The Black Swan: The Impact of the Highly Improbable

Imagine a speck of dust next to a planet a billion times the size of the earth. The speck of dust represents the odds in favor of your being born; the huge planet would be the odds against it. So stop sweating the small stuff. Don't be like the ingrate who got a castle as a present and worried about the mildew in the bathroom. Stop looking the gift horse in the mouth-remember that you are a Black Swan.

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The Black Swan: The Impact of the Highly Improbable by Nassim Nicholas Taleb

Entertaining and Eye opening 👌🏻 I had read The beginning of Infinity recently and I had been thinking of inductivism and uncertainty. This book covers in depth into randomness and handling black swan events.

3 attributes of black swan events:

• Rarity
• Extreme impact
• Retrospective predictability

Human mind suffers from 3 alignments:

• The illusion of understanding (Nobody knows what's going on)

• The retrospective distortion (History does not crawl, it jumps)

  History seems clearer and more organized in books than in reality

• The overvaluation of factual information (Education in a taxicab) The curse of learning.

2 types of randomness analogy

• Mediocristan – land of average (Mild randomness)

When your sample is large; no single instance will significantly change the aggregate or total. The largest observation will remain impressive, but insignificant to the sum. IE – Human weights, Human heights, car accidents, IQ

• Extremistan – land of black swans (Extreme randomness)

Inequalities are such that one single observation can disproportionately impact the aggregate or the total. IE – wealth, income, book sales per author, financial markets, commodity prices, inflation rates, economic data

I find it hard to explain that when you have a very limited loss you need to get as aggressive, as speculative, and sometimes as "unreasonable" as you can be.

Causes for the blindness to black swans

• The error of confirmation (We focus on pre-selected segments of the seen and generalize from it to the unseen)

• The narrative fallacy (We favor stories that fit our preconceptions and suppress or ignore what does not fit)

• The distortion of silent evidence (We focus on the evidence we have and neglect the evidence we do not have)

For every person that “prayed to be saved” and survived, there are many that prayed but died. Only the people who made it are able to tell their stories.

Absence of evidence is not evidence of absence

Barbell Strategy

• Be as hyper-conservative and hyper-aggressive and you can instead of being mildly aggressive or conservative

• Put 80-90% in extremely safe investments – (Example – T-Bills)

• Put the other 10-20% in extremely speculative investments (Example – VC)

• You have no risk on one side and high risk on the other, which equals out to medium risk. This minimizes your risk of negative black swans and exposures you to positive black swans

• Put yourself in situations where favorable consequences are much larger than unfavorable ones

• I am very aggressive when I can gain exposure to positive Black Swans and very conservative when I am under threat from a negative Black Swan

I have taught myself to resist running to keep on schedule. This may seem a very small piece of advice, but it registered. In refusing to run to catch trains, I have felt the true value of elegance and aesthetics in behavior, a sense of being in control of my time, my schedule, and my life. Missing a train is only painful if you run after it! Likewise, not matching the idea of success others expect from you is only painful if that's what you are seeking.

References

• https://www.fooledbyrandomness.com/tenprinciples.pdf