Black swan theory

: "For Taleb's book on the subject, see" The Black Swan.The black swan theory refers to a large-impact, hard-to-predict, and rare event beyond the realm of normal expectations.

Background

The theory was described by Nassim Nicholas Taleb in his 2007 book "The Black Swan". Taleb regards many scientific discoveries as black swans—"undirected" and unpredicted. He gives the rise of the Internet, the personal computer, the first world war, as well as the September 11, 2001 attacks as examples of Black Swan events. [Nassim Nicholas Taleb, " [http://www.fooledbyrandomness.com] "]

The term "black swan" comes from the ancient Western conception that 'All swans are white'. In that context, a black swan was a metaphor for something that could not exist. The 17th Century discovery of black swans in Australia metamorphosed the term to connote that the perceived impossibility actually came to pass. Taleb notes that John Stuart Mill first used the black swan narrative to discuss falsification.

Non-philosophical epistemological approach

Taleb's black swan is different from the earlier (philosophical) versions of the problem as it concerns a phenomenon with specific empirical/statistical properties which he calls "the fourth quadrant". [ [http://www.edge.org/3rd_culture/taleb08/taleb08_index.html The Fourth Quadrant and The Limits of Statistics] ] Before Taleb, those who dealt with the notion of improbable, like Hume, Mill and Popper, focused on the problem of induction in logic, specifically that of drawing general conclusions from specific observations. Taleb's Black Swan has a central and unique attribute: the high impact. His claim is that "almost all consequential events in history come from the unexpected"—while humans convince themselves that these events are explainable in hindsight (bias).

One problem, labeled the Ludic fallacy by Taleb, is the belief that the unstructured randomness found in life resembles the structured randomness found in games. This stems from the assumption that the unexpected can be predicted by extrapolating from variations in statistics based on past observations, especially when these statistics are assumed to represent samples from a bell curve. These concerns are often highly relevant to financial markets, where major players use value at risk models (which imply normal distributions) but market movements have fat tails.

Taleb notes that other functions are often more descriptive, such as the fractal, power law, or scalable distributions; awareness of these might help to temper expectations. [Brendan Nyhan, Columbia Univ, " [http://www.stat.columbia.edu/~cook/movabletype/archives/2007/04/nassim_talebs_t.html Statistical Modeling, Causal Inference, and Social Science] " ] Beyond this, he emphasizes that many events are simply without precedent, undercutting the basis of this sort of reasoning altogether. Taleb also argues for the use of counterfactual reasoning when considering risk. [Nassim Nicholas Taleb, NY Times, " [http://www.nytimes.com/2007/04/22/books/chapters/0422-1st-tale.html?ex=1178769600&en=bdae1078f2b4a98c&ei=5070 The Black Swan: The Impact of the Highly Improbable] " (First Chapter)] [ [http://search.ft.com/ftArticle?queryText=Robert+Scholes+April+16+2008%2C+FT.com%2C+%22Mispriced+risk+tests+market+faith+in+a+prized+formula%22+&aje=true&id=080416000224&ct=0 ANALYSIS: Mispriced risk tests market faith in a prized formula] by Anuj Gangahar (New York), Financial Times. 16 April 2008]

ee also

*Taleb Distribution
*List of cognitive biases
*Quasi-empiricism in mathematics
*The Long Tail
*Randomness
*"Fooled by Randomness"
*Uncertainty

References

External links

* [http://www.edge.org/3rd_culture/taleb08/taleb08_index.html The Fourth Quadrant and The Limits of Statistics] -Taleb's idea on the limits of statistics
* [http://www.buzzle.com/articles/135661.html The Black Swan Theory of Chance] - A treatise regarding unpredictable aspects of life. Guardian Newspapers, August 2008.