5. Contents
What is a Black Swan ?
The World Today
Problem of induction and biases
We just can’t predict
Aesthetics of randomness
Conclusion- Lessons from The Black Swan
Pradeep-XYZ
6. What is a Black swan ?
History behind the title (Once upon a time in Europe)
Highly improbable (difficult to predict- an outlier)
Highly Consequential
Retrospective ( see it coming!)
Pradeep-XYZ
7. Examples
9/11
Oct. 19, 1987
Harry Potter
Computer
Internet
iPod (10 years back)
Google(15 years back)
Pradeep-XYZ
8. The world today
Extremistan Vs Mediocristan1
The Flat World (Globalised and interconnected with Web)
Recursive (The Harry Potter effect)
Pradeep-XYZ
9. Mediocristan Vs Extremistan
Mild Randomness Wild Randomness
[ Height, Weight, IQ] [ Wealth, Book Sales, Hits]
Pradeep-XYZ
11. Biases
Behavioral Economists- irrationality (Daniel Kahneman
and Amos Tversky1)
Confirmation bias2
Narrative fallacy3
Silent evidence
Fight with the pecking order
Ludic fallacy4
Pradeep-XYZ
12. System 1 and System 2 (Biases)
System 1 : Experiential one, effortless, automatic, fast,
Opaque, parallel-processed and can lend itself to errors
System 2 : the cognitive one (thinking), reasoned, effortful,
slow, logical, serial and self aware
Pradeep-XYZ
16. We just cant predict
Examples
Track record – Philip Tetlock’s research1 and WWII
Attitude towards prediction2 ? (I don’t know Vs
Guesstimation)
Tools of predictions (Bell curve-extremistan and Spreadsheet-
anchoring)
Serendipitous world (Sextus empiricus) & Complex world
(Sensex and Swine flu)
What to do when you can’t predict ?
Pradeep-XYZ
17. Examples on prediction errors
Computer (IBM)
Telephone
Beatles (expectation)
Recent economic recession
Tsunami
Charles Darwin’s “The origin of species” paper
Pradeep-XYZ
18. “This telephone has too many shortcomings to be seriously considered
as a means of communication. The device is inherently of no value to
us.”
(Western Union memo, 1876)
Pradeep-XYZ
19. “I think there’s a world market for maybe five computers.”
(Thomas Watson, Chairman of IBM, 1943)
Pradeep-XYZ
20. "Everything that can be invented has been invented." -- Charles H. Duell,
Commissioner, U.S. Office of Patents, 1899.
Pradeep-XYZ
21. “We don’t like their sound and guitar music is on the way out.”
(Decca Recording Company rejecting the Beatles, 1962)
Pradeep-XYZ
22. Aesthetics of randomness
From Mediocristan to Extremistan
Challenges with Bell-curve
Fractal Geometry (aka Geometry of nature)
Pradeep-XYZ
23. Mediocristan to Extremistan
The economics of superstars1
Cumulative advantage (Academic citations)
Lingua franca2 (Zipf’s law)
The Long Tail- Chris Anderson
Globalisation (Reason behind recent recession ?)
Pradeep-XYZ
24. The aesthetics of randomness
Benoit Mandelbrot ( Rock star of Mathematics- Author-
(Mis) behavior of markets)
Fractal Geometry or Geometry of Nature (irregularity,
Chaos )
What’s common (Connect Dots ?) (Music, Literature, Markets,
Sociology, Temples, Nature, Star wars graphics)
Symmetry, Scalable2 , exponential1
80/20 or 50/01
Pradeep-XYZ
32. What to do when you can’t predict ?
Being a fool in the right places (be human)
Be prepared (Barbell strategy)
The idea of positive accident (love to fail as Americans do)
Pradeep-XYZ
1. crises: Terrorism, Global warming, pandemic viruses, recession and global wars
Pandemic, Global warming, Global recession, Terrorism and fads (books, music and movies) Index fallen by 29.2 per cent and the odds are 10^50
1. Thought Experiment : Bringing 1000 persons in a room and measuring the heights and wealth and book sales
Daniel Kahneman and Amos Tversky from Israel ( Heuristics and Biases – Nobel Prize for Economics in 2002) Confirmation bias : Terrorists and counting sequence (2,4,6..), Global warming and how Pakistanis and Indians read the same news with different perspective Narrative fallacy:1) 13:01 US Treasuries fall; Hussein capture may not curb terrorism and 13:31 US Treasuries rise; Hussein capture boosts allure of risky assets;2) which is more likely –a massive flood somewhere in America or a massive flood in California 3) see in the back page Ludic fallacy: Life is not a game defined rules, players and pay-offs, Dr. John Vs Fat tony & Casino Case study Silent evidence: How to become a millionaire in ten steps. Get the economist article from Predictably irrational
Philip Tetlock research- Taken 27,000 predictions from 300 specialists and asked to predict events in political, economic and military events Empirical tests shown that we are bad at guessing as our error rate is 15% to 30% Take example of IIM grad Vs Avenue Rd. babu and get the example of Mona Lisa painting valuation
Sherwin Rosen “The economics of superstars” (Ex: a r rahman classical hits for Rs 100 or Joshua Julias guitar melodies for Rs 90; Microsoft Vs Apple ; 3 idiots (Life is a race, Rs 240 Crs gross sales in first week) Get the web link of the most common words
Get the exponential laws in web from the video Wealth distribution, book sales, hits of websites, frequency of words, telephone calls received, magnitude of earthquakes, population of cities &* add market charts- daily, monthly and yearly &* add gud designs of fractal geometry &* Give them one exercise to draw a simple fractal
