Black Swan blindness:

“The underestimation of the role of the Black Swan, and occasional overestimation of a specific one.” (p. 307, Taleb).

This means that the effects of extreme events are even greater because we think they are more unexpected than they actually are. As an example, we do not distinguish between ‘risk’, which technically, can be calculated, and ‘uncertainty’ which cannot. Taleb maintains that the ‘high’, ‘medium’ and ‘low’ risk options offered to you by your financial adviser are a fiction because they are all based on ‘normal’ distributions that ignore the effect of Black Swans.

Confirmation bias:

“You look for instances that confirm your beliefs, your construction (or model) — and find them.” (p. 308, Taleb)

Part of the bias comes from our overvaluing what we find that confirms our model and undervaluing or ignoring anything that challenges our model.

Fallacy of silent evidence:

“Looking at history, we do not see the full story, only the rosier parts of the process.” (p. 308, Taleb) Ignoring silent evidence is complementary to the Confirmation Bias. “Our perceptual system may not react to what does not lie in front of our eyes. The unconscious part of our inferential mechanism will ignore the cemetery, even if we are intellectually aware of the need to take it into account. Out of sight, out of mind: we harbor a natural, even physical, scorn of the abstract.” [and randomness and uncertainty certainly are abstractions] (p. 121, Taleb).

By “the cemetery” Taleb means: The losers of wars don’t get to write history; Only survivors tell their story; Prevented problems are ignored; Only fossils that are found contribute to theories of evolution; Undiscovered places do not get onto the map; Unread books do not form part of our knowledge.

Apparently 80 per cent of epidemiological studies fail to replicate, but most of these studies don’t get published so we think causal relationships are more common than they are.

Fooled by Randomness:

“The general confusion between luck and determinism, which leads to a variety of superstitions with practical consequences, such as the belief that higher earnings in some professions are generated by skills when there is a significant component of luck in them.” (p. 308, Taleb)

We have a hard time seeing animals as randomly selected, but even when we can accept that, we are even less likely to accept that the design of a car or a computer could be the product of a random process.  Also, with so many people in the financial markets, there will be lots of “spurious winners.” Trying to become a winner in the stock market is hard, because even if you are smart, you are competing with all the spurious winners.

Future Blindness:

“Our natural inability to take into account the properties of the future” (p. 308, Taleb)

Our inability to conceive of a future that contains events that have never happened in the past — just think how difficult it can be to help some people associate into a desired outcome of their own choosing!

We can use Robert Dilts’ Jungle Gym model to postulate that Future Blindness is equivalent to Perceptual Position Blindness (e.g. the inability to take into account the mind of someone else — one of the features of autism)  and Logical Level Blindness — the inability to notice the qualitative differences occurring at different levels (e.g. using sub-atomic theory to ‘explain’ human behaviour). Gregory Bateson frequently griped about Logical Level Blindness, and it is a characteristic of people Ken Wilber calls “flatlanders”.

Lottery-ticket fallacy:

“The naive analogy equating an investment in collecting positive Black Swans to the accumulation of lottery tickets.” (p. 308, Taleb)

The probability of winning the lottery is known precisely and is therefore not a Black Swan — just unlikely.

Locke’s madman:

“Someone who makes impeccable and rigorous reasoning from faulty premises thus producing phony models of uncertainty that make us vulnerable to Black Swans.” (p. 308, Taleb).

As examples, both Taleb and Ormerod pick out a couple of Nobel prize-winning economists (Robert Merton Jr. and Myron Scholes) who did much to promote the Modern Portfolio Theory. In the summer of 1998, as a result of having applied their theories, their company, LTCM, could not cope with the Black Swan of the Russian financial crisis and “one of the largest trading losses ever in history took place in almost the blink of an eye … LTCM went bust and almost took down the entire financial system with it.” (p. 44 & p. 282, Taleb) However that’s not the real story. The more important question is, why ten years after the failure of LTCM, is the Modern Portfolio Theory still the dominant model taught at universities and business schools?

 Ludic fallacy:

Using “the narrow world of games and dice” to predict real life. In Real life “randomness has an additional layer of uncertainty concerning the rules of the game.” (p. 309, Taleb).

Narrative fallacy:

“Our need to fit a story or pattern to a series of connected or disconnected facts.” (p. 309, Taleb)

i.e. to explain past events. Note, the plausibility of the story is not a factor. The fallacy is forgetting any narrative is only one of many possible narratives that could be made to fit ‘the facts’ and therefore believing we understand ‘the cause’.

Nonlinearity:

“Our emotional apparatus is designed for linear causality. With counter intuitive: linearities, relationships between variables are clear, crisp, and constant, therefore Platonically easy to grasp in a single sentence. In a primitive environment, the relevant is the sensational. This applies to our knowledge. When we try to collect information about the world around us, we tend to be guided by our biology, and our attention flows effortlessly toward the sensational — not the relevant.  Our intuitions are not cut out for nonlinearities. Nonlinear relationships can vary; they cannot be expressed verbally in a way that does justice to them. These nonlinear relationships are ubiquitous in [modern] life. Linear relationships are truly the exception; we only focus on them in classrooms and textbooks because they are easier to understand.” (extracts from pp. 87-89, Taleb)

Platonic fallacy:

Has several manifestations:

1. “the focus on those pure, well-defined, and easily discernible objects like triangles” and believing those models apply to “more social notions like friendship or love”;
2. focusing on categories “like friendship and love, at the cost of ignoring those objects of seemingly messier and less tractable structures”; and
3. the belief that “what cannot be Platonized [put into well-defined ‘forms’] and studied does not exist at all, or is not worth considering.” (p. 309, Taleb),/p>

Good examples are the importance we attach to numbers (did you know that 76.27% of all statistics are made up?), and how much better we feel when we have a label for an illness.

Retrospective distortion (Hindsight bias):

“Examining past events without adjusting for the forward passage of time leads to the illusion of posterior predictability.” (p. 310, Taleb)

Commonly known as ‘hindsight’, we think we could have predicted events, if only we known what we know now.  Most of what people look for, they do not find; most of what they find, they did not look for. But hindsight bias means discoveries and inventions appear to be more planned and systematic than they really are. As a result we underestimate serendipity and the accidental.

Reverse-engineering problem:

“It is easier to predict how an ice cube would melt into a puddle than, looking at a puddle, to guess the shape of the ice cube that may have caused it. This ‘inverse problem’ makes narrative disciplines and accounts (such as histories) suspicious.” (p. 310, Taleb)

Round-trip fallacy:

“The confusion of absence of evidence of Black Swans (or something else) for evidence of absence of Black Swans (or something else).” (p. 310, Taleb)

Just because you have never seen a Black Swan doesn’t mean they don’t exist.

Toxic knowledge:

“Additional knowledge of the minutiae of daily business can be useless, even actually toxic. The more information you give someone, the more hypothesis they will formulate along the way, and the worse off they will be.  They see more random noise and mistake it for information. The problem is that our ideas are sticky: once we produce a theory, we are not likely to change our minds — so those that delay developing their theories are better off. When you develop your opinions on the basis of weak evidence, you will have difficulty interpreting subsequent information that contradicts these opinions, even if this new information is obviously more accurate. Two mechanisms are at play here: Confirmation bias and belief perseverance. Remember, we treat ideas like possessions, and it will be hard for us to part with them.” (p. 144, Taleb)