Limitations of Prediction (Black Swan)
Taleb argues that forecasting is limited both by overconfidence and by the complexity of the systems being forecast. His Black Swan concept concerns consequential events that were not anticipated but seem explainable afterward.
THE IDEA
At JFK
At New York’s JFK airport you can find gigantic newsstands with walls full of magazines. They are usually manned by a very polite family from the Indian subcontinent (just the parents; the children are in medical school). These walls present you with the entire corpus of what an “informed” person needs in order “to know what’s going on.” I wonder how long it would take to read every single one of these magazines, excluding the fishing and motorcycle periodicals (but including the gossip magazines—you might as well have some fun). Half a lifetime? An entire lifetime?
Sadly, all this knowledge would not help the reader to forecast what is to happen tomorrow. Actually, it might decrease his ability to forecast.
There is another aspect to the problem of prediction: its inherent limitations, those that have little to do with human nature, but instead arise from the very nature of information itself. The Black Swan has three attributes: unpredictability, consequences, and retrospective explainability.
Notes from the source
The author notes that the book was approximately and “unexpectedly” fifteen months late.
While forecast errors have always been entertaining, commodity prices have been a great trap for suckers. Consider this 1970 forecast by U.S. officials (signed by the U.S. Secretaries of the Treasury, State, Interior, and Defense): “the standard price of foreign crude oil by 1980 may well decline and will in any event not experience a substantial increase.” Oil prices went up tenfold by 1980. I just wonder if current forecasters lack in intellectual curiosity or if they are intentionally ignoring forecast errors. Also note this additional aberration: since high oil prices are marking up their inventories, oil companies are making record bucks and oil executives are getting huge bonuses because “they did a good job”—as if they brought profits by causing the rise of oil prices.
A detached note from another discussion answers a question about Catherine’s lover count: twelve. The surrounding discussion is not included.
Structural Limits on Prediction
Taleb argues that people both think “narrowly” and overestimate their forecasting record. Overconfidence is only part of his argument. Some systems may be too complicated to forecast reliably with the information and tools available to us. More reading or more confidence need not overcome those limits.
When to use it
When evaluating economic forecasts, consider the inherent uncertainty in complex systems.
In risk management, acknowledge that some risks are fundamentally unpredictable and plan for resilience.
In personal decision-making, avoid making high-stakes bets based on predictions of future trends.
In scientific hypothesis testing, be cautious of assuming that models can predict all outcomes.
FROM THEORY TO EVERYDAY LIFE
In practice
JFK Newsstands
Taleb describes the vast magazine selection at JFK, then questions whether reading it all would improve a forecast of tomorrow. The anecdote challenges the assumption that more information necessarily means better prediction.
Oil Price Forecast (1970)
A 1970 forecast by U.S. officials predicted that oil prices would not experience a substantial increase by 1980, but in fact prices went up tenfold, demonstrating the failure of expert prediction.
The Fortune-Teller
Caravaggio’s The Fortune-Teller illustrates our susceptibility to those who claim to predict the future, as the fortune-teller steals the victim’s ring.
A MOMENT TO REFLECT
Put it to work.
How can you identify areas where your predictions are likely to be unreliable due to structural complexity?
What steps can you take to avoid overconfidence in forecasts, especially when dealing with rare events?
Can you think of a past prediction that failed because of unforeseen Black Swan events?
CONTINUE THE CONVERSATION
Source texts
- The Black Swan The Impact of the Highly Improbable With a new section On Robustness and Fragility (Nassim Nicholas Taleb)