"[O]nly a single black swan is required to falsify the theory that "all swans are white" even when there are thousands of white swans in evidence."
A review of "The Black Swan" by the Wall Street Journal:
The power-law distribution, by contrast, would seem to have little to recommend it. Not only does it disproportionately reward the few, but it also turns out to be notoriously difficult to derive with precision. The most important events may occur so rarely that existing data points can never truly assure us that the future won't look very different from the present. We can be fairly certain that we will never meet anyone 14-feet tall, but it is entirely possible that, over time, we will hear of a man twice as rich as Bill Gates or witness a market crash twice as devastating as that of October 1987.
The problem, insists Mr. Taleb, is that most of the time we are in the land of the power law and don't know it. Our strategies for managing risk, for instance--including Modern Portfolio Theory and the Black-Scholes formula for pricing options--are likely to fail at the worst possible time...
Mr. Taleb is fascinated by the rare but pivotal events that characterize life in the power-law world. He calls them Black Swans, after the philosopher Karl Popper's observation that only a single black swan is required to falsify the theory that "all swans are white" even when there are thousands of white swans in evidence. Provocatively, Mr. Taleb defines Black Swans as events (such as the rise of the Internet or the fall of LTCM) that are not only rare and consequential but also predictable only in retrospect. We never see them coming, but we have no trouble concocting post hoc explanations for why they should have been obvious. Surely, Mr. Taleb taunts, we won't get fooled again. But of course we will.
And this is where he hits his stride. We eagerly romp with him through the follies of confirmation bias (our tendency to reaffirm our beliefs rather than contradict them), narrative fallacy (our weakness for compelling stories), silent evidence (our failure to account for what we don't see), ludic fallacy (our willingness to oversimplify and take games or models too seriously), and epistemic arrogance (our habit of overestimating our knowledge and underestimating our ignorance).
This looks like a very good book and is getting very favorable reviews. It sounds like it delves into an exposition of "Knightian Uncertainty". Frank Knight was Chicago economist who made an important distiniction between risk and uncertainty in his 1921 seminal work, "Risk, Uncertainty, and Profit":
"Uncertainty must be taken in a sense radically distinct from the familiar notion of Risk, from which it has never been properly separated.... The essential fact is that 'risk' means in some cases a quantity susceptible of measurement, while at other times it is something distinctly not of this character; and there are far-reaching and crucial differences in the bearings of the phenomena depending on which of the two is really present and operating.... It will appear that a measurable uncertainty, or 'risk' proper, as we shall use the term, is so far different from an unmeasurable one that it is not in effect an uncertainty at all."
Incidentally, Frank Kight had tremendous influence on James Buchanan, one of GMU's two Nobel Prize winners.
Something tells me I will be ordering a copy of "The Black Swan" very soon. It looks like an approachable, less academic look at the world of the unexpected that buids on many of the ideas laid out by Knight. I hope it succeeds at bringing these concepts to a wider audience.
Listen to GMU Professor Russ Roberts interview with Taleb on Black Swans on the always excellent EconTalk Podcast. (Follow the link for many resources related to the podcast.)
Order a copy of the book here and see Nassim Nicholas Taleb's home page.
Decision Science News has this roundup of other reviews of the book:
- Niall Ferguson in the Sunday Telegraph & The LA Times
- Roger Lowenstein in Portfolio.com
- Gregg Easterbrook in The New York Times
- Taleb’s reply to Easterbrook
- The first chapter free online at the New York Times.
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