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Why Nassim Taleb’s Black Swan idea won’t catch on

http://www.nakedcapitalis…black-swan.html

While not quite a book review, Yves Smith of nakedcapitalism.com discusses Nassim Nicholas Taleb’s The Black Swan from the perspective of how likely the ideas in the book are to spreading and being widely understood and internalized.

It’s an interesting post. Even in these times where we are increasingly observing the effects of long tails and fundamental unpredictability/randomness, people still cling to the idea that the world will unfold as planned even though it’s rarely ever this way.

NNT discusses this problem within the book. In particular, the problem of hindsight bias causes us to overstate our own control over event outcomes that are fundamentally more random — particularly when it is a positive outcome. On the flipside, we acknowledge how uncontrollable things are when the event has a negative outcome. This sinister bias inflates our belief in our own predictive power. Sort of silly, right?

I particularly like Yves’ conclusion (see bolded bit). You have to love that the success of a book about unpredictability and luck is, itself, a sort of black swan. Mind, this is Taleb’s second book on randomness and unpredictability; however, Taleb’s success as a stock trader, making massive sums and achieving widespread acclaim for his correct trading of the 1987 stock market crash, is arguably a black swan event — right? Or does expecting a black swan cause the expected event to cease being a black swan?

Further still, is Taleb’s success anecdotal proof that awareness of black swans and exposing yourself to upside potential from random events, planning for the unplannable, is not only possible, but could be a wildly profitable pursuit? I tend to think this may be the case, but maybe my human control bias is creeping in.

Fundamentally, I just don’t know.

Here is Yves:

I sincerely doubt [Nassim Taleb’s ideas] will be internalized. . . . The very fact that his construct has been reduced to the soundbite “black swan” when it is more complicated and richer is telling.

What are some of the reasons? Let me speculate.

First, Taleb goes to some length to establish that he is not the first to go down this line of thinking; he has quite a few intellectual ancestors. Yet these observations never took hold.

Of course, one reason is that the implications are pretty uncomfortable for a lot of professions . . .

But second, and perhaps as important, people do not want to see the world as subject to chance to the degree that Taleb says it is. This is hugely unsettling if you really do come to terms with the implications of his argument. We like to believe we have some measure of control over our lives. . . .

Third, if our mental construct of how the world works is off in some fundamental respects, it also calls into question our ability to make good decisions. And apart from Taleb, there are reasons to question our abilities here. It has been pretty well documented in brain research that humans can only hold so many variables in their consciousness at once. Our decision-making capabilities are more limited than we’d like to believe. And confronting every situation as if it were new would be simply exhausting, That is why we rely heavily on rules of thumb (more fancily called heuristics). Now we also have certain types of analytic processes, what I like to think of as pattern recognition, that can serve us well (this was the topic of Malcolm Gladwell’s Blink). The problem is that this quick pattern recognition can work very well, or be absolutely wrong, and we have no easy way of telling which.

Essentially, Taleb paints a picture of the world and human behavior that is unflattering. So as much as his work makes a fundamentally important set of observations, its success may be largely a function of luck. It came out just when the credit markets were starting to unravel and well established practices, both among traders and the broader financial community, were being shown to have serious flaws. Had his book come out at another juncture, it probably would not have been as well received.