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TECH TALK: Black Swans: Nassim Taleb (Part 2)

August 11th, 2004 · No Comments

Nassim Taleb goes on [in Edge] to ask and discuss some very important questions: The puzzling question is why is it that we humans don’t realize that we don’t know anything about the significant brand of randomness? Why don’t we realize that we are not that capable of predicting? Why don’t we notice the bias that causes us not to realize that we’re not learning from our experiences? Why do we still keep going as if we understand them?

A lot of insight that comes from behavioral and cognitive psychology particularly with the work of Daniel Kahneman, Amos Tversky, and, of course, Daniel Gilbert which shows that we don’t have good introspective ability to see and understand what makes us tick. This has implications on why we don’t know what makes us happy affective forecasting why we don’t quite understand how we make our choices, and why we don’t learn from our own experiences. We think we’re better at forecasting than we actually are. Viciously, this applies particularly in full force to categories of social scientists.

We are not made for type-2 randomness. How can we humans take into account the role of uncertainty in our lives without moralizing? As Steve Pinker aptly said, our mind is made for fitness, not for truth but fitness for a different probabilistic structure.

Steve Waite adds:

As Taleb puts it, many investors are drivers looking through the rear view mirror while convinced they are looking ahead.

Taleb believes that one of the reasons people are so bad at understanding Black Swan dynamics or alternatively type-2 randomness, is that part of our brain is designed for the Pleistocene era and not the 21st century. As he points out, our risk machinery is designed to run away from tigers; it is not designed for the information-laden modern world. Indeed, much of the research into humans risk-avoidance machinery shows that it is antiquated and unfit for the modern world.

Taleb believes that in order to defend ourselves against black swans we must first acquire general knowledge. His mission today is to aggressively promote his skeptical brand of probabilistic thinking into public intellectual life.

David Ignatius wrote in the Washington Post:

Taleb’s basic point is that the events that drive history are outliers — “black swans” that don’t meet our expectations because we’ve seen only white ones. We tend to assume risks are distributed with the same type of randomness as height, weight or blood pressure. But in fact, the events that really matter don’t follow those predictable rules at all. They embody what Taleb calls the “power law” of all or nothing.

“Our ability to predict large-scale deviations that change history has been close to zero,” he notes. We tend to get our guidance about what to do in the future from our experience of the past — which is actually irrelevant. Taleb likens it to a driver who looks only in the rearview mirror, and inevitably runs into walls.
Another problem with risk, beyond its unpredictability, is that it tends to skew. If one bad event happens, that may increase the likelihood of another — because of network effects we don’t understand.

So, where am I headed? What does a black swan have to do with entrepreneurship? I did not make the connection when I first heard and read about Nassim Talebs ideas. But, that day, as I spoke like a dreamy entrepreneur, something connected the dots.

Tomorrow: Entrepreneurship


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