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Blackswan
 

Blackswan

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    Blackswan Blackswan Presentation Transcript

    • “ 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 Crisis In 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 their incomes? • 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
      • Military
      • Catastrophe insurance
      • Homeland security
      • Banking, lending
      • Scientific Research
      • Biotech
      • Movies
      • Publishing
      • Venture Capital
      Negative Black Swan Industries Positive Black Swan Industries
      • 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 with the 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 billion times more capable than all human intelligence today – and puts the date at 2045