The Black Swan: The Impact of the Highly Improbable (Nassim Taleb)

The Black Swan: The Impact of the Highly Improbable (Nassim Taleb)

The first edition of this book was released in 2007, a year before the global financial meltdown.

It was timely for Taleb, whose book was all about the question of how to think about and prepare for unlikely events with extreme effects. When the crash happened in 2008 he was treated as something of a prophet.

The title comes from a standard philosophical question about inductive reasoning. If all the swans we've ever observed are white, then can we conclude that all swans are white? Can we conclude that it is very likely that all swans are white? These are historically very difficult questions to answer.

Taleb is a skeptic about this kind of inductive reasoning, he says there is no answer to these questions. Yet we must anticipate the likelihood of encountering a "black swan", an event that we would judge to be highly improbable, but nevertheless could have enormous consequences.

Taleb contends that banks and trading firms are very vulnerable to hazardous Black Swan events and are exposed to losses beyond those that are predicted by their defective financial models.

Also recommended is Taleb's follow-up book Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets, and his more recent book Antifragile: Things That Gain Order From Disorder.

But we warned: Taleb is an acerbic writer who often reacts defensively to criticism, and is notoriously dismissive of certain professional classes (journalists, economists, risk management professionals in the finance industry, etc.).

For these very reasons he can be both fun and exasperating to read. Still, I value the perspective and questions he has raised on the topics of probability, risk analysis and self-deception.