"I am interested in how to live in a world we don’t understand very well –in other words, while most human thought (particularly since the enlightenment) has focused us on how to turn knowledge into decisions, I am interested in how to turn lack of information, lack of understanding, and lack of 'knowledge' into decisions – how not to be a 'turkey'. My last book The Black Swan (and the 4th Quadrant papers) drew a map of what we don’t understand; my current work focuses on how to domesticate the unknown" - What To Do In A World We Don't Understand by Nassim Nicholas Taleb
Story Line: The Black Swan Events (...thanks to Mukund Shenoy and C P Low for reference material)
The term Black Swan comes from the 17th century European assumption that 'All swans are white'. In that context, a black swan was a symbol for something that was impossible or could not exist. In the 18th Century, the discovery of Black Swans in Western Australia metamorphosed the term to connote that a perceived impossibility may actually come to pass.
The Black Swan Theory (in Nassim Nicholas Taleb's version) concerns high-impact, hard-to-predict, and rare events (opportunities and disasters) beyond the realm of normal expectations. The theory was described by him in his 2007 book, "The Black Swan". Taleb regards almost all major scientific discoveries, historical events, and artistic accomplishments as "black swans"—undirected and unpredicted. He gives the rise of the Internet, the personal computer, World War 1, and the September 11 attacks as examples of Black Swan events. The main idea in Taleb's book is not to attempt to predict Black Swan events, but to build robustness to the negative ones, while being able to exploit positive ones.
In the following video (highly recommended), he describes Black Swan Events, consequences and remedies in a very humorous way. It is entertaining, thought provoking and educational.
Short Introduction: click here
Some Quotable Quotes from Nassim Nicholas Taleb:Instead of trying to anticipate low-probability, high-impact events, we should reduce our vulnerability to them. Risk management, we believe, should be about lessening the impact of what we don’t understand.
Psychologists distinguish between acts of commission and those of omission. Although their impact is the same in economic terms—a dollar not lost is a dollar earned—risk managers don’t treat them equally. They place a greater emphasis on earning profits than they do on avoiding losses. However, a company can be successful by preventing losses while its rivals go bust—and it can then take market share from them. In chess, grand masters focus on avoiding errors; rookies try to win.
Standard deviation—used extensively in finance as a measure of investment risk—shouldn’t be used in risk management. The standard deviation corresponds to the square root of average squared variations—not average variations.
We don’t appreciate that what’s mathematically equivalent isn’t psychologically so.
Most executives don’t realize that optimization makes companies vulnerable to changes in the environment. Biological systems cope with change; Mother Nature is the best risk manager of all. That’s partly because she loves redundancy. Evolution has given us spare parts—we have two lungs and two kidneys, for instance—that allow us to survive.
You often hear risk managers—particularly those employed in the financial services industry—use the excuse “This is unprecedented.” They assume that if they try hard enough, they can find precedents for anything and predict everything. But Black Swan events don’t have precedents. In addition, today’s world doesn’t resemble the past; both interdependencies and nonlinearities have increased. Some policies have no effect for much of the time and then cause a large reaction.Sources:
1. The Six Mistakes Executives Make in Risk Management by Nassim N. Taleb, Daniel G. Goldstein, and Mark W. Spitznagel Harvard Business Review