Recommended Reads – The Black Swan

by John DePutter, May 1st, 2012
In my last post, I mentioned that I often share book recommendations with customers and other people I meet – and as part of my series of suggestions, here’s another to consider adding to your reading list.

It’s The Black Swan, by Nassim Nicholas Taleb.  This one is harder going than my previous suggestions, but if you’ll take your time with it, gleaning bits and pieces of wisdom, you’ll find lots.

The book is written by a brilliant and insightful mind, to be sure.

Before the discovery of Australia, Taleb explains, people in the Old World were convinced that all swans were white. By definition, a swan was white. Upon sighting a bird in Australia that appeared to have all the characteristics of a swan but was black, the definition had to change.

With Taleb’s coining of the phrase, the term Black Swan is now used frequently to refer to a statistically unlikely event; an event few would have imagined before it happened – an outlier, you might say, with nothing in the past to convincingly point to its possibility or probability.

Taleb’s contention is that Black Swan developments, by their definition being unpredictable or not commonly imagined before they come into play, and by their nature being considered so statistically improbable as to require no preparation, tend to have the most profound effects on individuals and societies.

These days, with the world as interconnected as it is, we are more affected on a global basis to Black Swan Events that in previous decades and centuries might have had significant impacts on only localized areas, Taleb suggests.

We tend to over-rate our ability to predict and plan around our predictions, he explains. Yet it is the things we cannot and do not predict that change our worlds.

One idea I took from his book was that as a market analyst, I might best encourage my clients to build robust operations to gird against negative Black Swans. This can be more useful than offering a lot of predictions.

For example, these days I can encourage farmers fortunate enough to be raking in solid profits from the current great cycle high in crops to use the money to build firm, diversified, non-leveraged businesses, perhaps also putting some money away, rather than leveraging aggressively into expansion. This may be more useful than laying out bullish or bearish predictions.

I might also help them identify areas that would be most vulnerable to bearish Black Swans, suggesting that markets that are high-flying, buoyed by optimism and speculative enthusiasm, would be more susceptible to bearish surprises than those that are quiet and subdued with a lot of bearish news already reflected in their prices.

Invest in preparedness, rather than in predictions, Taleb would advise.

There’s more. These are only brief examples of my many take-aways. I was enthralled to the point of documenting several key concepts and thoughts, as I found many practical philosophies related to my work and ongoing learning.

Not for everyone, but recommended if you are looking for an interesting challenge.