Summary of the Book ‘The Black Swan” by Nassim Nicholas Taleb
1. "Black swans" are highly consequential but unlikely events that are easily explainable – but only in retrospect.
2. Black swans have shaped the history of technology, science, business and culture.
3. As the world gets more connected, black swans are becoming more consequential.
4. The human mind is subject to numerous blind spots, illusions and biases.
5. One of the most pernicious biases is misusing standard statistical tools, such as the “bell curve,” that ignore black swans.
6. Other statistical tools, such as the "power-law distribution," are far better at modeling many important phenomena.
7. Expert advice is often useless.
8. Most forecasting is pseudoscience.
9. You can retrain yourself to overcome your cognitive biases and to appreciate randomness. But it's not easy.
10. You can hedge against negative black swans while benefiting from positive ones.
Pareto’s Law – The Law of the Vital Few and the Trivial Many
Pareto’s 80:20 rule is so well known to most people that it is part of the business (6-Sigma) gospel. This common knowledge is incomplete and leads the majority of business managers to very significant errors of judgement about what is important in the way they manage their resources. Correct application would simplify their business processes and help make significant bottom line improvement.
Pareto’s Law is valid if the population being studied is made up of independent entities. In systems of dependent entities the 80:20 rule does not hold. In such a system of interdependent entities (such as your business system) the rule is more like 99:1! Your focus should be on the one entity (and there can be only one) that limits, that prevents you from achieving more of your goal. I believe Pareto recognized this and postulated this second Pareto’s law along with the first.
The consequence is 1 operation, 1 resource or 1 division determines 99% of profit! When enough businesses realize this simple fact and learn how to use it to their advantage the World economy can experience a Black Swan and what a wonderful one! If you must focus on just one resource for bottom line improvement, would that not be a major simplification? (It is not quite as simple as I am making out, once you have the correct focus and know how to get the most from the limiting factor the rest of your organisation must be aligned to that. Everyone must support the decision how the business will get the most from its constraint.
Today every department or division is given marching orders – IMPROVE! Being good soldiers they all shout ‘YES SIR’ and do their best to improve the area they are responsible for. Since the 99:1 ratio holds, the result is inevitable – relative to the effort expended very little bottom line effect will be achieved. Oh yes, every manager can point to his improvements and as a result even get a bonus and/or a raise. But whatever most managers have done, 99% of it is a waste – at least for the time it takes for their part of the organisation to become the constraint.
In a business the first questions should be: “What should be our focal point? Where can we find the focal point? How will we deal with it? The focal point must be the limiting factor.
The next question must be: “How should the rest of our organisation behave to support the focal point?”
Could we be the source of a Black Swan? Could we trigger a Black Swan? If they are just random events the answer is NO! If someone (anyone) can discover a powerful leverage point – the limiting factor - and the way to exploit it then … why could WE not hatch a black swan?
A consequence, for you (a person within a large organisation) is you are probably not the limiting factor. Before you go looking for the limiting factor you need to recognize that the way management thinks is to get improvement everywhere. Your job is “make the boss aware of Pareto’s second rule.” Then a self-generated Black Swan becomes possible, even quite probable
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