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My review of Taleb's *The Black Swan*
The book is very stimulating, here is one excerpt from my review on Slate.com:
Another human failing stems from the nature of happiness. In the short run, people's happiness is often shaped more by how many "positive events" occur in their day than by the arrival of one important piece of good news. Winning $100,000 in the lottery feels almost as good as winning $1 million. We therefore look, consciously or not, for small but repeated successes when we should be shooting for "one large win." It's easy to see why: Big payoffs come only rarely, and perhaps late in life; in the meantime, who wants to keep on feeling like a loser?
Here is another bit:
Oddly, Taleb's argument is weakest in the area he knows best, namely finance. Only on Wall Street do people seem to give proper credence—not too much, not too little—to very unlikely events. It is easy enough to use hindsight to identify the black swans Wall Street has missed, such as stock-price crashes. But it is harder to argue that the market undervalues surprise more generally. Stock and bond markets offer simple ways to bet on black swans. In financial terminology, you can purchase an option that is "deeply out of the money"; for instance, you can bet that Google shares will rise or fall in value an enormous amount over the next three months. These investments pay off precisely when the rest of the market does not anticipate the scope for surprise. Yet "long-shot" strategies are well-studied, and they do not yield extra profit. In other words, organized securities markets track rare and unpredictable events as well as the current state of knowledge will allow. If you don't believe me, it is easy enough to bet on the Los Angeles Clippers to win the 2008 NBA title, or to bet on the longest odds at the racetrack. Such actions are hardly the path to either happiness or riches.
Here is my previous post on the book. Here is Taleb's podcast on EconTalk. If you've read the book, do tell us what you thought of it...
Posted by Tyler Cowen on June 13, 2007 at 08:28 PM in Books | Permalink
Comments
Neither Tyler's review nor the detailed interview on EconTalk make me want to read this book - or at least, I don't want to buy it.
It is trivially obvious that human inferences are based on incomplete and biased data. But in life inferences _must_ be made, action must be taken - and often urgently.
So a general policy of 'greater skepticism about stuff' (because it's probably just random noise) usually leads to decision-paralysis camouflagued by a smug sort of quietism - which I seem to detect in the style of Taleb.
Posted by: Bruce G Charlton at Jun 14, 2007 6:35:00 AM
i'll have to admit that i had high expectations for this book after loving his first one (fooled by randomness). half way through, i have been a bit disappointed - kind of like my reaction to reading Atlas Shrugged after having reading The Fountain Head...ok, ok, I submit, I get the message already.
Posted by: pk at Jun 14, 2007 6:55:27 AM
I'm about halfway to 3/4 through with the book.
I find his style of writing annoying. Taleb is a name dropper. Taleb is full of himself, and while he decries overconfidence, is quite overconfident himself. In fact, "NNT" as he likes to refer to himself, is quite an ass.
On the positive side, the book is quite easy to read. So he's got that going for him.
But at the end of the day, I don't know if his whole book couldn't have been summed up in one chapter!
Posted by: Buzzcut at Jun 14, 2007 9:52:34 AM
"Another human failing stems from the nature of happiness. In the short run, people's happiness is often shaped more by how many "positive events" occur in their day than by the arrival of one important piece of good news. Winning $100,000 in the lottery feels almost as good as winning $1 million. We therefore look, consciously or not, for small but repeated successes when we should be shooting for "one large win." It's easy to see why: Big payoffs come only rarely, and perhaps late in life; in the meantime, who wants to keep on feeling like a loser?"
Nonetheless, getting out of our comfort zones is good for innovation and thus good for the economy."
This is no more than to say "Humans don't find happiness in the way I would like, and that qualifies as a failing" Why on earth should things that are "good for innovation and thus for the economy" represent the highest goal of human endeavor? Why are small but repeated successes worthy of disdain? Apparently because they aren't what Tyler would prefer us to seek.
I think I see a larger human failing at work here. That is the notion, apparent in Tyler's argument, that one's own preferences represent the greatest good.
Posted by: kharris at Jun 14, 2007 9:54:12 AM
I thought the book stimulating, but wish Taleb has elaborated more on the difference between independent and dependent events, which, I think, is the key to the long-tail phenomenon. Here are some of my random thoughts: in China, where people are less individualistic and more subjected to peer pressure, events tend to be more connected, at least locally. When the pressure of a system increases, local connectivity can spread globally, and lead to a phase transition of some sort. WWI is a good example.
Posted by: Yan Li at Jun 14, 2007 10:53:08 AM
I was surprised at the importance I found in Taleb's basic tenet: not that unexpected events happen but that an unexpected major event can have consequences that wipe out entirely all the gains or losses of a long series of predictable day-to-day events. I also thought his suggestion to have your money in only two kinds of investments - those as safe as possible and those as risky as possible - the first to guard against negative black swans and the second to take advantage of positive black swans, was amusing. He doesn't seem to take into account, though, that a man may live his whole life without encountering either variety of black swan. In that event his investment strategy would seem to limit gains tremendously.
All in all, though, I enjoyed the book quite a bit. It starts one thinking, which is always dangerous but entertaining.
Posted by: Robert Speirs at Jun 14, 2007 11:20:07 AM
I was pretty unimpressed. I had trouble getting over his self-indulgent and arrogant writing style, and the book often felt like a long essay entitled, "Why I'm smarter than 99.9% of the population and how the other .1% and I have deep intellectual conversations." Overall, I don't think I learned much more from the book than could already be gleaned from the EconTalk podcast.
Posted by: Kyle at Jun 14, 2007 11:42:24 AM
I haven't read Black Swan (it's on my list) but I did read Fooled by Randomness, and will echo the comments of others that this author's writing style is unusually grating. It's egomaniacal and dismissive of everyone else. You'd like to think the editor would soften that tone.
My question, to those have read the Black Swan, is what is the marginal value of this book? It's sounds like a repackaging of the same idea from FbR. Thanks.
Posted by: wph at Jun 14, 2007 12:03:40 PM
I read both FBR and the Black Swan. I agree about the overlap of the topics and also that the Black Swan could have been considerably condensed. Those with ideas dont always convey them best.
In response to two of your points from the review:
1) I think NNT makes a meaningful distinction between betting on longshots, such as betting on the Clippers, and unknowable extreme events with no determinable outcome. Betting on the Clippers is a defined improbability. It will pay a certain amount, say 500 to 1, for a defined event. They win or they don't. The other events he mentions, publishing a hit book or a drop in the stock market, have an almost unlimited floor or ceiling. We may know they will happen but we don't know when they will happen or how big it will be.
2) I dont think he totally discounts hard work. He does talk about people that work hard, hoping that the Black Swan will be their novel, their scientific research, their cumulative effort recognized in some way.
Posted by: conor at Jun 14, 2007 1:50:09 PM
Taleb comes across as obnoxious, as other commenters have pointed out. He is also wrong in many cases. His thinking about finance is wrong both in terms of people valuing options (Did his fund avoid bleeding to death?) and in terms of the expected pay out of a career in finance for people of a certain skill level (He touches a lot on his FbR ideas again in this book). He tries to apply the efficient market hypothesis to life - the returns you get will come only in proportion the risk you take. His framework is stupid because he seems to assume there is no "alpha" in life choices, just beta and randomness. All those Goldman MDs pulling in millions a year? They are lucky, risk/reward wise they should have been dentists. This is true because you have to think about where the whole population of first year analysts at bulge bracket banks end up. Most of them are broke and pennyless in proportion to the rich and successful population of MDs. But no, not really. That argument only really works for actors/sports stars. Also, considering this theory that we live in extremism and black swans are very prevalent, it would have been better if he didn't spend so much time talking about fictional characters.
Posted by: agent00yak at Jun 14, 2007 4:32:39 PM
Fooled by Randomness was a bad book. He never gives any proof that his investing methods are better than the normal investing methods. The book was a content-less sales pitch for his hedge fund.
Posted by: joeo at Jun 14, 2007 4:46:34 PM
Wow, what book did I read? I enjoyed "Fooled By Randomness" but loved "The Black Swan." I don't love books very often. His strategy for dealing with extreme events as an investor is to make small bets on positive longshots (books, drugs, new technologies) and not large bets on mostly hidden negative outcomes-- mostly hidden because of mistaken 'safety' (banks, hotels, service industries in general). Reading these comments makes me wonder if 1. you missed some of the point of his making fun of himself and others (arrogance? Read Thomas Friedman!) 2. that his main point is that humans often get probability horribly wrong and 3. there are many many more extreme events in a highly complex society because we are so interconnected. Black swans are not rare, they are unexpected because they lay outside our zone of expectations. His writing is clear and his stories reflect a very different way of looking at things. The podcast prompted me to buy the book (I'm on the second read-through with pen in hand) and I'm buying two more for friends. -- A question to everyone-- How many of you have purchased books based on hearing the podcast?
Posted by: Eric at Jun 14, 2007 4:58:29 PM
So, ah, utility functions tend to have diminishing returns? And this is somehow new?
Play often for low stakes. That minimizes your objective expected losses and maximizes your subjective expected utility.
Posted by: jb at Jun 14, 2007 8:11:04 PM
I also believe that a lot of readers decide what they think of Taleb's books rather quickly and their responses have little to do with the information contained within.
There is a lot of self-mockery and humor in his writing. He doesn't use an editor.. so if that's a problem, then read any other book that has been edited. Also, it is not realistic to complain about him not tipping his hand.. no intelligent speculator tips his or her hand.
Taleb never suggests making fixed long-odds bets. Betting $50 that the Houston Texans will win the Super Bowl next year (paying off a fixed $5,000 if they win) is a vastly different bet than a $50 bet that a $500 stock will drop 24% in less than 4 weeks (paying off $5,000 for every 1% past that 24% point). A 25% drop would cover the $5,000.. a 26% drop would give you $10,000. A 30% drop would pay out $30,000 (600 to 1).
Unfortunately, so many things can go wrong with this sort of stock bet.. and there are only 2 stocks (as long as they don't split) that even allow for this sort of betting.
Anyway, from reading Taleb's assorted writings, I get the impression that he is more interested in fixed income and currency derivatives. There's more complacency about the extremes in those areas maybe.
Posted by: eli at Jun 14, 2007 8:44:13 PM
I read both of Taleb's books and expected more than I got from the Black Swan.
Fooled by Randomness has a number of impressive observations, and is pitched as such. There is no overall theory about rare events, only a number of interesting examples about how wrong some pretty bright people are about the rareness of events. Normal distributions come in for a reasonable bashing.
What I was hoping for in the Black Swan was some stabs at a theory, series of models, different explanations of how it is possible that
a) we all agree that X has low chances of happening;
b) we are wrong, and;
c) this happens on a consistent enough basis, but we don't get much better in estimating X's.
The Black Swan does not contain any of this, hence my own disappointment.
As to the Taleb's writing style, I find it engaging, amusing, but maddening at times.
I found Fooled by Randomness to repay careful re-reading - like Steve Gilbert's book on Happiness, Taleb can be too fun to read. But since I expected more simple models or examples of the Black Swan, I am not sure that I will return to Taleb's new book that often.
Posted by: michael webster at Jun 15, 2007 2:45:51 PM
Tyler,
Taleb's previous book, Fooled by Randomness, was fair. It made some good points, not trivial, but not profound or new, as you point out in your review of the Black Swan on Slate. But Fooled is poorly written, which at first I thought was intentional - Ira Glass, from This American Life, claims that his intentionally annoying cadence and voice actually makes people listen more closely than if he had a smooth, predictable announcer's voice. But I gradually realized Taleb was not intentionally writing badly - he just got mad when his editors tried to change anything. So in the end, it is hard to recommend Fooled By Randomness.
However, contrary to your assertion about financial markets properly pricing negative shocks, Taleb claims that he has made all his money essentially by taking puts against downside shocks. Maybe he was just lucky? :)
Posted by: Dennis at Jun 15, 2007 4:09:18 PM
There's another good old podcast at it converseations. I think I'd have rated him pompous if I hadn't got the nature of his humor from that. My feeling was the same, that Fooled by Randomness was a great read, and that Black Swan is a little uneven (does he dismiss editors in the book, even as he needs an editor?).
I am reading Stumbling on Happiness now, and I see many parallels.
Posted by: odograph at Jun 16, 2007 6:15:01 PM
Taleb was not amused:
"Also I read the review in Slate by Tyler Cowen, thanks to my “name recognition” heuristic (I recognized both names). The poor guy got the ideas of The Black Swan exactly backwards. He does not seem to understand the difference between absence of evidence and evidence of absence –the very subject of my book. This justifies the application of the heuristic: avoid reading what he writes (on any subject) –I cannot trust his judgment & intellectual abilities"
Welcome the club of people Taleb thinks are idiots (ie, everyone who criticizes him)
Posted by: alex at Jun 18, 2007 5:58:59 PM
Alex,
In the least, Taleb is preparing a full point by point response to the Slate review. He does this with some reviews if he thinks them unfavorable.
Mainly, he holds the ideas he writes about very seriously and spends a lot of time clarifying his points if he feels a reviewer didn't get it.
The only other "negative" reviewer to get a full retort is Gregg Easterbrook of the New York Times.
Anyhoo, it does help to listen to him speak to get a sense of his humor.
There is also a section on his site for "Black Swan Debates/Critiques"
Posted by: eli at Jun 19, 2007 2:51:34 PM
Nassim's response to the Slate review is here
Posted by: eli at Jun 20, 2007 12:27:04 PM
Taleb's response seems characteristically opaque. I'd have thought he would just reply that the studies showing 'no extra profit' are themselves contaminated by assuming the distribution is Gaussian and/or by eliminating outliers from any tests of the hypothesis that the distribution is Gaussian. I've forgotten nearly all the statistics I ever learned (not much to begin with), so maybe I am off the mark.
Further, I don't think he ever claimed a variant on his strategy would ever make 'extra profit', he would probably reject the whole framework. His concern is that conventional strategies are vulnerable to black swans (he might say that they are likely to be wiped out before they are closed out). To him, it is all about whether or not you're vulnerable to negative black swans and positioned to benefit from some positive black swans. Offered a choice between a portfolio that makes ordinary (or even extra) profits but is vulnerable to crashes and one that makes pathetic profits or even small losses during 'ordinary times' but never loses your shirt and could make enormous profits from a black swan, Taleb prefers the latter (not entirely clear when black swan lottery tickets cost too much). Of course, he vaguely mentions a strategy with most of the portfolio in treasury securities and a small portion in highly speculative options, but obviously there are black swans that could make treasury securities worthless, so it's not clear why he is not recommending that everyone stock up on canned goods and become survivalists.
One of Taleb's claims makes me wish I had enough stats to give me a better feel for whether he was right or wrong - (I should probably go look it up specifically, but I am too lazy, so forgive me if this is only approximately what he wrote). He claimed that the crash of 1987 was a six sigma outlier (six standard deviations from the mean), an event that could be expected (if the data are actually Guassian) to occur once in 10,000 or 100,000 years. So the fact that both that and the various other crashes, especially the crash of 1929, occurred within a few hundred years of the beginning of the stock market should be sufficient to reject the hypothesis that the data are actually Gaussian. My perhaps lame exposition of the Taleb position would be that the standard models exclude outliers such as these crashes to get a better fit for ordinary activity (Taleb's 'Mediocristan'). If we instead include the outliers in the regression, we end up with something that stinks even at predicting ordinary stuff, and still cannot predict crashes. Hence, Taleb rejects the models and ordinary measures of risk and extra profit.
I found the book very interesting but frustrating, the arguments often difficult to follow. He accuses his critics of ad hominem, but he (especially on his web page) uses ad hominem himself to an unfortunate degree. I found his ideas interesting, but not entirely convincing. I didn't find Tyler's review helpful. I'm not sure whether this means Tyler wasn't taking Taleb seriously, or whether (as I think is sometimes the case with Tyler) he left out a lot of stuff he considers obvious, but which by no means is obvious to me.
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Posted by: aion at Jul 14, 2009 10:33:33 PM
"Only on Wall Street do people seem to give proper credence—not too much, not too little—to very unlikely events"
I suppose that's why the investment banks have all blown up (except for the favored two with an inside track at the Fed and Treasury) and likewise (except for their access to TARP bailout funds)the money center banks?
The only difference between the banksters and Bernie Madoff is the ability of their connected friends to monetize their IOU's at the expense of taxpayers, and hand the money to the banksters so that they can get back to rolling the dice in the interest of the next bonus check. Validating them with foolish comments like this only turns them loose to continue their depradations. NNT is arrogant perhaps, but to the hubris of the court economists, whether on Wall Street or hiding out in the Ivy League, his self-inflation is like a small hill compared to the Himalayas.
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