Book Club Session Recap: The Black Swan

By Emily Li and Sydney Wozniczka

The Stepping Stone, May 2025

On Sept. 25, 2024, the Joint Risk Management (JRM) and Leadership & Development (L&D) sessions co-sponsored a book club session to discuss Nassim Nicholas Taleb’s seminal work, The Black Swan: The Impact of the Highly Improbable. 20 members from diverse backgrounds gathered virtually for an in-depth exploration of the book's themes and a lively discussion on the implications of Black Swan events in both personal and professional contexts. Notably, the session included both seasoned risk experts and emerging risk managers, fostering a balance of innovative ideas and established knowledge.

Overview of The Black Swan

Taleb's The Black Swan delves into the concept of the rare and unpredictable event, termed Black Swan, and argues that our inability to forecast these events is rooted in the limitations of our knowledge and inherent cognitive biases. The book is structured into three distinct sections, each addressing different facets of these events.

Part One: "Umberto Eco's Antilibrary"

In the first section, Taleb introduces the concept of the Black Swan and scrutinizes the limitations of human knowledge. He employs Umberto Eco's library metaphor to emphasize that what we do not know is far more significant than what we do know. Taleb asserts that humans often believe they possess more knowledge than they actually do, rendering them blind to the unknown. Through the lens of intellectual humility, he underscores the necessity of acknowledging our knowledge limits to remain open and adaptable when confronted with the unexpected.

Part Two: "We Just Can't Predict"

The second section explores why traditional forecasting methods fail, particularly critiquing the reliance on Gaussian distributions and the bell curve, which overlook the extreme deviations that characterize Black Swan events. Taleb discusses the dangers of herding behavior among forecasters, which leads to a convergence of forecasts that may stray far from actual outcomes. Additionally, he highlights the narrative fallacy, where we create stories to explain past random events, thereby distorting our understanding of history.

Part Three: "Those Grey Swans of Extremistan"

In the final section, Taleb examines the implications of Black Swan events across various domains, including finance, politics, and personal life. He introduces the concepts of "Extremistan" and "Mediocristan."

Extremistan refers to a realm where a single observation can disproportionately affect overall results, characterized by fat-tailed distributions. Conversely, Mediocristan represents domains with thin-tailed events, where impacts do not correlate closely with broader outcomes. Taleb explains that financial markets embody Extremistan, as events like market crashes can be disproportionately impactful. He reiterates that reliance on Gaussian distributions leads to an underestimation of risk.

To navigate the challenges posed by Extremistan, Taleb prescribes strategies such as:

fostering intellectual humility,
applying the barbell strategy (combining very safe and very speculative investments to minimize catastrophic loss), and
developing systems that exhibit robustness and antifragility.

Taleb concludes by advocating for a skeptical and humble approach to knowledge and prediction. Instead of attempting to foresee Black Swan events, he encourages us to build resilience against them by acknowledging our limitations and preparing for the unexpected. He suggests strategies like diversification, redundancy, and avoiding over-reliance on predictive models. This last point should be particularly interesting for actuaries whose work so depends on modeling. The book ultimately inspires readers to embrace uncertainty, prepare for the unforeseen, and maintain skepticism toward overly confident forecasts.

Discussion Highlights

The book club session featured a robust discussion on the practical implications of Black Swan events, with participants sharing insights and experiences from their personal and professional lives.

Overuse of the Term Black Swan

One participant observed the misuse of the term Black Swan to justify neglecting prudent risk prevention measures. They recounted an incident involving a builder in Texas who claimed that insufficient pipe insulation was acceptable because “extreme cold weather in Texas is a Black Swan event.” This oversight, despite prior documented freezing conditions in various years that caused numerous pipe failures, illustrates a cognitive bias where individuals focus on the “normal” and neglect to prepare for the “extreme.” The group collectively recognized that denying the existence of a known extreme event differs significantly from encountering a truly unpredictable “unknown unknown,” the essence of which Taleb describes in his work.

A relevant discussion point was how to distinguish between noise and early signs of a true Black Swan event. The group agreed that not all extreme events qualify, and that there is a need for a more nuanced understanding. This involves developing better tools and frameworks to identify early warning signals without falling into the trap of over-prediction.

It should also be acknowledged that their definition could differ from person to person or company to company. One example given was that cancer is a Black Swan event for a person with no family history of such cancer, but not for a patient with a family history.

Unpredictability of Black Swan Events & The Purpose of Prediction

The group also discussed how Black Swan events can “mimic” prior events, but that still doesn’t make them predictable. It is the nuance that led up to the event and its consequences that create a distinguishable Black Swan. One example discussed was whether the COVID-19 pandemic was a Black Swan given the historical occurrence of pandemics. The group agreed that the pandemic itself does not qualify, but how the pandemic unfolded and its interaction with the financial market could make it a Black Swan event.

Considering the unpredictability of Black Swan events, one member questioned whether organizations/individuals should just stop predicting. The group discussed the purposes of making a prediction and preparing for those rare and unpredictable events, including:

Preparedness: By attempting to predict these events, organizations can develop contingency plans and strategies to mitigate potential impacts. This preparedness can reduce the severity of the consequences when such events occur.
Resilience Building: Understanding potential risks, even if they are highly improbable, helps in building more resilient systems and processes that can withstand unexpected shocks.
Pattern Recognition / Refinements: While these events are unpredictable, studying past events can provide insights into patterns or triggers that might lead to similar occurrences. This exercise can inform better decision-making.
Continuous Enhancements: Continuous improvement of predictive models, even if they can't predict Black Swan events perfectly, can enhance understanding of complex systems and reduce vulnerability to unforeseen events.

Another member raised a thought-provoking question: “If we are preparing for an extreme event, does it cease to be a Black Swan event?” Preparation may transform an unpredictable anomaly into a manageable risk, redirecting focus from prediction to resilience and adaptability. This is exactly why we want to continue predicting, reflecting, and refining our predictive models so that we build resilience and adaptability.

Danger of Gaussian Distribution

Aligning with Taleb’s criticism of the Gaussian distribution and its shortcomings in modeling real-world phenomena, the group discussed the implications for the actuarial profession. The world does not operate on a Gaussian distribution, and relying on such models can lead to significant underestimation of risks.

Gaussian distribution is a common assumption embedded in various actuarial assumptions. One member highlighted that sometimes we assume Gaussian distribution in our experience studies and treat historical data that do not fit this distribution as outliers or noise. It raises the question on how we should distinguish between noise and early signs of a true Black Swan event.

The group also discussed that the use of Gaussian distribution and ignoring the Black Swan events/outliers can be reasonable in certain assumption settings, as the quality of the assumption is not solely measured on accuracy, but also stability. For assumptions that are used for long-term trends, over-sensitive assumptions can do more harm than good. One member argued that agent-based modeling, which considers the interactions of individual agents, is a more realistic approach.

Will AI be the Solution?

The group also debated whether AI will become the ultimate solution for more accurate prediction, considering AI excels at running through large datasets and recognizing complex patterns and relationships. Most members believe that AI is only as good as how it is trained. While AI can process large datasets and improve modeling accuracy, it will still lack the human creativity necessary for better predictions. Despite the capabilities of AI, it cannot fully replace human intuition and creativity and will thus need to be used in conjunction with human thought. Some members remain hopeful about the superintelligence that AI can offer once it crosses its tipping point.

Notes at the End

The book club session on The Black Swan fostered a rich and engaging discussion that highlighted the complexities and challenges associated with predicting and preparing for highly improbable events. Participants gained valuable insights into the limitations of traditional forecasting methods and the importance of intellectual humility, resilience, and adaptability in the face of uncertainty. The session emphasized a balanced view of risk and the potential role of AI in enhancing predictive capabilities, while also recognizing the irreplaceable value of human intuition and creativity. As we continue to navigate an increasingly unpredictable world, the lessons from Taleb's work remind us to embrace uncertainty, prepare for the unforeseen, and remain skeptical of overly confident forecasts.

More to Come!

Missed the lively discussions in our previous book club sessions? No worries! Stay tuned for future announcements and ensure you don't miss out on the excitement. Sign up for the SOA Book Club email list to receive the latest updates and express your interest in volunteering with the program.

Are you eager for more in-depth conversations on hot-button risk topics with fellow professionals? Keep an eye out for the Joint Risk Management section’s exciting new "Risk and Refreshment" series, featuring one-hour dedicated discussions on selected risk topics.

Emily Li, FSA, CERA, FRM, MAAA, is a Manager at Deloitte, LLP. She can be reached at mengrli@deloitte.com or via LinkedIn.

Sydney Wozniczka, is a Consultant at Deloitte, LLP. She can be reached at swozniczka@deloitte.com or via LinkedIn.