current), Oxford University (current), University of Massachusetts Amherst, Courant Institute of Mathematical Sciences University of Paris (B.S & M.S) Wharton School (M.B.A.) University of Paris (Dauphine) (Ph.D.) Hlyette Geman Applied epistemology Friedrich Hayek, Karl Popper, Henri Poincar, Michel de Montaigne, Benoit Mandelbrot, Frdric Bastiat
Alma mater
Nassim Nicholas Taleb (Arabic: , alternatively Nessim or Nissim, born 1960) is a Lebanese American essayist, scholar and statistician, whose work focuses on problems of randomness, probability and uncertainty.[2] His 2007 book The Black Swan was described in a review by the Sunday Times as one of the twelve most influential books since World War II.[3] Taleb is a bestselling author,[4][5] and has been a professor at several universities, currently at Polytechnic Institute of New York University and Oxford University.[6] He has also been a practitioner of mathematical finance,[7] a hedge fund manager,[8][9][10] a derivatives trader,[11][12] and is currently a scientific adviser at Universa Investments and the International Monetary Fund.[13] He criticized the risk management methods used by the finance industry and warned about financial crises, subsequently profiting from the late-2000s financial crisis. He advocates what he calls a "black swan robust" society, meaning a society that can withstand difficult-to-predict events. He proposes "antifragility" in systems, that is, an ability to benefit and grow from a certain class of random events, errors, and volatility[14][15] as well as "convex tinkering" as a method of scientific discovery, by which he means option-like experimentation outperforms directed research.[16]
Taleb received his bachelor and master in science degrees from the University of Paris. He holds an MBA from the Wharton School at the University of Pennsylvania and a PhD in Management Science (his thesis was on the mathematics of derivatives pricing) from the University of Paris (Dauphine) under the direction of Hlyette Geman. A polyglot, Taleb has a literary fluency in English, French, and classical Arabic; a conversational fluency in Italian and Spanish; and can read classical texts in Greek, Latin, Aramaic, and ancient Hebrew, as well as the Canaanite script.[21]
Finance career
Taleb considers himself less a businessman than an epistemologist of randomness, and says that he used trading to attain independence and freedom from authority. As a hedge fund manager, his business model has been to safeguard investors against crises while reaping rewards from rare events, and thus his investment management career has included several jackpots followed by lengthy dry spells. Taleb was a pioneer of tail risk hedging (now sometimes called "black swan protection"), whereby investors are insured against extreme market moves. He has held the following positions: managing director and proprietary trader at Credit SuisseUBS; worldwide chief proprietary arbitrage derivatives trader for currencies, commodities and non-dollar fixed income at First Boston; chief currency derivatives trader for Banque Indosuez(now Calyon); managing director and worldwide head of financial option arbitrage at CIBC Wood Gundy; derivatives arbitrage trader at Bankers Trust (now Deutsche Bank), proprietary trader at BNP Paribas, as well as independent option market maker on the Chicago Mercantile Exchange; and founder of Empirica Capital, after which Taleb retired from trading and became a full-time author and author in 2004. Taleb is currently Principal/Senior Scientific Adviser at Universa Investments in Santa Monica, California, a tail protection firm owned and managed by former Empirica partner Mark Spitznagel. Taleb reportedly became financially independent after the crash of 1987 and was successful during the financial crisis that began in 2007[citation needed], a development which he attributed to the mismatch between statistical distributions used in finance and reality. Universa is a fund which is based on the "black swan" idea and to which Taleb is a principal adviser. Some of the separate funds managed by Universa made returns of 65% to 115% in October 2008. Following the economic crisis that started in 2008, Taleb has become an activist for what he called a "black swan robust society" and as of July 2011, Taleb is working with the International Monetary Fund on identifying and mitigating tail risks in financial markets.
Academic career
Taleb became a full-time scholar and essayist in 2006 as a university professor.[22] He is currently Distinguished Professor of Risk Engineering at Polytechnic Institute of New York University,[23] and Distinguished Research Scholar, Said Business School, Oxford University. He was Visiting Professor at London Business School and the Dean's Professor in the Sciences of Uncertainty at the Isenberg School of Management at the University of Massachusetts Amherst, Adjunct Professor of Mathematics at the Courant Institute of New York University, and affiliated faculty member at the Wharton Business School Financial Institutions Center. He jointly teaches regular courses with Paul Wilmott and occasionally on the Certificate in Quantitative Finance. In May 2012, he ranked fourth in terms of the number of downloaded papers on the Social Science Research Network (SSRN).[24]
Writing career
Taleb's first non-technical book, Fooled by Randomness, about the underestimation of the role of randomness in life, around the same time as the September 11 attacks, was selected by Fortune as one of the smartest 75 books known. His second non-technical book, The Black Swan, about unpredictable events, was published in 2007, selling close to 3 million copies (as of February 2011). It spent 36 weeks on the New York Times Bestseller list,[25] 17 as hardcover and 19 weeks as paperback, and was translated into 31 languages. The Black Swan has been credited with predicting the banking and economic crisis of 2008. Taleb's non-technical writing style mixes a narrative style (often semi-autobiographical) and short philosophical tales together with historical and scientific commentary. The sales of Taleb's first two books garnered an advance of $4 million for a follow-up book on anti-fragility. A technical companion for the Incerto Trilogy is freely available on Taleb's website.[26] A book of aphorisms, The Bed of Procrustes: Philosophical and Practical Aphorisms, was released in December 2010. The final book of his Incerto series Antifragile: Things That Gain from Disorder was published in November 2012 by Random House in the United States and Penguin[27] in the United Kingdom. In the introduction of the book, Taleb describes it as follows: "Some things benefit from shocks; they thrive and grow when exposed to volatility, randomness, disorder, and stressors and love adventure, risk, and uncertainty. Yet, in spite of the ubiquity of the phenomenon, there is no word for the exact opposite of fragile. Let us call it antifragile. Antifragility is beyond resilience or robustness. The resilient resists shocks and stays the same; the antifragile gets better."[28] In 2007, in The Black Swan, Taleb warned about the coming crisis: Globalization creates interlocking fragility, while reducing volatility and giving the appearance of stability. In other words it creates devastating Black Swans. We have never lived before under the threat of a 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, incestuous, bureaucratic banks when one fails, they all fall. The increased concentration among banks seems to have the effect of making financial crisis less likely, but when they happen they are more global in scale and hit us very hard. We have moved from a diversified ecology of small banks, with varied lending policies, to a more homogeneous framework of firms that all resemble one another. True, we now have fewer failures, but when they occur .... I shiver at the thought. The government-sponsored institution Fannie Mae, when I look at its risks, seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup. But not to worry: their large staff of scientists deem these events "unlikely". He warned of pseudostability in Syria:[29]
Nassim Nicholas Taleb Dictatorships that do not appear volatile, like, say, Syria or Saudi Arabia, face a larger risk of chaos than, say, Italy, as the latter has been in a state of continual political turmoil since the second war.
Philosophical theories
His book The Bed of Procrustes summarizes the central problem: "we humans, facing limits of knowledge, and things we do not observe, the unseen and the unknown, resolve the tension by squeezing life and the world into crisp commoditized ideas". Taleb disagrees with Platonic (i.e., theoretical) approaches to reality to the extent that they lead people to have the wrong map of reality rather than no map at all. He opposes most economic and grand social science theorizing, which in his view suffer acutely from the problem of overuse of Plato's Theory of Forms. Relatedly, he also believes that universities are better at public relations and claiming credit than generating knowledge. He argues that knowledge and technology are usually generated by what he calls "stochastic tinkering" rather than by top-down directed research.[30][31] He calls for cancellation of the Nobel Memorial Prize in Economics, saying that the damage from economic theories can be devastating.[32] He opposes top-down knowledge as an academic illusion and believes that price formation obeys an organic process.[33] Together with Espen Gaarder Haug, Taleb asserts that option pricing is determined in a "heuristic way" by operators, not by a model, and that models are "lecturing birds on how to fly". Pablo Triana has explored this topic with reference to Haug and Taleb,[34][35] and says that perhaps Taleb is correct to urge that banks be treated as utilities forbidden to take potentially lethal risks, while hedge funds and other unregulated entities should be able to do what they want.[36] Taleb's writings discuss the error of comparing real-world randomness with the "structured randomness" in quantum physics where probabilities are remarkably computable and games of chance like casinos where probabilities are artificially built.[37] Taleb calls this the "Ludic fallacy". His argument centers on the idea that predictive models are based on Plato's Theory of Forms, gravitating towards mathematical purity and failing to take some key ideas into account, such as: the impossibility of possessing all relevant information, that small unknown variations in the data can have a huge impact, and flawed theories/models that are based on empirical data and that fail to consider events that have not taken place but could have taken place. Discussing the Ludic fallacy in The Black Swan, he writes, "The dark side of the moon is harder to see; beaming light on it costs energy. In the same way, beaming light on the unseen is costly in both computational and mental effort." In the second edition of The Black Swan, he posited that the foundations of quantitative economics are faulty and highly self-referential. He states that statistics is fundamentally incomplete as a field as it cannot predict the risk of rare events, a problem that is acute in proportion to the rarity of these events. With the mathematician Raphael Douady, he called the problem statistical undecidability (Douady and Taleb, 2010). Taleb sees his main challenge as mapping his ideas of "robustification" and "anti-fragility", that is, how to live and act in a world we do not understand and build robustness to black swan events. Taleb introduced the idea of the "fourth quadrant". One of its applications is in his definition of the most effective (that is, least fragile) risk management approach: what he calls the 'barbell' strategy which is based on avoiding the middle in favor of linear combination of extremes, across all domains from politics to economics to one's personal life. These are deemed more robust to estimation errors. For instance, he suggests that investing money in 'medium risk' investments is pointless because risk is difficult if not impossible to compute. His preferred strategy is to be both hyper-conservative and hyper-aggressive at the same time. For example, an investor might put 80 to 90% of their money in extremely safe instruments, such as treasury bills, with the remainder going into highly risky and diversified speculative bets. An alternative suggestion is to engage in highly speculative bets that are insured against losses of more than a specified amount. He asserts that by adopting these strategies a portfolio can be "robust", that is, gain a positive exposure to black swan events while limiting losses suffered by such random events.[38] Taleb also applies a similar barbell-style approach to health and exercise. Instead of doing steady and moderate exercise daily, he suggests that it is better to do a low-effort exercise such as walking slowly most of the time, while occasionally
Nassim Nicholas Taleb expending extreme effort. He avers that the human body evolved to live in a random environment, with various unexpected but intense efforts and much rest.[39] Taleb stays in touch using his simple official Facebook page, but reminds readers not to write in it about finance and (sic.) "similarly depraved topics"
Nassim Nicholas Taleb The late Berkeley statistician David Freedman said that efforts by statisticians to refute Taleb's stance have been unconvincing.[46] Taleb wrote in the second edition of The Black Swan that he had a session in 2008 with statisticians in which the hostility changed: I found out that telling researchers "This is where your methods work very well" is vastly better than telling them "This is what you guys dont know." So when I presented to what was until then the most hostile crowd in the world, members of the American Statistical Association, a map of the four quadrants, and told them: your knowledge works beautifully in these three quadrants, but beware of the fourth one, as this is where the Black Swans breed, I received instant approval, support, offers of permanent friendship, refreshments (Diet Coke), invitations to come present at their sessions, even hugs(...) They tried to convince me that statisticians were not responsible for these aberrations, which come from people in the social sciences who apply statistical methods without understanding them. Taleb and Nobel laureate Myron Scholes have traded personal attacks, particularly after Taleb's paper with Espen Haug on why nobody used the Black-Scholes-Merton formula. Taleb said that Scholes was responsible for the financial crises of 2008, and suggested that "this guy should be in a retirement home doing Sudoku. His funds have blown up twice. He shouldn't be allowed in Washington to lecture anyone on risk." Scholes retorted that Taleb simply "popularises ideas and is making money selling books". Scholes claimed that Taleb does not cite previous literature, and for this reason Taleb is not taken seriously in academia.[47] Haug and Taleb (2011) listed hundreds of research documents showing the Black-Scholes formula was not Scholes' at all and argued that the economics establishment ignored the literature by practitioners and mathematicians (such as Ed Thorp), who had developed a more sophisticated version of the formula. Citing his academic works on the same topics covered in The Black Swan, Taleb said that "Academics should comment on data there, not make technical comments on a literary book". He has said that no direct published criticism has been directed at his ideas, but rather at his person and style. He wrote, "you never win an argument until they attack your person." In an interview on Charlie Rose, Taleb said that he was pleased that none of the criticism he received for The Black Swan had any substance, as it was either unintelligent, ad hominem, or style over substance, which convinced him to "go for the jugular" with a huge financial bet on the breakdown of statistical methods in finance. Taleb's aggressive attitude against the finance industry has led to personal attacks, including a smear campaign and death threats from former employees of Lehman Brothers.
Personal life
The Penguin book cover writes that Taleb "refuses all awards and honours as they debase knowledge by turning it into competitive sport". Though a non-smoker, Taleb suffered from throat cancer in the mid-1990s, which he overcame. He has stated that his major hobby is "teasing people who take themselves and the quality of their knowledge too seriously and those who don't have the guts to sometimes say: 'I dont know ...'" Some reporters have commented that information about his personal life is difficult to extract, though Taleb appears to enjoy being in the limelight.[48] Others find him more talkative: Malcolm Gladwell, in What the Dog Saw, wrote: "We would have lunches that would last for hours. The delight I took in his company was offset only by the dread I felt at the prospect of transcribing all those hours of tapes."[49]
Bibliography
Literary and nontechnical books
Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets. New York: Random House and Penguin. 2001/2005. ISBN0-8129-7521-9. Le Hasard Sauvage. Paris: Les Belles Lettres. 2005. ISBN2-251-44297-9. The French edition of Fooled by Randomness with revisions and changes to the English version. The Black Swan: The Impact of the Highly Improbable. New York: Random House and Penguin. 2007/2010. ISBN978-1-4000-6351-2.The book was completed in 2010 with the second edition including a long essay "On Robustness and Fragility". Force et fragilit, reflexions philosophiques et empiriques. Paris: Les Belles Lettres. 2010. The Bed of Procrustes: Philosophical and Practical Aphorisms. New York: Random House. 2010. ISBN978-1-4000-6997-2. Antifragile: Things That Gain from Disorder. New York: Random House. 2012. ISBN978-1-4000-6782-4.
Nassim Nicholas Taleb The Prediction of Action, in (eds. T. O' Connor & C. Sandis) A Companion to the Philosophy of Action (Wiley-Blackwell). (2010) with Pilpel, A., "Common Errors in the Interpretation of the Ideas of The Black Swan and Associated Papers" [61],Critical Review, Vol 21, No. 4 (2010) "The Risk Externalities of Too Big to Fail" [62] Physica A (2010) with Tapiero, C. "Option traders use (very) sophisticated heuristics, never the BlackScholesMerton formula", Journal of Economic Behavior and Organizations, 77(2), (February 2011). with Haug, E. G. "Robustness and Model Error inside the Fourth Quadrant" [63], (2010) "Why Did the Crisis of 2008 Happen?" [64], New Political Economy (2011) "Statistical Undecidability" [65], (2011). with Douady, R, "The Black Swan of Cairo" [66],Foreign Affairs, 90, 3 (2012) with Blyth, M. "How to Avoid Another Crisis", SAIS Review of International Affairs with Martin, G. "The Illusion of Thin Tails Under Aggregation (A Reply to Jack Treynor)", Journal of Investment Management (2012) with Martin, G. "A Map and Simple Heuristic to Detect Fragility, Antifragility, and Model Error", Quantitative Finance (2012) "The Future Has Thicker Tails than the Past: Model Error as Branching Counterfactuals", Mandelbrot Memorial (2012) "The Problem is Beyond Psychology: The Real World is More Random than Regression Analyses", International Journal of Forecasting (2012) with Goldstein, D. "A New Heuristic Measure of Fragility and Tail Risks: Application to Stress Testing" (August 2012). IMF No. 12/216. with Canetti, Elie R.D., Kinda, Tidiane, Loukoianova, Elena and Schmieder, Christian,[67]
Other essays
Edge article: "The Opiates of the Middle Class" [70] (2006) "On Forecasting." In John Brockman, ed., "What We Believe But Cannot Prove: Today's Leading Thinkers on Science and the Age of Certainty. (2006) New York: Harper Perennial. Edge article: Real Life is Not a Casino [71], in John Brockman, ed., Edge Question 2008. New York:Harper Perennial. The article explains Taleb's position on global warming and why we need to be green regardless of models. Edge Essay: "The Fourth Quadrant: A Map of the Limits of Statistics" [72] (2008) Edge article: The Idea of Iatrogenic Science [73], in John Brokman, ed., Edge Question 2009. New York: Harper Perennial. Edge article: AntiFragility Or the Property of Disorder Loving Systems [74], in John Brockman, ed., Edge Question 2011. New York: Harper Perennial.
Collaborations
Taleb was collaborating with Benoit Mandelbrot on a general theory of risk management. Taleb also works with Daniel Goldstein on a project to test empirically people's intuitions about ecological and high impact uncertainty.
Honors
Inducted into the Derivatives Hall of Fame in February 2001. Selected for the Power 30 in Business by SmartMoney in October 2007. 2007 getAbstract International Book Award. 2008 Frost & Sullivan Visionary of the Year Award. 2008 Prospect Magazine Long list for Public Intellectual of the Year. 2009 Made the Forbes Magazine list of "Most Influential Management Gurus". In 2011, he made the Bloomberg 50 most influential people in global finance.
Quotes
If you see fraud and don't shout fraud, you are a fraud" Read books are far less valuable than unread ones
Notes
[1] Berenson, Alex. " A Year Later, Little Change on Wall St. (http:/ / www. nytimes. com/ 2009/ 09/ 12/ business/ 12change. html?pagewanted=2)", The New York Times (2009-09-11): "Nassim Nicholas Taleb, a statistician, trader, and author, has argued for years that...." [2] http:/ / archive. poly. edu/ press/ _doc/ Nassim_Nicholas_Taleb_joins_Polytechnic. pdf [3] Appleyard, Bryan. " Books that helped to change the world (http:/ / entertainment. timesonline. co. uk/ tol/ arts_and_entertainment/ books/ article6716157. ece)", The Sunday Times (2009-07-19). [4] " Hardcover Business Best Sellers (http:/ / www. nytimes. com/ 2008/ 11/ 02/ books/ bestseller/ besthardbusiness. html?pagewanted=print)", New York Times (2008-11-02). [5] See also [6] " NASSIM NICOLAS TALEB, Author of the National Bestseller, The Black Swan, JOINS POLYTECHNIC INSTITUTE OF NYU (http:/ / archive. poly. edu/ press/ _doc/ Nassim_Nicholas_Taleb_joins_Polytechnic. pdf)", Polytechnic Institute of New York University (2008-10-03) [7] http:/ / www. ft. com/ cms/ s/ 0/ ddd47642-55b7-11e0-a00c-00144feab49a. html#axzz1I1UzeFiM [8] " Brevan Howard Shows Paranoid Survive in Hedge Fund of Time Outs (http:/ / www. bloomberg. com/ apps/ news?sid=aPaQ1qmwpYmw& pid=newsarchive)", Bloomberg News (2009-03-31): "'black swans' difficult-to-predict events that can wipe out a fund. The term was popularized by hedge fund manager and author Nassim Taleb." [9] " He Said It (http:/ / pqasb. pqarchiver. com/ washingtonpost/ access/ 1578644971. html?dids=1578644971:1578644971& FMT=CITE& FMTS=CITE:FT& type=current& date=Oct+ 19,+ 2008& author=Anonymous& pub=The+ Washington+ Post& desc=He+ Said+ It& pqatl=google)", Washington Post (2008-10-18): "Nassim Taleb a former hedge fund manager commenting on the performance of accounts run by Universa Investments where he is an adviser...." [10] " What I read (http:/ / www. usatoday. com/ money/ companies/ management/ 2006-08-06-whatiread_x. htm)", USA Today (2006-08-04): "Taleb, a hedge fund manager, warns of trying to predict behavior by analyzing past successes." [11] The Risk Maverick (http:/ / www. fooledbyrandomness. com/ bloombergProfile. pdf), Stephanie Baker-Said, Bloomberg L.P., May 2008 [12] Dubner, Stephen. " Straight From the Black Swans Mouth (http:/ / freakonomics. blogs. nytimes. com/ 2007/ 05/ 21/ straight-from-the-black-swans-mouth/ )", The New York Times (2007-05-21). [13] Baker, Stephanie. " Talebs Universa Bets on Black Swan Deflation, Hyperinflation (http:/ / www. bloomberg. com/ apps/ news?pid=newsarchive& sid=aDVgqxiT9RSg)", Bloomberg News (2009-06-01). [14] http:/ / www. mdpi. com/ 2073-4425/ 2/ 4/ 998 [15] http:/ / www. project-syndicate. org/ commentary/ the-anti-fragile-life-of-the-economy [16] http:/ / edge. org/ conversation/ understanding-is-a-poor-substitute-for-convexity-antifragility [17] Wighton, David. " Lunch with the FT: Nassim Nicholas Taleb (http:/ / us. ft. com/ ftgateway/ superpage. ft?news_id=fto032820081709226056)", Financial Times (2008-03-28). [18] Helmore, Edward. " The new sage of Wall Street (http:/ / www. guardian. co. uk/ books/ 2008/ sep/ 28/ businessandfinance. philosophy)", The Guardian (2008-09-28).
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External links
Nassim Taleb's home page (http://www.fooledbyrandomness.com/) Lecture on Philosophy of Probability (http://www.fooledbyrandomness.com/Princeton-phil.WMA) at Princeton University Nassim Nicholas Taleb (https://www.facebook.com/people/Nassim-Nicholas-Taleb/13012333374) on Facebook Appearances (http://www.c-spanvideo.org/nassimtaleb) on C-SPAN Nassim Nicholas Taleb (http://www.imdb.com/name/nm2643232/) at the Internet Movie Database Nassim Nicholas Taleb (http://www.theguardian.com/books/nassim-nicholas-taleb) collected news and commentary at The Guardian Works by or about Nassim Nicholas Taleb (http://worldcat.org/identities/lccn-n96-74723) in libraries (WorldCat catalog) Interviews Interview (http://www.fooledbyrandomness.com/PhilosophyNow.pdf) with Constantine Sandis Roberts, Russ. "Nassim Taleb Podcasts" (http://www.econtalk.org/archives/_featuring/nassim_taleb/). EconTalk. Library of Economics and Liberty. Nassim Nicholas Taleb Interview June 2010 (http://www.newstatesman.com/ideas/2010/06/ god-cameron-detractors) New Statesman Video : In conversation with Daniel Kahnemann, (http://www.nypl.org/audiovideo/ live-nypl-nassim-taleb-daniel-kahneman) New York Public Library, February 2013 Review FrankVoisin.com (http://www.frankvoisin.com/?p=52) Summary and review of Fooled By Randomness
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LC Classification Q375 .T35 2007 Preceded by Followed by Fooled by Randomness The Bed of Procrustes: Philosophical and Practical Aphorisms
The Black Swan: The Impact of the Highly Improbable is a literary/philosophical book by the epistemologist Nassim Nicholas Taleb. The book focuses on the extreme impact of certain kinds of rare and unpredictable events (outliers) and humans' tendency to find simplistic explanations for these events retrospectively. This theory has since become known as the black swan theory. The book also covers subjects relating to knowledge, aesthetics, and ways of life, and uses elements of fiction in making its points. The first edition appeared in 2007 and was a commercial success. It spent 36 weeks on the New York Times best-seller list. The second, expanded edition appeared in 2010.
Sales
Since being published in 2007, as of February 2011 has sold close to 3 million copies. It spent 36 weeks on the [2] New York Times Bestseller list list; 17 as hardcover and 19 weeks as paperback. It was published in 32 languages.[3]
The Black Swan (2007 book) The book's position is that a Black Swan event depends on the observerusing a simple example, what may be a Black Swan surprise for a turkey is not a Black Swan surprise for its butcherhence the objective should be to "avoid being the turkey" by identifying areas of vulnerability in order to "turn the Black Swans white".
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Summary
Nassim Nicholas Taleb refers to the book variously as an essay or a narrative with one single idea: "our blindness with respect to randomness, particularly large deviations."[4] It is Taleb's questioning of why this occurs and his explanations of it that drive the book forward. The book's layout follows "a simple logic"[5] moving from literary subjects in the beginning to scientific and mathematical subjects in the later portions. Part One and the beginning of Part Two delve into psychology. Taleb addresses science and business in the latter half of Part Two and Part Three. Part Four contains advice on how to approach the world in the face of uncertainty and still enjoy life. Taleb acknowledges a contradiction in the book. He uses an exact metaphor, Black Swan idea to argue against the "unknown, the abstract, and imprecise uncertainwhite ravens, pink elephants, or evaporating denizens of a remote planet orbiting Tau Ceti." There is a contradiction; this book is a story, and I prefer to use stories and vignettes to illustrate our gullibility about stories and our preference for the dangerous compression of narratives.... You need a story to displace a story. Metaphors and stories are far more potent (alas) than ideas; they are also easier to remember and more fun to read.[6]
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Arguments
The term black swan was a Latin expression its oldest reference is in the poet Juvenal expression that "a good person is as rare as a black swan" ("rara avis in terris nigroque simillima cygno", 6.165).[8] It was a common expression in 16th century London as a statement that describes impossibility, deriving from the old world presumption that 'all swans must be white', because all historical records of swans reported that they had white feathers. Thus, the black swan is an oft cited reference in philosophical discussions of the improbable. Aristotle's Prior Analytics most likely is the original reference that makes use of example syllogisms involving the predicates "white", "black", and "swan." More specifically Aristotle uses the white swan as an example of necessary relations and the black swan as improbable. This example may be used to demonstrate either deductive or inductive reasoning; however, neither form of reasoning is infallible since in inductive reasoning premises of an argument may support a conclusion, but does not ensure it, and, similarly, in deductive reasoning an argument is dependent on the truth of its premises. That is, a false premise may lead to a false result and inconclusive premises also will yield an inconclusive conclusion. The limits of the argument behind "all swans are white" is exposedit merely is based on the limits of experience (e.g. that every swan one has seen, heard, or read about is white). Hume's attack against induction and causation is based primarily on the limits of everyday experience and so too, the limitations of scientific knowledge.
Higher frequency
Rare and improbable events do occur much more than we dare to think.[9] Our thinking usually is limited in scope and we make assumptions based on what we see, know, and assume. Reality, however, is much more complicated and unpredictable than we think. Also, assumptions relevant to average situations are less relevant to irregular situations, especially when the "rules of the game" themselves do change.
The Black Swan (2007 book) cultural phenomenon are somewhat a necessary precondition to learning, since complete openness to every event would be inefficient. Bertrand Russell observed, "An open mind is an empty mind." So we cannot be completely open, but we must guard against being completely closed as well. It would be most efficacious if we could find a balance between the known and unknown and the limits of our knowledge and experience. The effect of unexpected events likely is integral to finding this balance. Thus, the rare and unexpected is far more significant to our formation of knowledge than people often imagine. Taleb argues that the proposition "we know", in many cases, is an illusion, albeit a necessary one; the human mind tends to think it knows, but it does not always have a solid basis for this delusion of "I know". This notion that we do not know is very old, dated at least as far back as Socrates. The Socratic method of questioning and avowal of ignorance is the type of corrective action to the delusion that we know something completely and truly. Similarly, to those who might argue that the advancement of science has rendered the world well-known, Taleb argues that while science added knowledge, we always run the risk of experiencing the improbable, rare, and novel. We can be shocked by this knowledge and experience or we can be open to it. As with the dictum of Socrates, "the only thing I know is that I do not know", is as true as ever, Taleb concludes. Taleb further expands this idea of finite knowable worlds (e.g. a game) vs. infinite and thus unknowable worlds (our natural world) in what he calls the Ludic fallacy.
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Praise
The Nobel Prize winning psychologist Daniel Kahneman wrote The Black Swan changed my view of how the world works and explains the influence in his 2011 book Thinking, Fast and Slow.
Notes
[1] [2] [3] [4] [5] [6] http:/ / worldcat. org/ oclc/ 71833470 http:/ / www. businessweek. com/ magazine/ content/ 11_10/ b4218047676960. htm http:/ / www. amazon. com/ The-Black-Swan-Improbable-Robustness/ dp/ 081297381X/ ref=dp_ob_title_bk p.xix. PROLOGUE p.xxviii. PROLOGUE p.xxvii, Taleb call this human tendency the narrative fallacy: we seem to enjoy stories, and we seem to want to remember stories for their own sake. [7] PROLOGUE p8. [8] http:/ / www. jstor. org/ pss/ 294875 [9] http:/ / users. math. yale. edu/ ~bbm3/ web_pdfs/ misbehaviorprelude. pdf [10] The Fourth Quadrant and The Limits of Statistics (http:/ / www. edge. org/ 3rd_culture/ taleb08/ taleb08_index. html) [11] Glossary p. 309. [12] Antifragile: Things That Gain From Disorder, Random House, 2012 [13] https:/ / docs. google. com/ file/ d/ 0B_31K_MP92hUNjljYjIyMzgtZTBmNS00MGMwLWIxNmQtYjMyNDFiYjY0MTJl/ edit?hl=en_GB [14] David Aldous, A critical review of Taleb, Nassim Nicholas. The Black Swan: The impact of the highly improbable (http:/ / www. stat. berkeley. edu/ ~aldous/ 157/ Books/ taleb. html), A.M.S. Notices, March 2011, pp. 427-413 [15] http:/ / www. nytimes. com/ 2007/ 04/ 22/ books/ review/ Easterbrook. t. html?pagewanted=all& _r=0 [16] http:/ / www. fooledbyrandomness. com/ easterbrook. pdf [17] http:/ / papers. ssrn. com/ sol3/ papers. cfm?abstract_id=1285054
References
Taleb, Nassim Nicholas (2007), The Black Swan: The Impact of the Highly Improbable, Random House, ISBN978-1400063512
External links
Author's website (http://www.fooledbyrandomness.com) Black Swan Glossary (http://www.fooledbyrandomness.com/glossary.pdf) Slideshow lecture explaining the Ludic Fallacy with clarity By Peter Taylor of Oxford University (http://www. fhi.ox.ac.uk/teaching and posters/MT07/LudicFallacy.ppt). Nassim Taleb podcast interview on The Black Swan (http://www.econtalk.org/archives/2007/04/ taleb_on_black.html). YouTube Video Explanation (http://www.youtube.com/watch?v=BDbuJtAiABA) Will Davies (2007) 'All in a Flap: Beware of Unknown Unknowns' (http://www.oxonianreview.org/wp/ all-in-a-flap-beware-unknown-unknowns/), review of The Black Swan in the Oxonian Review. After Words interview with Taleb on The Black Swan, September 22, 2007 (http://www.c-spanvideo.org/ program/Nassi)
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Background
Black swan events were introduced by Nassim Nicholas Taleb in his 2001 book Fooled By Randomness, which concerned financial events. His 2007 book The Black Swan extended the metaphor to events outside of financial markets. Taleb regards almost all major scientific discoveries, historical events, and artistic accomplishments as "black swans"undirected and unpredicted. He gives the rise of the Internet, the personal computer, World War I, dissolution of the Soviet Union, and the September 2001 attacks as examples of black swan events.[3] The phrase "black swan" derives from a Latin expression; its oldest Black swan known occurrence is the poet Juvenal's characterization of something being "rara avis in terris nigroque simillima cygno" ("a rare bird in the lands, very much like a black swan"; 6.165). In English, when the phrase was coined, the black swan was presumed not to exist. The importance of the simile lies in its analogy to the fragility of any system of thought. A set of conclusions is potentially undone once any of its fundamental postulates is disproved. In this case, the observation of a single black swan would be the undoing of the phrase's underlying logic, as well as any reasoning that followed from that underlying logic. Juvenal's phrase was a common expression in 16th century London as a statement of impossibility. The London expression derives from the Old World presumption that all swans must be white because all historical records of swans reported that they had white feathers. In that context, a black swan was impossible or at least nonexistent. After Dutch explorer Willem de Vlamingh discovered black swans in Western Australia in 1697, the term metamorphosed to connote that a perceived impossibility might later be disproven. Taleb notes that in the 19th century John Stuart Mill used the black swan logical fallacy as a new term to identify falsification.
Black swan theory Taleb asserts: What we call here a Black Swan (and capitalize it) is an event with the following three attributes. First, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility. Second, it carries an extreme 'impact'. Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable. I stop and summarize the triplet: rarity, extreme 'impact', and retrospective (though not prospective) predictability. A small number of Black Swans explains almost everything in our world, from the success of ideas and religions, to the dynamics of historical events, to elements of our own personal lives.
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Epistemological approach
Taleb's black swan is different from the earlier philosophical versions of the problem, specifically in epistemology, as it concerns a phenomenon with specific empirical and statistical properties which he calls, "the fourth quadrant".[5] Taleb's problem is about epistemic limitations in some parts of the areas covered in decision making. These limitations are twofold: philosophical (mathematical) and empirical (human known epistemic biases). The philosophical problem is about the decrease in knowledge when it comes to rare events as these are not visible in past samples and therefore require a strong a priori, or an extrapolating theory; accordingly predictions of events depend more and more on theories when their probability is small. In the fourth quadrant, knowledge is both uncertain and consequences are large, requiring more robustness.[citation needed] According to Taleb, thinkers who came before him who dealt with the notion of the improbable, such as Hume, Mill, and Popper focused on the problem of induction in logic, specifically, that of drawing general conclusions from specific observations. The central and unique attribute of Taleb's black swan event is high profile. His claim is that almost all consequential events in history come from the unexpected yet humans later convince themselves that these events are explainable in hindsight.
Black swan theory One problem, labeled the ludic fallacy by Taleb, is the belief that the unstructured randomness found in life resembles the structured randomness found in games. This stems from the assumption that the unexpected may be predicted by extrapolating from variations in statistics based on past observations, especially when these statistics are presumed to represent samples from a normal distribution. These concerns often are highly relevant in financial markets, where major players sometimes assume normal distributions when using value at risk models, although market returns typically have fat tail distributions.[citation needed] Taleb said "I don't particularly care about the usual. If you want to get an idea of a friend's temperament, ethics, and personal elegance, you need to look at him under the tests of severe circumstances, not under the regular rosy glow of daily life. Can you assess the danger a criminal poses by examining only what he does on an ordinary day? Can we understand health without considering wild diseases and epidemics? Indeed the normal is often irrelevant. Almost everything in social life is produced by rare but consequential shocks and jumps; all the while almost everything studied about social life focuses on the "normal," particularly with "bell curve" methods of inference that tell you close to nothing. Why? Because the bell curve ignores large deviations, cannot handle them, yet makes us confident that we have tamed uncertainty. Its nickname in this book is GIF, Great Intellectual Fraud." More generally, decision theory, based on a fixed universe or a model of possible outcomes, ignores and minimizes the effect of events that are "outside model". For instance, a simple model of daily stock market returns may include extreme moves such as Black Monday (1987), but might not model the breakdown of markets following the 9/11 attacks. A fixed model considers the "known unknowns", but ignores the "unknown unknowns" (Donald Rumsfeld).[citation needed] Taleb notes that other distributions are not usable with precision, but often are more descriptive, such as the fractal, power law, or scalable distributions and that awareness of these might help to temper expectations. Beyond this, he emphasizes that many events simply are without precedent, undercutting the basis of this type of reasoning altogether. Taleb also argues for the use of counterfactual reasoning when considering risk.Wikipedia:Citing sources
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References
[1] [2] [3] [4] [5] Taleb 2010, p.xxi. http:/ / www. fooledbyrandomness. com/ FatTails. html Taleb 2010. Taleb 2010, pp.37478. Taleb 2008.
Bibliography
Taleb, Nassim Nicholas (2010) [2007], The Black Swan: the impact of the highly improbable (http://books. google.com/books?id=tXiBZwEACAAJ&dq=isbn:9780141034591) (2nd ed.), London: Penguin, ISBN9780141034591, retrieved 23 May 2012. (September 2008), "The Fourth Quadrant: A Map of the Limits of Statistics" (http://www.edge.org/ 3rd_culture/taleb08/taleb08_index.html), Third Culture (The Edge Foundation), retrieved 23 May 2012.
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External links
Ten Principles for a Black Swan Robust World (http://www.fooledbyrandomness.com/tenprinciples.pdf) (PDF), Fooled by randomness. David, Dr. Gil, Black Swans in the Cyber Domain (http://www.israeldefense.com/?CategoryID=512& ArticleID=1297), Israel defense. Black Swan Stocks Could Make Your Portfolio a Turkey (http://www.cnbc.com/id/100280567), CNBC.
Ludic fallacy
The ludic fallacy is a term coined by Nassim Nicholas Taleb in his 2007 book The Black Swan. "Ludic" is from the Latin ludus, meaning "play, game, sport, pastime."[1] It is summarized as "the misuse of games to model real-life situations." Taleb explains the fallacy as "basing studies of chance on the narrow world of games and dice."[2] It is a central argument in the book and a rebuttal of the predictive mathematical models used to predict the future as well as an attack on the idea of applying nave and simplified statistical models in complex domains. According to Taleb, statistics works only in some domains like casinos in which the odds are visible and defined. Taleb's argument centers on the idea that predictive models are based on platonified forms, gravitating towards mathematical purity and failing to take some key ideas into account: It is impossible to be in possession of all the information. Very small unknown variations in the data could have a huge impact. Taleb does differentiate his idea from that of mathematical notions in chaos theory, e.g. the butterfly effect. Theories/Models based on empirical data are flawed, as they cannot predict events that have never happened before, but have tremendous impact. E.g. the 911 terrorist attacks, invention of the automobile, etc.
Examples
Example 1: Suspicious coin
One example given in the book is the following thought experiment. There are two people: Dr John, who is regarded as a man of science and logical thinking. Fat Tony, who is regarded as a man who lives by his wits. A third party asks them, "assume a fair coin is flipped 99 times, and each time it comes up heads. What are the odds that the 100th flip would also come up heads?" Dr John says that the odds are not affected by the previous outcomes so the odds must still be 50:50. Fat Tony says that the odds of the coin coming up heads 99 times in a row are so low (less than 1 in 6.33 1029) that the initial assumption that the coin had a 50:50 chance of coming up heads is most likely incorrect. The ludic fallacy here is to assume that in real life the rules from the purely hypothetical model (where Dr John is correct) apply. Would a reasonable person bet on black on a roulette table that has come up red 99 times in a row (especially as the reward for a correct guess is so low when compared with the probable odds that the game is fixed)? In classical terms, highly statistically significant (unlikely) events should make one question one's model assumptions. In Bayesian statistics, this can be modelled by using a prior distribution for one's assumptions on the fairness of the coin, then Bayesian inference to update this distribution.
Ludic fallacy
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Relation to Platonicity
The ludic fallacy is a specific case of the more general problem of Platonicity, defined by Taleb as: the focus on those pure, well-defined, and easily discernible objects like triangles, or more social notions like friendship or love, at the cost of ignoring those objects of seemingly messier and less tractable structures.
References
[1] Simpson, D.P. (1987). Cassell's Latin and English Dictionary. New York: Hungry Minds. p. 134. [2] Taleb, Nassim (2007). The Black Swan. New York: Random House. p. 309. ISBN 1-4000-6351-5.
Further reading
Medin, D.; Atran, S. (October 2004). "The native mind: biological categorization and reasoning in development and across cultures". Psychological Review. 111 (4): 96098. Fodor, Jerry (1983). Modularity of Mind. Cambridge, MA: MIT Press. ISBN 9780262260701. Dubner, Stephen J. (August 9, 2007). "Freakonomics Quorum: The Economics of Street Charity" (http:// freakonomics.blogs.nytimes.com/2007/08/09/freakonomics-quorum-the-economics-of-street-charity/). Freakonomics.
Fooled by Randomness
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Fooled by Randomness
Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets
Author Language Genre Publisher Publication date Pages ISBN OCLC Number Dewey Decimal LC Classification Followed by Nassim Nicholas Taleb English Statistics, Philosophy, Finance Random House 2001 316 0-8129-7521-9 60349198 123/.3 22 HG4521 .T285 2005 The Black Swan [1]
Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets is a book by Nassim Nicholas Taleb that deals with the fallibility of human knowledge.
Reaction
The book was selected by Fortune as one of the 75 "Smartest Books of All Time." U.S.A Today recounted that many criticisms raised in this book of the financial industry turned out to be justified. Forbes admitted to the book being playful, self-effacing and at times insufferably arrogant, but always thought provoking. The Wall Street Journal (one of the publications that Taleb pokes fun at in his book) called Universa Investments' buys in October 2008 a "Black Swan gain (alluding to the Black Swans mentioned in the book)" The New Yorker (one of the publication which receives more favourable comments in this book) said that the book was to conventional Wall street wisdom what Martin Luthers ninety-nine theses were to the Catholic Church.
Thesis
Taleb sets forth the idea that modern humans are often unaware of the existence of randomness. They tend to explain random outcomes as non-random. Human beings: 1. overestimate causality, e.g., they see elephants in the clouds instead of understanding that they are in fact randomly shaped clouds that appear to our eyes as elephants (or something else); 2. tend to view the world as more explainable than it really is. So they look for explanations even when there are none. Other misperceptions of randomness that are discussed include: Survivorship bias. We see the winners and try to "learn" from them, while forgetting the huge number of losers. Skewed distributions. Many real life phenomena are not 50:50 bets like tossing a coin, but have various unusual and counter-intuitive distributions. An example of this is a 99:1 bet in which you almost always win, but when you lose, you lose all your savings. People can easily be fooled by statements like "I won this bet 50 times". According to Taleb: "Option sellers, it is said, eat like chickens and go to the bathroom like elephants", which is
Fooled by Randomness to say, option sellers may earn a steady small income from selling the options, but when a disaster happens they lose a fortune.
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Editions
In 2001, TEXERE published the first edition of the book. (ISBN 1-58799-071-7, London : Texere, 2001) In 2004, TEXERE published a revamped second edition. In 2005, Random House published a softback edition with more changes. (ISBN ISBN 1-58799-190-X, New York : Random house, 2005) In 2005, a French version appeared, with many unique changes.[citation needed] The book has been translated into 20 languages,[2] and is reported to have sold over half a million copies. Further editions have been published by Penguin (softback, May 2007) and Random House (hardback, October 2008.)
References
[1] http:/ / worldcat. org/ oclc/ 60349198 [2] fooled by randomness (http:/ / www. fooledbyrandomness. com)
External links
Nassim Taleb's home page (http://www.fooledbyrandomness.com/) scroll down there to see a description of the book as well as many media reviews
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License
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License
Creative Commons Attribution-Share Alike 3.0 //creativecommons.org/licenses/by-sa/3.0/