Sunday, July 03, 2011

Simple Way to Explain Black Swan Theory (Book Review)

You may have heard before the “Black Swan” movie but have you heard of the “Back Swan theory”? At first I thought the movie talks about the “Black Sawn theory". So I went to watch it. But after watching it, it turned out that there are 2 independent subjects. One talks about psychology and another one is economy. :)

The black swan in fact is a book which was written by Nassim Nicholas Taleb, a practitioner of mathematical finance. The book was published in 2007.  Yes, I know it is old book but I only have a chance to read it now after introduced by my VP in few years back. However, I did not finish reading the book simply because I find this book is too difficult to understand. A very simple idea but the author makes it so complicated for layman to understand. I do not know why. Perhaps this is called “expert”?  or it is probably not meant for layman to read. So if you think you’re layman like me, read my following post will do or else you can go to the bookstore to purchase this book for in-depth understanding.

What is Black Swan Theory?

Let’s understand what is black swan. First of all, it is an event and not a bird! lol. The reason why black swan is used is an event is because before discovery of Australia, all swans were convinced to be white. It was then proven wrong. Does this sound familiar to you? That is what happen to the subprime mortgage crisis. Real estate were convinced to be the best reliable asset but it was then proven wrong again. The black swan is used to explain such phenomena that is unpredictable and creates major impact. The black swan event term was then also referred as the Black Sawn theory or the theory of black swan event.

Can You Predict Black Swan Event?

Well if the answer is can, then it is no longer called Black Swan. :) Probably the answer is yes for the economy in 20 years ago. One could still possible to predict future using statistic based on historical data. However during this 21’s century,  this is no longer be true. Statistics has failed!

2 reasons why statistic has failed. The first reason - based on the statistics calculation or any type of economy’s formula, the probability of such black swan event is always very small and nearly impossible to happen. Another words, the formula has failed to model the economy. The second reason - people have build-in physiological biases that make them unable to predict.  For example, I have been getting salary since day one of working and never going to have pay cut for 10 years. Thus, I predict my future will NOT have pay cut as well regardless of my job performance. The technical term for this prediction is called “Inductive Reasoning”.

What is the solution?

At first when I was reading this book, I expected the author will give a better solution to replace the existing statistic formula to model the economy. Unfortunately, I don’t think the book offers such solution. Offering advice, probably yes. This also makes the whole book is completely useless in my opinion at least to me The reason is I have already known all these facts since the day one I learned about physics:
  1. Whatever proven right today, doesn’t mean it will be right forever. It can be proven wrong tomorrow.
  2. Whatever proven wrong tomorrow, doesn’t mean it will NOT be proven right again.
  3. Whatever proven wrong today, doesn't mean it will be wrong forever. It can be proven right tomorrow.
  4. Whatever proven right tomorrow, doesn’t mean it will NOT be proven wrong again.
This books basically in a way tells the same thing that I have learned since my secondary school.:)

What are the takeaways?

You may ask what are the takeaways then? If you ask me, I only have 2. The first thing is you should not deny the black swan events. It happens to everyone. Another important thing to understand is, a black swan event to me might not be a black swan event to you. For example, getting pay cut is a Black Swan event (i.e. unpredictable event ) to me while it could be White Swan event (i.e. predictable event) to you. This is just an example. Black swan event could happen in personal too and not always global.

The second takeaway is plan for the worst case. What could be the black swan event for you? You lost a job tomorrow? You get a job demotion? Property house price bubble burst? Car accident? Something serious happen to your family? Your health problem? You should not be too optimistic but always identify your worst case scenario. Once your worst case is identified, plan for a defense strategy. This is also called "Personal Financial Planning"! :) :) :)


I honestly do not really understand why this book get the New York Times Bestseller. It is definitely not a book for layman. The content of this book is also questionable as the ideas that being brought up in this book is really nothing new. Everyone knows that  the statistic’s formula is just a prediction and it could be wrong. Not to talk about the human’s greediness, whatever statistic data that you have seen out there could be designed to blind you from the truth too based on their own biasness. Basically smart people will know all these technical analysis based on statistic cannot be trusted and you have to use it at your own risk.

This book has 444 pages with plenty of words and very less graphic or diagram explanation that makes me really no mood to continue reading. The worst part of this book is it explains a very simple idea with 444 pages and I could summarize these 444 pages into one sentence below:

“No one can predict the future, so you have to plan for the worst case and do not over optimistic.”

P/S: I have no intention to shoot the author of this book and I was just giving my opinion from a layman reader’s perspective. If you do think this book is good or beneficial to read especially for layman, I’m happy to hear your opinion.


Alvin said...

I've read somewhere before about how a book actually becomes a top 10 bestseller in the US....and a book which is unpopular, and sux totally, can still make it into the top 10 due to their funny way of 'estimating the popularity'. hahaha

i normally just look at the reviews in amazon

but well, there are also a lot of books which are popular...and which are actually talking about things which are dead obvious to everyone and yet nobody notices them :P

ChampDog said...

Really? I have no idea on that. :) I read this book because was recommended by my ex-VP. :) Perhaps that books is beyond my standard to appreciate it. :D

Just like a popular food doesn't always the most delicious one! Yet you still very long queue. What's up? lol

Mt. said...

if u r able to find the author's solution in the book then this is not a good black swan book. But 10 years later you will realize this book is actually talking all about solution ... then its qualified as a good black swan book !? Come back to this post again 10 years later ya ....

ChampDog said...

Will keep in mind on that to revisit this book after 10 years! :D Hopefully all solutions will be there... :)

tiff bonfiglio said...

interesting reading

tiff bonfiglio

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