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The Black Swan Summary & Analysis

The Black Swan

The book "The Black Swan" is a how to, or rather, a how not to guide to investing written by the recently renowned author Nassim Nicholas Taleb. Taleb published his book mere months before the Great Recession, and was viewed by some as a prophet for what it predicted. "The Black Swan" is full of great information and many learning opportunities, and this summary brings together the main points that Taleb presents to readers.

The biggest lesson that "The Black Swan" informs readers of is to expect the unexpected. A Black Swan event in itself is an unexpected anomaly with extreme effect on the environment it occurred in. The Great Recession in the US in 2008 is an example of a Black Swan event, one that happened to occur right after the release of this book. To turn this towards investing, Taleb warns us of the issues in how most people invest their money. Certain experts and certain indices use past representation of events and future assumptions of outcomes as guidelines to how most of the masses should be investing. According to Taleb, however, they are wrong by doing this, because you cannot predict every single variable that the future holds. Eventually, a Black Swan may occur and if investors have not built their portfolios to be ready for an event like this, then they will be the greatest losers of that Black Swan event.

One of the examples that Taleb uses is an Extremistan versus a Mediocristan environment. He states how unwise it would be to set two limits as to the numbers an observation is planned land between (Gaussian distribution) during an Extremistan environment, while it would be much more acceptable in a Mediocristan due to risk. A rare and improbable event is likely to occur in either environment, and they actually happen more often than we all know about. This is because according to Taleb, our minds are conditioned to think only about what we have seen in the past, not about what lay unseen. He actually does a great job of summarizing many of the points that our blindness leads to on page 50:

a) "We focus on pre-selected segments of the seen and generalize from it the unseen: The error of confirmation.

b) We fool ourselves with stories that cater to our platonic thirst for distinct patterns: The narrative fallacy.

c) We behave as if the Black Swan does not exist; human nature is not programmed for Black Swans.

d) What we see is not necessarily all that is there, history hides Black Swans from us [if they didn't happen] and gives a mistaken idea about the odds of these events: This is the distortion of silent evidence.

e) We "tunnel": That is, we focus on a few well-defined sources of uncertainty, on too specific a list of Black Swans (at the expense of others that do not come so readily to mind)."

In conclusion, Taleb suggests that the best strategy to invest is to prepare for the negative Black Swans to hit, as well as positive ones. This way, the negative Black Swan has a minimal effect, while the positive Black Swan will be an easy opportunity for an investor to exploit and take advantage of.