The Black Swan: The Impact of the Highly Improbable by Nassim Nicholas Taleb

 

Book No. 3: The Black Swan: The Impact of the Highly Improbable by Nassim Nicholas Taleb

(Source: Amazon.com) 

The Black Swan spits in the eye of conventional analysts and economists. If you don’t like your previously held beliefs about the market challenged, then we don’t recommend this book.

However… if you are like us and are always looking for the cracks in the dam to start spreading, this book is for you.

Traders have often overlooked Taleb’s book in favor of his other classic, Fooled by Randomness (which we also recommend if you haven’t read it yet). Both books show how our psychology can conspire against us to make us blind to the most significant risks and opportunities in the market.

If you hear a “prominent” economist using the word equilibrium, or normal distribution, do not argue with him; just ignore him, or try to put a rat down his shirt.

Taleb makes a strong case that traders tend to overprice small changes in the market and underprice risky-but-rare catastrophic events. In another of Taleb’s books, he proves this using option pricing theory, which is also recommended for those with a mathematical background.

Reading The Black Swan will give you insights into why market crashes happen… which may not help you predict them but will help you to identify them when they happen before it is too late. The book is not purely about trading, either; this is an excellent read for anyone who wants to understand why we tend to underestimate the probability of significant changes in all aspects of our lives.