Elegant, startling, and universal in its applications, The Black Swan is a concept that will change the way you look at the world. Black Swans underlie almost everything, from the rise of religions, to events in our own personal lives. A Black Swan is a highly improbable event with three principle characteristics: it is unpredictable; it carries a massive impact; and, after the fact, we concoct an explanation that makes it appear less random and more predictable than it was. The astonishing success of Google was a black swan; so was 9/11. And why do we always ignore the phenomenon of Black Swans until after they occur? As Nassim Nicholas Taleb reveals, we are hard-wired not to truly estimate risk, too vulnerable to the impulse to simplify, narrate, and categorize and not open enough to rewarding those who can imagine the ‘impossible’. In this revelatory book, Taleb explains everything we know about what we don’t know, and shows us how to face the world.

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Prologue

ON THE PLUMAGE OF BIRDS

Before the discovery of Australia, people in the Old World were convinced that all swans were white, an unassailable belief as it seemed completely confirmed by empirical evidence. The sighting of the first black swan might have been an interesting surprise for a few ornithologists (and others extremely concerned with the coloring of birds), but that is not where the significance of the story lies. It illustrates a severe limitation to our learning from observations or experience and the fragility of our knowledge. One single observation can invalidate a general statement derived from millennia of confirmatory sightings of millions of white swans. All you need is one single (and, I am told, quite ugly) black bird.*

*The spread of camera cell phones has afforded me a large collection of pictures of black swans sent by traveling readers. Last Christmas I also got a case of Black Swan Wine (not my favorite), a videotape (I don't watch videos), and two books. I prefer the pictures.

I push one step beyond this philosophical-logical question into an empirical reality, and one that has obsessed me since childhood. What we call here a Black Swan (and capitalize it) is an event with the following three attributes.

First, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility. Second, it carries an extreme impact. Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable.

I stop and summarize the triplet: rarity, extreme impact, and retrospective (though not prospective) predictability.** A small number of Black Swans explain almost everything in our world, from the success of ideas and religions, to the dynamics of historical events, to elements of our own personal lives. Ever since we left the Pleistocene, some ten millennia ago, the effect of these Black Swans has been increasing. It started accelerating during the industrial revolution, as the world started getting more complicated, while ordinary events, the ones we study and discuss and try to predict from reading the newspapers, have become increasingly inconsequential.

**The highly expected not happening is also a Black Swan. Note that, by symmetry, the occurrence of a highly improbable event is the equivalent of the nonoccurrence of a highly probable one.

Just imagine how little your understanding of the world on the eve of the events of 1914 would have helped you guess what was to happen next. (Don’t cheat by using the explanations drilled into your cranium by your dull high school teacher.) How about the rise of Hitler and the subsequent war? How about the precipitous demise of the Soviet bloc? How about the rise of Islamic fundamentalism? How about the spread of the Internet? How about the market crash of 1987 (and the more unexpected recovery)? Fads, epidemics, fashion, ideas, the emergence of art genres and schools. All follow these Black Swan dynamics. Literally, just about everything of significance around you might qualify.

This combination of low predictability and large impact makes the Black Swan a great puzzle; but that is not yet the core concern of this book. Add to this phenomenon the fact that we tend to act as if it does not exist! I don’t mean just you, your cousin Joey, and me, but almost all “social scientists” who, for over a century, have operated under the false belief that their tools could measure uncertainty. For the applications of the sciences of uncertainty to real-world problems has had ridiculous effects; I have been privileged to see it in finance and economics. Go ask your portfolio manager for his definition of “risk,” and odds are that he will supply you with a measure that excludes the possibility of the Black Swan — hence one that has no better predictive value for assessing the total risks than astrology (we will see how they dress up the intellectual fraud with mathematics). This problem is endemic in social matters.

The central idea of this book concerns our blindness with respect to randomness, particularly the large deviations: Why do we, scientists or nonscientists, hotshots or regular Joes, tend to see the pennies instead of the dollars? Why do we keep focusing on the minutiae, not the possible significant large events, in spite of the obvious evidence of their huge influence? And, if you follow my argument, why does reading the newspaper actually decrease your knowledge of the world?

It is easy to see that life is the cumulative effect of a handful of significant shocks. It is not so hard to identify the role of Black Swans, from your armchair (or bar stool). Go through the following exercise. Look into your own existence. Count the significant events, the technological changes, and the inventions that have taken place in our environment since you were born and compare them to what was expected before their advent. How many of them came on a schedule? Look into your own personal life, to your choice of profession, say, or meeting your mate, your exile from your country of origin, the betrayals you faced, your sudden enrichment or impoverishment. How often did these things occur according to plan?

What You Do Not Know

Black Swan logic makes what you don’t know far more relevant than what you do know. Consider that many Black Swans can be caused and exacerbated by their being unexpected.

Think of the terrorist attack of September 11, 2001: had the risk been reasonably conceivable on September 10, it would not have happened. If such a possibility were deemed worthy of attention, fighter planes would have circled the sky above the twin towers, airplanes would have had locked bulletproof doors, and the attack would not have taken place, period. Something else might have taken place. What? I don’t know.

Isn’t it strange to see an event happening precisely because it was not supposed to happen? What kind of defense do we have against that? Whatever you come to know (that New York is an easy terrorist target, for instance) may become inconsequential if your enemy knows that you know it. It may be odd that, in such a strategic game, what you know can be truly inconsequential.

This extends to all businesses. Think about the “secret recipe” to making a killing in the restaurant business. If it were known and obvious, then someone next door would have already come up with the idea and it would have become generic. The next killing in the restaurant industry needs to be an idea that is not easily conceived of by the current population of restaurateurs. It has to be at some distance from expectations. The more unexpected the success of such a venture, the smaller the number of competitors, and the more successful the entrepreneur who implements the idea. The same applies to the shoe and the book businesses — or any kind of entrepreneurship. The same applies to scientific theories — nobody has interest in listening to trivialities. The payoff of a human venture is, in general, inversely proportional to what it is expected to be.

Consider the Pacific tsunami of December 2004. Had it been expected, it would not have caused the damage it did — the areas affected would have been less populated, an early warning system would have been put in place. What you know cannot really hurt you.

Experts and “Empty Suits”

The inability to predict outliers implies the inability to predict the course of history, given the share of these events in the dynamics of events.

But we act as though we are able to predict historical events, or, even worse, as if we are able to change the course of history. We produce thirty-year projections of social security deficits and oil prices without realizing that we cannot even predict these for next summer — our cumulative prediction errors for political and economic events are so monstrous that every time I look at the empirical record I have to pinch myself to verify that I am not dreaming. What is surprising is not the magnitude of our forecast errors, but our absence of awareness of it. This is all the more worrisome when we engage in deadly conflicts: wars are fundamentally unpredictable (and we do not know it). Owing to this misunderstanding of the causal chains between policy and actions, we can easily trigger Black Swans thanks to aggressive ignorance — like a child playing with a chemistry kit.

Our inability to predict in environments subjected to the Black Swan, coupled with a general lack of the awareness of this state of affairs, means that certain professionals, while believing they are experts, are in fact not. Based on their empirical record, they do not know more about their subject matter than the general population, but they are much better at narrating — or, worse, at smoking you with complicated mathematical models. They are also more likely to wear a tie.

Black Swans being unpredictable, we need to adjust to their existence (rather than naïvely try to predict them). There are so many things we can do if we focus on antiknowledge, or what we do not know. Among many other benefits, you can set yourself up to collect serendipitous Black Swans (of the positive kind) by maximizing your exposure to them. Indeed, in some domains — such as scientific discovery and venture capital investments — there is a disproportionate payoff from the unknown, since you typically have little to lose and plenty to gain from a rare event. We will see that, contrary to social-science wisdom, almost no discovery, no technologies of note, came from design and planning — they were just Black Swans. The strategy for the discoverers and entrepreneurs is to rely less on top-down planning and focus on maximum tinkering and recognizing opportunities when they present themselves. So I disagree with the followers of Marx and those of Adam Smith: the reason free markets work is because they allow people to be lucky, thanks to aggressive trial and error, not by giving rewards or “incentives” for skill. The strategy is, then, to tinker as much as possible and try to collect as many Black Swan opportunities as you can.

Learning to Learn

Another related human impediment comes from excessive focus on what we do know: we tend to learn the precise, not the general.

What did people learn from the 9/11 episode? Did they learn that some events, owing to their dynamics, stand largely outside the realm of the predictable? No. Did they learn the built-in defect of conventional wisdom? No. What did they figure Out? They learned precise rules for avoiding Islamic prototerrorists and tall buildings. Many keep reminding me that it is important for us to be practical and take tangible steps rather than to “theorize” about knowledge. The story of the Maginot Line shows how we are conditioned to be specific. The French, after the Great War, built a wall along the previous German invasion route to prevent reinvasion — Hitler just (almost) effortlessly went around it. The French had been excellent students of history; they just learned with too much precision. They were too practical and exceedingly focused for their own safety.

We do not spontaneously learn that we don’t learn that we don’t learn. The problem lies in the structure of our minds: we don’t learn rules, just facts, and only facts. Metarules (such as the rule that we have a tendency to not learn rules) we don’t seem to be good at getting. We scorn the abstract; we scorn it with passion.

Why? It is necessary here, as it is my agenda in the rest of this book, both to stand conventional wisdom on its head and to show how inapplicable it is to our modern, complex, and increasingly recursive environment.***

***Recursive here means that the world in which we live has an increasing number of feedback loops, causing events to be the cause of more events (say, people buy a book because other people bought it), thus generating snowballs and arbitrary and unpredictable planet-wide winner-take-all effects. We live in an environment where information flows too rapidly, accelerating such epidemics. Likewise, events can happen because they are not supposed to happen. (Our intuitions are made for an environment with simpler causes and effects and slowly moving information.) This type of randomness did not prevail during the Pleistocene, as socioeconomic life was far simpler then.

But there is a deeper question: What are our minds made for? It looks as if we have the wrong user’s manual. Our minds do not seem made to think and introspect; if they were, things would be easier for us today, but then we would not be here today and I would not have been here to talk about it — my counterfactual, introspective, and hard-thinking ancestor would have been eaten by a lion while his nonthinking but faster-reacting cousin would have run for cover. Consider that thinking is time-consuming and generally a great waste of energy, that our predecessors spent more than a hundred million years as nonthinking mammals and that in the blip in our history during which we have used our brain we have used it on subjects too peripheral to matter. Evidence shows that we do much less thinking than we believe we do — except, of course, when we think about it.

Nassim Nicholas Taleb is the critically acclaimed author of Fooled by Randomness. Here he talks about his latest book, The Black Swan

The Black Swan is an intriguing title - can you give us an overview of what a black swan looks like?
The Black Swan is about these unexpected events that end up controlling our lives, the world, the economy, history, everything. Before they happen we consider them close to impossible; after they happen we think that they were predictable and partake of a larger scheme. They are rare, but their impact is monstrous. My main problem is: We don't know that these events play such a large role. Why are we blind to them?

What is your favourite example of a black swan?
Most successful stories in the arts and letters are Black Swans. Outside the arts, my favorite one is the emergence of the computer and the internet. Also, almost all drug discoveries are Black Swans. The existence of the universe is a Black Swan...

What first got you interested in the world of uncertainty and probability?
I have been thinking about the neglected role of luck and our overestimation of knowledge ever since I can remember. You know, children philosophize more than adults - and they are critical of adults. I hated school because I liked to daydream and the system tried to stop me from that. Later, I figured out that that the system trained you to become a sucker by making you ashamed of saying 'I don't know'. The world is too ambiguous - the Black Swan comes from the overestimation of our skills in mapping the world. But I was only able to express my idea after I started working in the City and in Wall Street. It seemed so obvious that people in the City didn't know what was going on, yet thought that they did. It was so blatant that they overestimated their explanations, the role of 'skills', yet didn't realize it. So I kept a tally of predictions and realized they can't predict - but somehow manage to convince themselves they can.

The Black Swan, that rare, high-impact event, was the main reason for their failure to predict and understand the world. It was both a psychological problem (we didn't know) and an empirical one; so I approached the problem from both ends.

What do you want people to take away from reading your book?
How not to be a fool for things that matter. You can take advantage of uncertainty if you know how to look it in the eye, and know the limits of what we understand. How to avoid taking seriously the 'faux experts' (those who wear suits and act in a pompous way). How listening to the media or studying economics, degrades your knowledge of the world.

How do you write? Do you have a special room in which you work and a set routine?
My principal activity is daydreaming, so I may write mostly in my head. I have no routine, no work ethics. For years I had an upper limit of 50 minutes a day of actual writing so I would keep enjoying it. If I am bored, I stop right away, or I try to change the subject. You can easily fool yourself, not the reader: if you don't enjoy what you are writing about, the reader will somehow figure it out. So I may go for a long time without writing anything except a check. Also, I need an aesthetic environment. I write in my 'literary library', the one that does not have technical books and technical papers - it is like a sacred space. I also like to write in cafes, away from business people. Writing is sacred, other activities are profane, and I don't want them to corrupt my writing.