“All swans are white" had long been used as the standard example of a scientific truth. So what was the chance of seeing a black one? Impossible to calculate, or at least they were until 1697, when explorers found Cygnus in Australia.

About the author

Taleb holds an MBA from the Wharton School at the University of Pennsylvania, and a Ph.D. in management science from the University of Paris (Dauphine). He is currently Distinguished Professor of Risk Engineering at NYU.

"My major hobby is teasing people who take themselves and the quality of their knowledge too seriously and those who don’t have the guts to sometimes say: 'I don’t know...."

Warning of the Global Banking CrisisIn 2006, in The Black Swan

“Globalization creates interlocking fragility, while reducing volatility and giving the appearance of stability. In other words it creates devastating Black Swans. We have never lived before under the threat of a global collapse. Financial Institutions have been merging into a smaller number of very large banks. Almost all banks are interrelated. So the financial ecology is swelling into gigantic, incestuous, bureaucratic banks – when one fails, they all fall. The increased concentration among banks seems to have the effect of making financial crisis less likely, but when they happen they are more global in scale and hit us very hard. We have moved from a diversified ecology of small banks, with varied lending policies, to a more homogeneous framework of firms that all resemble one another. True, we now have fewer failures, but when they occur ….I shiver at the thought.

The government-sponsored institution Fannie Mae, when I look at its risks, seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup. But not to worry: their large staff of scientists

deem these events unlikely.”

What Is A Black Swan?•A black swan is:

– A rare event– With high-impact– Hard to predict (pattern attributed post event)

•Examples include:– the collapse of the USSR– 9/11– Current financial crash– Penicillin– eBay, Paypal– Thanksgiving day for turkey– Rome: Between the end of the first century CE and the end of the 6th century,

Rome was devastated by fire 6 times; hit by nine major earthquakes and ten disastrous floods; ravaged by plague in the 2nd century,3 times more in the 3rd, and yet again in the sixth;

Why Are They Important•A small number of events explain most of the world’s developments

• all consequential events in history come from the unexpected—while humans convince themselves that these events are explainable in hindsight (bias).

•Infinite white swans prove nothing, but one black swan negates entire theories

•Unstructured randomness, not planned approaches, have led to all significant discoveries

•Negative black swan’s have cataclysmic & dire consequences

•Positive black swan’s drive exponential improvements in life

Black Swan statistics are governed by Power Laws: whereas extreme events have essentially zero probability under Bell curve distributions, they are the essence of the Power Law distribution

Example: at random, take two US people with a joint income of $1M/yr – what is the likely breakdown of theirincomes?• Bell curve: $0.5M each• Power law: $50k and $950k

While we plan and manage risk around Bell curve statistics, much of real world operates on a power law basis– In a Power Law world, what you don’t know is far more relevant than what you do know• It’s not how often you’re right, it’s your cumulative error that counts

Statistics Behind

The Data

The Projection

The Real Function

The Data

The Projection

The Data

The Projection

The Data

• History are not facts.• Continued theme of inability to

predict, inability to comprehend uncertainty

• Future blindness – Humans are not natural skeptics

– Disbelief requires more energy

• Do not learn from the past• Cannot understand a future mixed

with chance• Black Swan asymmetry allows

confidence in what is wrong• “Our problem is not just that we

don’t know the future, we don’t know much of the past either…”

Humans can’t predict

The Real Function

What Does This Mean for Entrepreneurs?

•Payoff is inversely proportional to predictability– Everyone sees it, dozens of competitors arise

•At the time, everyone thinks the idea is crazy or dumb– Can lead to years in the wilderness– Visibility is uncertain as is success

•One must expose oneself to as many black swans as possible– This means iterating often and killing ideas quickly

•It also means creating a culture that embraces failure– It is a necessary part of success if you don’t labor on it

•It also means thinking revolution not evolution

Implications

•Being agile & open-minded is much more valuable than being smart•Realize that you will have no idea where success will come from

– Iterate & make your own luck, don’t stop moving•Pull analogs & approaches from other disciplines•Be humble, be open

• Phenomenon: low volatility = high risk• Action in the face of the Black Swan

– Be fooled in small matters not large– Benefit from unpredictability

• Embrace trial and error• Manage exposure to Black Swans• Be prepared and seize opportunity

• Central theme: Asymmetric outcomes– Uncertainty: prepare for possible consequences

(knowable) vs. the probability of occurrence (unknowable)

Go to parties!

• Distinguish between positive and negative contingencies• Act against errors in prediction and risk perception

– Lopsided barbell: increase exposure to positive Black Swans, decrease exposure to negative Black Swans

– Financial investments: 85-90% in T-bills (safest), 10-15% in as many as possible options/private equity (riskiest)

Manage your Black Swan exposure

Positive Black Swan Industries

Negative Black Swan Industries

• Scientific Research• Biotech• Movies • Publishing• Venture Capital

• Military• Catastrophe insurance• Homeland security• Banking, lending

• Don’t look for the precise and the local– Pasteur “Chance favors the

prepared”• Seize opportunity

– Collect non-lottery tickets (open-ended payoffs)

– Gain exposure to the envelope of serendipity: go to parties

• Beware of forecasters– Public and private sector equally

bad at forecasting - “paid forecasters are institutionalized fraud”

Be prepared and seize opportunity

You Ain’t Seen Nothing Yet…

Past 100 years: US highway system, microwave oven, antibiotics, DNA, airflight/jets, space program, global electric & phone systems, universal access to education, integrated circuit, articial heart, fusion/atomic bomb, polio vaccine, electron microscopes, cell phones, radio, television, air conditioning, lasers, imaging, fiber optics, nylon, radar, PC, eBay, online payments, etc…

“The next 20 years of change will be equivalent to the past 100 years of change.” -- Ray Kurzweil Accelerating Returns

Destructive Capitalism Has Always Driven Innovation

Progress is accelerating

• Increasingly powerful inexpensive computing power will yield $1000 computers withthe processing equivalent of the human mind by ~2030• Key issue is software development and the potential for strong AI– If successful, then we’ll see a singularity– Once one machine is our equal, we will be vastly surpassed the next day– Kurzweil has defined the singularity as the point when non-biological intelligence is a billiontimes more capable than all human intelligence today – and puts the date at 2045