Big Ideas

The Black Swan is a study of low probability, high impact events and how human behavior, business, and science generally do a very poor job of accounting for their existence. A Black Swan event lies outside the realm of expectations but has a disproportionate impact and therefore we tend to ignore them when making predictions for the future and when attempting to understand the past. Instead of ignoring these Black Swans, you are far better off recognizing the limits of our existing narrow models and acting according to the upside or downside risk.

The biggest ideas in this book are:

1. A complete and honest approach to understanding phenomenon has to take into account Black Swan events.
2. Humans do not naturally think in terms of randomness or chance when predicting the future and analyzing the past, however we can be more prepared and effective if we take this idea into consideration.
3. There are two types of randomness: randomness subject to Gaussian distributions where outliers do not impact the mean substantially and randomness where outliers dictate the mean.
4. Much of the world can be understood using models based on historical knowledge or prior understanding however not everything can be explained using Gaussian statistics; knowing the difference is critical.
5. If you can differentiate between phenomenon where Black Swans are relevant and where they are not you have an advantage because you are seeing the world as it really is and could be, instead of what's convenient and easy.

Notes

What is a black swan?

• "It illustrates a severe limitation to our learning from observations or experience and the fragility of our knowledge. One single observation can invalidate a general statement derived from millennia of confirmatory sightings of white swans. All you need is one single (and I am told, quite ugly) black bird."
• Three Attributes
• ~"First it is an outlier, as it lies outside the realm of regular expectations, because nothing int he 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."
• Three Attributes Summarized
• ~Rarity
• ~Extreme Impact
• ~Retrospective Predictability
• "A small number of Black Swans explain almost everything in our world, from the success of ideas and religious, to the dynamics of historical events, to elements of our own personal lives."
• "The highly expected not happening is also a black swan."
• "We tend to act as if [this phenomenon] doesn't exist."
• "The central idea of this book concerns our blindness with respect to randomness, particularly the large deviations."
• "Black swan logic makes what you don't know far more relevant than what you do. Consider that many Black Swans can be caused and exacerbated by their being unexpected."
• "The payoff of a human venture is, in general, inversely proportional to what it is expected to be."
• "The inability to predict outliers implies the inability to predict the course of history ... what is surprising is not the magnitude of our forecast errors, but our absence of awareness of it."
• "The strategy for the discoverers and entrepreneurs is to rely less on top-down planning and focus on maximum tinkering and recognizing opportunities when they present themselves ... the strategy is, then, to tinker as much as possible and try to collect as many Black Swan opportunities as you can."

Plato and the Nerd

• Social sciences place great emphasize of the "normal" and the "bell curve" however much of reality exists, and is a result of, events occurring outside the curve, these large deviations are generally ignored much to the detriment of our understanding.
• "What I call Platonicity ... is our tendency to mistake the map for the territory, to focus on pure and well-defined "forms" ... when these ideas and crisp constructs inhabit our minds, we privilege them over the less elegant objects, those with messier and less tractable structures."
• "Platonicity is what makes us think we understand more than we actually do."
• "I am not saying that Platonic forms don't exist. Models and constructions, these intellectual maps of reality, are not always wrong; they are wrong only in some specific applications. The difficulty is that
• ~You do not know beforehand where the map will be wrong and
• ~the mistakes can lead to severe consequences"
• "The Platonic fold is the explosive boundary where the Platonic mind-set enters in contact with messy reality, where the gap between what you know and what you think you know becomes dangerously wide. It is here that the Black Swan is produced."

The Bottom Line

• "The best in this book is not just the bell curve and the self-deceiving statistician, not the Platonified scholar who needs theories to fool himself with. It is the drive to "focus' on what makes sense to us. Living on our planet, today, requires a lot more imagination than we are made to have. We lack imagination and repress it in others."
• "our world is dominated by the extreme, the unknown, and the very improbable (improbably according to our current knowledge) - and all the while we spend our time engaged in small talk, focusing on the known, and the repeated. This implies the need to use the extreme event as a starting point and not treat it as an exception to pushed under the rug."
• "in spite of our progress and the growth in knowledge, or perhaps because of such progress and growth, the future will be increasingly less predictable, while both human nature and social "science" seem to conspire to hide the idea from us."

Part I

"The human mind suffers from three ailments as it comes into contact with history, what I can the triplet of opacity.

1. "the illusion of understanding, or how everything thinks he knows what is going on in a world that is more complicated (or random) than they realize"
2. "the retrospective distortion, or how we can assess matters only after the fact ... "
3. "the overvaluation of factual information and the handicap of authoritative and learned people, particularly when they create categoires - when they 'Platonify'."

Two Varieties of Randomness

• There exists "two varieties of uncertainties, two types of randomness"
• Mediocristan vs Extremistan
• Mediocraistan (Type 1 Randomness)
• ~The supreme law of Mediocristan: "When your sample size is large, no single instance will significantly change the aggregate or the total."
• ~For example, human weight. No matter how heavy the largest, heaviest person is in the world, given enough people this person is unable to move the average weight by much if anything.
• ~"Mediocristan is where we must endure the tyranny of the collective, the routine, the obvious and the predicted"
• Extremistan (Type 2 Randomness)
• ~"In Extremistan, inequalities are such that one single observation can disproportionally impact the aggregate, or the total."
• ~For example, human wealth. If you put Bill Gates in a room with a thousand people his wealth would have a significant impact on the average.
• ~"Extremistan is where we are subject to the tyranny of the singular, accidental, the unseen and the unpredicted."
• This concept when applied to knowledge means that its very hard to make generalizable claims about things from Extremistan

Implications

• Example of the Thanksgiving Day turkey
• "Mistaking a naive observation of the past as something definitive or representative of the future is the one and only cause of our inability to understand the Black Swan."
• "A black swan is relative to knowledge."
• Obviously if the turkey had a way to know what Thanksgiving involved then his future would seem inevitable as opposed to completely surprising given his past experience
• "In general, positive Black Swans take time to show their effect while negative ones happen ver quickly - it is much easier and much faster to destroy than to build."
• Themes arising from Black Swan blindness

1. "We focus on preselected segments of the seen and generalize from it to the unseen: the error of confirmation"
2. "We fool ourselves with stories that cater to our Platonic thirst for distinct patterns: the narrative fallacy."
3. "We behave as if the Black Swan does not exist."
4. "What we see is not necessarily all that is there. History hides Black Swans from us and gives us a mistaken idea about the odds of these events: this is the distortion of silent evidence."
5. "We 'tunnel': that is we focus on the few well-defined sources of uncertainty, on too specific a list of Black Swans (at the expense of the others that do not easily come to mind).

Part II

On Predicting the Future

• "We are demonstrably arrogant about what we think we know." e.g. epistemic arrogance
• "True, our knowledge does grow, but it is threatened by greater increases in confidence, which make our increase in knowledge at the same time an increase in confusion, ignorance, and conceit."
• "Epistemic arrogance bears a double effect:
• ~"We overestimate what we know"
• ~"and underestimate uncertainty, by compressing the range of possible uncertain states."
• Fire hydrant experiment (10 steps vs 5 steps of decreasing blurriness of a photo of a fire hydrant)
• "The more information you give someone, the more hypotheses they will formulate along the way, and the worse off they will be. They see more random noise and mistake it for information."

On Experts

• Real Experts can be professionals who deal with "bell curve" type problems and situations. They deal with things that "don't move".
• Fake Experts are people who deal with "things that move" ... "professions that deal with the future and base their studies on the non-repeatable past"
• "I am not saying that no one who deals with the future provides any valuable information, but rather that those who provide no tangible added value are generally dealing with the future."
• "Experts are narrowly focused persons who need to "tunnel". In situations where tunneling is safe, because Black Swans are not consequential, the expert will do well."

Forecasting

• "We cannot truly plan, because we do not understand the future - but this is not necessarily bad news. We could plan while bearing in mind such limitations. It just takes guts."
• "Forecasting without incorporating an error rate uncovers three fallacies"
• ~"The first fallacy: variability matters. The first error lies in taking a projection too seriously, without heeding its accuracy. Yet, for planning purposes, the accuracy in your forecast matters far more than the forecast itself." For example. "Don't cross a river it is four feet deep on average."  i.e. it could be 1 foot deep for most of it and then have one section that's 30 feet deep. The range of possible errors matters a lot.
• ~"The second fallacy lies in failing to take into account forecast degradation as the project period lengthens. We do not realize the difference between near and far futures."
• ~"The third fallacy, and perhaps the gravest, concerns a misunderstanding of the random character of the variables being forecast. Owing to the Black Swan, these variables can accommodate far more optimistic - or far more pessimistic - scenarios than are currently expected."
• "Even if you agree with a given forecast, you have to worry about the real possibility of a significant divergence from it."
• "Prediction requires knowing about technologies that will be discovered in the future. But that very knowledge would almost automatically allows us to start developing those technologies right away. Ergo, we do not know what we will know."
• "The notion of future mixed with chance, not a deterministic extension of your perception of the past, is a mental operation that our mind cannot perform"

Future and Past

• "There is an asymmetry between past and future, and it is too subtle for us to understand naturally." This is what he calls our "Blind Spot".
• This causes us to for example:
• ~Overestimate the happiness associated with getting new things and the way that feeling will fade
• ~"Overestimate the effect of misfortune on our lives", usually we adapt and move on
• Self deception "is supposed to orient us favorable towards the future." and is thus useful for in the domain of human behavior, but in other domains it prevents us from more accurately judging the likelihood of events, good and bad

Lessons Learned

• In light of all this then how should we behave?
• "The lesson for the small is: be human! Accept that being human involves some amount of epistemic arrogance in running your affairs. Do not be ashamed of that. Do not try to always withhold judgement - opinions are the stuff of life. Do not try to avoid predicting - yes, after this diatribe about prediction I am not ordering you to stop being a fool. Just be a fool in the right places."
• "What you should avoid is unnecessary dependence on large-scale harmful predictions - those and only those. Avoid the big subjects that may hurt your future: be fooled in small matters, not in the large."
• "Know how to rank beliefs not according to their plausibility but by the harm they may cause."
• "Be aware of the numbing effect of magic numbers. Be prepared for all relevant eventualities."
• "Maximize the serendipity around you."
• Barbell strategy for investing [see original text]
• Tricks to take advantage of unpredictability
• ~"First, make a distinction between positive contingencies and negative ones. Learn to distinguish between those human undertakings in which the lack of predictability can be (or has been) extremely beneficial and those where the failure to understand the future caused harm."
• ~"Don't look for the precise and the local. Simply, do not be narrow-minded."
• ~"Seize any opportunity, or anything that looks like opportunity. They are rare, much rarer than you think."
• ~"Beware of precise plans by governments."
• ~"There are some people who, if they don't already know, you can't tell 'em" - Yogi Berra

Summary

• There are three reasons why we can't figure out what's going on

1. "Epistemic arrogance and our corresponding future blindness"
2. "the Platonic notion of categories, or how people are fooled by reductions, particularly if they have an academic degree in an expert-free discipline"
3. "flawed tools of inference, particularly the Black Swan - free tools from Mediocristan

Part III

The World Trends Towards Extremistan

• "The world is moving deeper into Extremistan"
• "Capitalism is, among other things, the revitalization of the world thanks to the opportunity to be lucky. Luck is the grand equalizer, because almost everyone can benefit from it. The socialist governments protect their monsters and, by doing so, killed potential newcomers in the womb."
• "Luck is far more egalitarian than even intelligence. If people were rewarded strictly according to their abilities, things would still be unfair - people don't choose their abilities."
• "The long tail is a by-product of Extremistan that makes it somewhat less unfair: the world is made no less unfair for the little guy, but it now becomes extremely unfair for the big man. Nobody is truly established. The little guys is very subversive."
• Financial and economic globalization is actually a consolidation of risk and makes the downside of Black Swan events far greater

The Gaussian Bell Curve is Overused

• "the Gaussian bell curve [is] a contagious and severe delusion"
• "The ubiquity of the Gaussian is not a property of the world, but a problem in our mind, stemming from the way we look at it."

Another Way

• "Mandelbrotian, or fractal, randomness ... as it happens, many rare events can yield their structure to us: it is not easy to compute their probability, but it is easy to get general idea about the possibility of their occurrence."
• "We are either blind, or illiterate, or both. That's nature's geometry is not Euclid's was so obvious, and nobody, almost nobody, saw it."
• "Fractality is the repetition of geometric patterns at different scales, revealing smaller and smaller versions of themselves."
• How does this apply to understanding properties of Extremistan?
• ~"the fractal has numerical or statistical measure that are (somewhat) preserved across scales -- the ratio is the same, unlike the Gaussian."
• ~Example: "the superrich are similar to the rich, only richer - wealth is scale independent, or, more precisely, of unknown scale dependence."
• "Fractals should be the default, the approximation, the framework. They do not solve the Black Swan problem and do not turn all Black Swans into predictable events, but they significantly mitigate the Black Swan problem by making such large events conceivable."

Part IV

• "I worry less about small failures, more about large potentially terminal ones."
• "I worry less about advertised and sensational risks, more about the more vicious hidden ones."
• "I worry less about embarrassment than about missing an opportunity."
• "I am very aggressive when I can gain exposure to positive Black Swans - when a failure would be of a small moment - and very conservative when I am under threat from a negative Black Swan."
• "Not matching the idea of success others expect from you is only painful if that's what you are seeking. You stand above the rat race and the pecking order, not outside of it, if you do so by choice."