Taleb is the author of the international bestseller Fooled By Randomness and the blockbuster The Black Swan: The Impact of the Highly Improbable. The books largely overlap, but the second (the focus of the present article) is less liable to misunderstanding, probably because of confusion among readers of the first.
The black swan is a metaphor for the limits of our knowledge and, perhaps more important, our unfounded confidence in our knowledge. The metaphor draws on the familiar notion that before discovering counterexamples in Australia, people in the Old World would have been certain that all swans were white. To be more precise, Taleb lists three attributes of the black swan event his book addresses:
First, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility. Second, it carries an extreme impact. Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable.
Both of Taleb’s books are filled with “fun facts,” just as Malcolm Gladwell fills his own (bestselling) work. Yet the difference is that Gladwell—in such romps as The Tipping Point and Outliers—never has much of a coherent theory for which his amazing anecdotes are relevant.
Taleb, on the contrary, tells us his thesis up front, then draws on his vast knowledge to illustrate his points. One of his central claims is that people place too much confidence in their estimates. Taleb stresses that the issue is not how smart or how dumb people are. “We certainly know a lot, but we have a built-in tendency to think that we know a little bit more than we actually do, enough of that little bit to occasionally get into serious trouble.”
Taleb strings together sentences of surprising profundity while packing his prose with interesting statistics and stories. When reading The Black Swan, I had to stop noting every “interesting” paragraph in the margins, lest I fill them up.
The book’s prologue alone is an interesting essay, containing such standalone gems as the following:
What is surprising is not the magnitude of our forecast errors, but our absence of awareness of it”; “We do not spontaneously learn that we don’t learn that we don’t learn. . . . Metarules (such as the rule that we have a tendency to not learn rules) we don’t seem to be good at getting”; “Who gets rewarded, the central banker who avoids a recession or the one who comes to ‘correct’ his predecessors’ faults and happens to be there during some economic recovery?
Taleb openly despises those in “suits”—very often mainstream economists or students of finance—who make predictions without bothering to study the record of their previous forecasts. Taleb declares, “Anyone who causes harm by forecasting should be treated as either a fool or a liar. Some forecasters cause more damage to society than criminals. Please, don’t drive a school bus blindfolded.”
Of perhaps most interest to the Austrian reader, Taleb champions Friedrich Hayek and mocks Paul Samuelson (who died in December). In a section titled, “They Still Ignore Hayek,” Taleb lauds the Austrian focus on the pretense of knowledge. Yet of Samuelson, the epitome of the neoclassical mainstream, Taleb issues harsh judgment indeed:
In orthodox economics, rationality became a straitjacket. Platonified economists ignored the fact that people might prefer to do something other than maximize their economic interests. This led to mathematical techniques such as “maximization,” or “optimization,” on which Paul Samuelson built much of his work. . . . I would not be the first to say that this optimization set back social science by reducing it from the intellectual and reflective discipline that it was becoming to an attempt at an “exact science.” By “exact science,” I mean a second-rate engineering problem for those who want to pretend that they are in the physics department—so-called physics envy. In other words, an intellectual fraud.
Coming from a philosopher (or an academic Austrian economist, for that matter), such criticism would not mean much to the so-called experts in various fields. Yet Taleb’s criticisms come with a harsh sting, for he is a respected contributor to the field of quantitative finance; Taleb (and a coauthor), for example, offered a more intuitive derivation of the Black-Scholes formula for option pricing.