Book reviews

The Black Swan. The impact of the highlyimprobable, Nassim Nicholas Taleb, Allen Lane(Eds.), 2007, Hardcover, 366 pages, ISBN: 978-0713-99995-2, £20, Paperback, ISBN 978-0141-03459-1, £8.99

In October 2004 I ran a scenario planning exercisein Sri Lanka with over 100 executives. Their task wasto write scenarios describing how events over the nextfive years might impact on the island's tourist industry.The scenarios they produced were rich with possibi-lities — the country's tragic civil war might or mightnot be resolved, escalating demand for oil on theworld's markets might cause rises in the price of airtravel to the country, increased wealth in India mightlead to more visitors from within the region, and so on.But there was one devastating event that was notincluded in a single scenario, and it occurred less thanthree months later— it was, of course, the Boxing Daytsunami.

Nassim Nicholas Taleb refers to events like these,which are both unpredictable and massive in theirimpact, as Black Swans. He uses the term to illustratethe dangers that arise when we use our limitedexperience of the world to produce confident asser-tions about the future or about the world beyond thatexperience. Before Europeans discovered Australiathey were convinced that all swans were white. Theobservation of just one black swan in Australia wassufficient to invalidate a belief that had been based onthousands of years of observations of white swans.Unfortunately, after the occurrence of a Black Swan,hindsight bias kicks in, and the event seems, inretrospect, to have been much more predictable than itreally was.

Taleb describes the world we live in as Extremistan:aworldwhere themost powerful and influential events–the events that really matter, such as the rise of

Google, 9/11 and the stock market crash of 1987 – liebeyond our ability to predict. He accuses statisticians,economists, and forecasters of living in a differentworld, Mediocristan, where past data is an adequatebasis for drawing inferences about the future, andGaussian distributions conveniently describe therange of uncertainty we face (the 1987 crash involveda fall of more than twenty standard deviations fromthe mean).

In a book which is by turns erudite and facetious,irritating and fascinating, but never cautious or selfeffacing, Taleb rails against iniquities ranging fromlinear regression and R-squared to ‘Platonicity’, whereour focus on ‘pure and well defined forms’ (such asmathematical models) blinds us to the messiness andintractability of the world, and makes us think weunderstand more than we do. He denounces theGaussian distribution as the Great Intellectual Fraud(GIF), and condemns those who fall for the ‘Ludicfallacy’ by applying the neat probability landscape ofthe casino to the rugged mountainous uncertainty thatprevails in Extremistan. His heroes include Mandel-brot, Hayek, Keynes and Eco (Mandelbrot's mathe-matics allow us to take into account the scalability ofExtremistan, where a few television celebrities cangain contracts worth hundreds of millions of dollarsand a tiny band of elite academics can number theircitations in tens of thousands). His villains include theself important ‘empty suits’ who are paid a fortune tomake forecasts in the world's financial centres that areno better than guesswork, and the media forecastingpundits who feed our need for reassuring certainty, butwho also fare no better than forecasts based on thetossing of a coin.

In a chapter called ‘The Scandal of Prediction’, heasks, ‘why on earth do we predict so much? … Whydon't we talk about our record in predicting? Whydon't we see how we (almost) always miss the big

Available online at www.sciencedirect.com

International Journal of Forecasting 24 (2008) 551–554www.elsevier.com/locate/ijforecast

events?’ The human race, he asserts, is afflicted by‘chronic underestimation of the possibility of thefuture straying from the course initially envisioned’.We suffer from ‘epistemic arrogance’, in that weoverestimate our knowledge, and, worse still, follow-ing each small increase in our knowledge ouroverconfidence swells disproportionately. Out ofaround a million papers in politics, finance andeconomics, he claims, there have only been a smallnumber of investigations into the predictive value ofthe knowledge amassed in these disciplines.

Spyros Makridakis and Michele Hibon are amongthe few people who have organised such investigations,and Taleb uses the results of their M-competitions toattack complex forecasting methods (though hewrongly implies that these competitions tested econo-metric methods: they actually focussed on time seriesmethods). In a similar vein, he argues that more pastdata, or more detailed data, tempt us into developingmore complex theories to explain what we have seen,and we end up mistaking noise for information. Whenwe extrapolate, our forecasts therefore let us down.

So where do Taleb's ideas leave the forecastingcommunity? Should the arguments in the sections ofthe book entitled ‘Once again beware the forecasters’or ‘Get another job’ cause us to quietly pack away ourlaptops and move to other, more productive fields? Weare even told (p. 163) that ‘Some forecasters causemore damage to society than criminals’, so is it timefor us to collectively turn ourselves in, conceding thatthis is a fair cop? Well, in a book that emphasises thehumbleness of human knowledge and the danger ofdrawing overconfident inferences from this knowl-edge, Taleb is clearly prepared to make some strong,confident statements based on what he thinks heknows. Follow his arguments through, and all thosehard working supply chain forecasters who use theirskills to keep customers supplied with goods andservices through thick and thin are wasting their time(close the baked beans forecasting department, therejust might be a Black Swan event sometime in the next5000 weeks). In Taleb's world, all those successfulforecasting models described in Ian Ayres' recentbook, Supercrunchers: How anything can be predicted(Ayres, 2007), somehow just don't exist. With hisunassailable self assurance, a Taleb living before thenineteenth century would surely have believed that allswans are white, and branded those who disagreed as

fools. But just as the modern Taleb accepts that at leastsome swans are black, a little more research wouldhave told him that at least some forecasters are useful.

Reference

Ayres, I. (2007). Supercrunchers: How Anything Can Be Predicted.London: John Murray.

Paul GoodwinThe Management School, University of Bath, Bath,

BA2 7AY, United KingdomE-mail address: mnspg@bath.ac.uk

Elements of Forecasting, Francis X. Diebold (Ed.),4th ed., Thomson, South-Western: Ohio, US(2007), 458 Hardcover, ISBN: 978-0-324-35904-6

This is the fourth edition ofDiebold's textbook on thestatistics and econometrics of forecasting, although it isthe first time it has been reviewed in the IJF. It hasobviously been well-received (apart from one knowl-edgeable and discontented reviewer on Amazon, towhom I will return). Its claimed target audience isquantitative undergraduates and post-grads, with aknowledge of regression being its only pre-requisite.The fourth edition gives an ‘enhanced and extendeddiscussion of probability and statistics of maximalrelevance to forecasting’. It includes many newexercises, problems and ‘complements, i.e. extensionsof the basic text’, with some re-working of material. Theexercises stay much the same, with data from the 1990s.As you would expect from someone as expert asDiebold, some aspects of the book are excellent. Inparticular, the discussion of statistical graphics, model-ling trend and seasonality, leading to ARIMA model-ling, is intuitively motivated, well paced and clear. WhatDiebold views as additional material is relegated to the‘complements’ section. This contains questions andchallenges to the students that most would findunnerving, with many of the references being welloutside the book's stated pre-requisite level (and even acomplex number intrudes at some point). Amore carefuland selective approach would be welcomed here.

doi:10.1016/j.ijforecast.2008.03.006

552 Book reviews