Tuesday, December 04, 2007

I just finished The Black Swan by Nassim Taleb.

This is a very interesting book, interesting enough that I am considering buying a copy when it comes out in paperback so that I can refer to it and spend more time digging into the ideas Taleb presents.

Recently I posted on the book Super Crunchers, and commented that I thought it should have spent more time on the limits of statistics. The Black Swan is the polar opposite of this - it is all about the limits of modern statistical thinking and it raises a lot of good points. At this point, I don't agree with everything in the book and I think Taleb has gone too far in some areas, but the bulk of his argument is correct and has important ramifications for the modern, global economy. In particular, I bet that he is having a good laugh about the current sub-prime mortgage crisis that is currently going on in the US. This is exactly the kind of problem that he points out, with a lot of banks having booked profits for many years that are now turning out to be based on taking a lot more risk than they intended to take.

Along the way, he throws out a lot of related, and very interesting ideas. For example, the difference between scalable and non-scalable careers. Examples of a non-scalable career would be a barber or a farmer while an engineer or a novelist would be scalable examples.

The book is not a technical book - all but a few chapters are written for lay readers and could be appreciated by anyone who is willing to put in a little thought. For example, Taleb defines a black swan as a improbable event that has a large impact. As an example, he gives two groups of 1000 people. One group is weighed to generate an average weight. It is apparent that even if you added the thinnest or fattest person possible, the average weight would not shift significantly. For the second group, their net worth is recorded and averaged. Now if you add the richest person in existence (e.g. Bill Gates), the average will be dramatically different. In fact, any analysis you do of the second group's net worth will be totally driven by the black swan (Bill Gates) since his net worth is tens of thousands larger than the average persons. Taleb's whole point is that to apply the same kind of analysis to the second group as you do to the first results in bad choices.

Amazon Link: The Black Swan: The Impact of the Highly Improbable