Nassim Taleb explains what a Black Swan is in February 2008 at a talk in San Francisco. This is particularly interesting because in just a few short months, his prediction would come true. An event similar to the ones he describes occurred and we had one of the most severe financial crashes since the Great Depression. Take a look at the way he talks about black swans and try to understand the methodologies he applies to the concept of statistical “outliers.”
Video excerpt below:
What is a Black Swan?
Before the discovery of Australia, we had no reason to believe swans could be any other color but white. Affectionately, there was an expression in medieval England, “you’d sooner see a black swan than…” for example. It was like saying when pigs fly or when… when George Bush does something intelligent or something.
So there was an expression until we saw Australia and effectively, with one sighting of a single bird, destroyed millennia of confirmation. So it was posed as a logical problem: make sure there’s no reason you cannot rule out black swans because you haven’t seen any. So my problem is not a logical question. My black swan is an event, not a bird.
It’s an event that has three properties.
1. It is hard to predict
It is hard to predict based on information before its occurrence (based on historical information). You have here a sample of black swans. The most interesting one is the tie. If someone was going to forecast the future, they’d have to forecast that human beings two thousand years away would constrict their blood supply with this device, for example. So that’s very difficult to predict. The computer was a black swan. It changed the world and nobody thought the computer would do anything. You know, it was initially used for common storage. I mean Watson from IBM did not that this tool could have any use.
The rise of religions, black swans, totally unpredictable. Harry Potter is a black swan. A lot of cultural phenomenon are black swans.
To me the most significant black swan, and the one I’m going to focus on for the next few minutes is the First War. The first war we had after Napoleon, we thought for about 100 years that the world had become civilized and that, you know, people became conscious of the need for peace. And you had this devastating war, the biggest war, something that destroyed a great deal.
Of course it came in two volumes, you had volume one and then you had a sequel. So here we have black swans. Events of low predictability and high consequence.
But the most vicious part is the following one: that before the fact they’re extremely predictable but after the fact, we saw them coming. So we have retrospective distortion – these events are prospectively unpredictable, retrospectively predictable.
We even have disciplines to give us the illusion of understanding the world. We have disciplines that make us misunderstand the world by giving us this illusion of predictability. History, for example, economics, other such things.