Black Swans Gray Swans and White Swans


(E) Life is full of surprises. Good and bad. We all know that. What we learn over time is that a few of those surprises have sculptured the bodies of our lives. The whole world evolves through large incremental random changes!

Until 1697, the Western world believed that all Swans were White until a Dutch explorer, named Willem de Vlamingh, documented the first observation of a Black Swan in Australia. In his book “The Black Swan”, Mr. Nassim Nicholas Taleb, an ex-Wall Street quant and trader now Professor, leverages the metaphor of a Black Swan to describe “The Impact of the Highly Improbable.”

The Definition of a Black Swan

Mr. Taleb defines a Black Swan as a random event with three attributes:
“First, it is an outlier, as it lies outside the realm of regular expectations because nothing in the past can convincingly point to its possibility. Second, it carries an extreme impact. Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable.”

A Black Swan is a change of low predictability but of a large impact. What makes the impact of a Black Swan extraordinary is that it built over time a cumulative effect.

The notion of Black Swans can be applied to many kinds of random changes that can occur in personal life, business, arts, cultures, and civilizations.

White Swans, Gray Swans, and Black Swans

To “somewhat” expand Mr. Taleb’s thoughts, we can consider three species of Swans: White Swans, Gray Swans, and Black Swans. And, any Swan can have a positive or negative consequence.

White Swans are random events that we know, have a high probability of occurring and create little implications in our lives. We learn how to deal with White Swans in our everyday life. A positive White Swan could be falling in love, finding a new job, while a negative White Swan could be getting the flu or having your vacation flight being canceled.

Gray Swans are random events that we know, have a low probability of occurring but have significant impacts. A positive Gray Swan was Newton’s law of gravity, the first heart transplantation, or could be a start-up going for an IPO or a best seller from an unknown author such as Harry Potter, while a negative Gray Swan could be an earthquake in California or the next Katerina.

Black Swans are random events that we have never imagined before their occurrence, have an extremely low probability of occurring but have dramatic consequences. A positive Black Swan was the first man walking on the moon, the long-term economic expansion of the 20th century, the increase of human life expectancy, while a negative Black Swan was Global Warming, the continuation of new and old war conflicts, the atomic bomb, September 11 or the spread of the AIDS virus.

Why We do not Take into Account Black Swans?

In his book, Mr. Taleb demonstrates that forecasts, models, and evaluations fail because they are based on what we know when they should be based on what we do not know, because what we do not know is in the end what is going significantly to shape the outcome of the forecast, the model, or the evaluation. Not what we know.

A doctor can tell you that there is No Evidence of Disease but he or she cannot tell you that there is Evidence of No Disease (Mr. Taleb calls this confusion the round-trip fallacy). In other words, it is not because you do not look sick and have no symptoms of being sick that you are not sick. Now replace the word “sick” or “disease” by “Black Swan” and think for a second. You got it!

Our inability to take into account Black Swans lies in our excessive focus on how we think with what we know. Having spent certainly much less time than Mr. Taleb studying Black Swans, I believe (and maybe I am wrong?) that our inability of taking into account Black Swans lies in the Darwinian evolution of mankind and animal species. Biological species modify their brains, bodies, and behaviors to adapt to the long-term impacts of environmental Black Swans. When a change occurs, species adapt or die. If the change occurs too quickly like now with Global Warming, the species dies; according to the International Union for Conservation of Nature, “One-Quarter of World’s Mammals Face Extinction.”

To survive, we know how to adapt to very large random changes but we still fail to take them much into account in our thinking and decision process. It is simply not into our brains.

Dealing with the Impacts of the Swans

Simply put, the impact of a Swan is “somewhat” inversely proportional to its probability of occurring (assuming the impact can be of course quantified).

We do not know what could be a Black Swan until we see it. But we know about some Gray Swans that will come back again.  We need to expose ourselves to positive Gray Swans while being prepared for the consequences of negative Gray Swans.

By increasing our exposition to positive Gray Swans, the likelihood of an occurrence grows significantly. If your goal is to study the secrets of the stars in the sky and meet a Ph.D. (male or female) in astrophysics, take as many lectures as you can at Berkeley or at Princeton University; or if your goal is to study the beauty of human nature and meet a top fashion model (male or female), save enough money to go partying in the Champs Elysees or in Fifth Avenue since the probability of those two Gray Swans decreases exponentially if you stay anywhere in the country or in the world.

And if you do not take the actions of increasing your exposure to positive Gray Swans at least welcome them when they come into your life: accept, nurture and love any new good opportunity which happens to come your way: the very interesting (and very cute!) person sitting next to you in a flight from New York to San Francisco, somebody who recognizes your talents and want to sponsor your art, somebody who is sharing with you his business plan for an interesting venture, the recovery of your Mom from an illness etc…

Much less enjoyable, to reduce the negative impact of Gray Swans prevention shall be our best and only strategy. Nobody knows when the next earthquake will shake California or when Global Warming will produce another Katerina but everybody must be prepared when they will occur.

Unfortunately, as Mr. Taleb noted in his book, the social reward for those who try to prevent is much lower than the social reward for those who try to cure. So, we always end up curing and never preventing. C’est la vie!

Note 1: Mr. Taleb does not consider White Swans in his book. He is more interested by Gray Swans than White Swans and by Black Swans than Gray Swans.

Note 2: I was not planning to write this article but one of my readers who is not interesting by Black Swans into the stock markets (my next article) wanted to understand Mr. Taleb’s thoughts. So, there is a little bit of overlap between this article and the next one. Sorry!

Taleb, Nassim (2007), The Black Swan. The Impact of the Highly Improbable, Random House.

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