Nassim Taleb caused something of a stir in August when he appeared at the Royal Society for the Encouragement of Arts, Manufacturing and Commerce (RSA) with David Cameron and argued that economic and financial risk had not diminished over the last two years due to sustained high levels of debt. Unsurprisingly, Cameron seized on his comments and criticised the current government’s financial policies, suggesting debt might reach the point where the government would be unable to pay back money it had borrowed from international investors.
Anyone inspired by these comments to obtain a copy of Taleb’s book, ‘The Black Swan’ (first published in 2007), looking for some intellectual justification for his dislike of debt will be disappointed. In 300 pages, they will find only a passing reference to the amount of debt built up in the financial system. If Taleb is now convinced that debt is at the root of all problems, financial and economic, he appears to have reached this conclusion with the hindsight granted by the experiences of the last two years. On the other hand, he does display some foresight when suggesting that globalisation and the growth of mega-banks will lead to ‘fewer but more severe [financial] crises’.
This is not, though, primarily a book about the economy and the financial system; it is a book about Taleb’s big idea: ‘The Black Swan’ – an event that is unpredictable, has an extreme impact and, afterwards, we try to rationalise, refusing to accept its unpredictability. Examples of Black Swans quoted by Taleb include the First World War, the 9/11 terrorist attacks, the success of J K Rowling’s Harry Potter books and the stock market crash of 1987.
In essence, the idea of a Black Swan is a simple one, easy to set out and understand and not particularly contentious. Therefore, Taleb spends most of his time, explaining why humans act in ways that deny the existence of Black Swans. This takes him into the territory of behavioural economists, who have studied phenomena such as confirmation bias (looking only for evidence which supports an existing view) and overconfidence in our forecasting ability. It also leads him to denigrate much of what might be called ‘conventional thinking’ in a number of fields, including economics, philosophy and history. It is clear Taleb does not suffer fools gladly and he appears to regard about 99% of the population as fools, so it is a surprise when, at one point, he refers to himself as ‘this (more or less) humble author’. I cannot think of an author I have ever read who came across as less humble.
Taleb has been described as a right-wing author and the The Guardian called him ‘David Cameron’s new intellectual guru’ but that is to simplify far too much. There is praise in this book for Hayek, but also for Keynes and Minsky, economists he regards as ‘true thinkers’ because they argued for the importance of risk in creating economic crises. Taleb believes in free markets and is wary of government interference in the economy (because governments cannot know what is best) but he has little respect for CEOs of large corporations, who he thinks largely reach their positions through luck. He also argues that the fund management industry is largely a fraud, because performance is the result of chance, not skill, and notes that large American banks in 1982 ‘lost close to all their past earnings (cumulatively), about everything they had ever made in the history of American banking’. (This is clearly a favourite statistic because he uses it twice in the book and repeated it at the RSA).
The style of this book will not appeal to everyone and it will irritate many. It contains many personal anecdotes, stories and diversions; this is as much a book about Nicholas Taleb as it is a book about The Black Swan. For example, we are told, for no particular reason, how he put on 8¾ pounds over a period of four and a half years. Quite often the reader will wonder what the point of the current line of argument is and how it relates to the notion of a Black Swan before concluding that it does not and that Taleb has included it because he finds it funny or entertaining. Taleb’s prejudices also emerge at various points (as well as bankers, security analysts and economists, he appears not to like the French or vegetarians).
This is, however, a thought-provoking and challenging book. The central idea, when set down in black and white, might not appear particularly new but Taleb does an excellent job of explaining why it is human nature to behave as if Black Swans do not exist, even when confronted with evidence that they do.
One final point. In the book Taleb uses the example of book reviewers to illustrate how journalism produces ‘clusters’ of common views. One person writes a review, which is read by other commentators who use some of the arguments in their own reviews, which are in turn read by other commentators and so on until a strong consensus is formed. To avoid such clustering, this review was written without the author having read any other reviews of ‘The Black Swan’.