The Black Swan: A Fascinating, Albeit Infuriating, Read

by: Eddy Elfenbein

I finally got around to reading The Black Swan: The Impact of the Highly Improbable by Nassim Nicholas Taleb. It’s a fascinating, albeit infuriating, book.

In it, Taleb critics the idea that financial markets follow the classic bell curve. As a result, much of understanding about markets—everything from risk control to options values—is completely wrong. While this is an intriguing idea, and I believe he’s correct, The Black Swan is largely unreadable.

Taleb’s writing isn’t merely bad, it’s downright offensive. The entire book is written in a smug and obnoxious style filled with pointless asides. He’s argument is barely coherent and nearly every page includes parentheticals or scare quotes that simply aren’t needed. Taleb, like all writers, ought to adhere to Mark Twain’s dictum: eschew surplusage.

Taleb could have written the book in 50 pages, tops. He also could have spared us his opinion on everything I don’t care about. Taleb constantly reminds us that he’s an aesthete, which you would think would lead him to be a better writer.

He’s one of the people, and I’m sure you’ve met someone like this, who needs to call everything by its less-well-known variant. Do you remember the guy in college who did one semester abroad and came back suddenly using “lift” and “petrol”? That’s Taleb. Now imagine 300 pages of it. Muslims are “Moslems”; he’s “Levantine” not Lebanese. First and second become “primo” and “secondo” (I had to Google it). Strangely, even Daniel Kahneman is routinely called “Danny.”

Leaving the writing aside, the subject is very important. The question that I think it most interesting is, how do we quantify the risk of outliers—meaning, very rare events. Or, due to their nature, is that impossible? Interestingly, we’ve been watching a Black Swan event unfold (fly out?) before us in real time. The subprime crisis has exposed many financial firms to far more risk than they believed.

All the major investment banks report their “value at risk,” or if you’re a cool kid, their VAR. They all use different equations to reach their VAR but basically, it designed to measure how much money is at risk with a 95% confidence level. But this is where some problems are coming. For example, Merrill Lynch’s VAR indicated that it couldn’t be expected to lose more than $5.8 billion in a single quarter. Well, they lost $8.4 billion.

I don’t have any answers to the issues Taleb raises, but it’s not an academic point. The worst part of the subprime debacle is that we don’t know what we don’t know. The odd thing about Black Swans is that even if we suspect their existence, then they no longer exist.

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