October 31, 2014

The Black Swan for Entrepreneurs

The Black Swan book review for entrepreneursLast week I read The Black Swan: The Impact of the Highly Improbable by Nassim Nicholas Taleb. If you are starting a high potential venture or are investing in one, this book has a lot of useful information.

The main thesis of the book is that prediction is very difficult and the statistical tools used to manage risk are flawed because they don’t deal well with “Black Swans” — really rare events with outsized effects, like September 11.

The book makes several useful points for entrepreneurs and investors that come from the existence of Black Swans.

  • One of these is that a valuable investment strategy is to put the vast majority of one’s investments in very safe instrument like treasury bills and the rest in venture capital-type investments. If you are lucky, one of those VC-like investments will be a Black Swan and give you a Google-type return.
  • A second valuable point is the uselessness of forecasting when you can’t predict the future with much accuracy. From the arguments in the book, it is easy to see how much time entrepreneurs waste preparing financial projections that invariably are incorrect.
  • A third valuable point is the sensitivity of outcomes to the variance in initial conditions. If there is even a moderate amount of variance in those conditions — like the talent of entrepreneurs or the attractiveness of their opportunities — the amount of variance across ventures becomes so magnified over time that one can explain tremendous differences between the most and least successful start-ups from minor differences in initial conditions. To me this point helps to explain how we get tremendous successes like Google from start-ups that, on day one, look only a little different from the typical start-up.

The one recommendation I would make to entrepreneurs interested in the information in this book is to get a book summary. The author is long-winded and spends a lot of time trying to impress readers with his knowledge of philosophy and superiority over other experts. I found that tiresome; and it detracts from the message. A good summary would just avoid the problem.

Editor’s note: In keeping with Professor Shane’s suggestion of reading a book summary, I found a free summary of The Black Swan over at BookJive. BookJive looks to be a helpful service that will even email new book summaries to you. There’s also a short YouTube video excerpt describing the Black Swan theory, delivered by Nassim Nicholas Taleb himself. — Anita Campbell, Editor

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About the Author: Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of eight books, including Illusions of Entrepreneurship: The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By; Finding Fertile Ground: Identifying Extraordinary Opportunities for New Ventures; Technology Strategy for Managers and Entrepreneurs; and From Ice Cream to the Internet: Using Franchising to Drive the Growth and Profits of Your Company.

11 Comments ▼

Scott Shane


Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.

11 Reactions

  1. The link for the free summary is very helpful. There is nothing more irritating than a book or movie that is too long with too much fluff. I prefer getting straight to the point. Thank you for a no nonsense review.

  2. I finally read through the book summary and have to say I’m not sure exactly how to put this book’s teachings to use.

    The message feels a little too much like “don’t bother planning, because it all depends on some unforeseen act happening over which you have no control anyway”.

    I don’t think I could live my life that way or run my business that way. Even if it’s true. :)

  3. Great book, specially for people who trade the markets.

    Anita, this book teaches you one clear lesson ; no matter what the facts are telling you, always plan for a worst case scenario.

    Very important in analysing markets.

  4. Moise, I can relate to your interpretation of the book – “no matter what the facts are telling you, always plan for a worst case scenario.” I am always thinking ahead . . . be it in my personal life, my professional life, my work, etc. Planning is wise but at times, I’ve discovered that there are just some things in life beyond our control. Maybe the authors point is simply – to not spend too much time planning. Make a plan, but don’t spend tireless hours of time doing so.

  5. @Moise, OK, I see, THAT lesson I can appreciate. “Plan for the worst case because something unexpected could happen.” At least then I feel like I am in control to some degree. I hate feeling like I have no control over anything, because, then what’s the point of your life?

    @Chris, “in all things, moderation.” Sounds like a good plan to me.

    — Anita

  6. I would not recommend it the book because although it does have several interesting ideas I find its writing style a mess of barely related chapters with little to hold it together.

    http://www.posbrowser.com.au/b2evolution/blogs/index.php?blog=1&s=black+swan&sentence=AND

  7. Hi Anita
    that bookjive book review now says “This book summary has been removed at the request of the book’s author. Please check back later for more details or view similar books.” Bummer.

    I enjoyed The Black Swan and pulled a lot of useful thinking from it. Like many biz books, there’s bias and fluff as some of the other comments allude to — but there are real gems in helping one to think analytically about the unknown, the stuff that can blindside you. Does it help us in running a small business? Maybe, if part of your work involves looking out for clients/customers.
    TJ

  8. @Bernard, thanks so much for sharing your review.

    @TJ, that’s too bad about removing the book summary. Actually, one can learn enough about the book to decide whether to read it just based on perusing some book reviews and comments like those here.

  9. Interesting concept — I hadn’t run across it before (unless of course the author pulled it out of thin air). A shame about the summary being removed… maybe I’ll try the youtube. Thanks for writing on this!

  10. Philosophical speaking, the occurrence of the “black swan” is not destroying the open-ended formation of the concept, swan. I really enjoy your book tips.

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