Can black swans be positive? Book#48

Good decision taking in a world of uncertainty must aknowlwedge the possibility of extreme but rare events. The famous ex-trader Nassim Taleb is not criticising risk taking but uninformed risk taking and how accepting our limitations should change our decision making.

The Black Swan: The Impact of the Highly Improbable had been on my reading list for a while. I am happy I eventually got to it last year in 2015.

The long list of behavioural biases is once more apparent here, like in several other books on the topic. Knowing about them helps us take better decisions. Here are some examples:

1. Cognitive ease bias: i.e. Know when to switch your brain off the autopilot mode. Some things deserve second thoughts and rational weighting of arguments.
2. Survivorship bias. This one explains the beginners’ luck. Why? Because those who begin something and fail don’t actually brag about it. You never hear about them. Hence our lives are inundated with biased samples of success stories. I think it is especially true in the tech industry for instance. I find it useful to remind myself that 99.9% of tech start ups fail within 3 years. So don’t be lured by success stories, they are only the tip of the iceberg.
3. Tunnel vision bias. I liked the chapter with the small story about fat Tony, the street smart wealthy business man and Dr John, the phd in maths with average income. They run an experiment. Flip a coin 50 times and it turns out on its head 45 times. What does the Phd says? “It is a rare but probable event”. What does fat Tony says? “The coin is loaded”. And indeed fat Tony may be closest to the truth. Real life is not theory. Challenge what you have been told. Think outside the box.
4. Overconfidence bias. Worry about what is not obvious. Be sceptical about what is taken as solid. Don’t assume anything. Wonder what you are missing and that other people seem to ignore.

My personal main takeaway in addition to the above is about the importance of:

1. Positive assymetry. Our decisions in life must lead us to get exposure to positive black swans i.e.: situations where rewards are far superiror to risks. Heads I win, tail I don’t loose much. Just like in the The Dhando investor book by Mohnish Pabrai. It is not only true for investing but for everything. If you follow that path with discipline, over time you can only win.
2. Trial and error. The benefits of trying and failing can be priceless. America understands that. This has been one of the biggest factors behind its success. Europe has a lot of room for improvement on that front. Value Failure. The trick is to keep failures small so that you are able to learn the lessons and still keep trying.

My purpose in life is independence, fulfilment and a better understanding of how the world works. Like Charlie Munger, I believe in the discipline of mastering the best that other people have ever figured out. And like Sir Isaac Newton, I believe in our ability to see further than any others before us by acknowledging that we are standing on the shoulders of giants. With this blog I hope to keep track of my learning about investing, business, decision making, entrepreneurship and self development while inspiring others to do the same. For the moment the format of this blog will be one post for each book that has influenced me, but I expect it to evolve over time. Join my Journey. John.