Monday, December 20, 2010

Black Swan

All too often, an unpredicted event happens and it changes the landscape of business, politics, society, and in some cases the entire world. Even the first decade of 21th century saw the occurrence of Sep11, Indonesia Tsunami, and financial crisis.

Why it is the case? Why we can’t predict all these events?
One reason is based on the framework we make. We tend to make framework or theory to make it easy to understand the world. When you look through the history of philosophy, you see how the most of the philosophers simplified the way to understand the world.

Frameworking has its fundamental and potential flaw.
First, it is based on limited information. Take the Ptolemaic system for example. Now you have the information provided by satellite and you are sure that Ptolemaic system is wrong. However, if you live in 15th century, having no information provided by the man-made planet, you may be sure that Copernican system is absurd notion.
Second, the information you use for frameworking is simplified and may be missing some crucial facts. For instance, all history has been edited by the authors. Learning from the history may not work, since it may be showing one side of the fact which is actually full of complexity. You formulate the stock pricing model based on the historical data, but the data may be simplified and missing real driver of the price.

To be accurate, I don’t mean we should not use framework. Frameworking does work to the certain extent. We need some sort of heuristics to deal with complexity and uncertainty. The problem is to totally rely on the framework and have no doubt in using it. We human beings have the thought system to justify what we know, and we should be extraordinarily cautious in using the framework.

Nassim Nicholas Taleb, the author of Black Swan, emphasizes the importance of Black Swan, the unpredicted event which drives the world to evolve.

Black Swan is characterized by three factors. One is rarity. It cannot be predicted based on the events occurred in the past. Second is extreme impact. Like 9.11 or black Monday, when it shows up, it brings about significant impact on the society and even change the landscape. Third is retrospective predictability. Once you find out Black Swan, later you’ll be able to predict that the same event will happen again.

Taleb suggests that we take the Black Swan into consideration when you make decision. You need to think about the extreme case – both the bad and good ones. You should think big. You’d better to be overall correct, than to be accurately wrong. You need to experience it. Whenever you have the chances to do something cool, you have to try to grab for them.

I don’t think what Taleb mentioned in his book is entirely new. When he says framework, it seems to mean the static framework. However, some dynamic frameworking approach, SECI model of Ikujiro Nonaka for example, already assumes the happenstance of something unpredicted. SECI model depicts how unknown becomes to be known. It is the process where tacit knowledge transforms into explicit knowledge. Also he seems to understand finance theory, especially equilibrium theory too narrowly. To criticize “underevaluated theory” is to easy.

With all that said, his point is valuable. We’d better to be conscious of potential error that human beings make and try to avoid the disaster and to find out the coolest innovation.

1 comment:

Anonymous said...

Thanks for your post. This review made me interested in "Black Swan". Maybe I'll read it in the future.
I also thought it's important for us to update framework, give up the old one and move to a new one, and accept the change of the new framework. And I wonder what kind of framework Japan needs now. (Speaking too generally though...)
I'm looking forward to your next post. (Hope you'll post the review of "The world is flat")