What do a turkey being fattened up for Thanksgiving and Federal Reserve Board Chairman Ben Bernanke have in common? According to Nassim Nicholas Taleb, author of the best-selling The Black Swan: The Impact of the Highly Improbable, both mistakenly act as if the past predicts the future. The turkey, getting fed for 1,000 days, expected only food from the farmer until the ax fell just prior to the holiday. Bernanke, author of “The Great Moderation,” mistook a lack of volatility for a lack of risk. They both failed to consider the potential for a “black swan,” the focus of Taleb’s speech on “How to Live in a World of Black Swans,” delivered to the Financial Planning Association’s annual conference in Boston on October 4. Taleb reviewed some of the concepts discussed in his book, and then concluded with a call for investing in robust “barbell” portfolios.

Black  Swans, Mediocristan, and Extremistan

Three terms are key to understanding Taleb’s take on the current financial crisis in the U.S.: black swans, Mediocristan, and Extremistan.

The term “black swan” refers to an unexpected rare event. It comes from the European assumption that all swans were white—until they discovered the black swan in Australia. According to Taleb, a statistical black swan:

• Must be of very low probability
• Carries massive consequences when it occurs
• Is not anticipated before the fact, but after the fact “everyone” acts as if they know exactly why it happened

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