One of the most neuron-draining concepts that my friends have told me about is “there is no way you can imagine a new color unless you have witnessed it.” While draining my brain, craving to understand how to expand my imaginative spectrum of color, this notion struck me with its similarity to a Black Swan event. Its mnemonic origin goes back to philosopher John Stuart Mill’s idea in “A System of Logic” in 1843. According to Mill, Europeans held the belief that “all swans are white” because they had never witnessed black swans, highlighting the peril of collective inductive reasoning (204).   

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Nassim Nicholas Taleb, a “statistician, trader, and author,” famously popularized the idea of Black Swan events in his 2007 publication directly prior to the 2008 financial crisis (Berenson). In his seminal work, “The Black Swan,” Taleb presents a compelling critique of the prevailing wisdom that rational acumen bestows financial professionals with the ability to accurately forecast market performance. According to Taleb, a Black Swan event is defined by three key characteristics: rarity beyond the realm of regular expectation, extreme impact, and retrospective (though not prospective) predictability (Bogle 30). These events mercilessly reveal that financial professionals’ avowed purports to predict the future, in the face of an inscrutable financial market, can be futile and absurd.   

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By focusing on Black Swan events’ psychological foundation known as the Monte Carlo fallacy and the philosophical underpinning in Platonic blindness, one can explore the absurdity and incapability of attempting to foresee the financial market. Instead of voraciously slogging to be omniscient, one should utilize a positive mindset and the possible strategies to maintain personal economic buoyancy, both monetarily and mentally.  

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Black Swan events in the financial market pertain to instances of financial crisis or financial turmoil that are commonly assumed to be improbable due to the limited experiences of financial professionals or their excessive optimism regarding the efficacy of regulatory systems (as exemplified by the 2007-2008 Subprime Mortgage Crisis) (Zimmer). Black swan events in financial markets have been observed throughout history, characterized by the potential to exhibit drastic, wide-reaching consequences in affected markets. These events are often marked by their nature of unpredictability, and subject to hindsight bias (the tendency to overestimate the ex-ante likelihood of an outcome, relative to what one would have guessed before the event (MacCoun). In recent years, instances of such events include the COVID-19 pandemic, the Global Financial Crisis of 2008, and the 2000 Dot-Com Crash (CFI).    

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People are incorrigible. The phenomenon, coined by Alan Greenspan, “irrational exuberance”, describing an elevated state of speculative fervor, has been observed to persist over time (Shiller). However, the Monte Carlo fallacy's reliance as a backbone of predicting financial market performance is too burdensome.   

Also referred to as “The Gambler’s Fallacy,” a common sight that perfectly encapsulates this phenomenon is observed regularly at dorm poker table. Imagine a weekly Deja-vu scenario on the poker table in which your roommate always bluffs their hand. In a weekly poker game unlike the rest, your roommate bluffs the first nine hands. You go all in, what’s to say the tenth hand isn’t a continuation of their saga of facades. To your surprise your roommate has the winning hand, and you lose all your money in a shameful defeat. Here, there exists a prevalent misconception that the historical occurrence of bluffed hands surpasses that of truthful ones, leading to the erroneous assumption that the subsequent outcome will inevitably be a bluffed hand.   

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In a similar vein, much to gamblers, financial professionals have a propensity to undervalue the risks associated with the market activities. In this concept, the Monte Karlo fallacy refers to a cognitive misjudgment of the randomness and independence of a sequence of events. Monte Karlo fallacy has proven to be dangerous in the world of finance, that as a collective community, the financial workers uniformly neglect the incidents that already ring the dead bell of the upcoming crisis. Throughout the financial market collapse caused by irrational exuberance, it can be observed that financial professionals, when confronted with pyrrhic semblance resulting from a lack of regulation or economic inflation, may fail to retain a rational mindset necessary for analyzing such exuberance.  

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How do Black Swan events relate to the Monte Karlo fallacy then? Black Swan events are unpredictable and random. If one (I mean, you) firmly believed that your roommates knew some magic trick or altered the cards in anyway, you maintained confidence in your ability to accurately anticipate future financial performance, it is important to consider the randomness of financially volatile events. Think of the 2008 Subprime Mortgage Crisis, think of the COVID-19 pandemic; these occurrences were unforeseeable. Therefore, these events substantiate the impracticality of forecasting the future performance of the financial market. The error is in the mindset to accurately forecast future performance, as random and independent events that “have no bearing on each other thus cannot influence a future outcome” (Shatz).   

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  What exactly prompts us to exhibit such a feverish inclination towards predicting the future, despite being aware of the absurdity of such avowed hope? Taleb offers one explanation. This concept can be perceived as the source of relief, as it grants (at least to my father, when his stock is in tank *again*) freedom from excessive self-criticism over missing a rational mindset. Why not attribute the responsibility to the media and society, blaming them as convenient justifications for our irrational selves?  

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The novel explanation that Taleb builds by integrating media and sociology elucidates people’s reliance on predicting the future. This framework encompasses two key concepts: “platonify” and “platonic field.” According to Taleb, people experience an entrenched sense of insecurity and a satiable desire for positive future market outcomes. As a result, they tend to anchor their mental need towards a tangible object, something grandiose, and provides them with a sense of trust in its potential for a prosperous future. He argued, that “we (humans) love the confirmation, the palpable, the real, the visible, the concrete, the known…. Click here to enter text. the Académie Françoise, Harvard Business School, the Nobel Prize, dark business suits with white shirts and Ferragamo ties, the moving discourse, and the lurid” (132) The psychological bridging between aspiration for a successful future and “the handicap of authoritative and learned people” is known as “platonification” (Taleb 8). The process of platonizing involves the human tendency to establish categorical frameworks to simplify complex phenomena. However, this simplification comes at the expense of disregarding the outliers, specifically the occurrence of rare and unpredictable events.   

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Digging into the foundation of platonificaiton, the reliance on superficial superiority for resolving anxiety comes from “cognitive miser.” This psychological term illustrates the fundamental circuit of human reasoning, wherein individuals prioritize the “rapid, adequate solutions rather than for slow, accurate solutions” (Fiske and Taylor 15). In the current world where social media over-exposes random, shattered pieces of information, designed to be eye-catching in exuberant languages, this cognitive circuit inevitably magnifies its ability to generate errors and biases, hence jeopardizing our critical thinking ability. Moreover, such over-exposure irrationalizes people to be bildungsphilister (a term from Nietzsche, meaning “someone who reads newspapers and reviews and imagines themselves to be cultured and educated but lacks genuine, introspective erudition.”) Instead of collecting and analyzing data on financial markets, many of the bildungsphilisgter choose to read a 1-minute short anecdote with title such as “END OF WORLD: THIS IS HOW U CAN PROTECT UR MONEY IN XXX INFLATION.” Interestingly, these people habitually enjoy and are satisfied with information that they can access immediately and thus reduce their internal anxiety and fear of the unknown. Or alternatively, some of them try to convince themselves of their ideas by seeking out partial information. Are they really craving for information on their situation? No. Unfortunately, such futile attempts only reinforce their conviction.    

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People’s reliance on financial predictions exploits their own desire for control and mastery over their possessions. As we try to control the assets we own and the mediums we use for our benefits, it is common to rely on external factors because of the volatility of these mediums. Such mediums paralyze us against the effects of the volatility generated by Black Swan events. The accumulation of insecurity plays a significant role in the existence of financial market predictions. When the prediction comes in association with numerous profits, the anxiety and greed to be prophetic generates unavoidable simplification of our minds, putting both our sanity and the financial world into unnecessary turmoil. Thus, it is a valuable tool to develop a tolerance of the volatility and instability of the financial markets. Remember these two life-saving remedies when dealing with financial risks: rationality and clear-mindedness.