The Black Swan: The Impact of the Highly Improbable

[atto 20]

Risk experts do not understand risk. The Bell Curve has been abused since its inception. You are exposing yourself to risks you don't even know about.

 

Nassim Taleb's hit followup to Fooled by Randomness: The Hidden Role of Chance in the Markets and in Life exposes the academic and risk community for failing at modeling risk, while denying he's any better. Taleb focuses primarily on theory and ideas rather than direct trading application; however, this book is extremely valuable to anyone who deals with risk (read: you!). This book is written with the non-technical in mind.

 

Black Swan makes the argument that the outliers that end up shaping much of our finances and lives are unpredictable and unpreventable. Distributions are tending towards the extreme and irregular verses limited and regular. For example, the stock market crash in October 1987 was something that should have been statistically impossible, but it happened. Russia's default on their bonds in 1997 should have been a far off possibility, but it happened. Taleb argues that these "black swan" events have a termendous effect on us, but it is foolish to even try to predict them. Just because there are a million white swans, it doesn't mean all swans are white. Ergo, just because it's never happened, doesn't mean it never will.

 

The book itself is filled with humorous anecdotes, and often goes off on tangents. Taleb makes very clear his distain for academics, economists, and those who calculate risk. At times, he comes off with an elitist and arrogant air. However, the points he makes are refreshing and insightful.

 

Taleb encourages readers to try limit their downside exposure in all things (not just trading), even against the unlikely, and leave their upside exposure open. That way, readers stand to benefit from black swan events.

 

All in all, this book has reshaped my view of risk. I think The Black Swan is highly insightful and a great read. Check it out on Amazon.com.

Edited June 26, 2008 by atto

[darthtrader2.0 10]

I don't know, Fooled By Randomness is one of my all time fav books. I've tried to read The Black Swan a few times at Barnes and Noble but just can't get into it.

Another book that is possibly better is Plight of the Fortune Tellers by Riccardo Rebonato but I haven't read it yet. If you look on the quant boards they all think Taleb is a tool but respect for Rebonato.

[atto 20]

I can see that. He is arrogant and makes attacks on the French several time . Outside of that, he's a smart fellow. I'll check out Rebonato.

[vladv 10]

It's a very interesting book to read.Thanks!

[john.potter 10]

There is an irony with this book. In western Australia there is an aboriginal legend that the White swan and the possum had an argument over what the sun was made of, so the Swan went to have a look, anyway he got to close and burnt all his feathers so from that day on all swans were black. but the thing is in Western Australia all the swans are black and they have always been black, so how would a primitive aboriginal whos people have been on this continent for 30,000 years or more, how would they know that there are White Swans ?