The ​Black Swan 8 csillagozás

Barbell Strategy. l am trying here to generalize to real life the notion of the „Barbell” strategy I used as a trader, which is as follows. If you know that you are vulnerable to prediction errors, and if you accept that most „risk measures” are flawed, because of the Black Swan, then your strategy is to be as hyperconservative and hyperaggressive as you can be instead of being mildly aggressive or conservative. Instead of putting your money in "medium risk' investments (how do you know it is medium risk? by listening to tenure-seeking „experts”?), you need to put a portion, say 85 to 90 percent, in extremely safe instruments, like Treasury bills as safe a class of instruments as you can manage to find on this planet. The remaining 10 to 15 percent you put in extremely speculative bets, as leveraged as possible (like Options), preferably venture capital—style port folios. That way you do not depend on errors of risk management; no Black Swan can hurt you at all, beyond your „floor,” the nest egg that you have in maximally safe investments.

I am sometimes taken aback by how people can have a miserable day or get angry because they feel cheated by a bad meal, cold coffee, a social rebuff, or a rude reception. […] We are quick to forget that just being alive is an extraordinary piece of good luck, a remote event, a chance occurrence of monstrous proportions.

We cannot truly plan, because we do not understand the future but this is not necessarily bad news. We could plan while bearing in mind such limitations. It just takes guts.

The writer Umberto Eco belongs to that small class of scholars who are encyclopedic, insightful, and nondull. He is the owner of a large personal library (containing thirty thousand books), and separates visitors into two categories: those who react with „Wow! Signore professore dottore Eco, what a library you have! How many of these books have you read?” and the others – a very small minority – who get the point that a private library is not an ego-boosting appendage but a research tool. Read books are far less valuable than unread ones. The library should contain as much of what you do not know as your financial means, mortgage rates, and the currently tight real-estate market allow you to put there.

Part One - Umberto Eco's Antilibrary, or How We Seek Validation

To view the potency of narrative, consider the following statement: „The king died and the queen died.” Compare it to the „The king died, and then the queen died of grief.” This exercise, presented by novelist E. M. Forster, shows the distinction between mere succession of information and a plot. But notice the hitch here: altough we added information to the second statement, we effectively reduced the dimension of the total. The second sentence is, in a way, much lighter to carry and easier to remember; we now have one single piece of information in place of two. As we can remember it with less effort, we can also sell it to others, that is, market it better as a packaged idea. This, in a nutshell, is the definition and function of a narrative.

A Better Way To Die

…and I want to stay light on my feet, and reduce my surprises. I want to be broadly right rather than precisely wrong. Elegance in the theories is often indicative of Platonicity and a weakness – it invites you to seek elegance for elegance's sake.

We can have a clear idea of the consequences of an event, even if we do not know how likely it is to occur. I don't know the odds of an earthquake, but I can imagine how San Francisco might be affected by one. This idea that in order to make a decision you need to focus on the consequences (which you can know) rather than the probability (which you can't know) is the central idea of uncertainty. Much of my life is based on it. You can build an overall theory of decision making on this idea. All you have to do is mitigate the consequences. As I said, if my portfolio is exposed to a market crash, the odds of which I can't compute, all I have to do is buy insurances or get out and invest the amounts I am not willing to ever lose in less risky securities.

Let us examine what I call epistemic arrogance, literally, our hubris concerning the limits of our knowledge. Episteme is a Greek word that refers to knowledge; giving a Greek name to an abstract concept makes it sound important. True, our knowledge does grow, but it is threatened by greater increases in confidence, which make our increase in knowledge at the same time an increase in confusion, ignorance, and conceit.

In a famous argument, the logician W. V. Quine showed that there exist families of logically consistent interpretations and theories that can match a given series of facts. Such insight should warn us that mere absence of nonsense may not be sufficient to make something true.

We, members of the human variety of primates, have a hunger for rules because we need to reduce the dimension of matters so they can get into our heads. Or, rather, sadly, so we can squeeze them into our heads. The more random information is, the greater the dimensionality, and thus the more difficult to summarize. The more you summarize, the more order you put in, the less randomness. Hence the same condition that makes us simplify pushes us to think that the world is less random than it actually is. And the Black Swan is what we leave out of simplification. Both the artistic and scientific enterprises are the product of our need to reduce dimensions and inflict some order on things. Think of the world around you, laden with trillions of details. Try to describe it and you will find yourself tempted to weave a thread into what you are saying. A novel, a story, a myth, or a tale, all have the same function: they spare us from the complexity of the world and shield us from its randomness. Myths impart order to the disorder of human perception and the perceived „chaos of human experience.” Indeed, many severe psychological disorders accompany the feeling of loss of control of—being able to „make sense” of—one's environment. Platonicity affects us here once again. The very same desire for order, interestingly, applies to scientific pursuits—it is just that, unlike art, the (stated) purpose of science is to get to the truth, not to give you a feeling of organization or make you feel better. We tend to use knowledge as therapy.

Andrey Nikolayevich's Rule