Sunday, October 12, 2008

The Black Swan - Nassim Nicholas Taleb

Subtitled: The Impact of the Highly Improbable. This book is challenging, but in a good way. It sets what we know and assumptions we hold dear on their ear, and Dr. Taleb shows us in an engaging and entertaining way how even the most revered "experts" can be dead wrong. The challenge is applying these theories of randomness to our perceptions and decision making processes once we return this book to the bookshelf.

I thought it was eye-opening and astonishing, and already I look at things differently based on ideas he has such as "silent evidence." Once you can grasp concepts like "absence of proof is not the same thing as proof of absence" you can see how our decision making process is heavily skewed toward that which we know and can confirm, and we ignore and don't factor in that which we don't know or which is unknowable. I think this is probably one of the most intellectually challenging and important books I've read since college, and it took me a long time to read it.

These concepts are far from academic. In fact he rails against the academic community and their focus on elegant mathematics, predictive modeling and theories. Having been a stock trader in his previous career, he considers himself a "practitioner." And what matters is applying theories of randomness to our decision making process so we end up with the result we want - not being suckers. He calls himself irreverent and I think that's an accurate description. It also makes the book engaging and entertaining to read despite the complex and complicated subject matter.

Much of what has happened with the current global financial meltdown Taleb foreshadows in the book. Right down the collapse of Fannie Mae which is covered in a footnote on page 225: "The giant firm, J.P. Morgan put the entire world at risk by introducing in the nineties Risk Metrics, a phony method aiming at managing people's risks, causing generalized use of the ludic fallacy . . . Likewise, the government-sponsored institution Fanny Mae, when I look at their risks, seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup. But not to worry: their large staff of scientists deemed these events 'unlikely.'" And with that, we have a real world, up-to-the minute example of what a Black Swan really is. The book was written in 2006 and published in 2007.

I could go on and on in giving examples of the accuracy of Dr. Taleb's thinking as evidenced by headlines in today's newspapers. That's not the point however. He's giving us new words to explain new concepts and works to help us understand empirical skepticism and its effect on the world around us. I highly recommend this book. It is well worth the investment of time and effort to read it.

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