Absence of Evidence is not Evidence for Absence
Since all those swans which we have seen is white does not mean there are no Black Swans is an example of what Taleb would call as errors in confirmation. I spent the last two weeks reading Nassim Nicholas Taleb’s The Black Swan and had one of the best intellectual journey I have ever had. I do not want to repeat the same problem he had highlighted of writing the similar book review what is already written in the internet. You can search the internet, being a new york time bestseller, this book would have more than a million reviews.
As I read the book, I started posting those amazing quotes in my tumblr which really created an Aha moment. So just to reiterate what a Black Swan as per Taleb – It is an event which is of very rare occurrence , but very consequential and extremely hard or rather impossible to predict its occurrence. But after the event we can definitely give a logical reason of why this was so evident and was about to happen – which is what he calls as Narrative fallacy to which we fall.
We could encounter a Positive Black Swan / Negative black swan depending on the consequence but we cannot predict it. So what is the point in knowing about black swan was the question I had. But Serendipity, he calls, is one of the key to exposing ourselves to those positive black swans. Avoiding ourselves in to traps like Huge debt is a way not to expose ourselves to those negative Black Swans.
If I look at my own life there had been probably only 2 large events that changed my course of life. One event was – when my father passed away in an accident during my school time. It definitely changed the course of life for my mother and me. It was a rare, unpredictable and consequential event my life. The other event was getting an admission to one of the top B School in India. Getting that admission I would definitely not attribute to my skill, but to my luck, and do not want to be fooled by randomness. I could never have predicted which college I wanted to go, and it was a rare occurrence and it was consequential in my life which really put me on a different trajectory in my career and earnings. But I was in the state of serendipity writing one exam after the other, and had no clue I would crack one of those exam - XAT really well scoring at the 99th percentile in India. If I were asked to re write that competitive exam I cannot assure I would end up in the same percentile. But the payoff from the event, later on definitely changed the direction of my family’s financial situation.
Coming back to the book – I read this book after reading Against the Gods, the remarkable Story of Risk. So Against the Gods gave me the history of probability and various distributions and how risk as a concept evolved. Black swan really goes a little deeper and made me really understand the Gaussian Distribution better, because he covers a chapter about the problems we have with a Gaussian distribution in some of the places where the inequality is very high. Though the Gaussian distribution bashing would be allover the book it is abused in a lot of places where it does not fit, but from Taleb you would really learn the distribution well.
I learnt about the concept of Fractal when I did my engineering project on Fractal Image compression based on Fractal Dimension, but never thought the concept of fractal had relation to analyzing data in the way of Mandelbrotian distribution. The concept of self-affinity and scalability which I read first in fractal for the purpose of image compression had same application in this scalable mandelbrotian distribution to analyze the fat tail distributions which we see in the field of Extremistan according to Taleb. He does explain a bit about Power laws and fat tails, but it gets too technical, which can be skipped and still the reader can get the crux of the books. Most of the happenings in the world and in your own life can be attributed to few large events ( sounds similar to Pareto 80/20 right ).
I thoroughly enjoyed reading Taleb’s Black Swan over the last 10 days and I just followed with the book by Roger Lowenstein on LTCM – When Genius Failed. Another fascinating read, on how the most smartest people ( couple of Nobel Laurets) as well had a big Financial disaster when they over relied on predicting future with Mathematical models and brutally hit by a Negative Black Swan.
Also do watch Buffet's elucidation of the LTCM story in one of his talks. So what is the use of knowing black swans if they are not predictable. So instead of predicting the probability of those happening, focus on the asymmetric outcomes. Protect yourself from negative blackswans, like having high leverage. A simple thing is buying everything on your home on EMI including a huge home with a huge debt and if they are hit by a layoff in the company ? No need to explain further. The best thing would be have some small high risk bets where you expose yourself to positive Blackswans. Working for a startup, trying with smaller ventures , or even as Sanjay Bakshi explains how to expose in investing etc. where you could hit a positive black swan which could lead to assymetric payoffs. Luck favors those who are in search of them.