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Finished The Black Swan: The Impact of the Highly Improbable by Nassim Nicholas Taleb (3/5). This book contains interesting ideas presented in a sometimes ranty, sometime repetitive, and sometimes rambly manner. Overall, I enjoyed it, but I would not necessarily recommend it.

Taleb's topic of discussion was the black swan: those events that are not amenable to statistical modeling, at least not the common sort of statistical modeling that assumes that the domain being modeled has gaussian properties. They are highly unpredictable, high impact events, especially those that everyone, after the fact, thinks were perfectly predictable, Taleb spends much the book defining the black swan (and a good portion of it going on about why he likes or dislikes particular intellectuals). Beyond the definition, he comes back time and again to two points.

First, black swans are often just a matter of perception. A particular prediction may seem "safe" because the risks are assumed to be so unlikely that they can be ignored. When that "so unlikely" scenario occurs, it's occurrence is a black swan to those who assumed it would never happen. But to those who did not discount the risk so readily, it's what Taleb calls a grey swan -- still unpredictable, but not completely out of the blue.

Second, in a world riddled with black swans, a world that is not nearly as tidy and predictable as people would like to see it, what is the best strategy for dealing with risk? To answer this question, it helps to observe that black swans are often asymmetric: either the the maximum positive or maximum negative impact swamps the other. People who are trying to play it safe often try to avoid things with a large positive upside -- those are the things we traditionally call risky -- and instead inadvertently end up relying on those things with a large but invisible negative downside.

Taleb recommends switching this mentality: Be on the lookout for negative risks that are being waved away as too unlikely and avoid those things. Instead, put more resources into the higher risk, higher reward scenarios. In other words, don't look for moderate risk bets -- in practice they may be hidden high risk bets. Instead, split yourself between super safe bets (which, in reality are still riskier than you would expect) and bets with high risk and big potential payoff. You'll actually end up more moderate on average than taking the bets that seem moderate but really are not.

I don't know if that's a good strategy, but it's certainly an intriguing one to think about. And that really sums up my feelings about this book: I'm not sure if it's good, but it was intriguing.

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Erika RS

May 2012

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