Just finished reading NNT‘s Black Swan.
In parts 2, 3, 4, Taleb went into further details on actions and decision making in face of the unknown unknown. He contrasts the lopsidedness of how things work and how Black Swans changes things. Winners tend to win more often. The winners might have gotten there by luck, not skills. So life is not fair. At the same time, due to Black Swans, those on top could be toppled quickly, unexpectedly. In that sense, the world offers opportunities for the little guys.
Central to his theme is that we tend to look at the world by creating or believing in theories to fit the world to the theories, rather than looking at what’s happening. This could apply to math, science, religion, history, and especially more so with economics and social sciences. And, when economists apply flawed theories to real world finance and governance, dire consequences could happen.
As we do not know the level of risk and extent of uncertainty of the future, Taleb suggests the following approach to deal with that uncertainty, to avoid the negative Black Swans, and to increase the likelihood of catching positive Black Swans:
- Be prepared for all relevant eventualities
- Barbell strategy:
- Be extremely conservative (very, very safe) with 85-90% of your assets, in your approach
- Be extremely, wildly aggressive with 10-15% of your assets
- Modest tricks:
- Make a distinction between positive contingencies and negative ones
- Don’t look for the precise and the local. Don’t be narrow minded, be open to possibilities.
- Seize any opportunity, or anything that looks like opportunity.
- Beware of precise plans by governments.
- Don’t waste time trying to fight forecasters, …
Taleb also writes an entire chapter on his mentor, Benoit Mandelbrot, who introduced fractals to the world. Fractals have scale-invariance, which is an interesting property that Taleb says is prevalent in how we compare things. Further, Taleb says looking at the world in terms fractals could make Black Swans gray.
Taleb speaks like an outlier, not part of the mainstream. That’s what’s appealing about the book. He forwards arguments that make the mainstream and those in power, as mostly the result of randomness. After reading the book, I feel less afraid of those in power. In the end, they are not that different from you and I.
Taleb practices an open minded approach to view, think, and act about the world. You have to read the book to get that approach. He drills these notions into your head. The last advice (don’t run after trains) in the book is especially uplifting. Read the book.
Copyright (c) 2008 by Waiming Mok
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