Book Review: The Black Swan – The Impact of the Highly Improbable by Nassim Nicholas Taleb

This masterpiece by Nassim Taleb has made me introspect my decision-making process and it covers several critical behavioral aspects that bring biases in decisions.

Every decision – howsoever big/ small, related to investing or made in the normal course of life – involves a lot of uncertainties. Some are regular ones (or known) which we face quite often, and hence they become an integral part of our decisions. On the other hand, there are some uncertainties that are unknown. It is the latter that can significantly impact the outcomes. Nassim calls such unknown events “Black Swan”.

A Black Swan event has three attributes – it is an outlier, with extreme impact, and people have an explanation for the event after it has occurred (hindsight bias). These can be positive as well as negative. Nassim has classified events such as the rise of the personal computer/ internet revolution and the world wars as Black Swan events. In the Indian context, I can think of two such events – the recent demonetization and 1991 economic liberalization.

Throughout the book, Nassim has challenged narrow-minded thinking. Things in real life seldom follow a normal distribution, and linear relationships are rare. Nassim suggests that it makes more sense to focus on consequences (which one can estimate) rather than probability (which one doesn’t know) to more effectively deal with uncertainties.

There are several thought-provoking analogies in the book that I would like to emulate in my research. In the routine research process, many times, we tend to consider only the “normal” risk events, leading to underestimation of risks. While it is impossible to predict such extreme events, I would try to condition my mind to think outside the box and broaden the range of potential outcomes before arriving at any investment decision.

– Repost from UTI Mutual Fund