Nassim Taleb hit the jackpot on timing his book The Black Swan: The Impact of the Highly Improbable. However, the book is more theoretical than practical insofar as actionable advice.
In Kenneth Posner’s book, Stalking the Black Swan: Research and Decision Making in a World of Extreme Volatility,Ken moves past the proposition that black swans occur because humans posses biases and live in a universe packed with unknowns. Ken focuses his efforts on filling the void for all those Benjamin Graham acolytes who are interested in how black swans affect their beloved investment framework.
In brief, Ken advises thorough investors pick up some new skills including:
- Focusing on critical issues;
- Thinking probabilistically;
- Studying the diagnostic power of new information;
- Mitigating cognitive dissonance;
- Dropping complex models when environments turn volatile; and,
- Being ready to adjust decision-making rules and shift strategies.
In order to accomplish these goals, Ken recommends integrating both quantitative and psychological models into a single approach. Ken asserts that as computer power continues to accelerate, quant and human will become increasingly merged. He believes those who get this integration right will make much better investment decisions. We agree.
I found many topics well explained — especially:
- the importance of “hypothesizing” when considering future outcomes for an investment;
- a comparison of computer power to intuition explaining the strengths and weaknesses of each;
- the pitfalls in the emotional signal of confidence both in quantitative modeling and intuition;
- a guide to mapping out problems to maximize model accuracy while minimizing complexity;
- examples of how fundamental research can be implemented with sophisticated modeling techniques; and,
- a discipline to continuously adjust and refine analytical techniques.
If you are looking for a well-written book which seeks to merge quantitative analysis, fundamental research, and human psychology, Stalking the Black Swanprovides a great resource to help you fine tune your investing framework for the volatile environment of our times.