Black Swan events and the myth of predictability: A chat with Sid and YZ

In a recent YouTube discussion between Sid and YZ, the duo delved deep into the complexities and intricacies of decision-making in data-driven environments.

Sid’s recent MBA insights:

Fresh from completing his MBA at USC, Sid highlighted some prevalent misconceptions about data-driven decision-making.

He remarks that the over-reliance on historical data to predict the future often leads to costly mistakes, especially in the realm of finance.

The Thanksgiving turkey paradox:

Sid introduced a compelling concept he discovered in Nassim Taleb’s “The Black Swan”—the Thanksgiving turkeyParadox.

In short, a turkey, raised for Thanksgiving, believes humans care for it, seeing as its life is comfortable and it’s well-fed. This perception strengthens daily until, suddenly and unexpectedly, it is slaughtered for the holiday feast.

This story illustrates the dangers of making assumptions based on limited historical data.

Real-life Black Swan events:

Black Swan events, as Sid explains, are unpredictable and extreme events that can cause significant impact.

Examples include terrorist attacks, the financial crisis of 2007, or even the rise of disruptive technologies like the internet in the late ’90s. These events often catch people and businesses off guard, especially if decisions are made based solely on historical data.

The mediocristan vs. extremistan:

Sid also introduced two contrasting realms of problems as discussed in “The Black Swan.” The Mediocristan World is where extreme outliers don’t significantly impact the mean, like heights or weights. On the other hand, Extremistan represents problems where outliers, like the wealth of billionaires, can drastically skew results.

Investing and the power of extreme days:

Sid presented a revealing study by the Bank of America, which analyzed the returns of the S&P 500 from 1930 to 2020. The study showcased the outsized impact of a few extreme days in the stock market on overall returns.

Missing the ten best days each decade could plummet returns from 17,000% to a mere 28%.

The takeaway: Diversification and accepting unpredictability

Sid’s and YZ’s discussion underscored the importance of diversification in investments, decision-making, and life in general.

Rather than putting all efforts into predicting that elusive 1% event, it might be wiser to spread out one’s bets. This way, one can ride the wave of unpredictability and possibly benefit from those rare, high-impact tail events.

This conversation between Sid and YZ is a gentle reminder of the inherent uncertainties in life. Instead of getting caught up in the chase to predict the unpredictable, perhaps it’s more fruitful to diversify, be adaptive, and learn from the ever-evolving tapestry of experiences.