"The art of war teaches us to rely not on the likelihood of the enemy's not coming, but on our own readiness to receive him; not on the chance of his not attacking, but rather on the fact that we have made our position unassailable." - Sun Tzu, The Art of War
"The art of survival teaches us to rely not on the likelihood of the LOSSES's not coming, but on our own readiness to receive him; not on the chance of his not attacking, but rather on the fact that we have made our position unassailable." - Createwealth8888, The Art of Survival
Before jumping into any investment of any kinds including trading or setting up small businesses, besides looking at how much we are going to MAKE, few people really think harder, how much we are going to LOSE, and how long can we SURVIVE under losing environment before we are forced to GIVE UP. Always remember that there is possibility of a BLACK SWAN appearing.
Black swan theory
The term black swan comes from the ancient Western conception that all swans were white. Thus, the Black Swan is an oft cited reference in philosophical discussions of the improbable. Aristotle's Prior Analytics is most likely the original reference that makes use of example syllogisms involving the predicates "white", "black" and "swan." More specifically Aristotle uses the White Swan as an example of necessary relations and the Black Swan as improbable. This example may be used to demonstrate either deductive or inductive reasoning. However, neither form of reasoning is infallible since in inductive reasoning premises of an argument may support a conclusion but does not ensure it and similarly in deductive reasoning an argument is dependent on the truth of its premises. That is, a false premise can possibly lead to a false result, and inconclusive premises will also yield an inconclusive conclusion. John Stuart Mill first used the black swan narrative to discuss falsification.
Ironically the 17th Century discovery of black swans in Australia metamorphosed the term to connote an exception to the rule and the very existence of the improbable. Thus, the limits of the argument behind "all swans are white" is exposed - it is merely based on the limits of experience (e.g that every swan I have seen, heard, or read about is white). Hume's attack against induction and causation is primarily based on the limits of experience and so too the limitations of scientific knowledge.
Rare and improbable events do occur much more than we dare to think. Our thinking is usually limited in scope and we make assumptions based on what we see, know, and assume. Reality, however, is much more complicated and unpredictable than we think.
Also, assumptions relevant to average situations are less relevant to irregular situations, especially when the "rules of the game" themselves do change.
The huge effect
Extreme events do happen and have a big effect. Examples abound, including September 11th. The Internet with its various effects was scarcely anticipated, and it is a development that has had a significant effect. The effects of extreme events are even higher due to the fact that they are unexpected.
Limited human knowledge
Why do people tend to neglect rare events? Partly because humans underestimate their ignorance in most situations—the effect of unexpected events is far more significant than people often imagine. Taleb argues that the proposition "we know" is in many cases an illusion—the human mind tends to think it knows, but it does not always have a solid basis for this delusion of "I know". This notion that we do not know is very old, dated as far back at least as Socrates. Some felt[who?] that the advancement of science has rendered the world well-known; Taleb argues that while science added knowledge, the world did not turn into a fictitious world where everything is known. Socrates' dictum "the only thing I know is that I do not know" is as true as ever, Taleb concludes. Taleb characterizes the trait, in part, as the Ludic fallacy.
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