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TECH TALK: Black Swan: Definition

June 4th, 2007 · No Comments

One of the books I have been eagerly looking forward to reading is Nassim Talebs The BlackSwan. I first came across Nassim Taleb in one of our Book Club meetings, via Chetan Parikh. I then read Fooled by Randomness, Talebs first book. I also have made references to the Black Swan in a number of my blog posts and Tech Talks (here is one) in the past. And so, it was with great eagerness that I picked up Talebs new book. I recommend you do the same. In this Tech Talk series, I will take you through what various people (including Taleb) have to say about Black Swans.

Lets start with a definition of Black Swan from the book: What we call here a Black Swan (and capitalize it) is an event with the following three attributes. First, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the 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[It can be summarized as a triplet]: rarity, extreme impact, and retrospective (though not prospective) predictability.

Business World spoke to Nassim Taleb. Excerpts from the interview:

What is a Black Swan?
Medieval Europeans had only ever seen white swans. In fact, any impossible event was termed a black swan. So, when the first settlers reached Australia, they were shocked to find black swans all over! Taleb’s black swans are those events that were once thought impossible, but when they occur, hit hard. In this extract, he writes about how we create narratives after black swan events; making them seem predictable after they occur.

Why are black swans important?
People say Taleb wants us to worry about meteorites hitting Earth. I want to help people navigate in a world where we dont have a clear understanding of reality. Black Swan is essentially a map of how to deal with such a reality. The book distinguished between [two imaginary places] Mediocristan and Extremistan. In Mediocristan, variations in any sample do not result in large deviations from the average. The question, then, is which domains or areas have highly consequential variables? These places are Extremistan.

What are some of the classic examples of black swan events?
A classic black swan event is the First War (World War I). It was not as predictable as people believe it was. Then you have all this technology computers, lasers. Their future uses could never be predicted when they were invented.

Wired also interviews Nassim Taleb:

With better models and more computational power, won’t we get better at predicting Black Swans?
We know from chaos theory that even if you had a perfect model of the world, you’d need infinite precision in order to predict future events. With sociopolitical or economic phenomena, we don’t have anything like that. And things are getting worse, not better, because the growing complexity of the world dwarfs any improvement in sophistication or computational power.

So what do we do? If we can’t forecast the really important things, how do we act?
You need to ask, “If the Black Swan hits me, will it help me or hurt me?” You cannot figure out the probability of a Black Swan hitting. But if you’re in a business that’s prone to negative Black Swans, like catastrophe insurance, I advise you not to take your forecasting seriously and to think about getting into a different business. You don’t want to be a sucker. What you want are situations where you can have as much of the good uncertainty as possible, where nothing too bad can happen to you, and where you have what I call free options. All of technology, really, is about maximizing free options. It’s like venture capital: Most of the money you make is from things you weren’t looking for. But you find them only if you search.

Wikipedia has more on Nassim Taleb.

Tomorrow: Book Excerpt

TECH TALK Black Swan+T

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