PRINT-The Black Swan by Nassim Nicholas Taleb

Nassim Nicholas Taleb's The Black Swan is a book about highly improbable events that have a very large impact. Taleb's target is the Gaussian Bell Curve and the delusion that it creates which he terms the ludic fallacy.

Taleb divides the world into two fictional countries he calls Mediocristan and Extremistan. Mediocristan is the world of the bell curve. It is where the distribution of events is normal. It looks like this:



Extremistan is quite different. Things are much more chaotic. Prediction is impossible. The world of extremistan is dominated by black swans that occur whenever and wherever. It really undermines confidence.

The world abounds with black swans--tsunamis, earthquakes, 9/11, war, fashion trends, etc. Even the best laid plans can be laid low by a black swan. Conversely, positive black swans can literally change your life overnight.

Taleb makes the case that the normal distribution is not really how the world is, and I tend to agree. Newtonian physics is not how the world really is either, but it works for certain applications. Similarly, the bell curve works for insurance, managing portfolios, etc.

Do I accept or reject Taleb's thesis? Looking at my own chaotic life, I am inclined to accept it. But I have no intentions of abandoning my current investment strategy for Taleb's barbell strategy of 80% of his wealth in Treasuries and 20% of his wealth in the riskiest shit the financial world has to offer. But I agree that you should have some exposure to positive black swans. It is the only way to become rich in a short period of time. Mediocristan is for those who wish to get rich slowly.

The Black Swan is not an investing book. It is more of a philosophical essay than anything else. Taleb's strategy involves embracing uncertainty and learning to live with it and even enjoy its beneficial consequences. I find this very appealling. This is why I network like a fiend and go to parties and apply for all sorts of jobs and study the crazy things I do. In order to enjoy these positive black swans, you just need exposure.

My current work is how to capture these black swans in the marketplace. Like indexing, it follows a strategy of diversification. That part is easy. The hard part is hedging the risk. This is the difficulty. A lot of stuff to think about and consider.

I highly recommend this book.

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