What is a Black Swan?

The growing volcanic ash cloud spewed by the volcano under the Eyjafjallajokull glacier in Iceland has been brought about many knock-on effects beyond just atmospheric disturbance. The wider the ash cloud spreads, the longer the disruptions in air travel will continue. Already, thousands of people are stranded in airports around the globe because airplanes cannot take off or land in many areas in Europe. More than creating inconvenience to travel and holiday plans, the freak incident has also spawned economic repercussions such as delaying food deliveries and reducing jet fuel demand, further underscoring how interconnected we really are today.

Does it matter if it's black or white?

This also reminds of a book I read by Nassim Taleb entitled ‘The Black Swan’. In it, he terms Black Swans events as those that are totally unexpected, with widespread impact, and largely impossible to predict and hard to model. The examples he draws from history includes the outbreak of World War I, the rise of the Internet and the September 11 terrorist attacks. Why a black swan? Because from the past until the late 17th century, all observations of swans recorded that swans have white feathers, and was thus assumed that all swans must be white. It was only with the discovery of black swans in western Australia in 1697 that this was overturned, thus leading to the use of the ‘black swan’ metaphor to mean a perceived impossibility that may later be found to exist.

How you can use this blog entry:

Paper 1 (Globalization, Air Travel)

Paper 2 (AQ – Imagination)


~ by irwin on May 20, 2010.

2 Responses to “What is a Black Swan?”

  1. A comment from Fred T taken from the original blog:

    Irwin, I am reading Malcolm Gladwell’s book “What the Dog Saw” and there is a chapter on Nassim Taleb. What a coincidence! While a key takeaway must be that random events can have unforseen consequences in an increasingly interdependent world, the “Black Swans” idea also lends a perspectve on how we should perceive information and make decisions in an uncertain, random world.

    Gladwell had written a short article on Taleb, even before Taleb wrote about Black Swans. Taleb adopted an unconventional approach to investment. He was an advisor to an investment fund, Universa, which apparently made lots of money during the 2008 financial crisis because of the so-called “Black Swan protection protocols” – investment strategies that precisely profit from random events by, in a sense, hedging against such risks.

    An important takeaway from Taleb’s writings on Black Swans is about how we deal with uncertainty and risk, especially in an increasingly inter-related and complex world where cause-effect relationships are hard to model and outcomes from our actions are hard to predict. One of the first few lessons on Logic in philosophy class is about truths and falsehoods. While what is not true is necessarily false, what is not false is not necessarily true. Hence, it’s easier to show something to be false than to show it to be true. [Think about how to prove the statement “A loves B” and we can begin to appreciate the difficulties.]

    If we apply this to how we make decisions, woudn’t that mean that it’s easy to tell when we go wrong and therefore avoid mistakes? Probably not. The explanation for this lies in the quote from an earlier entry – we see what we want to look for. Whenever we make a decision – be it a military commander deciding on a course of action for his forces or a corporate executive deciding on a business plan – we typically look for facts that support our decisions. We seldom make a real effort to think about the facts or circumstances that can derail our plans completely. Hence, we become blinded to the risks or consider them highly improbable.

    It is no wonder that Nassim Taleb is a fan of the philsopher Karl Popper. Popper is often associated with the idea of the Falsification Principle. In order to avoid catastrophic failure as a result of being blinded to risks, some militaries have borrowed from Popper’s ideas and incorporated them into their planning methodology so that they will deliberately consider how their plans could be wrong, i.e. to “falsify” their conclusions. They do so by testing assumptions and identifying key indicators that could prove their plans wrong. Government agencies and big corporations all do this to some extent. In a way, scenario planning was broadly meant to address such problems even before the idea of “black swans” became popularised.

    While many of us will not have to deal with these grand theories and how they apply to major policies or major business strategies, we do have to grapple with these ideas in our own way. After all, we all need to worry about how to manage our savings – should we invest in stocks, by a second property, keep it in the bank etc.? We often look to financial advisors, newspaper reports, knowledgeable friends and so on to give us information about what the world is going to be like and therefore what we should do with our money. Thinking about how we perceive such information (e.g. whether we can be certain that something is true or not) and how we go about handling risk and uncertainty in an environment of imperfect information (what if I’m wrong?) will go a long way in helping us make better decisions, big or small.

  2. A comment from Fred T taken from the original blog:

    Not all is doom and gloom with the current air travel disruptions. The two chinese characters that represent crisis are ‘wei’ (danger) and ‘ji’ (opportunity). While the disruptions have led to losses and inconveniences for some, others have profitted from it.

    Australia had issued an advisory that it will be difficult to find hotel accommodation across Asia due to many travellers extending their stay. The hotels can’t be too upset… Also in the news today, Japanese fish markets and restaurants are looking to New Zealand for salmon as supplies from the usual sources in Norway are disrupted.

    As they say – every dark cloud has a silver lining. Just make sure it’s not lightning… or an ash cloud 🙂

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