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Posts Tagged ‘black swan’

Key Lessons from Black Swan

I find NNT‘s Black Swan stimulating.  Here’s what I’ve learned:

  • The world split into 2 parts: 
  • Beware that books, games don’t necessarily apply to the real world
  • Avoid noise, usually generated by news and media
  • Don’t be the turkey:  future projection using history could be detrimental
  • We do not know much about the past, especially causes and effects — “look at a puddle of water, … and try to reconstruct in your mind’s eye the shape of the ice cube it may once have been.”
  • We just can’t predict, esp. Black Swans

 

  • Work to be a skeptical empiricist, for the brain tends to operate using intuition, making mistakes relative to reality, and the brain is not built to deal with Black Swans
  • Think fractal, Black Swans could turn gray
  • Be open minded, don’t be stuck with a particular theory

 

  • Beware and leverage the scalable:  winner takes all, Matthew Effect
  • 80/20 rule is also the 50/01 rule
  • Apply the 90/10 rule:  be ultra-conservative 90%, hyper-aggressive 10%
  • Winners might have gotten there via luck, Black Swans could change things
  • Prepare and be ready for serendipity
  • Seize any opportunity — they are very rare

 

  • Don’t run after the train – “Missing a train is only painful if you run after it!”
  • Be the one to reign.  … It’s difficult to be a loser in a game you set up yourself.
  • You always control what you do; make this your end.

Copyright (c) 2008 by Waiming Mok

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Black Swan, Remaining Parts

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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Black Swan, Part 1

Just finished reading Part 1, first 133 pp., of NNT‘s Black Swan.  Teleb presents 322px-mandel_zoom_00_mandelbrot_sethis observations and conjectures on how we humans are not equipped to see and learn from the (1) rare events that have (2) significant impact and we tend to (3) ignore these events.  These 3 points define the Black Swans.  For me, Teleb jogs me with very interesting set of ideas, while prompting me to question what I do, how I think and interpret the world.  As he presents his argument with stories, some real-life, some with names changed, normalcurvesome thought experiments, it’s hard for me to say that he’s scientific in his approach.  At the same time, Teleb suggests that traditional scientific approaches in social sciences 325px-levyskew_distributionpdf(e.g. economics, or looking at things like Black Swan) have too simplified models (e.g. Bell Curve) that do not reflect reality (more Mandelbrot like).  From reading Part 1, I gain new perspectives and a recurring pinging in my mind to question how I think and look at the world.  Worth reading. 

There following are some interesting concepts from Part 1:

  • Teleb says that Black Swans are invisible to most humans because we are not equipped to think about randomness, and ignore what could have happen, as it is hard to see and think about such abstractions.   Experts often use simplified models like the Bell Curve erroneously to describe what we see and then derive decisions from these models.  Sometimes, by luck, one among millions, could end up successful over a long period of time, but could still hit the Black Swan because it is not in model.  And the Black Swan wipes out all the gains that were gotten from the previous successes.
  • Teleb tells a story of casinos spending millions to manage risks with gambling and monitor cheating with sophisticated security equipment, and yet for the Mirage Casino which lost hundreds of millions of dollars because they lost Siegfried and Roy due to an unexpected tiger mawing of Roy.
  • World environments are either Mediocristan (non-scalable, winner takes a bit … ) or Extremistan (scalable, winners takes almost all … )
  • Humans think in 2 modes: System 1 (“intuition”, effortless, automatic, fast, opaque, …) vs System 2 (“thinking”, effortful, reasoned, slow, logical, …, self-aware)
  • “Most of our mistakes in reasoning come from using System 1 when we are … thinking that we are using System 2.”
  • The world is more nonlinear than we think.  E.g. you play tennis every day with no signs of improvement, then after years of playing, one day, you start beating the pros.
  • Don’t be like turkey.  A turkey is fed every day for 1,000 day — the turkey would be thinking the 1001th day bring food again, but on that day, the turkey goes on the Thanksgiving table.
  • The dead and failures are silent.  We tend not to count them, when we look at statistics of those who have succeeded, and then start attribute what led to these people’s success are due to what they did rather than randomness…
  • To deal with these biases and innate handicaps, Teleb suggests that we look at reality, avoid interpretation based on our simple models of the world, be always skeptical, and keep an open-mind.  For, to think out of the box, especially to catch a Black Swan, you cannot be stuck inside the box, where Black Swans could not be seen.

Copyright (c) 2008 by Waiming Mok

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