Prior to the review, I will acknowledge a few things. First, owing to the extent of description, no review may be able to completely summarise the content and will only give you a gist of it. Second, this book is not for a casual reader, as the words get denser than the amazon jungle while the narratives get deeper than the pacific ocean, only the ones driven by persistent curiosity may be able to finish. And I admit that this is perhaps the most daunting book that I have read so far, and I almost gave up on finishing this book.
This book is dense not only in terms of the narratives, as witnessed in academic literature and research papers, but also in terms of subject matter, from philosophical narratives to mathematical explanations. The description makes it evident that the author has spent his life pursuing this subject. Since the author understands that this may make it difficult for a casual reader, whenever applicable he has posted an option to skip chapters. As the entire book deals with uncertainty only, one who can survive without complicated excel models, will still gain substantial understanding even by skipping optional chapters.
Now that you know what you are signing up for, let us move on to the main topic. As the title conveys, this is all about unknown unknowns. If you are surprised to encounter this phrase, known unknowns are the few future possibilities that are predictable, while unknown unknowns are the numerous possibilities that are beyond imagination. And the reason these are beyond our imagination is because of the extreme nature of the event and its impact. The author explains this with the example of 9/11 attacks and the 2008 market crash, both of which changed our world forever. Just as for everything there are two possibilities, either positive or negative, so is the case with these extremities. For instance, a friendly alien race can clean our mess, whereas a hostile one can annihilate our species!
The extremities with positive outcomes are known as white swans, which I call damn good luck, while the ones with negative outcomes are called black swans. As unknowns are mere possibilities, there are associated certainties, denoted by a small number, that indicates the probability of the particular outcome. And this is where the narrative takes a turn from philosophy to mathematics. The author challenges the applicability of current prediction models based on bell curves, which are still in practice despite numerous past failures. And the central portion of this book continues to explain what makes such models ill-suited for predictions. Despite his elaborate explanations, experts continue to contest his explanation and continue using their methods to decide the fate of billions of dollars.
In simple words, statisticians use regression or bell curves to predict future outcomes based on past records. However, this method has limitations as it requires sufficient data and an assumption that the past trends will continue. This may be true with things that have low deviation from averages such as test scores, weight, height, and so on, but this is never true for items such as net worth or wars! Hence, owing to the drastic variations, range of prediction can be too large to be of any use or there may not be sufficient data to make a prediction. This is conveyed through the trends of stock markets, as the author proves that only a handful of days are responsible for the major gains and losses across a five-decade timespan.
And finally, the book moves on to an alternate model of fractals that can be used to predict the extreme events. In simple words, this is an exponential method, as we know that exponents grow quickly, within a few steps the probabilities grow too small to be calculated, or at least interpreted, to make any inferences. Along with explaining this theory, the author also describes a way around the rejection of his idea by the platonic practitioners of bell-curve. You will encounter sharp sarcasm, and demeaning adjectives for platonic practitioners, especially for academicians. And I would agree with the author that academicians may be excellent lab practitioners who perform well under ‘ideal conditions’ but fail to apprehend the deadly realities of the battlefield. But finally, the author realises that his point blank contradiction repels the intellectuals and finds a subtle way of explanation to gain agreement.
As a consultant, this book has opened up new thought perspectives and helped improve upon my methods. Hence, if you work in any form of consulting or investment firm, not just risk advisory, this book will be helpful. As description is between academic theory and research papers, this should not be treated as a joyous read found in a book store. This will be daunting to read and challenging to grasp, but definitely worth your time.
Header Image Photo by Edwin Chen on Unsplash
Savvy Munshi 