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Definition Of A Black Swan

By on March 5, 2021

This is exactly the opposite of what Taleb might predict. In other words, Taleb might be wrong — people might be overestimating, rather than underestimating, the risk of market crashes. The rarer something is — a volcanic eruption or an asteroid strike — the more hazy our projection about its probability becomes. And if we have no good underlying theory of why something happens — for example, nobody really knows what causes stock-market crashes — then our job of estimating the probability is basically hopeless. Taleb is a skeptic about this kind of inductive reasoning, he says there is no answer to these questions.

He suggested putting 70–80% of R&D into safe sustaining innovations, but about 5–10% into high-risk disruptive innovations. For example, if I represent a commercial real estate company, elements from the future might be autonomous vehicles and sustainable urban agriculture. This might mean less demand for car parking spaces, and more demand for vertical farms. As such, it might make sense to gain some exposure to opportunities in this space. Taleb points out that watching the news comes at the risk of developing and incrementalist, Mediocristan view of the world, impairing our ability to see and think how we should in Extremistan.

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Black swan events are characterized by their extreme rarity, severe impact, and the widespread insistence they were obvious in hindsight. There are ways to account for this problem including an understanding of The Lucretius Problem, factoring in a Margin of Saftey, and having skin in the game. The problem with rare events is that they’re almost impossible to predict by looking at the past.


The Black Swan The Impact of the Highly Improbable

In summary, a speculator’s energy is most correctly focused on playing the right side of the potential effects of highly unpredictable extreme events. Love of the certainty offered by Gaussian statistics sustains its misapplication to scalable variables. In summary, human beings are not well-equipped to learn from history. In summary, there are multiple, insurmountable barriers to accurate forecasting of scalable variables. In summary, there are strong, inherent, counterintuitive limitations on forecasting scalable variables.

Standard deviation, correlation and regression have little or no significance for such variables. In summary, people should rely on their own judgment to assume medium, positively-skewed risk to Black Swans. People tend to overestimate the personal impacts of both pleasant and unpleasant events, regardless of past experience with such events.

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If you’re looking for help with a personal book recommendation, consult our Weekly Recommendation Thread, Suggested Reading page, or ask in r/suggestmeabook. But I maintain that the fundamental idea is a good one, and in Taleb’s later books (I’m thinking Antifragile especially) the concept gets its conclusion and antidote. I’ll try to give you a very rough summary of the idea of the Black Swan, which may help guide you through Taleb’s tricky style. It is as if Taleb – thoughtful Taleb whom we thought we once knew – has been mugged by an editor determined to dumb down in the most stupid way conceivable. Then consider joining the 30,000 other people getting the Monday Medley newsletter.

Where relevant, or inspired to do so, I’ve provided some additional commentary or linked to other ideas you might be familiar with . Use the robust directory search to find and connect with members. Participate in technical, career, and academic discussions about chemical engineering. But by acknowledging the potential and being prepared, the impact of such events can be minimized.

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People tend to underestimate severely the probability of a future Black Swan. In summary, it is very difficult to generalize from historical information in scalable environments. Experts cannot predict the socioeconomic future, but they can confidently explain the past.

What is the point of the Black Swan movie?

It has a simple story. An evil sorcerer, Rothbart, turns a princess, by the name Odette, into a swan. She is cursed to remain like that until she finds true love. Prince Siegfried, a carefree prince, is being forced by his mother to get married.

The line of thinking is effortless, automatic and quick. We take shortcuts when applying this mindset.This line of thinking can obviously get us into trouble. Well-founded, logical, slow and progressive are some of the words that characterize this type of meaning creation. You make fewer mistakes when applying this line of thinking; as so forth you do make mistakes, you can track back to when, where, why and what caused the mistake. Nassim warns us that most of humans’ misconceptions stem from applying system 1 when we think that we’re putting system 2 at work.

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There is a fundamental incompleteness in your grasp of such events, since you do not see what’s inside the box, how the mechanisms work. Of course the September 11 attack was a Black Swan to those victims who died in it; otherwise, they would not have exposed themselves to the risk. But it was certainly not a Black Swan to the terrorists who planned and carried out the attack. I have spent considerable time away from the weight-lifting room repeating that a Black Swan for the turkey is not a Black Swan for the butcher.

Nassim warns that we’re often arrogant about what we know. We often believe that we know a bit more than we actually do. The concept dictates that we often overrate what what we know, and underestimate uncertainty. This underestimation The Black Swan The Impact of the Highly Improbable of uncertainty leads to a blindness towards Black Swans. Vi simply underestimate the probability of the extreme, that which is outside our realm of comprehension. Complete game changer in thinking about sudden, unexpected events.

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At the same time, there is a risk of dogmatism, falling victim to anchoring and ‘so and so said that…’ thinking. To predict the future, you first need to incorporate elements from it. The problem of silent evidence / history is written by the victors. For example, a Thanksgiving turkey might ‘randomly’ find itself under the blade on its 1000th day after being fed daily and allowed to roam free for the previous 999 days. But what in this case seems random to the turkey would not seem so random to the butcher who possessed this knowledge and had it penned in their calendar. Reading the book through the eyes of an entrepreneur, author and podcaster — someone playing in the sandpit that Taleb calls Extremistan, I have attempted to extract and capture some of the key lessons from this book.

The point is not so much that we tend to mispredict our future happiness, but rather that we do not learn recursively from past experiences. Law of iterated knowledge – to understand the future to the point of being able to predict it, you need to incorporate elements from this future itself. In general, positive Black Swans take time to show their effect while negative ones happen very quickly—it is much easier and much faster to destroy than to build.

The Black Swan: Second Edition: The Impact Of The Highly Improbable: With A New Section: ‘on Robustness And Fragility’

Taleb accuses this professor falling into the causation trap – of thinking you know what the past cause of something is and how it links to the present effect. Taleb and his publishers clearly believe the success of Fooled by Randomness is going to come again. The same cannot be said for The Black Swan, which despite the great utility of its insights is badly structured and hurriedly written. The real problem, Futures And Options Trading Tags though – the context Taleb does not appear to see, the reason the book itself is a turkey – is one of facetious style. In length, the author recommends one prepares oneself on Black Swans by investing 85% in extremely conservative investments, and 15% in extremely speculative ones. This seeks to ensure that Black Swans can’t hurt your base, but only the 15% that are placed in high-risk investments.

What mental illness is portrayed in Black Swan?

Although symptoms would not occur as rapidly as they do in Nina Sayers in most common cases of schizophrenia, it is plausible. Therefore, Black Swan is a decent portrayal of a person’s descent into paranoid schizophrenia.

The chapter on “The Scandal of Prediction” explains that we’re often arrogant about what we know. It’s this “bit” that often gets us into trouble; ‘epistemic arrogance’ leds to an underestimation of uncertainty and that which is outside our comprehension, which is why we’re never prepared when Black Swans flap their wings. The creation/perception ofmeaninghappens in on of two systems. The overarching application of System 1 is what leads to the misconception of Black Swans.

But for every winner using a ‘proven method’, thee are usually hundreds, if not thousands of people, who used said proven method, but ultimately failed. Bear this in mind when using bell curve or statistics-driven models to make high-risk financial decisions. They might work in Mediocristan, but are not sensitive to large deviations and ‘fat tails’ in Extremistan. We have severe limitations when learning from observation or experience is concerned, demonstrated by the above-mentioned discovery of black swans. For Centuries, the Old World agreed that all swans were white. That was of course, until black swans were discovered off the coast of Western Australia in 1697 by Dutch explorers, demonstrating the fact that an absence of evidence does not equate to an evidence of absence.

The Black Swan The Impact of the Highly Improbable

Using his experience as a day-trader and qualitative analyst, Nassim Taleb urges us to stop using the observable past as an indicator of the future. Humanity as a species have used data about the past to justify the narratives of the up and coming; this is inherently flawed and seeded in our predisposition for the sensational. Taleb pinpoints a variety of cases, The Black Swan The Impact of the Highly Improbable showing that nothing we know or understand about the world at that time of a rare occurrence could have indicated nor predicted such an event; these are the Black Swans. By observing the nature of highly unpredictable events, we can come to appreciate a newfound caution in our application of systems and models of the world used to predict the future.

The Black Swan: Second Edition: The Impact Of The Highly Improbable: With A New Section: On Robustness And Fragility (incerto)

In order to counter this, do as Taleb and others like 48 Laws of Power author, Robert Greene, have suggested, and increase your reaction time. As an entrepreneur, your time, energy, cognition and capital are all you have, so invest your time on the big decisions and on the big ticket items. I once witnessed a Director at a large Australian investment bank spend 45 minutes on the phone, debating a $1.50 surcharge on his most recent bank statement.

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