Book Review | The Black Swan - Second Edition: The Impact of the Highly Improbable: by Nassim Nicholas Taleb

By Nelson DeMestre | Associate Analyst at NAOS Asset Management

“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 invalidated a 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”.

This book is perhaps well read, but if you have yet to, I recommend it highly (especially given the current climate). The book deals with the Rumsfeld-esque “known knowns, known unknowns and unknown unknowns” or essentially the unpredictable. The COVID-19 pandemic could be considered the ultimate black swan, a global health crisis that has crippled hospitals, brought havoc to global business and a complete halt in international trade in a manner that is difficult to comprehend. What makes this crisis perhaps more severe, or several black swans at once, is how unevenly distributed the effects of the pandemic have been.

The societal retreat to home-based isolation has been the ultimate alignment of the planets for companies exposed to e-commerce, the digitisation of our lives and the edges of innovation. Conversely, those exposed to brick-and-mortar retailing or tourism and travel, have seen a true black swan that was perhaps ruled out completely as a possibility. The earnings of several assets in these industries were presumed to annuity like nature (guaranteed!) and featured in large infrastructure funds. Yet with the complete halt in international travel, their earnings fell well below zero. The pandemic has established new rules in every facet of daily life, several of which may become permanent yet all of whom were unforeseen, thus making a book such as this very interesting.

The key point Taleb makes is: 'the world is dominated by the improbable (improbable based on our current knowledge), yet certain lessons can help insulate us from the fallout from outlier events'. Among them:

1. History and Society do not crawl, they jump and the new fractures often occur rapidly and permanently.
2.  Making many predictions is often foolish. "I noticed that very intelligent and informed persons were at no advantage over cabdrivers in their predictions. Yet cabdrivers did not believe they understood as much as learned people – really they were not experts and they knew it.” 
3. Rather than attempting to predict outcomes, instead: “for the learning of every virtue there is an appropriate discipline and for the learning of suspended judgement, the best discipline is philosophy” 
4. Human nature rationalises black swam events “after the fact, making it explainable and predictable” even though they are often neither.

Taleb combines a vast array of analogies and examples to illustrate the extreme impacts of unexpected events in a way that is genuinely worth reading.

Link to Book