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Sunday, September 19, 2010

The Black Swan: The Impact of the Highly Improbable

Taleb's second classic again displays the intelligence, insight and wit that characterized his first book Fooled by Randomness.

Taleb is known for his philosophy of playing the stock market, covering his positions against unusual events (Black Swan events) like market crashes. Taleb became financially independent after the stock market crash of 1987 and has been pursueing The Black Swan ever since, in trading as well as in intellectual discourse.

The foundation of his trading and thought system is the observation that statistical economics is basically a flawed science because of its overreliance on Gaussian equations. Tools like standard deviations, sigma events, etcetera, are essentially useless because of the impossibility of statistical methods to capture real world data in models.

One of Taleb's observations is that half of all losses on the stock markets (Standard & Poors Index) came about on days that the point drop was larger than was held statistically possible according to the classic Gaussian approach.

As a consequence, Taleb is an avid opponent of Modern Portfolio Theory for which several economists received Nobel Prizes. Taleb himself is highly controversial among economists.

The Black Swan is a joy to read. Intelligent, sharp, witty and somewhat more accessible than Fooled by Randomness.

At the start of The Black Swan, Taleb also reveals the source of his Black Swan logic, which is the unusual circumstances in Lebanon during the long civil war in that country, a period in which he grew up.

This first chapter in his second bestseller book may actually reveal the vulnerability of his thought system.

Nevertheless, for finance professionals this book is an absolute must read.

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