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1) prevent the BLACK SWAN from working against you
2) allow the BLACK SWAN to work for you.
Let's say 2 BLACK SWANS happen, one long and one short.
If you only play long, then you will catch the long one.
If you switch teams, there is a possibility you do not catch one and they both work against you. Of course, you could be lucky and have both work for you but based on results how often does that happen (to you) ?
4. The objective is not to buy low and sell high, but to buy high and to sell higher. We can never know what price is "low." Nor can we know what price is "high." Always remember that sugar once fell from $1.25/lb to 2 cent/lb and seemed "cheap" many times along the way.
We can know what price is RELATIVELY low compared to yesterday's low, this week's low, this month's low, this year's low, etc...
5. In bull markets we can only be long or neutral, and in bear markets we can only be short or neutral. That may seem self-evident; it is not, and it is a lesson learned too late by far too many.
Price goes up and down in bear markets and in bull markets.
The rat does not know about bull and bear markets.
The rat knows how to get cheese more times than not.
"Look, for example, at this elegant little experiment. A rat was put in a T-shaped maze with a few morsels of food placed on either the far right or left side of the enclosure. The placement of the food is randomly determined, but the dice is rigged: over the long run, the food was placed on the left side sixty per cent of the time. How did the rat respond? It quickly realized that the left side was more rewarding. As a result, it always went to the left, which resulted in a sixty percent success rate. The rat didn't strive for perfection. It didn't search for a Unified Theory of the T-shaped maze, or try to decipher the disorder. Instead, it accepted the inherent uncertainty of the reward and learned to settle for the best possible alternative.
The experiment was then repeated with Yale undergraduates. Unlike the rat, their swollen brains stubbornly searched for the elusive pattern that determined the placement of the reward. They made predictions and then tried to learn from their prediction errors. The problem was that there was nothing to predict: the randomness was real. Because the students refused to settle for a 60 percent success rate, they ended up with a 52 percent success rate. Although most of the students were convinced they were making progress towards identifying the underlying algorithm, they were actually being outsmarted by a rat." - P64 "HOW WE DECIDE"
The Black Swan Theory (in Nassim Nicholas Taleb's version) concerns high-impact, hard-to-predict, and rare events beyond the realm of normal expectations. Unlike the philosophical " black swan problem", the "Black Swan Theory" (capitalized) refers only to events of large magnitude and consequence and their dominant role in history. "Black Swan" events are considered extreme outliers. Note that in his writings Taleb never uses the phrase "Black Swan Theory"; instead, he refers to "Black Swan Events" (capitalized).
Based on the author's criteria:
The event is a surprise.
The event has a major impact.
After the fact, the event is rationalized by hindsight, as if it had been expected.
