The Black Swan

Abstract

The Black Swan (BS) was brought to popular attention in the book by Nassim Taleb. BS was an outlier, had an extreme impact, was open to causal explanation after it appeared and was hard to predict. BS explained how the idea of normality had to be rejected and the idea of power law had to be accepted. BS highlights the non-linear and dynamic character of natural systems but subjectively believes that subjects like finance can not become scientific owing to the social nature of wealth, which can not be quantified. BS builds its subjective case of rejecting normality based on the fact that the probability of outliers decay very fast in the bell curve, while events which mattered and concerned human decision making and broad risk in society were driven by the power law, which saw a slower probability decay. This paper explains how the failure of preferential attachment as an idea to explain the mathematics of Rich Get Richer is connected to the failure of Taleb’s BS. And how the Mean Reversion Framework architecture which looks at Rich Get Richer, Poor Get Richer, Rich Get Poor and Poor Get Poorer in the same context can explain the relative probabilistic transformation between the Poor and Rich and hence shed more light on the debate between normality and non-normality. Understanding of outliers need more than a simple rejection of normality and propounding of power law as all encompassing.

Keywords: Power Law, Normal Distribution, Persistence, Mean Reversion, Black Swans, Outliers, Mean Reversion Framework

JEL Classification: A00, A10