Archive for December, 2007

The Black Swan – Nassim Nicholas Taleb

Monday, December 3rd, 2007

Amazon Listing: The Black Swan

For hundreds of years, the commonly held truth in Europe was that all swans are white. All the evidence “proved” this. Then one day a European explorer in Australia discovered a black swan. The theory of white swan exclusivity died suddenly. The black swan metaphor serves as the label for a series of examples in which absence of evidence is confused with evidence of absence in this intriguing book. A Black Swan is defined as an unlikely event with three parts: it is unpredictable, it has significant impact, and when we look back at the event, we perceive an obvious explanation that makes it appear predictable when in fact it wasn’t. The author asserts that Google’s sudden economic prowess was a Black Swan and that 9/11 was a Black Swan. He makes a compelling argument in this book that Black Swans underlie almost everything about our world, from the rise of religions to events in our own personal lives.

According to Taleb, we not only miss the forest for the trees, we tend to see the grass and miss the trees as well. We concentrate on variations of things we already know and fail to consider what we don’t know. As a result, we are unable to estimate very well. Fortunately, the author doesn’t just pose the challenge. He does offer some simple techniques for turning black swans into grey swans and then benefiting from them.

The Author
Nassim Nicholas Taleb was a successful quant-trader working on Wall Street. He is a highly educated man and was until recently Professor at the University of Massachusetts at Amherst. He is a polymath with a strong grasp of history and mathematics, and most importantly in a book like this, a sense of humor.

Empirical Skepticism

Monday, December 3rd, 2007

While it is true that great leaders inspire by painting a mental image of a better future, many charlatans and mean spirited characters can and have done as much. The hallmark of a great leader is a willingness to embrace doubt while driving to separate facts from opinions and theories. In short, the bedrock of great leadership behavior is empirical skepticism.

Abraham Lincoln wrote and spoke eloquently about a future America, but it was his deep doubts about the social norms of his time, his agonizing doubts about waging a war, and his ability to see slavery at face value, that made him a great President. Ghandi was eloquent about non-violent protest and a future India of shared cultures and equitable economics. He inspired millions to action with the hope of a better future, an unwillingness to accept the arbitrary social and economic structures accepted at that time, and a focus on the facts of inequity in his country that made him a great leader. Pope John Paul II was a great orator but it was his ability to see the facts on the ground in Poland and his unwillingness to accept the status quo that inspired millions to follow him. He faced great doubt about whether the communist regime would or would not try to kill him, and yet he had the courage to take action.

Great leaders are filled with doubt and yet will not allow themselves to wallow in it. Great leaders provoke us to face the world as it is and then demand from us the courage to achieve what we perceive to be impossible.

We are surrounded by fiction. As leaders we need to sort the facts from the fiction. Accountants, engineers, marketers, technicians, nurses, doctors, car mechanics, plumbers, even (especially?) medical researchers make assertions that blend their observations with their assumptions, theories, and opinions. For example, cash in the bank as of this moment seems like a fact. Then again, the bank will tell you what checks have cleared; more cash may be actually in the bank but won’t be available until a current deposit clears. Less cash may be in the bank because some checks already written have not been processed at this moment. Why does this matter? Well, if you are running a start-up and you are trying to assess whether you are going to make payroll, it might matter a lot to the people who are going to get paychecks. Some nuances, like the definition of cash in the bank, only have a practical impact in an edge case. For example, if you have plenty of cash to make payroll, you won’t care about this distinction. But if you have barely enough or are just a bit short on cash to make payroll, then this distinction matters quite a bit if you want your employees to have a pleasant experience when they go to their bank to cash their paychecks.

The same happens in every functional discipline. Take engineering as an example. A website that is available 99.999% of the time sounds like a great achievement, but it’s almost guaranteed to be fiction even if the data and the calculation were done without error and with sincerity. Achieving that level of availability likely means that maintenance time needed to sustain a superior level of stability was not included in the calculation. It is also likely that network availability (over which engineering has little control) was not included in the calculation. So although engineering can feel great about “five nines” the reality is that a consumer who visits the site experiences far less availability. And in the end, having a happy engineering team is good but having happy customers is better.

A good leader understands that the people who are presenting “facts” are usually layering many assumptions, theories, and opinions into their assertions. A leader needs to sort the facts from the fiction in order to surface the assumptions and theories, and evaluate them critically. You do this by suspending judgment, and drilling for assumptions to make them explicit. In this way, you can deliberately choose which explicit assumptions, opinions and theories are deemed valuable in combination with the facts at hand.