How to Profit from the Implausible
The Black Swan
All swans are white.” For centuries, this statement was watertight. Every snowy specimen corroborated this. A swan in a different color? Unthinkable. That was until the year 1697, when Willem de Vlamingh saw a black swan for the first time during an expedition to Australia. Since then, black swans have become symbols of the improbable.
You invest money in the stock market. Year in, year out, the Dow Jones rises and falls a little. Gradually, you grow accustomed to this gentle up and down. Then, suddenly, a day like October 19, 1987, comes around and the stock market tumbles 22 percent. With no warning. This event is a Black Swan, as described by Nassim Taleb in his book with the same title.
A Black Swan is an unthinkable event that massively affects your life, your career, your company, your country. There are positive and negative Black Swans. The meteorite that flattens you, Sutter’s discovery of gold in California, the collapse of the Soviet Union, the invention of the transistor, the Internet browser, the overthrow of Egyptian dictator Mubarak, or another encounter that upturns your life completely—all are Black Swans.
Think what you like of former U.S. secretary of defense Donald Rumsfeld, but at a press conference in 2002, he expressed a philosophical thought with exceptional clarity when he offered this observation: There are things we know (“known facts”), there are things we do not know (“known unknowns”), and there are things we do not know that we do not know (“unknown unknowns”).
How big is the universe? Does Iran have nuclear weapons? Does the Internet make us smarter or dumber? These are “known unknowns.” With enough effort, we can hope to answer these one day. Unlike the “unknown unknowns.” No one foresaw Facebook mania ten years ago. It is a Black Swan.
Why are Black Swans important? Because, as absurd as it may sound, they are cropping up more and more frequently and they tend to become more consequential. Though we can continue to plan for the future, Black Swans often destroy our best-laid plans. Feedback loops and nonlinear influences interact and cause unexpected results. The reason: Our brains are designed to help us hunt and gather. Back in the Stone Age, we hardly ever encountered anything truly extraordinary. The deer we chased was sometimes a bit faster or slower, sometimes a little bit fatter or thinner. Everything revolved around a stable mean.
Today is different. With one breakthrough, you can increase your income by a factor of ten thousand. Just ask Larry Page, Usain Bolt, George Soros, J. K. Rowling, or Bono. Such fortunes did not exist previously; peaks of this size were unknown. Only in the most recent of human history has this been possible—hence our problem with extreme scenarios. Since probabilities cannot fall below zero, and our thought processes are prone to error, you should assume that everything has an above-zero probability.
So, what can be done? Put yourself in situations where you can catch a ride on a positive Black Swan (as unlikely as that is). Become an artist, inventor, or entrepreneur with a scalable product. If you sell your time (e.g., as an employee, dentist, or journalist), you are waiting in vain for such a break. But even if you feel compelled to continue as such, avoid surroundings where negative Black Swans thrive. This means: Stay out of debt, invest your savings as conservatively as possible, and get used to a modest standard of living—no matter whether your big breakthrough comes or not.