Saturday, October 7, 2017

The Black Swan: The impact of the

Book Review by William J. Skinner

This is not the kind of book I would normally pick up and read.  Newt Gingrich mentioned it in his new book, Understanding Trump, so my interest was aroused.  I discovered the Palm Beach County Library had one copy each of the first (2007) and second (2010) edition and obtained the second to see what the book contained about politics, Trump and Florida.  I am glad I learned about this 444 page softback, including the 71 pages of Postscript Essays, chapter notes, bibliography, and index, because it may help to round out my thinking big with all the minutia I am programmed to read.

             Nassim Nicholas Taleb’s ancestral home was the Greek orthodox village of Amioun, in northern Lebanon, and he was born in 1960.  Talib was educated at the University of Paris,  Paris Dauphine University, University of Pennsylvania, and the Wharton School of the University of Pennsylvania.  At the time the second edition was published, Talib was a Distinguished Professor at New York University’s Polytechnic Institute. His official biography on the web says: “Taleb's works focuses on mathematical, philosophical, and practical problems with risk and probability, as well as on the properties of systems that can handle disorder. He spent 21 years as a derivatives trader and, after closing 650,000 option transactions and examining 200,000 risk reports, he changed careers in 2006 to become a scholar, mathematical researcher and philosophical essayist.”

             Taleb is in the thinking business.  The idea of Black Swan was first mentioned by Sextus Empiricus in his medical writings made probably in Alexandria in around 100 CE. (p204)  The Black Swan is an outlier or impossibility to most people because they assume or believe all swans are white.  Believe me there is a lot more to it than this.  Find out in the book.  This author has written down every thought he has ever had about his wonderings.  Taleb may be writing random thoughts with parenthetical phrases to make sure he tells the reader any exceptions. The book contains 19 chapters many of which are around 10 pages in length, so you will be moving from theory to theory.  A simple message is to forget the bell curve and forget the standard devation because they can be meaningless.

            But let me tell you five thoughts why Gingrich might have thought of Taleb’s book when he wrote about Trump.  This will also tell you more about the book.

             Taleb made a prediction after the 1987 stock market crash when Harry Markowitz and William Sharpe were awarded the Nobel prize for developing the Modern Portfolio Theory, when he wrote:  “In a world in which these who get the Nobel, anything can happen.  Anyone can become president.”(p277)  Trump became president in a black swan event few expected.

             Point two is that Donald Trump graduated from the Wharton School as did Taleb.  This bit is not in the book, but I know it anyway.

             Point three is that Taleb says Edward Lorenz, MIT meteorologist, discussed the butterfly effect as being when a butterfly moves its wings in India this could be responsible for a hurricane in New York two years later. (p179) At least this is a question of probability.  This is the Florida connection to Taleb’s thinking.

            Fourth, Taleb says a few times in the book that militarily trained people think about risks differently than otherwise educated individuals.  Trump graduated from a five year military prep school before going to Wharton.

             Despite these coincidences, there is no doubt in my mind that Taleb was not thinking about Donald Trump when he wrote this book.  Taleb was thinking about knowing the unknowns and determining probabilities of what will happen next in multiple contexts.   A couple more glimpses of Taleb’s subject matter follow.

             “What to Remember

            “Remember this: the Gaussian-bell curve variations face a headwind that makes probabilities drop at a faster and faster rate as you move away from the mean, while ‘scalables,” or Mandelbrotian variations, do not have such a restriction.  That’s pretty much most of what you need to know.” p234  Taleb dedicated this book to Benoit Mandelbrot.

            Taleb wrote it took him close to a decade and a half to find a real thinker, “the man who made many swans gray: Mandelbrot—the great Benoit Mandelbrot.” p252

             Yogi Berra is quoted at p136 as saying, “It is tough to make predictions, especially about the future.”

 The Black Swan and Fooled by Randomness are only two of Taleb’s books, but they are in print in thirty-one languages as of 2010.  The Black Swan is - ISBN: 978-0-8129-7381-5.