The Black Swan - The Impact of the Highly Improbable by Nassim Nicholas Taleb

Published On: 02-Jan-2019

The Black Swan - The Impact of the Highly Improbable by Nassim Nicholas Taleb
Comments by Nitin Jain
January 2019

This masterpiece by Nassim Taleb has made me introspect my decision-making process and it covers several critical behavioural aspects that bring biases in decisions.

Every decision - howsoever big/ small, related to investing or made in the normal course of life - involves a lot of uncertainties. Some are regular ones (or known) which we face quite often, and hence they become integral part of our decisions. On the other hand, there are some uncertainties that are unknown. It is the latter which can significantly impact the outcomes. Nassim calls such unknown events “Black Swan”.

A Black Swan event has three attributes – it is an outlier, with extreme impact, and people have explanation for the event after it has occurred (hindsight bias).These can be positive as well as negative. Nassim has classified events such as rise of personal computer/ internet evolution and the world wars as Black Swan events. In Indian context, I can think of two such events – the recent demonetisation and 1991 economic liberalisation.

Throughout the book, Nassim has challenged the narrow-minded thinking. Things in real life seldom follow a normal distribution, and linear relationships are rare. Nassim suggests that it makes more sense to focus on consequences (which one can estimate) rather than probability (which one doesn’t know) to more effectively deal with uncertainties.

There are several thought-provoking analogies in the book that I would like to emulate in my research. In the routine research process, many a times, we tend to consider only the “normal” risk events, leading to underestimation of risks. While it is impossible to predict such extreme events, I would try to condition my mind to think outside the box and broaden the range of potential outcomes before arriving at any investment decision.

Author Bio

Nitin Jain
Mr. Nitin Jain is a Senior Associate Vice President and Research Analyst in the equities team of the mutual fund operations of the company. He tracks IT, Internet, Oil and Gas sectors. Nitin joined UTI AMC Ltd in 2018. Prior to that he has worked with Credit Suisse, Ambit Capital and CRISIL in equity research domain. He is a Chartered Accountant (with All India Rank) from the Institute of Chartered Accountants of India and has also cleared the Level 3 exam of the CFA program conducted by the CFA Institute, USA.