What is the Black Swan Theory?
As an experiment, let’s measure the height of a random bunch of 1000 people. Assume the average height of the bunch is 6’0 ft. Now replace the 1000th person with a person who is 10’0 ft tall. How much do you think that would account for in the total height that was measured? Quite minuscule. It shows that a crazy outlier like a 10ft tall person would not make much difference to the average. Now let’s apply that same principle to wealth. If you add a billionaire to a random bunch of moderate earning people, how much do you think the billionaire would now account for all the people in that bunch? The answer would be an overwhelming majority. Contrary to the first experiment, the outlier here overwhelms everything else.
“ Money for all intents and purposes is just a number in someone’s book. The vast amount of money is completely digital “ - Nassim Taleb.
The modern economy is a winner take all system that rewards a few people with an unreasonable amount of the pie. The fact that the outliers in the contemporary world could be such wild shows how unpredictable the surroundings we are living in really are. We may be biased in thinking about what causes such outliers like thinking out of the box, start a revolutionary company, working extremely hard for a few years, and whether it can be happily ever after; however, when was the last time you read about a person who did all of these things and failed? Chances are probably never. Despite the measures one takes for a black swan event, improving our odds against a future black swan event would do no good. If anything, it might lure us into a false sense of security and worsen the chances of coping up with the following highly impactful event.
We tend to convince ourselves of the risks based on a closed-loop artificial game like poker, but equating them to a real-life poker game would be an oversimplification. We generally play simple games and conclude that the stock market works the same way. Given sufficiently poor luck, it could cause ruin. This, as defined by Taleb, is called the Ludic Fallacy.
The idea of a black swan is relative to the knowledge one possesses. The chicken who is slaughtered in a farm experienced a black swan event, but for a farmer, it was a completely routine event. Therefore the objective should be to be in the position of the farmer and not the chicken. Black swan events are generally unforeseen and unavoidable, and therefore the probability is everything.
References: The Black Swan: The Impact of the Highly Improbable - Nassim Taleb
