Fooled by the Black Swan

Vol. 22, No. 4, 2024
Sanjay K. Nawalkha

This paper offers a critical analysis of the normative theory of investment decisions as presented in Taleb’s The Black Swan. I find that the relentless pursuit of positive black swans can lead investors to overprice opportunities, potentially triggering financial bubbles and crashes in the medium to long term. Conversely, underinvestment in the corporate bond and stock markets due to extreme aversion to negative black swans, can result in significant shortfalls in wealth creation for individuals and value destruction for corporations. In defense of the Nobel prize-winning works of Black and Scholes and Merton, I contend that the issue lies not in the scandal of prediction, but in the crafty manipulation of information, which has contributed to Finance becoming a more pseudo-discipline.