Nicolas Taleb is one of my favourite authors. His ideas blow a fresh breeze into the often conservative finance ecosystem. It's a great book that you should read. In this article, I summarised some of the key insights for entrepreneurs and investors.
According to Nicolas Taleb, most predictions of the future (stock market, economy, politics...) are irrelevant because they cannot predict Black Swans - extreme events - which are the drivers of structural changes. Thus, they are not better at foreseeing what's going to happen as astrology. For Taleb, so-called experts making predictions (e.g. economists, academics, portfolio managers) are either frauds or self-deceiving.
Beyond Black Swans, predictions tend to particularly go wrong when
-> They are on a long timeframe - small deviations create exponential errors
-> There are a lot of variables (e.g. unemployment is influenced by dozens of factors including economic growth, raw materials prices, trade...)
Furthermore, past or current observations are unreliable predicators of future events. Before landing on Australia, humans thought that all swans were white. They derived this rule from hundreds of years of observation. Yet we were wrong as there are block swans in Australia. We cannot accurately predict the future on the basis of past events (see the problem of induction).
But what is a Black Swan? As defined by Nicolas Taleb, it is an outlier, an event :
1. Highly unlikely (rare)
2. With extreme impact
3. Unpredictable a priori
Eg: 9/11 terrorist attack, Covid 19...
Taleb thinks that we should focus much more on these extreme events. We cannot predict them, but we can adjust to their existence.
Key takeaway 1: don't waste time trying to predict the future, just assume you cannot. Build a resilient company and team, and adjust quickly to new circonstances. Also, include an error margin in your predictions. The idea is to be humble and cover as many cases as possible (e.g. cash flows of a company should include uncertainty).
"Understanding how to act under conditions of incomplete information is the highest and most urgent human pursuit."
Think about your personal life. How many times things went according to plan? Most of our successes stem from sheer randomness. According to Taleb, a similar logic applies to scientific discoveries and entrepreneurship.
"Almost no discovery, no technologies of note, came from design and planning - they were just Black Swans. The strategy for the discoverers and entrepreneurs is to rely less on top-down planning and focus on maximum tinkering and recognising opportunities when they present themselves."
Key takeaway 2: create as many opportunities for these unexpected events as possible. E.g. don't stay home, meet people. Don's stick to a single occupation, get involved in many side projects!
"You should set yourself up to collect serendipitous Black Swans (of the positive kind) by maximising your exposure to them".
We tend to seek and cherry-pick the pieces of information and evidence that sustain our beliefs and vision of the world. For instance, flat earth believers will only consult articles defending their idea, and not even read the ones written by contradictors. It's a natural human instinct, driven by ego, called confirmation bias. Science has identified long ago this fallacy and this is the cornerstone of scientific method: state a (bold) conjoncture and try to prove it wrong. This is the approach Peirce and later on Popper suggested to differentiate science from non-science.
"Successions of anecdotes selected to fit a story do not constitute evidence. Anyone looking for confirmation will find enough evidence to deceive himself - and no doubt his peers."
For that very reason, the philosopher Karl Popper promoted an "open" society, one that relies on scepticism as modus operandi, refusing and resisting definitive truths.
Does that mean that all things are relative? No. This is the delicate balance of this complex vision of the world, difficult to accept for our brains wired to label everything as black or white. It means that for each problem there is a dominant theory, chosen because of the number of experiments ran that failed to prove it wrong for now. But maybe a better theory will arise later. Think about gravity. Newton's theory was dominant until it couldn't explain the trajectory of the moon of Saturn. Yet, it was the best model of reality until Einstein's relativity came in.
Another phenomenon is belief perseverance. Our ideas are sticky. Once we elaborate a theory, we are not willing to change our minds, even facing strong evidence. We will cherry-pick anecdotal evidence that fits our initial belief (confirmation bias and belief perseverance here). The longer we believed in that idea, the harder it is to get rid of it, because of the cognitive dissonance it triggers.
Key takeaway 3: beware of your confirmation bias while making judgements. Consider fairly arguments that go in favour and against your initial opinion. Keep an open mind, try to prove yourself wrong.
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There is so much more to say about this book, but I decided to stick to three key ideas. Bonus quotes:
"I don't particularly care about the usual. If you want to get an idea of a friend's temperament, ethics, and personal elegance, you need to look at him under the test of severe circonstances, not under the regular rosy glow of daily life."
"We humans are the victims of an asymmetry in the perception of random events. We attribute our successes to our skills, and our failures to external events outside of our control, namely to randomness."
