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The Black Swan Effect

The Black Swan Effect
The Black Swan Effect
The Black Swan Effect

Black Swan is a movie that follows the story of a ballerina in a New York ballet company. Her life is consumed with dance.

Oops. Wrong Black Swan.

The Black Swan is a book that sets out the nature and impact of rare, improbable events. The author, Nassim Nicholas Taleb, coined the metaphor of Black Swan to describe them.

Why Black Swans?

Taleb is a learned man, with a love of the classics. He appropriated the metaphor from the Latin writer, Juvenal.

rara avis in terris nigroque simillima cygno

a rare bird on the Earth, and very much like a black swan

In classical and early modern times, Europeans thought all swans were white. It’s only on venturing to Australasia that explorers realised: there are black swans!

A black swan event is an extremely rare event. But they do happen, if you travel long and far enough.

In his 2007 book, the Black Swan (US|UK), Taleb points out how much of our lives is driven by these rare events. The book quickly became a best-seller.

What is a Black Swan Event?

A Black Swan event is a rare event, with a big effect. It is one that we fail to foresee yet, with hindsight, we believe we could have predicted.

This is not so. He draws a distinction between:

the randomness inherent in many real-world events, and

the statistical randomness of games of chance, like dice

In the latter, we can assign precise probabilities. In the former we cannot. Yet we often treat them as if we can. He calls this the ‘ludic falllacy’. Ludic comes from the Latin for games.

Another connected idea is his distinction between ‘Extremistan’ and ‘Mediocristan’.

Mediocristan is the domain of the average, normal, and mediocre. Successes and failures are small. Events are familiar and follow the same sort of statistics as games of chance. They are characterised by the Normal Curve – a bell-shaped distribution of likelihoods.

Extremistan is the domain of extreme events. These single extreme events dominate the totality of events. For example, a few best-selling books account for the vast majority of book sales. The Pareto Principle, or 80:20 Rule is an example. These events do not follow Normal Distribution statistics, but rather, Power Law distributions.

Definition of a Black Swan

Taleb himself defines a Black Swan as:

…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.

Taleb argued that our whole financial system is vulnerable to Black Swan events. Remember – his book was published in 2007, before the 2008 financial crisis.

How to Make a Black Swan

Taleb has created a Black Swan of his own. In Chapter 2 he tells the story of a Black Swan event. It is the publication of the book, ‘A Story of Recursion’ by unknown author, Yevgenia Krasnova. It becomes a massive best-seller. Publishers fall over themselves to tell her they would have seen its merit and published it.

A footnote at the start of Chapter 3 informs us that this story a fiction. Krasnova does not exist. Yet that did not stop millions of people hitting the search engines to find out about her. A trip to Google’s keyword planner shows us that even ten years after publication, the fictional author and her made-up book still get up to 1,000 searches each, per month! At its peak, Krasnova was a Black Swan search term!

Avoiding Black Swan Events

Taleb argues that our job is to turn Black Swans white. We do this by gathering enough information to properly predict them ahead of time.

But can we do this? Taleb gives an example that shows that a Black Swan event depends on the observer. His example is a Black Swan surprise for a turkey. It is not a Black Swan surprise to the butcher! If we can gain enough perspective on events, we can ‘avoid being the turkey’.

What is Your experience of Black Swan events?

We’d love to hear your experiences, ideas, and questions. Please leave them in the comments below.

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