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The market's reaction is very similar to that outlined above, although on varying scales. Unfortunately it is hard for me to provide many examples here as finding the exact time a news story breaks is a hard task. When you are trading live it is obvious, but months later it is tricky to pinpoint. For example, I traded the reaction to the North Korea foreign minister saying Trump's tweet was a declaration of war, but I'm not sure of the exact time this news hit the wires. Regardless, the price reaction was consistent. I have not cherry picked the above events and charts as they fit my narrative.

But I would say these observations are only tested on the equity indices, and I may have missed some events. Specific stocks may not have this reaction and the Swiss Franc shows us the risks involved in currency trading. EURCHF may be heading back to the place of origin, but it wiped out many a Forex trader, and even a few brokers on the way down. Actually the Swiss Franc debacle is perhaps less related to the examples I have used in this article and more in tune with Taleb's definition.

Some people knew the peg would be pulled, and there were warnings. You could say 'it is rationalized by hindsight, as if it could have been expected; that is, the relevant data were available but unaccounted for in risk mitigation programs'. This shows the importance of making the distinction set out in the first chapter; the event must be so unexpected even the most connected inside traders could not see it coming. This means they have not positioned for it and will be hurt by the downside reaction. Perhaps this is why price always recovers and lets them out unharmed?

Some people worry about black swan events, and the concerns are real if you use leverage. However, if the event is truly out of the blue, long term investors in equities should not panic. Price tends to return to the level it was at before the event. Moreover, the repeatable nature of the reaction provides opportunities to trade the recovery, and even fade the return to the scene of the crime. There are a hundred and one things to worry about as an investor, but black swan events aren't one of them.


I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it other than from Seeking Alpha. I have no business relationship with any company whose stock is mentioned in this article. What is a black swan event? Why the truly unexpected is nothing to worry about.

The event is a surprise to the observer.

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The event has a major effect. After the first recorded instance of the event, it is rationalized by hindsight, as if it could have been expected; that is, the relevant data were available but unaccounted for in risk mitigation programs. The same is true for the personal perception by individuals. Our inability to predict in environments subjected to the Black Swan, coupled with a general lack of the awareness of this state of affairs, means that certain professionals, while believing they are experts, are in fact not based on their empirical record, they do not know more about their subject matter than the general population, but they are much better at narrating-or, worse, at smoking you with complicated mathematical models.

They are also more likely to wear a tie. There are so many things we can do if we focus on anti knowledge, or what we do not know. Among many other benefits, you can set yourself up to collect serendipitous Black Swans by maximizing your exposure to them. View all New York Times newsletters. Learning to Learn. Another related human impediment comes from excessive focus on what we do know: we tend to learn the precise, not the general.

Did they learn that some events, owing to their dynamics, stand largely outside the realm of the predictable? Did they learn the built-in defect of conventional wisdom? What did they figure out? They learned precise rules for avoiding Islamic prototerrorists and tall buildings. Many keep reminding me that it is important for us to be practical and take tangible steps rather than to "theorize" about knowledge.

The story of the Maginot Line shows how we are conditioned to be specific. The French, after the Great War, built a wall along the previous German invasion route to prevent reinvasion-Hitler just almost effortlessly went around it. The French had been excellent students of history; they just learned with too much precision. They were too practical and exceedingly focused for their own safety. We do not spontaneously learn that we don't learn that we don't learn.

The problem lies in the structure of our minds: we don't learn rules, just facts, and only facts. Metarules such as the rule that we have a tendency to not learn rules we don't seem to be good at getting. We scorn the abstract; we scorn it with passion. It is necessary here, as it is my agenda in the rest of this book, both to stand conventional wisdom on its head and to show how inapplicable it is to our modern, complex, and increasingly recursive environment.

What are Black Swan events?

But there is a deeper question: What are our minds made for? It looks as if we have the wrong user's manual. Our minds do not seem made to think and introspect; if they were, things would be easier for us today, but then we would not be here today and I would not have been here to talk about it-my counterfactual, introspective, and hard-thinking ancestor would have been eaten by a tiger while his nonthinking, but faster-reacting cousin would have run for cover.

Consider that thinking is time-consuming and generally a great waste of energy, that our predecessors spent more than a hundred million years as nonthinking mammals and that in the blip in our history during which we have used our brain we have used it on subjects too peripheral to matter. Evidence shows that we do much less thinking than we believe we do-except, of course, when we think about it. It is quite saddening to think of those people who have been mistreated by history.

There are even schools named after high school dropouts. Alas, this recognition came a little too late for the poet to get a serotonin kick out of it, or to prop up his romantic life on earth. But there are even more mistreated heroes-the very sad category of those who we do not know were heroes, who saved our lives, who helped us avoid disasters. They left no traces and did not even know that they were making a contribution. We remember the martyrs who died for a cause that we knew about, never those no less effective in their contribution but whose cause we were never aware-precisely because they were successful.

This is a far more vicious kind of ingratitude: the feeling of uselessness on the part of the silent hero.

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I will illustrate with the following thought experiment. Assume that a legislator with courage, influence, intellect, vision, and perseverance manages to enact a law that goes into universal effect and employment on September 10, ; it imposes the continuously locked bulletproof doors in every cockpit at high costs to the struggling airlines -just in case terrorists decide to use planes to attack the World Trade Center in New York City. I know this is lunacy, but it is just a thought experiment I am aware that there may be no such thing as a legislator with intellect, courage, vision, and perseverance; this is the point of the thought experiment.

The legislation is not a popular measure among the airline personnel, as it complicates their lives. The person who imposed locks on cockpit doors gets no statues in public squares, not so much as a quick mention of his contribution in his obituary. Vox clamantis in deserto. He will retire depressed, with a great sense of failure.

He will die with the impression of having done nothing useful. I wish I could go attend his funeral, but, reader, I can't find him. And yet, recognition can be quite a pump. Believe me, even those who genuinely claim that they do not believe in recognition, and that they separate labor from the fruits of labor, actually get a serotonin kick from it. See how the silent hero is rewarded: even his own hormonal system will conspire to offer no reward. In their aftermath, who got the recognition? Those you saw in the media, on television performing heroic acts, and those whom you saw trying to give you the impression that they were performing heroic acts.

The latter category includes someone like the New York Stock Exchange Chairman Richard Grasso, who "saved the stock exchange" and received a huge bonus for his contribution the equivalent of several thousand average salaries. All he had to do was be there to ring the opening bell on television-the television that, we will see, is the carrier of unfairness and a major cause of Black Swan blindness.

Who gets rewarded, the central banker who avoids a recession or the one who comes to "correct" his predecessors' faults and happens to be there during some economic recovery? Who is more valuable, the politician who avoids a war or the one who starts a new one and is lucky enough to win?

black swan event

It is the same logic reversal we saw earlier with the value of what we don't know; everybody knows that you need more prevention than treatment, but few reward acts of prevention. We glorify those who left their names in history books at the expense of those contributors about whom our books are silent.

What is a Black Swan Event?

We humans are not just a superficial race this may be curable to some extent ; we are a very unfair one. This is a book about uncertainty; to this author, the rare event equals uncertainty. This may seem like a strong statement-that we need to principally study the rare and extreme events in order to figure out common ones-but I will make myself clear as follows. There are two possible ways to approach phenomena. The first is to rule out the extraordinary and focus on the "normal. The second approach is to consider that in order to understand a phenomenon, one needs to first consider the extremes-particularly if, like the Black Swan, they carry an extraordinary cumulative effect.

I don't particularly care about the usual. If you want to get an idea of a friend's temperament, ethics, and personal elegance, you need to look at him under the tests of severe circumstances, not under the regular rosy glow of daily life. Can you assess the danger a criminal poses by examining only what he does on an ordinary day? Can we understand health without considering wild diseases and epidemics?

Indeed the normal is often irrelevant. Almost everything in social life is produced by rare but consequential shocks and jumps; all the while almost everything studied about social life focuses on the "normal," particularly with "bell curve" methods of inference that tell you close to nothing. Because the bell curve ignores large deviations, cannot handle them, yet makes us confident that we have tamed uncertainty.

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Is Bitcoin a Black Swan Event?

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