The Black Swan Theory or "Theory of Black Swan Events" was developed by Nassim Nicholas Taleb to explain 1) the disproportionate role of high-impact, hard-to-predict, and rare events that are beyond the realm of normal expectations in history, science, finance and technology, 2) the non-computability of the probability of the consequential rare events using scientific methods (owing to their very nature of small probabilities) and 3) the psychological biases that make people individually and collectively blind to uncertainty and unaware of the massive role of the rare event in historical affairs. Unlike the earlier philosophical "black swan problem", the "Black Swan Theory" (capitalized) refers only to unexpected events of large magnitude and consequence and their dominant role in history. Such events, considered extreme outliers, collectively play vastly larger roles than regular occurrences.
Below is the excerpts from the Nassim Taleb's book.
The Black Swan
Prologue
Before the discovery of Australia, people in the old world were convinced that all swans were white, an unassailable belief as it seemed completely confirmed by empirical evidence. The sighting of the first black swan might have been an interesting surprise for a few ornithologists, but that is not where the significance of the story lies. It illustrates a severe limitation to our learning from observations or experience and the fragility of our knowledge. One single observation can invalidate general statement derived from millennia of confirmatory sightings of millions of white swans. All you need is one single (and, I am told, quite ugly) black bird.
I push one step beyond this philosophical – logical question into an empirical reality, and one that has obsessed me since child hood. What we call here a Black Swan (and capitalize it) is an event with the following three attributes.
First it’s an outlier, as it lies out side the realm of regular expectations.
Second, it carries an extreme impact
Third, inspite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable.
(Highly expected and not happening is also a black swan)
Every body knows that you need more prevention than treatment, but few reward acts of prevention. We glorify those who left their names in history books (like the politician who starts are war and is lucky enough to win rather than the one who avoids a war) at the expense of those contributors about whom our books are silent. We humans are not just a superficial race (this may be curable to some extent); we are a very unfair one.
You need a story to displace a story. Metaphors and stories are far more potent (alas) than ideas, they are also easier to remember and more fun to read. … Ideas come and go, stories stay.
The beast in this book is not just the bell curve and the self deceiving statistician, not the Platonified scholar who needs theories to fool himself with. It’s the drive to “focus” on what makes sense to us. Living on our planet, today, requires a lot more imagination than we are made to have. We lack knowledge and repress others it in others.
The Apprenticeship of an empirical skeptic
History and societies do not crawl. They make jumps. They go from fracture to fracture, with few vibrations in between. Yet we (historians) like to believe in the predictable, small incremental progression. It struck me, … that we are just a great machine looking backward, and that humans are great at self-delusion.
One thousand and one days, or how not to be a sucker
Bertrand Russell presents a particular toxic variant of what people call in philosophy, the problem of Induction or Problem of Inductive knowledge (- certainly the mother of all problems in life). How can we logically go from specific instances to reach general conclusions? How do we know what we know? There are traps built into any kind of knowledge gained from observation. Consider a turkey that is fed every day. Every single feeding will firm up the birds belief that it’s the general rule of life to be fed every day by friendly members of the human race “looking out for its best interests,” as a politician would say. On the afternoon of the Wednesday before thanks giving, something unexpected will happen to the turkey. It will incur a revision of belief.
How can we know the future, given knowledge of the past?
“But in all my experience, I have never been in any accident… of any sort worth speaking about…” E J Smith, 1907, Captain, RMS Titanic
Captain Smith’s ship sank I 1912 in what became the most talked about shipwreck in history.
In September 2006, a fund called Amaranth, ironically named after a flower that “never dies” had to shut down after it lost close to $ 7 Billion in a few days, the most impressive loss in trading history. A few days prior to the event the company made a statement t the effect that investors should not worry because they had 12 risk managers – people who use models of past to produce risk measures on the odds of such an event.
I am skeptical in matters that have implications for the daily life. In a way, all I care about is making a decision without being the turkey. Many middle brows have asked me over the past twenty years, “How do you, Taleb cross the street given your extreme risk consciousness?” Ofcourse I am not advocating total risk phobia (we will see that I favor an aggressive type of risk taking): All I will be showing you in this book is how to avoid crossing the street blindfolded.
An acronym used in the medical literature is NED, which stands for No Evidence of Disease. There is no such thing as END, Evidence of No Disease.
Doctors in the midst of scientific arrogance of the 1960’s looked down at the mothers milk as something primitive, as if it could be replicated in their laboratories – not realizing that mothers’ milk might include useful components that could have eluded their scientific understanding. Many people paid the price for this naïve inference; these who were not beast fed as infants turned out to be at an increased rick of a collection of health problems including higher likelihood of developing certain type of cancer. Further more, benefits to the mothers, who breast-feed were also neglected, such as reduction of breast cancer.
It was shown from the studies of Infant behavior that we came equipped with mental machinery that causes us to selectively generalize from experiences (i.e to selectively acquire inductive learning in some domains but remain skeptical in others… - As in if you show an over weight picture of tribesman to a child, she will not immediately choose to describe the tribe with weight challenge but will generally talk about the color of the skin if the picture has a dark color or white).
In the primitive environment, the “Black Swans” were limited to newly encountered wild animals, new enemies, and abrupt weather changes. These events were repeatable enough for us to have built an innate fear of them. This instinct to make inferences rather quickly, and to “tunnel” (i.e. focus on a small number of sources of uncertainly, or causes of known Black Swans) remains rather ingrained in us. This instinct, in a word, is our predicament.
Try to be a true skeptic, with respect to you interpretations and you will be worm out in no time. You will also be humiliated for resisting to theorize.. Even from an anatomical perspective, it’s impossible for our brains to see anything in raw form without some interpretations. We may not even always be conscious of it.
We members of the human varieties of primates, have a hunger for rules because we need to reduce the dimension of matters so they can get into our heads.
A novel, a story, a myth, or a tale, all have the same function: they spare us from the complexity of the world and shield us from its randomness. Myths impart order to the disorder of human perceptions and the perceived “chaos of human experience”
To view the potency of narrative, consider the following statement: The King died and the Queen died.” Compare it to “The King died, and then the queen died of grief,” This exercise presented by the novelist E M Forster, shows the distinction between mere succession of information and a plot.
In a famous argument, the logician W V Quine showed that there exist families of logically consistent interpretations and theories that can match a given series of facts. Such insights should warn us that mere absence of nonsense may not be sufficient to make something true.
The sensational and the black swan:
If I asked you how many case of lung cancer are likely to take place in the country, you would supply some number, say half million. Now if instead I asked you many cases of lung cancer are likely to take place because of smoking, odds are that you would give e a much higher number. Adding because makes thee matters far more plausible, and far more likely. Cancer from smoking seems more likely that cancer with a cause attached to it – an unspecified cause means no cause at all. Clearly the second statement seems more likely at first blush, which is pure mistake of logic, since the first, being broader, can accommodate more causes. All this can lead to pathologies in our decision making.
As Stalin, who knew something about the business of mortality supposedly said, “one death is tragedy,; one million is a statistics,”. Statistics stay silent in us.
Researchers have mapped our activities into (roughly) a dual mode of thinking, which they separate as “system 1” and “System 2” or the experiential or cogitative. The distinction is straight forward.
System 1 is what we call as intuition, system 2 is what we normally call thinking. Most of our mistakes in reasoning come from using system 1 when we are in fact thinking that we are using system 2. How? Since we react with out thinking and introspections, the main property of system 1 is our lack of awareness using it!
Emotions are assumed to be the weapon system 1 uses to direct us and force us to act quickly. It mediates risk avoidance far more effectively that our cognitive system. Indeed, neurobiologists who have studied the emotional system show how it often reacts to the presence of danger long before we are consciously aware of it – we experience fear and start reacting a few milliseconds before we realise that we are facing a snake. Much of our trouble with human nature resides in our inability to use much of system 2, or to use it in a prolonged way without having to take a long beach vacation. In addition, we often forget to use it.
Take the relationship between pleasure and drinking water. If you are in state of painful thirst, then a bottle of water increases your well being considerably. More water means more pleasure. But what if I give you a cistern of water? Clearly your well being become rapidly insensitive to further quantities. … So your enjoyment declines with additional quantities.
The uberpsychologist Danny Kahneman has given us evidence that we generally take risks not out of bravado but out of ignorance and blindness to probability.
That we got here by accident does not mean that we should continue to take the same risks. We are mature enough race to realise this point, enjoy our blessings, try to preserve by becoming more conservative what we got by luck
Alas, we are not manufactured in our current edition of the human race, to understand abstract matters – we need context. Randomness and uncertainty are abstractions. We respect what has happened, ignoring what could have happened. In other words, we are naturally shallow and superficial – and we do not know it.
To be able to focus is a great virtue if you are a watch repairman, a brain surgeon, or a chess player. But the last thing you need to do when you deal with uncertainty is to “focus” (you should tell uncertainty to focus, not us). This focus makes you sucker; it translates into a prediction problems.
The more information you give some one, the more hypotheses they will formulate along the way, and the worse off they will be. They see random noise and mistake it for information.
The problem is that our ideas are sticky: once we produce a theory, we are not likely to change our minds – so those who delay developing theories are better off. Remember, we treat ideas like possessions; it will be had for us to part with them.
We humans are victims of an asymmetry in the perception of random events. We attribute our success to our skills, and our failures to external events outside our control, namely randomness. We feel responsible for the good stuff, but not for the bad.
We can not truly plan, because we do not understand the future – but this is not necessarily bad news. We could plan while bearing in mind such limitations. IT JUST TAKES GUTS.
Forecasting by bureaucrats tend to be used for anxiety relief rather than for adequate policy making.
Any one who causes harm by forecasting should be treated as either a fool or liar. Some forecasters cause more damage to society than criminals. Please, don’t drive a school bus blindfolded.
If I can predict all of your actions, under given circumstances, then you may not be as free as you think you are. You are an automations responding to environmental stimuli. You are slave of destiny.
Tolstoy said that happy families were all alike, while each unhappy family is unhappy in its own unique way.
What is the most potent use of our brain? It’s precisely the ability to project conjectures into the future and play the counterfactual game – if I punch him in the face, when he will punch me back right back or worse call his lawyer in New York.
For philosopher Daniel Dennett, our minds are anticipation machines; for him the human mind and consciousness are emerging properties, those properties necessary for the our accelerated development
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We are not predisposed to respect humble people, those who try to suspend judgment. Now contemplate epistemic humility. Think of some one heavily introspective, tortured by the awareness of his own ignorance. He lacks the courage of idiot, yet has the rare guts to say “I don’t know.” He doe not mind looking like a fool or, worse an ignoramus. He hesitates, he will not commit, and he agonizes over the consequences of being wrong. This does not necessarily means that he lacks confidence, only that he holds his own knowledge to be suspect.
…. I wanted to put more of the interesting stuff from the book but it was growing big and bigger so I have refrained from it and hope you will go and read it yourself… please do... It’s a lovely book.
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Om Namah Shivaya
Welcome to One Shot Wednesday - highlight your poetic talents 
Welcome to One Shot Wednesday - highlight your poetic talents 
