Nassim Taleb’s Black Swans
In 2007, a Lebanese born American mathematician published a book with a strange-sounding name that sold 3 million copies. It turned into a personal black swan for Taleb, which was conveniently the book’s title.
“Once you take away the impossible, whatever remains, no matter how improbable, must be the truth.” — Arthur Conan Doyle
In my class on Leadership In Crisis, students raise the question, “what if it’s different time?” As the Eiffel Tower demonstrates, perhaps 2020 is the year that breaks the mold, but Nassim Taleb doesn’t think so.
In 1930, leading central bankers of our largest economies wanted to rein in speculation. Crisis history shows that when we respond to fear, the worst outcomes emerge. Their solution was to restore the gold standard, but it predictably led banks to hoard gold and drained the system of liquidity when it was needed most. More than anything else, that helped bring about the Great Depression.
It was as if someone lost their job and told the family, stop eating.
The world shriveled as money became scarce. Germany began printing Deutschmarks like lettuce leaves, and they became worthless. An unknown Austrian, whom the vast majority of Gemerans ridiculed, rose to the challenge of restoring order and discipline to the economy. Redirecting mass hysteria turned out to be his most exceptional talent. Without central bankers, Adolf Hitler’s days might have ended caging free coffees and scribbling absurd pamphlets. The Great Depression lasted until 1939, relieved by World War II, which in many respects it caused.
It was the definition of a black swan.
We have been in contact with black swans going as far back as the first unidentified flying object or UFO, sixty-five million years ago in Chipultapec, Mexico. At the time, an asteroid crashed into the Earth, wiping out the dinosaurs except for sea birds able to escape. It is why pelicans are so dinosaur-like, along with most other seabirds, they are the direct descendants of dinosaurs as they were able to fly over the cold waters of the ocean. The irony is that Earth’s first black swan (if you ignore the big bang) helped to save real black swans.
The more recent variety includes the Plague, the Cold War, Vietnam War, ’87 crash, Berlin Wall, 9/11, Internet crash, ’08 Recession, and now, the 2020 COVID 19 pandemic.
In every case, existential threats occurred just as the Great Depression did: we responded with poor strategies until we got them right. Then they ended in a hysteria of fear and forgetfulness. The connected, global, competitive world we live in today is likely to produce more, not fewer black swans.
And that is why we read Taleb.
Is The 2020 Pandemic a “black swan?”
What did we learn from the 2020 pandemic? A few of the more obvious things spring to mind, like keep some money in the bank, have your contact information at hand, and stay in touch with family and work colleagues.
But the big one may be to learn how to prepare for black swans. They happen, according to Taleb, when three phenomena are at work simultaneously: unpredictability, extreme impact, and a deliberate attempt to explain it away.
Black swans begin with the belief that they can’t happen to us, and end with a rationale for why we missed them in the first place. Therefore, nothing gets solved.
So how did Taleb discover them?
Nassim Taleb’s work as a hedge fund manager turned him into a deep-thinker on the subject of preparedness for the kind of events that destroy communities, industries, and countries.
The first goal was how not to lose money on these, and then he realized a more significant play, helping people avoid disaster. He came up with a list of requirements for Black Swan thinking:
Taleb’s 8 Rules
Taleb’s remedy is fewer regulations, more preparation. He suggests when we run from flames, we achieve nothing. Instead, we need to wrap ourselves, our families, and our companies in non-flammable fabric, which would create a “black swan robust” society.
His main worry as an options trader was that “tail risk” or exposure to extreme markets could not be avoided. It results in silly rules that lead us to believe we are safe from disaster. For example, we should wear masks to protect against spreading the pandemic. But when that becomes a ‘rule,’ it leads us to believe we can assemble with as many people as possible as long as we wear a mask, and invites a black swan into our community.
Independence of Thought
Financial independence was Taleb’s dream, but the real goal was to have enough to think independently. For example, he says much of the advice given when he was young sounds like what we tell our children: “I was told never procrastinate and waited 20 years to write The Black Swan. It sold 3 million copies.” The more he thought independently, the more money he made. It allowed Taleb to see crises as a pattern or habit of society, not something to blame.
In business, the ’08 financial crisis was predictable, although we did not know when it would appear. But that should not have removed the obligation to prepare, which few finance ministers did. They were not thinking independently, but like a mob worried about reputation.
Better Data, Not Better Predictions
Taleb has no love for the media, which he believes enflames our fears, causing us to overreact, which leads to more significant disasters.
Read any soothing pandemic headlines lately?
He wants people “to be able to withstand unexpected change, and to thrive on uncertainty.” Since Black Swans are impossible to predict, we should work to expose vulnerabilities in data, systems, and thinking that could lead to future Black Swans.
Find holes, fix them. When they are filled, look for what made them. Fix that. Repeat.
Writing about the 2011 Fukushima nuclear disaster in Japan, Taleb notes: “Today, Japan’s nuclear authority is building “smaller and less vulnerable reactors.” One black swan is a disaster. A second is a crime.
Taleb introduced the ‘barbell’ strategy, based on avoiding the middle in politics to one’s personal life. For instance, he suggests investing money in ‘medium risk’ investments is pointless because the risk is impossible to compute. You should invest most of your savings in safe instruments, and a smaller amount into high risk, high reward opportunities. If you lose all those, you won’t have to change your life.
If they hit it big, you will want to.
He even applies a barbell approach to health. Instead of doing steady and moderate exercise, he says, take a walk each day and pump the heaviest weights you can lift.
Victimhood vs. Resilience
Taleb believes we overreact to stress because it turns us into sympathetic victims. Then we are motivated by pity. He says if you remove stress, the system becomes fragile. Lounge on a couch for too long, and you will resemble the sofa.
He advocates for resilience in children through unsupervised playtime (not during a pandemic) and not overreacting to the rites of childhood, such as strict teachers and failing grades. In many cases, a child learns more by dealing with challenges rather than parental overlords help them.
Nature is Unsafe
Taleb says nature is unsafe and will always take a quick loss for long-term gain. Fires destroy enormous swaths of a forest but leave new growth. He would argue that to restrain nature leads to fewer but much larger fires. The same is true of bankers. If we allowed banks to fail, it would result in a more sustainable model capable of thriving under high-stress scenarios.
Adaptation is Key
Taleb suggests we stop thinking about black swans as one time events. They not only recur with increasing regularity, they have a habit, like a virus, of morphing and coming back. He says, “Do a total reset professionally, economically, personally.” Act as if the problem is not temporary, and you will be able to deal with anything, including the unexpected. Try to build your world around a new reality, and “if it goes away, it will be a bonus but remember that the shadow of the following one will be progressively built into the system.”
What Others Say About Taleb
The Nobel Laureate Daniel Kahneman proposed that Taleb is among the world’s top intellectuals, “Taleb has changed the way many people think about uncertainty, particularly in the financial markets. His book, The Black Swan, is an original and audacious analysis of how humans try to make sense of unexpected events.” Taleb was treated as a “rock star” at the World Economic Forum annual meeting in Davos in 2009; at that event, he had harsh words suggesting bankers would not repeat their recklessness “if you had punishment.”
Robert Lund, a mathematics professor at Clemson University, writes that in Black Swan, Taleb is “reckless at times and subject to overstatements.” However, Lund acknowledges that “there are many points where I agree with Taleb,” and writes that “the book is a must” for anyone “remotely interested in finance =probability.”
Taleb’s career took a turn for the better when he published the Black Swan in 2010 (note to self: next time I have a great idea, make sure it has an animal motif). But he was no stranger to the subject.
Taleb was born in Lebanon to Greek Orthodox parents, a doctor, and a professor, who saw their wealth disappear during the 1975 Lebanese Civil War. He graduated from the University of Paris and the Wharton School, taking an MBA and Ph.D. with a dissertation on derivative pricing. He reads ten languages. He is not someone to take lightly — nor should he be read lightly.
TALEB ON TALEB
Taleb gave a 2016 commencement address in which, describing his life, he stated:
- I hesitate to advise because every single piece of advice I was given turned out to be wrong.
- I was told to avoid putting fictional characters in my books, and I did put in Nero Tulip and Fat Tony because I got bored otherwise.
- I was told not to insult the New York Times and the Wall Street Journal; the more I abused them, the nicer they were to me.
- I was told to avoid lifting weights for back pain and became a weightlifter: never had a back problem since.
- If I had to relive my life, I would be even more stubborn and uncompromising.
- Taleb’s works include: Fooled by Randomness (2001), The Black Swan (2007–2010), The Bed of Procrustes (2010), Antifragile (2012), and Skin in the Game (2018). (Taleb’s books can be purchased here.)