{"id":4557,"date":"2019-11-20T06:17:05","date_gmt":"2019-11-20T10:17:05","guid":{"rendered":"https:\/\/www.shortform.com\/blog\/?p=4557"},"modified":"2023-04-13T14:01:02","modified_gmt":"2023-04-13T18:01:02","slug":"black-swan-theory","status":"publish","type":"post","link":"https:\/\/www.shortform.com\/blog\/black-swan-theory\/","title":{"rendered":"Black Swan Theory: The Complete Guide to Critical Events"},"content":{"rendered":"\n<p>What is a black swan? What is black swan theory? What does the term &#8220;black swan&#8221; mean?<\/p>\n\n\n\n<p>A black swan is an extremely unpredictable event that has a massive impact on human society. The Black Swan is named after a classic error of induction, the <a href=\"https:\/\/www.shortform.com\/blog\/black-swan-fallacy\/\">black swan fallacy<\/a>.<\/p>\n\n\n\n<p>We&#8217;ll cover the meaning of &#8220;black swan,&#8221; what black swan theory is, and what &#8220;black swan&#8221; means in economics.<\/p>\n\n\n\n<!--more-->\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-what-is-a-black-swan\">What Is a Black Swan?<\/h2>\n\n\n\n<figure class=\"wp-block-embed is-type-video is-provider-youtube wp-block-embed-youtube wp-embed-aspect-16-9 wp-has-aspect-ratio\"><div class=\"wp-block-embed__wrapper\">\n<div class=\"jetpack-video-wrapper\"><iframe loading=\"lazy\" title=\"The Black Swan | Book Summary\" width=\"750\" height=\"422\" src=\"https:\/\/www.youtube.com\/embed\/8sC9o_Kv12U?feature=oembed&#038;enablejsapi=1&#038;origin=https:\/\/www.shortform.com\" frameborder=\"0\" allow=\"accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share\" allowfullscreen><\/iframe><\/div>\n<\/div><\/figure>\n\n\n\n<p><em>The Black Swan<\/em> is the second book in former options trader Nassim Nicholas Taleb\u2019s five-volume series on uncertainty. What does &#8220;black swan&#8221; mean? This book analyzes so-called \u201cBlack Swans\u201d\u2014extremely unpredictable events that have massive impacts on human society.<br><\/p>\n\n\n\n<p>The Black Swan is named after a classic error of induction wherein an observer assumes that because all the swans he\u2019s seen are white, all swans <em>must <\/em>be white. Black Swans have three salient features:<br><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>They are rare (statistical outliers);<\/li><li>They are disproportionately impactful; and, because of that outsize impact,&nbsp;<\/li><li>They compel human beings to explain <em>why <\/em>they happened\u2014to show, after the fact, that they were indeed predictable.<\/li><\/ul>\n\n\n\n<p>Taleb\u2019s black swan theory, however, is that <strong>Black Swans, by their very nature, are<em> always <\/em>unpredictable<\/strong>\u2014they are the \u201cunknown unknowns\u201d<em> <\/em>for which even our most comprehensive models can\u2019t account. What is a black swan? The <a href=\"https:\/\/www.shortform.com\/blog\/importance-of-the-fall-of-the-berlin-wall\/\">fall of the Berlin Wall<\/a>, the 1987 stock market crash, the creation of the Internet, 9\/11, the 2008 financial crisis\u2014all are Black Swans.<br><\/p>\n\n\n\n<p>Once <a href=\"https:\/\/www.shortform.com\/blog\/nassim-nicholas-taleb\/\">Taleb<\/a> introduces the concept of the Black Swan, he delves into human society and psychology, analyzing why modern civilization invites wild randomness and why humans can neither accept nor control that randomness.<br><\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-black-swan-theory-extremistan-vs-mediocristan\">Black Swan Theory: <strong>Extremistan vs. Mediocristan<\/strong><\/h3>\n\n\n\n<p>To explain how and why Black Swans occur and what &#8220;black swan&#8221; means, Taleb coins two categories to describe the measurable facets of existence: <a href=\"https:\/\/www.shortform.com\/blog\/extremistan\/\">Extremistan<\/a> and <a href=\"https:\/\/www.shortform.com\/blog\/mediocristan\/\">Mediocristan<\/a>.&nbsp;<br><\/p>\n\n\n\n<p><strong>In Mediocristan, randomness is highly constrained, and deviations from the average are minor. <\/strong>Physical characteristics such as height and weight are from Mediocristan: They have upper and lower bounds, their distribution is a <a href=\"https:\/\/www.shortform.com\/blog\/the-bell-curve\/\">bell curve<\/a>, and even the tallest or lightest human being isn\u2019t much taller or lighter than the average. <em>In Mediocristan, prediction is possible.<\/em> In black swan theory, blacks swans don&#8217;t live in Mediocristan.<br><\/p>\n\n\n\n<p><strong>In Extremistan, however, randomness is wild, and deviations from the average can be, well, extreme.<\/strong> Most social, man-made aspects of human society\u2014the economy, the stock market, politics\u2014hail from Extremistan: They have no known upper or lower bounds, their behavior can\u2019t be graphed on a bell curve, and individual events or phenomena\u2014i.e., Black Swans\u2014can have exponential impacts on averages.<br><\/p>\n\n\n\n<p>What is a black swan? Imagine you put ten people in a room. Even if one of those people is Shaquille O\u2019Neal, the average height in the room is likely to be pretty close to the human average (Mediocristan). If one of those people is Jeff Bezos, however, suddenly the wealth average changes drastically (Extremistan).<br><\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-black-swan-theory-and-the-unreliability-of-experts\">Black Swan Theory and <strong>the Unreliability of \u201cExperts\u201d<\/strong><\/h2>\n\n\n\n<p>Taleb has very little patience for \u201cexperts\u201d\u2014academics, thought leaders, corporate executives, politicians, and the like. Throughout the book, Taleb illustrates how and why \u201cexperts\u201d are almost always wrong and have little more ability to <a href=\"https:\/\/www.shortform.com\/blog\/no-one-can-predict-the-future\/\">predict the future<\/a> than the average person.<br><\/p>\n\n\n\n<p>According to black swan theory, there are two reasons \u201cexperts\u201d make <a href=\"https:\/\/www.shortform.com\/blog\/bad-predictions\/\">bad predictions<\/a>:<br><\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-1-human-nature\"><strong>1) Human Nature<\/strong><\/h3>\n\n\n\n<p>Because of various habits innate to our species\u2014our penchant for telling stories, our belief in cause and effect, our tendency to \u201ccluster\u201d around specific ideas (<a href=\"https:\/\/www.shortform.com\/blog\/confirmation-bias-definition-2\/\">confirmation bias<\/a>) and \u201ctunnel\u201d into specific disciplines or methods (specialization)\u2014we tend to miss or minimize randomness\u2019s effect on our lives. Experts are no less guilty of this blindspot than your average person.<br><br><\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-2-flawed-methods\"><strong>2) Flawed Methods<\/strong><\/h3>\n\n\n\n<p>Because experts both (1) \u201ctunnel\u201d into the norms of their particular discipline and (2) base their predictive models exclusively on past events, their predictions are inevitably susceptible to the extremely random and unforeseen.<br><br><\/p>\n\n\n\n<p>Consider, for example, a financial analyst predicting the price of a barrel of oil in ten years. This analyst may build a model using the gold standards of her field: past and current oil prices, car manufacturers\u2019 projections, projected oil-field yields, and a host of other factors, computed using the techniques of regression analysis. The problem is that this model is innately narrow. It can\u2019t account for the truly random\u2014a natural disaster that disrupts a key producer, or a war that increases demand exponentially. This is what black swan theory attempts to explain.<br><\/p>\n\n\n\n<p>What is black swan theory? Taleb draws a key distinction between experts in Extremistan disciplines (economics, finance, politics, history) and Mediocristan disciplines (medicine, physical sciences). Experts like biologists and astrophysicists are able to predict events with fair accuracy; experts like economists and financial planners are not.<br><\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-difficulties-of-prediction\"><strong>Difficulties of Prediction<\/strong><\/h3>\n\n\n\n<p>According to black swan theory, the central problem with experts is their uncritical belief in the possibility of prediction, despite the mountain of evidence that indicates prediction is a fool\u2019s errand. Some key illustrations of the futility of prediction include:<br><\/p>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"h-discoveries\"><strong>Discoveries<\/strong><\/h4>\n\n\n\n<p>Most groundbreaking discoveries occur by happenstance\u2014luck\u2014rather than careful and painstaking work. The quintessential example is the discovery of penicillin. Discoverer Alexander Fleming wasn\u2019t researching antibiotics; rather, he was studying the properties of a particular bacterium. He left a stack of cultures lying out in his laboratory while he went on vacation, and when he returned he found that a bacteria-killing mold had formed on one of the cultures. <em>Voil\u00e1<\/em>\u2014the world\u2019s first antibiotic.<br><\/p>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"h-dynamical-systems\"><strong>Dynamical Systems<\/strong><\/h4>\n\n\n\n<p>A <a href=\"https:\/\/www.shortform.com\/blog\/what-is-a-dynamic-system\/\">dynamical system<\/a> is one in which an array of inputs affect each other. Whereas prediction in a system that contains, say, two inputs, is a simple affair\u2014one need only account for the qualities and behavior of those two inputs\u2014prediction in a system that contains, say, five hundred billion inputs is effectively impossible.<br><\/p>\n\n\n\n<p>The most famous illustration of a dynamical system\u2019s properties is the \u201cbutterfly effect.\u201d This idea was proposed by an MIT meteorologist, who discovered that an infinitesimal change in input parameters can drastically change weather models. The \u201cbutterfly effect\u201d describes the possibility that the flutter of a butterfly\u2019s wings can, a few weeks later and many miles distant, cause a tornado.<br><\/p>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"h-predicting-the-past\"><strong>Predicting the Past<\/strong><\/h4>\n\n\n\n<p>The past itself is as unknowable as the future, even the major <a href=\"https:\/\/www.shortform.com\/blog\/what-is-a-black-swan-event\/\">black swan events<\/a>. According to black swan theory, because of how complex the world is and how a single event could be influenced by any number of tiny causes, we cannot <a href=\"https:\/\/www.shortform.com\/blog\/how-to-reverse-engineer\/\">reverse engineer<\/a> causes for events.<br><\/p>\n\n\n\n<p>An example should help illustrate. Think of an ice cube sitting on a table. Imagine the shape of the puddle that ice cube will make as it melts.<br><\/p>\n\n\n\n<p>Now think of a puddle on the table and try to imagine how that puddle got there.<br><\/p>\n\n\n\n<p>When historians propose causes for certain historical events, they\u2019re looking at puddles and imagining ice cubes (or a spilled glass of water, or some other cause). The problem is that the sheer number of possible causes for a puddle\u2014or a historical event\u2014render any ascription of cause suspect.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-if-you-can-t-predict-how-do-you-deal-with-uncertainty\"><strong>If You Can\u2019t Predict, How Do You Deal with Uncertainty?<\/strong><\/h3>\n\n\n\n<p>Although Taleb is far more concerned with explaining why prediction is impossible than he is with proposing alternatives or solutions, he does offer some strategies for dealing with radical uncertainty in his black swan theory.<br><\/p>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"h-1-don-t-sweat-the-small-predictions\"><strong>1) Don\u2019t Sweat the Small Predictions<\/strong><\/h4>\n\n\n\n<p>When it comes to low-stakes, everyday predictions\u2014about the weather, say, or the outcome of a baseball game\u2014there\u2019s no harm in indulging our natural penchant for prediction: If we\u2019re wrong, the repercussions are minimal. It\u2019s when we make large-scale predictions and incur real risk on their basis that we get into trouble.<br><br><\/p>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"h-2-maximize-possibilities-for-positive-black-swans\"><strong>2) Maximize Possibilities for Positive Black Swans<br><\/strong><\/h4>\n\n\n\n<p>Although the most memorable Black Swans are typically the negatively disruptive ones, <strong>Black Swans can also be serendipitous<\/strong>. (Shortform note: Love at first sight is an example of a serendipitous Black Swan.)<br><br><\/p>\n\n\n\n<p>The black swan theory provides two strategies for opening ourselves up to positive Black Swans: (1) sociability and (2) proactiveness when presented with an opportunity.&nbsp; Sociability puts us in the company of others who may be in a position to help us\u2014we never know where a casual conversation might lead. And proactiveness\u2014for example, taking up a successful acquaintance on an invitation to have coffee\u2014ensures we\u2019ll never miss our lucky break.<br><br><\/p>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"h-3-adopt-the-barbell-strategy\"><strong>3) Adopt the \u201cBarbell Strategy\u201d<\/strong><\/h4>\n\n\n\n<p>The <a href=\"https:\/\/www.shortform.com\/blog\/barbell-strategy\/\">barbell strategy<\/a> is an important part of Taleb&#8217;s black swan theory. When Taleb was a trader, he pursued an idiosyncratic investment strategy to inoculate himself against a <a href=\"https:\/\/www.shortform.com\/blog\/black-swan-finance\/\">financial Black Swan<\/a>. He devoted 85%\u201390% of his portfolio to extremely safe instruments (Treasury bills, for example) and made extremely risky bets\u2014in venture-capital portfolios, for example\u2014with the remaining 10%\u201315%. (Another variation on the strategy is to have a highly speculative portfolio but to insure yourself against losses greater than 15%.) The high-risk portion of Taleb\u2019s portfolio was highly diversified: <strong>He wanted to place as many small bets as possible to increase the odds of a Black Swan paying off in his favor<\/strong>.<br><br><\/p>\n\n\n\n<p>The \u201cbarbell strategy\u201d is designed to minimize the pain of a negative Black Swan while, potentially, reaping a positive Black Swan\u2019s benefits. If the market collapses, a person pursuing this strategy isn\u2019t hurt beneath the \u201cfloor\u201d of the safe investments (say, 85%), but if the market explodes, he has a chance to capitalize by virtue of the speculative bets.<br><br><\/p>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"h-4-distinguish-between-positive-contingencies-and-negative-ones\"><strong>4) Distinguish Between Positive Contingencies and Negative Ones<em><br><\/em><\/strong><\/h4>\n\n\n\n<p>Different areas of society have different exposure to Black Swans, both positive and negative. For example, scientific research and moviemaking are \u201cpositive Black Swan areas\u201d\u2014catastrophes are rare, and there is always the possibility of smashing success. The stock market or catastrophe insurance, meanwhile, are \u201cnegative Black Swan areas\u201d\u2014upsides are relatively modest compared to the possibility of financial ruin. <br><br><\/p>\n\n\n\n<p>Suffice it to say, <strong>we should take more risks in a positive Black Swan area than in a negative Black Swan one<\/strong>.<br><br><\/p>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"h-5-prepare-don-t-predict\"><strong>5<\/strong><strong><em>) <\/em><\/strong><strong>Prepare, Don\u2019t Predict<\/strong><strong><em><br><br><\/em><\/strong><\/h4>\n\n\n\n<p>Because Black Swans are, by definition, unpredictable, <strong>we\u2019re better off <\/strong><strong><em>preparing <\/em><\/strong><strong>for the widest range of contingencies than <\/strong><strong><em>predicting <\/em><\/strong><strong>specific events<\/strong>.<br><br><\/p>\n\n\n\n<p>That\u2019s because, according to black swan theory, though Black Swans themselves can never be predicted, their <em>effects <\/em>can be. For example, no one can predict when an earthquake will strike, but one can know what its effects will be and prepare adequately to handle them.<br><br><\/p>\n\n\n\n<p>The same goes for an economic recession. No one can predict precisely when one will occur, but, using the \u201cbarbell strategy\u201d or some other means of mitigating risk, we can at least be prepared for one.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>What is a black swan? What is black swan theory? What does the term &#8220;black swan&#8221; mean? A black swan is an extremely unpredictable event that has a massive impact on human society. The Black Swan is named after a classic error of induction, the black swan fallacy. We&#8217;ll cover the meaning of &#8220;black swan,&#8221; what black swan theory is, and what &#8220;black swan&#8221; means in economics.<\/p>\n","protected":false},"author":4,"featured_media":4577,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[21,24],"tags":[60],"class_list":["post-4557","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-philosophy","category-society","tag-black-swan","","tg-column-two"],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v24.3 (Yoast SEO v24.3) - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Black Swan Theory: The Complete Guide to Critical Events - Shortform Books<\/title>\n<meta name=\"description\" content=\"What is black swan theory? Named after a classic logic error, a black swan is an extremely unpredictable event that has a massive impact on human society.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.shortform.com\/blog\/black-swan-theory\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Black Swan Theory: The Complete Guide to Critical Events\" \/>\n<meta property=\"og:description\" content=\"What is black swan theory? Named after a classic logic error, a black swan is an extremely unpredictable event that has a massive impact on human society.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/www.shortform.com\/blog\/black-swan-theory\/\" \/>\n<meta property=\"og:site_name\" content=\"Shortform Books\" \/>\n<meta property=\"article:published_time\" content=\"2019-11-20T10:17:05+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2023-04-13T18:01:02+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/www.shortform.com\/blog\/wp-content\/uploads\/2019\/11\/swan-black-swan-theory.jpg\" \/>\n\t<meta property=\"og:image:width\" content=\"776\" \/>\n\t<meta property=\"og:image:height\" content=\"515\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/jpeg\" \/>\n<meta name=\"author\" content=\"Amanda Penn\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"Amanda Penn\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"8 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"Article\",\"@id\":\"https:\/\/www.shortform.com\/blog\/black-swan-theory\/#article\",\"isPartOf\":{\"@id\":\"https:\/\/www.shortform.com\/blog\/black-swan-theory\/\"},\"author\":{\"name\":\"Amanda Penn\",\"@id\":\"https:\/\/www.shortform.com\/blog\/#\/schema\/person\/01b0e4c9ddb993e51d03808839d538b0\"},\"headline\":\"Black Swan Theory: The Complete Guide to Critical Events\",\"datePublished\":\"2019-11-20T10:17:05+00:00\",\"dateModified\":\"2023-04-13T18:01:02+00:00\",\"mainEntityOfPage\":{\"@id\":\"https:\/\/www.shortform.com\/blog\/black-swan-theory\/\"},\"wordCount\":1791,\"commentCount\":0,\"publisher\":{\"@id\":\"https:\/\/www.shortform.com\/blog\/#organization\"},\"image\":{\"@id\":\"https:\/\/www.shortform.com\/blog\/black-swan-theory\/#primaryimage\"},\"thumbnailUrl\":\"https:\/\/www.shortform.com\/blog\/wp-content\/uploads\/2019\/11\/swan-black-swan-theory.jpg\",\"keywords\":[\"The Black Swan\"],\"articleSection\":[\"Philosophy\",\"Society\"],\"inLanguage\":\"en-US\",\"potentialAction\":[{\"@type\":\"CommentAction\",\"name\":\"Comment\",\"target\":[\"https:\/\/www.shortform.com\/blog\/black-swan-theory\/#respond\"]}]},{\"@type\":\"WebPage\",\"@id\":\"https:\/\/www.shortform.com\/blog\/black-swan-theory\/\",\"url\":\"https:\/\/www.shortform.com\/blog\/black-swan-theory\/\",\"name\":\"Black Swan Theory: The Complete Guide to Critical Events - Shortform Books\",\"isPartOf\":{\"@id\":\"https:\/\/www.shortform.com\/blog\/#website\"},\"primaryImageOfPage\":{\"@id\":\"https:\/\/www.shortform.com\/blog\/black-swan-theory\/#primaryimage\"},\"image\":{\"@id\":\"https:\/\/www.shortform.com\/blog\/black-swan-theory\/#primaryimage\"},\"thumbnailUrl\":\"https:\/\/www.shortform.com\/blog\/wp-content\/uploads\/2019\/11\/swan-black-swan-theory.jpg\",\"datePublished\":\"2019-11-20T10:17:05+00:00\",\"dateModified\":\"2023-04-13T18:01:02+00:00\",\"description\":\"What is black swan theory? 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