Professor Tom Hanson Case

Professor Tom Hanson

Financial management Ⅰ

April 21, 2013

Case study 8

In prologue, Taleb tells us three properties of Black Swans: rarity, extreme impact and retrospective , and Platonicity. Also he says that this is a book about uncertainty; to this author, the rare event equals uncertainty. The main idea of Black Swans is reminding us importance of Black Swans, why we always ignore them and how we can get benefit from Black Swam.

There are mainly three parts: 1) how we perceive historical and current events and what distortions are present in such perception; 2) is about our errors in dealing with the future and unadvertised limitations of some "sciences"—and what to do about these limitations; 3) extreme events, explains how the normal distribution ( that great intellectual fraud is generated, and reviews the ides in the natural and social sciences loosely lumped under the label "complexity".

Part One, "Umberto Eco's Antilibrary", Taleb gives us many examples, such as the ebb and flow of his motherland Levant, the largest market drop in modern history, and the boom for Yevgenia's book, to present Black Swans. Then, he distinguishes two important definitions of randomness through almost whole book: Mediocristan and Etremistan. After that, in order to find the answer to how we tend to generalize from what we see, Taleb presents the four aspect of the same Black Swan problem: The error of confirmation, the narrative fallacy, how emotions get in the way of our logic thinking and the problem of silent evidence. Finally, it discusses the lethal fallacy of building knowledge from the world of games.

Part Two, "We Just Can't Predict", Taleb proves that we are not good at predicting by employing the example that Australians overspent for the Sydney Opera. Why? On the one hand, he points out, we are, ourselves, both tunnel and epistemic arrogance. To explain this, he describes difference between valuable and invaluable predictions and tells us three fallacies: variability matters, failing to take into account forecast degradation as the projected period lengthens and misunderstanding of the random character of the variables being forecast. On the other hand, structural limitations arising from complicated activity itself make predictions impossible. Moreover, he introduces epistemocracy and shows that we do not know the future, we do not know much of the past either. Admittedly, Taleb "totally" destroys prediction in our mind, but, eventually, he gives us a little hope that knowing that we cannot predict and be prepared, because we can get benefit from positive accident. Meanwhile, he generalize the "barbell" strategy and, more aggressively, taking advantage of the problem of prediction and epistemic arrogance.

Part