Hedge fund manager and professor Nassim Nicholas Taleb rose to prominence after publishing his book Fooled by Randomness about the role chance plays in our lives ad the market. Along with Dr. Doom Nouriel Roubini, Taleb was one of the market observers and participants who anticipated the upcoming crash by explicitly stating that the risk management practices of most Wall Street firms were grossly inadequate. However unlike Dr. Roubini who stayed invested in the market through the crash, Taleb’s hedge fund bets on the probability that something will go wrong, horribly wrong, just as Wall Street is least expecting it. He is looking at the extremities of the Gaussian Bell Curve that most quant models had assumed was flat and inconsequential, for rare and unlikely events to occur. In the markets, the 100 year storm that most people don’t plan for occurs with surprising frequency.
Using the example of a black swan that people living in the Northern Hemisphere did not believe existed simply because all the swans they had seen until that point had been white in color, Taleb illustrates how the sighting of a single black swan in Australia proved centuries of common belief to be wrong. Fooled by Randomness is a must read book to understand the impact of random events in our (investing) lives but it can also sometimes leave you with an unsatisfactory feeling as it attributes most of the success people have to luck rather than skill. If you have not read Fooled by Randomness or Taleb’s follow on book Black Swan, I would recommend reading the former and skipping the latter, as it mostly rehashes what was already covered in a much more entertaining fashion in Fooled by Randomness.
Speaking of black swans, I was a little taken aback when I encountered one at a hotel in Napa Valley, California.