Thursday, 9 August 2012

Book Review: The Black Swan (Nassim Nicholas Taleb)

It’s been some time since my last book review, so today I’ve decided to share my impressions of the latest book on probability by the ”financial dissident” Nassim Nicholas Taleb. If you still haven’t read his previous book — Fooled by Randomness (see my review here) — I strongly urge you to do so, even if you aren’t into trading. His latest book —The Black Swan — became a major bestseller and is a very important book, both for traders and for everyone else who works with the randomness.
The main idea of the book is that we can’t avoid the Black Swans (the rare events that are unpredictable in their nature) but we can try to decrease the amount of ”bad” Black Swans in our life and increase the amount of ”good” Black Swans — first, by admitting that our knowledge is very limited and by stopping to act like we can forecast rare events and, second, by choosing the life strategies, in which our potential success would be scalable and could surpass the potential failure. Other than that, the book offers the following important theses:
  • What we don’t know can be more important than what we think we know.
  • We live partly in Extremistan and partly in Mediocristan. Rare events are very important (and are unpredictable) in Extremistan. Rare events have little impact in Mediocristan and they usually can be predicted.
  • Financial analysts, experts, strategists, portfolio managers generally don’t posses much knowledge about the reality of their profession, but for some reason general public listens to their opinions. Taleb sates that it’s completely unjustified.
  • Bell curve (“the Great Intellectual Fraud”), although is a viable model in Mediocristan is a fallacy in Extremistan.
  • Modern world becomes more of Extremistan and less of Mediocristan.
  • Our minds are bound to search and unite different facts and reasons — that’s the problem of the narrative fallacy.
  • Pure probabilities don’t exist in Extremistan, they are properties of the artificial models — such as casinos and the study problems.
  • Fractal models of probabilities can’t predict the impact of the Black Swan, but they can give a slight hint, making a Black Swan Gray.
  • In Extremistan, metaphorically speaking, if you don’t chase the train, you don’t get frustrated by missing the train — if you don’t rely on the appearance or the lack of the Black Swans your state of mind won’t be disturbed by them.
Although I liked Taleb’s previous book (Fooled by Randomness) more, this one also deserves attention and was very interesting despite the small amount of the new ideas compared to his previous work. I’d like to point out the following advantages:
  • Interesting read due to the literary style of the author. I can imagine how boring could the book on such topic be if it would have been written by some “professor”.
  • Deeper understanding of the rare unpredictable events compared to Fooled by Randomness.
  • More practical advices. They are more of ideas than advices but still can be quite helpful.
  • A book with praises to both Popper and Mandelbrot in it? I buy it :)! (Yeah, that’s quite subjective.)
But to add some negative to this rather positive review, I’d want to mention that I liked Fooled by Randomness more than this one. Maybe that’s because the first book on a topic leaves a strong impression, or perhaps because of a rather bad translation (I couldn’t find The Black Swan in English here). Anyway, let’s list some disadvantages:
  • As it was the case with Taleb’s previous book, the structure of the book is quite bad, there is still a lot of subject jumping even inside the sub-chapters.
  • Nassim Taleb is a genius but his style is quite heavily ridden with snobbery of an erudite and an intellectual.
  • There were many things, about which I’d disagree with the author and which needed further discussion, but they don’t eliminate the importance of the main problem of the book.
To sum it all up, if you still haven’t read Fooled by Randomness, go, read it. If you liked it and want more, read The Black Swan. If you didn’t like it, then there’s no reason for you to read The Black Swan. But, apart from the direct usefulness of Taleb’s books, there’s always a big portion of aesthetic pleasure in reading his books. So, if you are looking for something to read, you can always stop by The Black Swan and combine the useful with the pleasant.

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