Nassim Taleb’s now-classic book on market risk, called The Black Swan, is a well-crafted, empirically demonstrated, and passionately delivered argument that shit happens. Serious, inexplicable, completely random shit happens. Taleb is parts philosopher, statistician, trader, and provocateur, and has used his theory to skewer other economic models and to make millions of dollars (so I hear) as an investor.
According to Taleb, these major shit storms aren’t just historical anomalies; they actually define our history. The crazy thing is that most leaders, academics, investors and entrepreneurs pretend these events don’t happen. Our risk models are largely still informed by the traditional bell curve of probability. Meanwhile, just 10 days of extreme market activity account for half the market value in the past 50 years.
Of course he doesn’t call these extreme events shit storms. He calls them Black Swan events, and they have three attributes: (1) they are outliers in that they fall outside the realm of regular expectations, (2) They carry an extreme impact, and (3) in spite of being unexpected events, people concoct explanations for their occurrence after the fact. 9/11 was a Black Swan event. As were the swift rise of Hitler, the spread of the Internet and the market crash of 1987.
Black Swans can also be awesome.
Positive Black Swans happen as well. The rise of Facebook and Google are Black Swans, as is the freakish popularity of Fifty Shades Of Gray. In fact, any industry with winner-take-all economics is dubbed by Taleb “Extremistan,” and succeeding in these industries is like experiencing your own personal positive Black Swan. The top novels, apps, and actors make almost all the money, while hordes of competitors struggle to survive. Deciding to become an entrepreneur is about as economically reasonable as trying to make it as an actor or novelist.
Not a fast read.
This book isn’t written to be skimmed and it’s not dumbed down. It includes a lengthy technical chapter that requires intermediate statistics literacy to follow (but to be fair, Taleb urges the non-technical reader to skip that section). So be ready to devote some time and energy to it.
The takeaway: don’t be a sucker. Invest (a bit) in startups.
The takeaway is to avoid being a sucker. Don’t lose your shirt when negative black swans happen and don’t miss out when positive ones do. Don’t trust money managers. Don’t believe anyone who thinks they have a handle on market risk. Put most of your money in super-conservative vehicles (t-bills?), but set aside a fraction to invest in multiple high-risk ventures. This way you’re shielded from the bad (say, a meltdown at Indian Point) and exposed good. When it comes to your personal life, take advantage of every opportunity that comes your way. Take opportunities to talk in public and agree to meetings with interesting people. You never know.
While there’s much more in The Black Swan, these are the salient points that stand out to me as a serial entrepreneur. I recommend picking up this book as it could shape your thinking for many years to come.