NO. This post is not about the Oscar Winning movie. Infact this post has nothing to do with show-business. Rather, this blog is about philosophy and economic thought.
For millenia, from swans had always been observed in white. these countless sightings convinced the thinkers in the traditional world that swans can be found only in white. There was not even a seed of doubt that swans could be of any other color. Come year 1790. Swans in black color were found on the coast of Australia. It was a shock to the traditional world, as the preceding circumstances gave no hint that swans could be black. This incident has far reaching consequences, if one uses it as a metaphor to understand present day events.
Another example. Suppose, hypothetically, you have a dog in your house. Say an Alsatian. You feed him everyday 2 pm without fail. You have been following this routine for the past 6 weeks. During these last 6 weeks, the Alsatian starts taking the daily food for granted. the longer you continue this routine, the stronger his conviction grows in his belief.
One day, due to some urgent work, suppose you have to leave house at 1 pm and fail to provide food for the Alsatian at the normal eating time of 2 pm. Alsatian's life goes for a toss. A belief reinforced by over six weeks of empirical evidence is proven false. It does not know what and why this happened to him.
Infact, a theory cannot be proved right sufficiently even with thousands of emperical evidences. However, it takes just one counter-evidence to prove it wrong. In short, '99% true is false'.
Another example. Suppose, hypothetically, today is September 9, 2001. There has never been an attack over US skies. Infact, imagining such a dire consequence would have been considered folly. There is no preceding evidence that an air-strike can occur in Manhattan, and there is no preceding evidence that a US plane can be hijacked. There are no indicators to predict a calamity like 9/11 might happen, let alone as early as day after tomorrow. Still, it happened.
In his book, "The Black Swan", Nassim Nicholas Taleb argues that we humans cannot understand most of the stuff which is happening around us. Our indicators may predict the periods of lull, but are rendered useless during dramatic events he terms as 'Black Swans'. These dramatic events define our lives, and these cannot be predicted. We should stop trying to "Normalize" everthing and try to fit in new emperical data with existing laws and norms.
Taleb believes that its very easy to comment on hindsight, but tougher to predict the future. This is because humans by instinct find it easy to fit in data with existing patterns and satisfies our expectations, rather than think out of the box and accept signs that predict the unlikely to happen. Journal records maintained just before the World War I, give no hint whatsoever that a war was impeding. Even contemporary political commentators predicted a period of peace. Sadly, their opinion was proved false. However, present day historians find it very easy to prove that the war was apparent. This very observation that its easy to comment on past happenings, but near impossible to predict 'black swans' which may occur randomly, proves Taleb's theory.
The author in his book also discusses where the application of black swan theory. He claims, the world can be divided into 'Mediocristan' and 'Extremistan'. 'Black swans' are significantly more likely in occur in extremistan than mediocristan. Now how to we differentiate them. lets see an example. Suppose in a hypothetic queue of 100 people, we are taking the mean of height and their wealth. If we introduce the tallest man on earth, there would not be an observable change in mean height. However, if we introduce Bill Gates to the queue, we will see an significant change in mean income. It is conditions where individuals do not impact the mean, that they are termed as Mediocristan. Where individual observations can change the whole circumstances, those areas are termed as Extremistan.
Wall Street, Books, Music etc, all these come under the umbrella 'Extremistan' and are subject to "Black Swans". Many of the books which become popular, music which becomes phenomenon are subject to randomness, luck and coincidence rather than merit. Wall Street simply cannot be predicted and its better to take advantage of the inherent randomness.
The author shouts a rallying cry, asking people to ignore the 'experts' and stop trying to predict future(at which we suck). Just like science accepted Heisenburg principle some 80 years ago, we need to accept uncertainty as an inherent part of our life and take advantage of it.
Question is how to take advantage of this randomness. Well, during the recent recession, Wall Street collapsed and thousands of millions of dollars were wiped out in months. It was in this circumstance, Nassim Nicholas Taleb made a fortune. Yes, u read right, a fortune. He followed his principle of 'black swan', believing that wall street had to crash, a crash no one could predict. Betting against the market again and again over a long duration, initially he lost money, but when the crash happened, he raked in a fortune, that too a massive one. If one follows the principles of 'black swan' and take advantage of randomness, one can not only be rich, but understand human life in a much deeper manner. In a nutshell, we should give more credit to luck.
