MEX wrote about Apple's Browser and the implications:

According to the information Apple released to developers attending its WWDC event, the iPhone browser will enable applications to run in a ’sandbox’ environment, through which they can interface with the integrated applications to access functions like phone calls, email messaging, mapping, contacts and calendar. In practice, this means browser-based applications will be able to offer features like click-to-call, storing event reminders in the local calendar or showing a location on the integrated map.

Developer reaction to this announcement has divided into two camps. On the one hand, some are hugely dissappointed Apple is not providing a public SDK for genuine native application development; on the other, there are those who are delighted Apple has chosen such an open development path and are excited by the possibility of being able to go direct to consumers without the delivery channel issues which continue to impair developers on most mobile platforms.
...
There is Apple with unprecedented hype around its iPhone launch and a vested interest in building a web-based media platform spanning desktop, living room and mobile. Then there is Nokia, the world’s largest handset manufacturer, which has publicly stated its commitment to becoming an ‘internet company’ and is planning a 2008 re-organisation which will see its devices, software and services businesses merged into a single business unit. Coming in from the left field, you have Google and Adobe actively seeking to disenfranchise Microsoft from its dominance of the desktop by making the web the software platform of choice. And finally, there is an army of developers constantly innovating and pushing the boundaries of what’s possible with web-based applications.

Safari for Windows is part of a PLATFORM in the same sense that iTunes is part of the iPod platform or vice versa. In this case the platform in question is the iPhone and an as-yet unmentioned partner in that platform is Google.

The iPhone absolutely needs AJAX applications for the phone to be a success on AT&T's EDGE network. By pushing more functional logic into the browser, the bandwidth consumed per http round-trip is significantly reduced, making the phone apps faster and helping to justify that big price tag. The problem with this is that AJAX apps don't always work the same (or at all) on every browser. The iPhone has real browser support, which is good, but remember AJAX is based on JavaScript, which in this case is not so good. JavaScript isn't statically typed and each browser has its own version of JavaScript. Developers are typically forced to hand-code different versions of their AJAX apps for different browsers. With the AJAX economy dictating that browsers with big market share like IE and Firefox get most of the effort, that leaves Safari as a second-class browser and, potentially, a liability for the iPhone.

Whaddayado? Introduce a Windows version of Safari, get a million people to download it in the first week, and scare developers into moving Safari customization higher on their AJAX priority list.

Where Google comes into this story is with the Google Web Toolkit (GWT), an open source compiler that compiles Java source code into optimized browser-specific JavaScript code. GWT makes writing AJAX apps like writing regular apps in the sense that developers can use many of the tools they are used to. And GWT adds the advantage that the GWT compiler handles all the problems of working with specific browsers.

Om Malik wrote about how Apple's iPhone will change the mobile business:

A true web applications platform for the mobile: Charles Ying thinks that Apple just reinvented the mobile applications platform. “This isn’t mobile Flash, mobile Java, or even the mobile Web. It’s the real Web, the real deal,” he writes.

Break the Wireless Walled Gardens iPhone is fully functional iPod, with full tracks of music. Do you need to download ring tones for $2.99 a pop, when you get a full song for a third of that price? Ditto for Wallpapers, and themes, and everything else that is being sold on the carrier deck.

Shift of control to the customers: If the embedded (Safari) browser if it performs the way as hyped by Jobs & Co., will give us the choice-control we have on the web. Search engines to web sites – nothing will be determined by the wireless carriers who have thus far done nothing but create barriers between what we want, and giving us what they want to sell.

Slow demise of subsidized, boring phones filled with bloat ware: The introduction of the unlocked iPhone will do two things – it would basically get US buyers savvy to the idea of buying full priced unlocked phones. Secondly, it is going to cause a behavior change - of buying phones instead of freebies.

Keep it simple or else: One of the lasting (at least for me) changes that iPhone will bring to the mobile market is simplification. Their new user interface is going to make complex mobile services relatively simple, and can have the same impact as Blackberry had on the corporate market.

I am certain that the mobile telecoms world will count its time in two Eras. The Era BI: time Before the iPhone, and the ERA AI: time After the iPhone.
...
From June all reviewers around the world will compare all new high-end phones with the iPhone. How near do they arrive in being "almost as good as the iPhone". This is the phrase we will see in most reviews of smartphones. And the yardstick in usability will from now on - and my prediction is that for the fore-seeable future of mobile phones - the latest iPhone. A clear watershed moment in the industry. For the first time a major handset device which was designed from the start to be both a multipurpose smartphone and yet easy to use.
...
The second and much greater impact is the mobile internet, or the value-add services industry of mobile telecoms...It has been a lopsided battle, when most early internet-capable phones were monochrome WAP phones or modest speed GPRS phones with still tiny colour screens. Now we get the glorious sharp 3.5" iPhone screen and its powerful web access software. It was easy to suggest a laptop with a WiFi or WiMax access card would "forever" trump a 2" tiny pocket screen of an early 2.5G or 3G phone. Now we get the big screen iPhone and suddenly the pocket internet seems very plausible. And even at 500 dollars (subsidised) the iPhone costs half that of a laptop. Do we really need a new computer. If all we need is e-mail and music and uploading some pictures to Flickr or Myspace, isn't an iPhone enough?
...
Yes the iPhone is a radical device and yes, we need the American IT and media and adveritsing industries to wake up to mobile phones. And yes, the iPhone will bring valuable goals for all user interface design in mobile telecoms, both for handset makers and mobile operators. But all invention didn't happen at Apple or be caused by the iPhone.

But the level of the noise around mobile will double in June. Very many big guns will join the game. That is good. And it will be a change from an old Era, where handset makers like Nokia and Motorola ran the show with the major mobile operators (carriers). Now media giants will join in, as will major IT players and internet companies.

It is a testament to the power of Apple’s brand name and reputation that many consumers appear to be giving it a chance to redefine phones as the iPod did music players. AT&T said 1.1 million potential customers had signed up on the company’s Web site asking to be contacted when the phone is for sale.

Steven P. Jobs, Apple’s chief executive, has said that he expects Apple to sell 10 million iPhones by the end of 2008. That projection could include sales outside the United States, but Apple has not yet announced any deals with foreign carriers.
…
For AT&T “the iPhone launch is bigger than the launch of a new device,” Mr. Hodulik said. “It’s something more strategic. It’s about moving the whole brand.”

Walter Mossberg wrote about two alternatives – Blackberry's Curve and the Nokia N95.

The new BlackBerry Curve 8300, sold by AT&T, is sort of a cross between the maker's low-end consumer-oriented Pearl and its larger, more traditional models like the 8800 series. It costs $199 after rebate, with a two-year contract.
...
The Nokia N95...[which costs $749]....lacks a full keyboard, physical or virtual and its email is primitive, but that's not its main purpose. This device is the best combination of a camera and a phone I've ever tested, and includes a long list of other media features.
...
For $749, you could buy the Curve and a very nice digital camera. But the N95 is for photo enthusiasts who want an all-in-one device. The Curve is a more mainstream smart phone that aims for a balance of features at a low price.

Mobile browers are awful. The Treo isn't bad, and it's the best of the above three, but the Samsung and Blackberrry browsers should be outlawed. They are that bad. They are so bad that Blackberry users' opinions about mobile services, mobile startups, etc. should be summarily dismissed.
iPhone: Browser is reputedly very good.

Touch screens rule. Once you've gone touch you'll never go back. Treo has it, Blackberry doesn't, and it drives me nuts. Trying to use a thumb wheel to touch a specific screen element is like dancing about architecture. It's briefly mildly entertaining, but ultimately stupid.
iPhone: Touchscreen. 'Nuff said.

Big screens rule. The Samsung screen is teensy and irritating. The Blackberry and Treo screens are bigger and better, but I want more. I hate having online real estate so crunched. It feels so ... 640x480.
iPhone: Big, bright mofo screen.

Forget the fact that the ultra-high-speed surfing shown on the first crop of iPhone TV commercials is a crock. Forget, too, that the main technical impediment to fast smartphone browsing isn't software -- it's the carrier networks. (Many of the carriers are putting higher-speed networks in place, though for the iPhone only AT&T is of concern.)

Where Jobs has it right is that we all want an alternative to the excruciatingly slow loads we have to deal with today, on our BlackBerrys and other smartphones. Jobs is correct in implicitly recognizing that lighter, WAP-style Web pages aren't really what users want. They don't deliver complete enough content, nor do they do enough of an end-around to the slow-loading issue to matter.

So, notwithstanding all my iPhone bashing, Jobs's vision that browsing on your mobile device should be no different than it is on your PC is absolutely on target.

Among other things, the iPhone also has Apple's Safari browser, which will make for an excellent Internet browsing experience. Not to mention that the phone runs the OS X operating system. As Lev Grossman wrote in Time in January: “They began by melting the face off a video iPod. No clickwheel, no keypad. They sheared off the entire front and replaced it with a huge, bright, vivid screen--that touch screen Jobs got so excited about a few paragraphs ago. When you need to dial, it shows you a keypad; when you need other buttons, the screen serves them up. When you want to watch a video, the buttons disappear. Suddenly, the interface isn't fixed and rigid, it's fluid and molten. Software replaces hardware...Into that iPod they stuffed a working version of Apple's operating system, OS X, so that the phone could handle real, nontoy applications like Web browsers and e-mail clients. They put in a cell antenna and two more antennas for wi-fi and Bluetooth, plus a bunch of sensors, so that the phone knows how bright its screen should be and whether it should display vertically or horizontally, and when it should turn off the touch screen so that you don't accidentally operate it with your ear.”

PC Magazine has a detailed analysis of tie iPhone features with other smartphones. “The iPhone occupies a unique place in the wireless market, straddling the line between smartphones, feature phones, and portable media players. In some cases, it exceeds the capabilities of all of these devices, while it lags behind in others. Will Apple's magic combination of killer design, features, and a revolutionary touch interface be enough to match its enormous hype? We're only a week away from finding out.”

New York Magazine wrote:

It took half an hour, no more than that, after Jobs unveiled his gleaming new toy for the bloggers to dub it the Jesus Phone. Here was the gizmo we’d all been pining for lo these many years: a music player, camera, e-mail tool, Web browser, and cell phone, all rolled into one impossibly seductive package. After watching Jobs enact the ta-da moment with typical brio—“I didn’t sleep a wink last night”—even cynical observers were smitten. “What a weird fucking day Tuesday was,” Josh Quittner, the editor of Business 2.0, remarked. “It was as if we were all participating in a shared consensual hallucination … All these supposedly hard-bitten tech reporters wandering around like they were getting laid for the first time.”

The panting over the Jesus Phone must have satisfied Jobs no end: Every product he crafts he regards as a sacred object, the primary aspiration of which is to incite naked lust. And in the months since then, the breathing has only gotten heavier. At the launch, the sales goals Jobs set forth were demure: 1 percent of the world market, about 10 million units, by the end of 2008. But industry analysts are less bashful. Piper Jaffray’s Gene Munster forecasts sales of 15.6 million units in that time—and 45 million in 2009. “Apple has been so good at executing these different multimedia elements with the Mac and iPod that they might be able to take over with their phone,” says a London-based telecom investor. “Nokia and the rest of those guys are absolutely shitting themselves.”

Jobs has done little to dampen either the giddiness or the panic. “It’s the best iPod we’ve ever made,” he says of the iPhone. “It’s an incredibly great cell phone … And it’s the Internet in your pocket for really the first time. If it was any one of those three, it would be successful … but it’s all three!”

As Apple prepares to release its iPhone with AT&T later this week in the US, the expectations are that the mobile industry is set to be changed. The expectations surrounding the release of the iPhone have been sky high ever since Steve Jobs made the announcement earlier in the year, even though it has widely anticipated that Apple would launch a mobile phone. (Engadget covered the January announcement of the iPhone.)

So, what is it about the iPhone that, despite its $500 price and locked down status, makes it such a desirable device? Let's start with the features, as outlined on Apple's iPhone page. “iPhone is a revolutionary new mobile phone that allows you to make a call by simply tapping a name or number in your address book, a favorites list, or a call log. It also automatically syncs all your contacts from a PC, Mac, or Internet service. And it lets you select and listen to voicemail messages in whatever order you want — just like email.”

Wikipedia has more: “The iPhone's functions include those of a camera phone, a multimedia player, mobile phone, and Internet services like e-mail, text messaging, web browsing, Visual Voicemail and wireless connectivity. iPhone input is accomplished via touchscreen with virtual keyboard and buttons. The iPhone is a quad-band GSM phone, though Jobs mentioned in his keynote that Apple has a "plan to make 3G phones" in the future. Apple has filed more than 200 patents related to the technology behind the iPhone...The iPhone will be available from the Apple Store and from AT&T Mobility, formerly Cingular Wireless, with a price of US$499 for the 4 GB model and US$599 for the 8 GB model, based on a two-year service contract. Apple intends to make the phone available in Europe in Q4 2007 and in Asia in 2008.”

One of the first things that strikes you about the iPhone is that there is no keyboard. Wikipedia writes:

The 3.5 inch (8.9 cm) liquid crystal display (320×480 px at 160 ppi) HVGA touch screen topped with optical-quality glass is specifically created for use with a finger, or multiple fingers for multi-touch sensing. No stylus is needed, nor can one be used, as the touch screen requires bare skin to operate.

For text input, the device implements a virtual keyboard on the touchscreen. It has automatic spell checking, predictive word capabilities, and a dynamic dictionary that learns new words. Notably, the predictive word capabilities have been integrated with the dynamic virtual keyboard so that users will not have to be extremely accurate when typing — i.e. touching the edges of the desired letter or nearby letters on the keyboard will be predictively corrected when possible. Additionally, an optional landscape mode for text entry with the virtual keyboard has been mentioned by Apple executives as a possibility for iPhone, but Apple has not yet come to a final decision as to its inclusion in the shipping version of iPhone. A possible advantage of landscape text entry would be the availability of larger keys to ease text entry, especially for individuals with larger fingers.

Jason Kottke wrote in a review of the book on his blog:

The Ghost Map is a book about:
- a bacterium
- the human body
- a geographical map
- a man
- a working friendship
- a household
- a city government
- a neighborhood
- a waste management system1
- an epidemic
- a city
- human civilization

You hooked yet? Well, you should be. As the narrative unfolds around the 1854 London cholera epidemic, author Steven Johnson weaves all of these social, geographical, and biological structures/webs/networks into a scientific parable for the contemporary world. The book is at its best when it zooms among these different scales in a Powers of Ten-like fashion (something Johnson calls The Long Zoom), demonstrating the interplay between them: the way the geography of a neighborhood affected the spread of a virus, how ideas spreading within a social context are like an epidemic, or the comparison between the organism of the city and the geography of a bacterial colony within the human colon. None of this is surprising if you've read anything about emergence, complexity, or social scale invariance, but Johnson effectively demonstrates how tightly coupled the development of (as well as our understanding of) viral epidemics and large cities were across all of these scales.

There’s a great story here, one of the signal episodes in the history of medical science, and Johnson recounts it well. It centers, figuratively and literally, on the infamous Broad Street pump. That pump, which was public, free and previously considered a safe source of drinking water, drew from a well beneath Golden Square, home to some of London’s poorest and most overcrowded people. In the last week of August 1854, many residents of Golden Square suddenly took sick and began dying. Their symptoms included upset stomach, vomiting, gut cramps, diarrhea and racking thirst. Whatever the cause, it was fast — fast to kill (sometimes within 12 hours of onset) and fast in spreading to new victims. “Hundreds of residents had been seized by the disease within a few hours of one another, in many cases entire families, left to tend for themselves in dark, suffocating rooms,” Johnson writes. Seventy fatalities occurred in a 24-hour period, most within five square blocks, and hundreds more people were in danger. “You could see the dead being wheeled down the street by the cartload.”
...
Johnson goes beyond the immediate details of the 1854 epidemic to consider such related matters as the history of toilets, the upgrading of London’s sewer system, the importance of population density for a disease that travels in human excrement, and the positive as well as negative aspects of urbanization itself. Never before Victorian London, Johnson reminds us, had 2.4 million primates of any species lived together within a 30-mile perimeter.
By solving the cholera mystery, Johnson asserts, John Snow and Henry Whitehead helped make the world safe for big cities. And cities are “where the action is” (he really does use that phrase, alas), being “centers of opportunity, tolerance, wealth creation, social networking, health, population control and creativity.”

Woven into the story is a textbook on cholera, microbes, biology, society, urbanization, epidemics, sewers and cesspools, and much more.

It is the way I love to learn. by stories that mean something as opposed to dry textbooks or lectures that put me to sleep.

If you are fascinated by technology and its impact on society, you should read this book.

Steven Johnson's book “Emergence” was one of the inspirations for this blog's title. His newest book is “The Ghost Map.” It is about the 1854 cholera epidemic in London. This is what Publisher's Weekly wrote: “In August 28, 1854, working-class Londoner Sarah Lewis tossed a bucket of soiled water into the cesspool of her squalid apartment building and triggered the deadliest outbreak of cholera in the city's history. In this tightly written page-turner, Johnson uses his considerable skill to craft a story of suffering, perseverance and redemption that echoes to the present day. Describing a city and culture experiencing explosive growth, with its attendant promise and difficulty, Johnson builds the story around physician John Snow. In the face of a horrifying epidemic, Snow (pioneering developer of surgical anesthesia) posited the then radical theory that cholera was spread through contaminated water rather than through miasma, or smells in the air. Against considerable resistance from the medical and bureaucratic establishment, Snow persisted and, with hard work and groundbreaking research, helped to bring about a fundamental change in our understanding of disease and its spread. Johnson weaves in overlapping ideas about the growth of civilization, the organization of cities, and evolution to thrilling effect. From Snow's discovery of patient zero to Johnson's compelling argument for and celebration of cities, this makes for an illuminating and satisfying read.”

Here is what Steven Johnson wrote after finishing the first draft of the book:

This book has a single, sustained narrative line running through it, a first for me. It's the story of the Broad Street cholera outbreak that took place in London in September of 1854. The outbreak itself was arguably the deadliest in London's history -- it literally decimated the western side of Soho, killing more than ten percent of the population there in a matter of eight days -- but it is most famous for the map that the physician and epidemiologist John Snow made of the outbreak, a map that eventually helped convince the world that cholera was in fact a waterborne illness, and not transmitted via the air as the then-dominant miasma theory maintained.
...
In many ways, the story of Broad Street is all about the triumph of a certain kind of urbanism in the face of great adversity, the power of dense cities to create solutions to problems that they themselves have brought about. So many of the issues that define the modern world today -- the runaway growth of megacities, environmental crises, fears of apocalyptic epidemics, digital mapping, the need for clean water, urban terror, the rise of amateur expertise -- are there, in embryo, in the Broad Street outbreak.

So The Ghost Map is in part a disease thriller, with some genuinely spooky and unsettling narrative turns. But it also widens its focus to tell the history of London's sewer system, the evolutionary history of bacteria, the biological and cultural roots of the miasma theory, the bizarre waste management techniques of Victorian society, and so on. It is the story of ten days in London in 1854, but it's also an attempt to tell that story at three different scales of experience: from the point of view of the humans living through it, but also from the point of view of the cholera itself, and the city.

Cory Doctorow wrote in a review of the book:

David Weinberger's "Everything is Miscellaneous" is the kind of book that binds together innumerable miscellaneous threads and makes something new, coherent, and incontrovertible out of them. Weinberger's thesis is this: historically, we've divided the world into categories, topics, and hierarchies because physical objects need to be in one place or another, they can't be in all the places they might belong. Computers and the Internet turn this on its head: because a computer can "put things" in as many categories as they need to be in, because individuals can classify knowledge, tasks, and objects idiosyncratically, the hierarchy is revealed for what it always was, a convenient expedient masquerading as the True Shape of the Universe.

It's a powerful idea: from org charts to science, from music to retail theory, from government to education, every field of human endeavor is tinged with hierarchy, and every hierarchy is under assault from the Internet. One impact of this change is that it reveals the biases lurking underneath the editorial carvery of our systems. From the Dewey Decimal system's laughable clunkers (mentalist bunkum gets its own category, but Islam has to share a decimal with a couple competing "Eastern" faiths) to the Britannica's paring away at "old" biographies to make way for the new, Weinberger makes a compelling case for a new kind of knowledge that more faithfully represents the messy, glorious hairball of the real world.
...
Weinberger's conversational style, excellent examples, and extensive legwork (the places he visits and people he interviews can best be described as wonderfully miscellaneous) give this the hallmarks of an instant classic. And unlike many business/tech books, whose simple thesis could be stated in a single New Yorker article, but which are nevertheless expanded to book-length for commercial reasons, every chapter in Everything is Miscellaneous brings new insight to the subject. This is a hell of a book.

The alternative universe exists. Every day, more of our life is lived there. It’s called the digital world.

Instead of atoms that take up room, it’s made of bits.

Instead of making us walk long aisles, in the digital world everything is only a few clicks away.

Instead of having to be the same way for all people, it can instantly rearrange itself for each person and each person’s current task.

Instead of being limited by space and operational simplicity in the number of items it can stock, the digital world can include every item and variation the buyers at Staples could possibly want.

Instead of items being placed in one area of the store, or occasionally in two, they can be classified in every different category in which users might conceivably expect to find them.

Instead of living in the neat, ordered shelves we find in the Prototype Labs, items can be jumbled digitally and sorted out only when and how a user wants to look for them.

Those differences are significant. But they’re just the starting point. For something much larger is at stake than how we lay out our stores. The physical limitations that silently guide the organization of an office supply store also guide how we organize our businesses, our government, our schools. They have guided—and limited—how we organize knowledge itself. From management structures to encyclopedias, to the courses of study we put our children through, to the way we decide what’s worth believing, we have organized our ideas with principles designed for use in a world limited by the laws of physics.

Suppose that now, for the first time in history, we are able to arrange our concepts without the silent limitations of the physical. How might our ideas, organizations, and knowledge itself change?
...
As we invent new principles of organization that make sense in a world of knowledge freed from physical constraints, information doesn’t just want to be free. It wants to be miscellaneous.

I have followed David Weinberger's blog for a long time. So, it was natural to want to read his new book “Everything is Miscellaneous: The Power of the New Digital Disorder.” David's two previous books include “The Cluetrain Manifesto” (as co-author) and “Small Pieces Loosely Joined.”

From the book's inside flap:

Human beings are information omnivores: we are constantly collecting, labeling, and organizing data. But today, the shift from the physical to the digital is mixing, burning, and ripping our lives apart. In the past, everything had its one place--the physical world demanded it--but now everything has its places: multiple categories, multiple shelves. Simply put, everything is suddenly miscellaneous.

In Everything Is Miscellaneous, David Weinberger charts the new principles of digital order that are remaking business, education, politics, science, and culture. In his rollicking tour of the rise of the miscellaneous, he examines why the Dewey decimal system is stretched to the breaking point, how Rand McNally decides what information not to include in a physical map (and why Google Earth is winning that battle), how Staples stores emulate online shopping to increase sales, why your children’s teachers will stop having them memorize facts, and how the shift to digital music stands as the model for the future in virtually every industry. Finally, he shows how by "going miscellaneous," anyone can reap rewards from the deluge of information in modern work and life.

From A to Z, Everything Is Miscellaneous will completely reshape the way you think--and what you know--about the world.

As businesses go miscellaneous, information gets chopped into smaller and smaller pieces. But it also escapes its leash--adding to a pile that can be sorted and arranged by anyone with a Web browser and a Net connection. In fact, information exhibits bird-like "flocking behavior," joining with other information that adds value to it, creating swarms that help customers and, ultimately, the businesses from which the information initially escaped.

For example, Wize.com is a customer review site founded in 2005 by entrepreneur Doug Baker. The site provides reviews for everything from computers and MP3 players to coffee makers and baby strollers. But why do we need another place for reviews? If you’re using the Web to research what digital camera to buy for your father-in-law, you probably feel there are far too many sites out there already. By the time you have scrolled through one store’s customer reviews for each candidate camera and then cross-referenced the positive and the negative with the expert reviews at each of your bookmarked consumer magazines, you have to start the process again just to remember what people said. Wize in fact aims at exactly that problem. It pulls together reviews from many outside sources and aggregates them into three piles: user reviews, expert reviews (with links to the online publications), and the general "buzz." (For shoppers looking for a quick read on a product, Wize assigns an overall ranking.) When Wize reports that 97 percent of users love the Nikon D200 camera, it includes links to the online stores where the user reviews are posted, so customers are driven back to the businesses to spend their money.

Wize...[makes] money by selling advertising, but their value is in the way their sites aggregate the miscellaneous--letting lots of independent sources flock together, all in one place.

We’re seeing the same trend in industry after industry, including music, travel, and the news media. Information gets released into the wild (sometimes against a company’s will), where it joins up with other information, and the act of aggregating adds value. Companies lose some control, but they gain market presence and smarter customers. The companies that are succeeding in the new digital skies are the ones that allow their customers to add their own information and the aggregators to mix it up, because whether or not information wants to be free, it sure wants to flock.

I attended a talk by Mohnish Pabrai a few years ago in Mumbai. He spoke about his philosophy of investing, which has been heavily influenced by Warren Buffet. But there were also some unique perspectives that he had. Now, Mohnish has written a book that every investor and entrepreneur must read: “The Dhandho Investor.” The subtitle “The Low-Risk Value Method to High Returns” could as easily have been “Heads I win, Tails I don't lose much.”

From the book's inside flap:

All investors are told that if you want to earn high rates of returns, you must take on greater risk. Of course, the groundbreaking value investing strategies of Benjamin Graham, Warren Buffett, and Charlie Munger have shown that it is indeed possible to keep risk to a minimum while still making a reasonable profit. The Dhandho method takes their successful approach to investing one step further and shows how you can actually maximize rewards while minimizing risk.

Dhandho (pronounced dhun-doe), literally translated, means "endeavors that create wealth." In The Dhandho Investor, Mohnish Pabrai demonstrates how the powerful Dhandho capital allocation framework of India's business-savvy Patels can be successfully applied and replicated by individual value investors in the stock market. The Patels, a small ethnic group from India, first began arriving in the United States in the 1970s as refugees with little education or capital. Today, they own over $40 billion in motel assets in the United States, pay over $725 million a year in taxes, and employ nearly a million people. How did this small, impoverished group come out of nowhere and end up accumulating such vast resources? The answer lies in their low-risk, high-return approach to business: Dhandho. This book will show you how to use that same technique to generate high returns in the stock market.

Pabrai's hedge funds, Pabrai Investment Funds, have outperformed all of the major indices and over 99% of other managed funds. $100,000 invested with Pabrai in 1999 was worth over $659,000 by 2006—an annualized return of over 28% after all fees and expenses. In this book, Pabrai distills the methods of Buffett, Graham, and Munger into a user-friendly approach applicable to individual investors. Combining their legendary investing wisdom with the business acumen of the Patels, Pabrai lays out the Dhandho framework in an easy-to-use format that will help any investor significantly improve on their results and soundly beat the markets—as well as most professionals.

The key concept to glean from this book is the difference between uncertainty and risk. According to Pabrai, most investors don't understand the difference. Risk means the chance of a loss of capital. Uncertainty is the range of different outcomes. So a stock may have high uncertainty but may not be risky, if no one knows what will happen but the worst case scenario would not results in a huge loss. According to Pabrai, these investments provide the greatest opportunities for investors.

The Dhandho Investor is pretty lean for an investment book --183 pages with fairly large type. Consequently, it's short on specifics. You won't really learn about how to analyze stocks. But that's fine. There are hundreds of books for that. But Monish Pabrai has presented a compelling way of looking at investing and decision-making in general, and reading this book will likely benefit any investor.

Invest in Existing Businesses
Invest in Simple Businesses
Invest in Distressed Businesses in Distressed Industries
Invest in Businesses with Durable Models
Few Bets, Big Bets, Infrequent Bets
Fixate on Arbitrage
Margin of Safety – Always
Invest in Low-Risk, High-Uncertainty Businesses
Invest in the Copycats rather than the Innovators

Continuing with Atanu Dey's perspective of the speech that the Indian Prime Minister should have made to the CII last month:

Ladies and gentlemen, our society is not today that heaven of freedom which Tagore prayed for, where “the world has not been broken up into fragments by narrow domestic walls. . .” The industry did not create these walls. The fragmentation of our society along caste and religious lines is the doing of political policies. Our policies of favoring special groups arise out of “the dreary desert sands of dead habit” of dividing the country for narrow-minded mean political gains.

The industry did not create the divisions in society, it cannot be expected to correct these distortions, and it must not be commanded to perpetuate these odious divisions by hiring based on caste and religious categories. The destruction of whatever the Indian industry has accomplished must not be lost in the cesspool of communal politics. Industry did not create the deep social inequalities. The government by raising the specter of violent social revolt to force industry to assume responsibility for the divisions of society is guilty of criminal negligence and gross dereliction of duty.

The government has failed so far to address the real concerns of its citizens. Universal primary education, although guaranteed by the constitution, is still not a reality after 60 years of independence. It is shameful that half the world’s illiterates are Indian. Surely, the failure of the Indian education system cannot be laid at the doorsteps of Indian industry. Indeed, Indian industry itself suffers as a consequence of the massive failure of the government in providing education. If Indian industry can build world-class corporations, surely it is quite capable of efficiently educating the population – provided of course that it is allowed to do so.

Indians are as talented a people as any other. Wherever they have enjoyed economic freedom, they have been among the best, from steel manufacture to high technology. Let’s ask ourselves why Indians in the US do so well, to just take one example out of scores of places where Indians shine. They succeed more often outside India than within India because in India they are denied economic freedom. They are forced to leave India to concentrate their entrepreneurial and innovative skills in building things rather than stay and fritter away all their energies in fighting our impossible bureaucracy. Our laws and regulations are so onerous that it can sap the strength – if not kill – the most talented and dedicated of our entrepreneurs. We have to radically change our regulations and our labor laws.

Indians thrive when they are free to get into the rough and tumble of the competitive marketplace. But our socialistic policies have crippled India’s industries. Allow me to quote Pranab Bardhan, one of India’s foremost economists at UC Berkeley (India loses fine academicians and researchers as well, not just engineers and doctors, due to a lack of freedom). “Leftists are understandably wary of the ‘wastes of competition’ and of the ‘anarchy of the market-place.’ But the last several decades of socialism have shown us unmistakably that the waste and anarchy of the bureaucratic command system are far more injurious to the health of the economy. Without competition in the sense of rivalry among firms (public or private) and a mechanism for exit for chronically sick firms, no economy can attain or retain its vigour and dynamism.”

The market rewards excellence and punishes underperformance. The government does not have to worry about whether you are doing your job to the best of your abilities or not – you would not be here if you were incompetent. But in government and politics, competency is not that much of a barrier to entry. The ability to manipulate the system is more valued. It appears that it is politics, not patriotism, which is the last refuge of the Indian scoundrel. Hardened criminals sit in our legislative bodies and we all are apparently powerless to change it. But there is a way out, I believe. If you, the captains of the Indian industry, were to support clean political candidates, you can make a difference. It is choice that you can exercise as citizens of this great democracy.

In conclusion, thank you for helping build the nation. You have my gratitude and you have my promise that I will do everything I can to help you create wealth so that no Indian is poor. Let’s make India a great nation.

Continuing with Atanu Dey's perspective of the speech that the Indian Prime Minister should have made to the CII last month:

Friends, the primary job of industries is to produce goods and services. The first necessary condition for a successful economy is that it produces sufficient amount of stuff. If industry cannot meet that goal, all other activities are futile. Distribution of insufficient production – however equitably – will not solve the problem that we face. Nor will merely generating employment because employment is a means, not a goal, of economic activity. Let’s not confuse means with ends. Given sufficient production, the problem of equitable distribution can be tackled if necessary by the government.

Which brings us to one important distinction between industry and government. Baldly stated, industries engage in productive activities whereas the government, at best, engages in activities that are sterile. A government takes part of the production in the form of taxes and redistributes it according to some objective function that is arrived at through a process of political bargaining among the electorate. This redistribution is often necessary but is not costless. Part of what it extracts with the purpose of redistribution, the government “consumes” in the process of redistribution. That is a “deadweight loss” which grows not just with the size of the amount redistributed but also with the size of the government mechanism doing the redistribution. One of our former prime ministers, Mr Rajiv Gandhi, had famously stated just only 15 paise out of every Re 1 gets redistributed; the deadweight loss is 85 percent in India. Therefore increasing the efficiency of distribution is paramount if taxes have to be reduced without actually reducing the transfer to those who need it.

Reducing the size of the government is important for increasing the efficiency of transfer, of course. But there is another more compelling reason: reduction of corruption. It is a simple matter to recognize that the larger a government is, larger the control it has, which in turn creates an incentive for people and firms to “capture” the government. It creates an unholy nexus between the government and industry, with the former being lobbied by the latter for licenses, permits, and quotas.

We both, the industry and the government, have a social contract. Yours is to produce efficiently without imposing social costs, and to make a profit. Market forces will ensure efficiency and the laws will ensure that externalities are compensated for. Our social contract is to make and enforce the laws fairly and efficiently, and to correct for any imperfections that exist in society.

Let’s take the matter of employment to distinguish between the two social contracts. You will compete in the marketplace to employ the best that you can. Who you hire and how much you pay is not our business. Today your survival in the global marketplace is determined by how well you run your business. The government will not dictate how you go about conducting your business. If your employment policy discriminates against people based on any criterion not relevant to the job, the discipline of the market will weed you out in short order.

The government’s job is to ensure that every citizen – irrespective of caste, religion, sex, or economic status – has an equal opportunity to be what he or she is capable of being. The government must enforce equality of opportunity but cannot, and must not attempt to, enforce equality of outcome. Discrimination is abhorrent and the government will not practice it nor force the industry to do so. To give equal opportunity, the government will support the education of the poor without discrimination. That is, the playing field will be level but who plays well and who doesn’t will depend on the individual.

Your job is to produce as much as you can and as efficiently as you can. Our job is to make the rules and ensure that everyone has a fair shot at playing in the game. To level the playing field, we have to do some appropriate redistribution of production. We must keep the amount we redistribute within reasonable limits so that we don’t cripple the industry. We have to become more efficient in effecting the transfer and this means we will reduce the size of the government.

Tomorrow: Of Economic Freedom and Bondage

Continuing with Atanu Dey's perspective of the speech that the Indian Prime Minister should have made to the CII last month:

Ladies and gentlemen, poverty is a fact in India. The vast majority of Indians – over 80 percent – actually live on less than Rs 100 a day. They are poor and have been for decades. The socialistic policies followed since independence did not allow for rapid economic growth. Inward-looking autarkic policies isolated India from the economic growth that propelled the economies of East Asia. Only after the mid-80s was the country granted a very small degree of economic freedom, and that too was in response to a severe balance of payment crisis facing the nation.

By the time India gained political independence, it was a very poor country, impoverished by the dictates of colonialism. But why did prosperity elude India even after independence? Could it be that we – the leaders of independent India – failed to provide the economic rules that promote and sustain economic growth? A dispassionate review of the facts force us to answer that question in the affirmative.

A lot of self-congratulatory chest thumping can be heard from some quarters of the government for having liberalized the economy to some limited extent. But that is like a man claiming that he is a wonderful husband because he has reduced the severity of the daily beatings of his wife. Liberalization of the economy has given us some gains but certainly not enough liberalization has been done. What the government has to do is to reduce the interference of the government in the economy so that the economy can be truly free to grow.

Big governments that control every aspect of the economy are harmful for social welfare for an obvious reason: it creates an incentive for individuals and corporations to seek profit not legitimately by providing goods and services in a competitive marketplace, but by bribing the politically powerful and thus influencing policy to gain undue advantage in the marketplace for making monopoly profits. Big governments force people to engage in what Jagdish Bhagwati, an illustrious son of our soil and one of the most celebrated economists in the world, calls “Directly Unproductive Profit-seeking” or DUP activities.

In this discussion on “Inclusive Growth – the Challenge for Corporations” I mention the failures of the government because the government is the greatest challenge that corporations face in what they are supposed to do, namely, produce goods and services so that the economy grows. We must remember that inclusive growth is predicated on growth.

Ladies and gentlemen, every segment of any modern large complex economy has distinct roles to play. It can be considered as a higher-level division of labor. Failure of even one segment to properly discharge its duties and responsibilities has repercussions for the whole economy. The government’s duty is to create a society that is free, fair, equitable, just and peaceful. Unfortunately, we are well aware that we have not achieved the ideal society and to a very large extent it is the failure of our government. Although it is fashionable in certain circles to lay the ills of our society on corporate doorsteps, I will not do so because it would be clearly hypocritical of me. Furthermore, it would be pointless to expect corporations to address those social ills which it has neither created nor has any particular expertise in addressing.

So what is the basic responsibility of corporations? Stated most simply it is this: To make a profit. Ours is a deep and ancient culture. Our cultural legacy not only includes profound spiritual values but also ethical business values expressed compactly in the dictum of “Shubh Labh” or “Fair and just Profit.” When you make a profit honestly supplying goods and services to society, it implies that society gains since the benefits (represented by the price paid) exceed the costs incurred to produce the good or service precisely by the amount of profit. Making that fair and just profit is your corporate social responsibility and nothing else.

I am here not to ask what corporations can do for the government (or even for the society at large) but rather to promise what the government should do to help corporations. Let’s examine that next.

Continuing with Atanu Dey's perspective of the speech that the Indian Prime Minister should have made to the CII last month:

Ladies and gentlemen, the sole objective of a government has to be to provide governance. The raison d’etre of a government is the creation of social capital, to be a guarantor of civil rights, to maintain law and order, to correct for externalities, to create an environment where individuals and corporations have the freedom to create wealth. The government has to be an enabler in the process of wealth generation, not an inhibitor that it has been for so long.

The role of the government is to set the rules, not play in the great economic game. Nobel prize-winning economist Douglass C. North noted that “economic history is overwhelmingly a story of economies that failed to produce a set of economic rules of the game (with enforcement) that induce sustained economic growth.” It is a cautionary observation and clearly underlines what lies at the root of our failure so far in sustaining our economic development: the government has abdicated its primary function of designing the rules and enforcing them fairly, and instead entered the game as a player.

The results of the government’s involvement in production rather than in rule-making and enforcement are plain to see. Just to take a very critical example, consider the generation, transmission, and distribution of electrical power—the life-blood of a healthy economy. Public sector power corporations have let us down. The shortage of power is severe, acute, and chronic. Just in the state of Maharashtra, demand outstrips the supply of 15,000 MW by over 5,000 MW. It is a crisis for consumers, but even more for our industries, the producers of wealth. It raises the production costs of our manufacturers and they are handicapped in the global marketplace.
In an era of globalization and international competition, Indian corporations face challenges that are mainly derived from government interference and control. Indian industry faces an acute shortage of trained human resources. It is regrettably reported that only about a quarter of our college graduates are employable—a sure sign of our failed education system. Once again, the government needlessly prevented the private sector to be in education, and instead took monopoly control of the sector. The results are as could be expected: poor quality, extreme shortages, and high costs.

The production of goods and services is not the job of the government; that is the job of the private sector. By getting into production – too often as a monopolist – the government has demonstrated its abject failure. And this is understandable because governments are not capable of inventiveness, entrepreneurship and innovation; qualities that it does not have and thus cannot compete in the marketplace. By wasting its energies on activities that it has no comparative advantage in, the government has neglected what it is required to do: design the rules and enforce them, and create the environment where contracts can be made and enforced. That failure is as costly – if not more – than the failed attempts by the government to produce goods and services efficiently and in sufficient quantities. Consider the functioning of our legal system, as an example.

Among the institutions of governance are the legislature, the executive, the bureaucracy, and most importantly the judiciary. The statistics of the inadequacy of the judiciary are staggering. There are an estimated over 20,000 cases pending in the Supreme Court, around 3 million in the high courts, and a mind-numbing 22 million cases in the rest of the legal system. There are cases in the high courts which date back to the 1950s. Aside from the deep concern that justice delayed is tantamount to justice denied, the backlog of cases has a detrimental effect on the conducting of business in India. When contracts cannot be enforced, the economy loses from potential trades that do not take place.

The limited liberalization of the economy from the shackles of socialistic control has given us an economy growing at a respectable rate of 7 to 9 percent annually. But unless the governance of the economy is improved, even further liberalization – which is sorely needed – will be insufficient to sustain growth. And if growth is not sustained, the hundreds of millions so long trapped in poverty will not have a reasonable shot at economic emancipation. Let’s consider what needs to be done.

Tomorrow: Fair and Just Profit

In May, the Indian Prime Minister Dr. Manmohan Singh made a widely- discussed speech to the CII. Here is the full-text of that speech. I think the PM missed an opportunity to lay out a vision for a New and Better India. My colleague, Atanu Dey, has written a speech that the Indian PM should have made. Here it is.

Dear Members of the Confederation of Indian Industries:

I am very honored to be invited to share my thoughts with you on the subject of “Inclusive Growth – the Challenges for Corporate India.” I appreciate deeply the critically important role that Indian corporations play in the present – and will continue to play – in the economic growth and development of India. For that, you have my gratitude; not just mine but the gratitude of the people of a nation that is on the move.

You, more than any other group, certainly understand the source of all wealth – production. And what is more, you know how to create wealth. Wealth does not drop like gentle rain from heaven; it does not come as a gift from some government agency; it does not spontaneously arise from some softly spoken magic spell; it does not materialize out of the vain electoral promises of some demagogue; it does not flow unbidden from the earth like some volcanic eruption. No, you know as well as anyone does that it requires hard work, entrepreneurship, risk taking, imagination, skill, investment, and vision to create wealth.

Production – that is, the creation of wealth – matters because ultimately that is what gets distributed as income to the people. If production were inadequate for whatever reason, even equitable distribution of that production would not eliminate poverty. The problem of a fair distribution of wealth is a much more tractable problem than the production of wealth. Society rightly burdens you – the corporations of the economy – with the task of producing wealth, and relieves you of the burden of correcting for any unfair distribution and assigns that task to the government. It is an understandable division of labor. Corporations have a comparative advantage in creating wealth. If any redistribution is necessitated, then it is the job of the government to do so.

You – the private sector – have to do what the government cannot do. The government does not create wealth; you do. In every sphere, wherever you have been allowed to go ahead with your job – producing wealth – you have surpassed all expectations. Decades of government involvement in attempted production of wealth had resulted in diminished expectations from India and Indians. You have demonstrated that if given the chance, India and Indians are second to none.

Consider for a moment those things that India is known globally for in the world of excellence and achievement. Every sphere in which India competes and comes out among the leaders has been the result of private enterprise, whether it is in IT and ITES, or in manufacturing. What about the government and political leadership? While the captains of our industries – the Tatas, Birlas, Kalyanis, Mallyas, Ambanis, and others – compare very favorably globally, our political leadership is infamous for being a haven for criminals. The percentage of criminals among the politicians is an order of magnitude greater than that in the general population. That is a fact that we have to keep in mind when we talk about governance of this great nation.

Ladies and gentlemen of the CII, in my talk here I will remind you of your responsibility and your duty, of course. But I will also take this opportunity to remind us of what the government’s responsibility is. I further assert that the industry and the government have distinct and important roles, and that separation of industry and government must be maintained if we have to have growth.

Tomorrow: Governance

The Guardian wrote about Nassim Taleb’s “The BlackSwan”: “If you are aware of your own ignorance, though, you can use it to make money, as Taleb did on Wall Street, as an options trader. Options are gambles about what the market will do. To sell an option to somebody else, you need to be confident you have some kind of theory about what will happen in the future. If you're right, you make a small amount of money; if you're wrong, you lose lots. Taleb, however, realised he had no theories. So he exploited everyone else's confidence, buying options according to no particular prediction. Most days, his rivals made a small amount of money, and he lost a small amount. But the one thing he could predict was that, if he waited long enough, something unpredictable would happen. When it did, some of his rivals would lose millions, and Taleb would make millions. It happened often enough for him to turn a big profit. It takes a rebellious nature, and an iron stomach, to go against the flow for so long. It is, perhaps, the kind of mindset that comes naturally to someone who lived through the Lebanese civil war - a classic, unpredictable black swan - and then found himself living as an exile, at one remove from American society. We are not all so good at resisting the herd's way of thinking.”

Bloomberg wrote:

There's an investment strategy to profit from improbability. ``Be as hyperconservative and hyperaggressive as you can instead of being mildly aggressive or conservative,'' Taleb advises. ``Instead of having medium risk, you have high risk on one side and no risk on the other. The average will be medium risk but constitutes a positive exposure to the Black Swan.''

The hand can feed the turkey for 1,000 days until, on day 1,001, it wrings the fowl's neck for Thanksgiving. The trick is to be the butcher, not the turkey.

``A thousand days cannot prove you right, but one day can prove you to be wrong,'' writes Taleb. ``I am not urging you to stop being a fool. Just be a fool in the right places.''

With risk measures at or near record lows, including volatility indexes, corporate bond defaults, credit spreads and emerging-market yields, Taleb might help you dodge the next Black Swan.

The Black Swan is not as unprecedented as Taleb claims. You may have encountered pieces of his arguments in recent popular books by the likes of Chris Anderson, James Gleick, Paul Ormerod, Duncan Watts, Steven Strogatz, Aaron Brown, and one of Taleb's few living heroes, Benoit Mandelbrot.

Moreover, despite Taleb's best efforts to make The Black Swan a useful guide to life, we human beings aren't wired to cope well with radical uncertainty. Donald Rumsfeld, the former Defense Secretary, famously cogitated in front of the microphones about "unknown unknowns," which is precisely Taleb's concept—and look where the philosophizing got him. Still, The Black Swan is a richly enjoyable read with an important message.

The ideas behind Mediocristan and Extremistan in Nassim Taleb’s “The BlackSwan” are worth exploring in more depth. Chetan Parikh has reproduced a table from the book which explains the differences between Mediocristan and Extremistan.

The Portfolio wrote:

N.N.T., who lives in New York and has taught at the University of Massachusetts at Amherst, previously traded derivatives on Wall Street. The academics who drive him to tears are the ones who have explained—or misexplained—his old profession. They think that markets are from Mediocristan when in fact they inhabit Extremistan.

Say what? Mediocristan is the terrain of the ordinary, the part of the world that conforms to the bell curve. It answers to statistics and knowable probabilities. Height resides in Mediocristan. You may find one 7-footer on your block, almost certainly not two. Experience (and biology) enable us to frame the odds. Weight is also from Mediocristan. Pick any 1,000 people and their average weight will be close to that of the general population (even if you include the world’s fattest person). Personal wealth, however, is from Extremistan. For instance, the average wealth of 1,000 people will be very different if one of those people is Bill Gates.

This distinction is potent. In Extremistan, past events are a faulty guide to projecting the future. Gates may be the world’s richest person, but it isn’t unthinkable that someday, someone (at Google, perhaps?) will be twice as rich. Wars also reside in Extremistan. Prior to World War II, the planet had never experienced a conflict as terrible. Then we did. Suppose you frequent a pond. Day after day you see swans—always white. Naturally (but incorrectly) you presume that all swans are white. World War II was a black swan—horrific and unpredictable.

Taleb claims that there are too many extreme events in securities markets for such markets to be located in Mediocristan. The black swan of October 1987, when the Dow Jones index fell by about 20 per cent, was the first trigger for his personal reassessment. The event was simply outside the realms of possibility in classical statistics. Taleb would first substitute power laws and the mathematics of extreme statistics for the reassurance of normal distributions. But this still gives more credence to economists and financial analysts than he allows. Probabilities can be defined and predictions made only if the events that are the subject of the probabilities and predictions can be described. Donald Rumsfeld distinguished known unknowns and unknown unknowns. Statistics, old and new, deal with known unknowns. Taleb’s world is determined by unknown unknowns - black swans.

No one, he says, could have predicted the invention of the wheel or measured the probability that the wheel would be invented, because if you could do either of these things you would already have invented the wheel. The invention of the wheel was a black swan.

Taleb argues convincingly that we treat far too much of our reality as if it were Mediocristan when in fact much of it often behaves like Extremistan, where there are occasional “black swans” (his name for the unexpected event and the title of his most recent book) among the white. So, for example, out of the many thousands of books, films and recordings released each year, a small number will account for the largest part of sales, and it is not possible to predict with certainty which of the many works released will find black swan-style success (or failure). Indeed, in any endeavor susceptible to notable, unpredictable exceptions, no amount of examining the past will enable us to foretell the future.

What’s going on here? Taleb discusses many factors contributing to our tendency to see our world as Mediocristan. There is the fact that our brains evolved long ago to deal with a world with many fewer variables, much less organized information, and a vastly smaller number of theories to explain them. The more complex any given situation, the larger number of examples you need to understand what is happening there. For instance, sampling the sales of a few dozen published books each year won’t tell you much about the prospects of the thousands of others not sampled. It’s just as likely as not that your sample would include one or more black swans—unexpectedly huge winners or losers—so anything you might conclude based on it would not be generalizable to the rest.

Here is what the Economist has to say about Nassim Taleb’s “The BlackSwan”:

Nassim Nicholas Taleb, a professor of the sciences of uncertainty (who gave us “known unknowns”), has no time for the “charlatans” who think they can map the future. Forget the important things: we can't even get it right when estimating the cost of a building—witness the massively over-budget Sydney Opera House or the new Wembley Stadium.

The problem is that almost all forecasters work within the parameters of the Gaussian bell curve, which ignores large deviations and thus fails to take account of “Black Swans”. Mr Taleb defines a Black Swan as an event that is unexpected, has an extreme impact and is made to seem predictable by explanations concocted afterwards. It can be both positive and negative. Examples include the September 11th 2001 attacks and the rise of the internet. Smaller shocks, such as novels and pop acts whose popularity explodes thanks to word of mouth, can also be Black Swans.

The power-law distribution, by contrast [to the bell-curve distribution], would seem to have little to recommend it. Not only does it disproportionately reward the few, but it also turns out to be notoriously difficult to derive with precision. The most important events may occur so rarely that existing data points can never truly assure us that the future won't look very different from the present. We can be fairly certain that we will never meet anyone 14-feet tall, but it is entirely possible that, over time, we will hear of a man twice as rich as Bill Gates or witness a market crash twice as devastating as that of October 1987.

The problem, insists Mr. Taleb, is that most of the time we are in the land of the power law and don't know it…If we accept Mr. Taleb's premise about power-law ascendancy, we are left with a troubling question: How do you function in a world where accurate prediction is rarely possible, where history isn't a reliable guide to the future and where the most important events cannot be anticipated?
Mr. Taleb presents a range of answers--be prepared for various outcomes, he says, and don't rush for buses--but it's clear that he remains slightly vexed by the world he describes so vividly. Then again, beatific serenity may not be the goal here. As Mr. Taleb warns, certitude is likely to be found only in a fool's (bell-curve) paradise, where we choose the comfort of the "precisely wrong" over the challenge of the "broadly correct." Beneath Mr. Taleb's blustery rhetoric lives a surprisingly humble soul who has chosen to follow a demanding and somewhat lonely path.

Taleb's central point, then, is that we are too much influenced by instinct, history, Plato and Gauss. We assume the entire world is "Mediocristan", whereas in reality large swathes of it are "Extremistan".
The trouble is that it is much harder to live with this insight than to live without it. As Taleb's critics in the financial world will tell you (and he himself admits), merely insuring yourself against fat tail events does not constitute a profitable trading strategy. Knowing that world wars can happen roughly twice a century is like knowing that a student can run amok roughly once a decade: it doesn't allow you to predict which diplomatic/personality crisis will be the lethal one.

For practical purposes, it turns out, we humans prefer to work with predictions and forecasts, even when they are nearly always wrong. We prefer to regard financial markets as casinos (what Taleb calls "the ludic fallacy" that odds are always calculable), even when they clearly aren't. And we resist paying excessive insurance premiums to cover ourselves against very remote contingencies.

Here is an excerpt from Nassim Taleb’s “The BlackSwan” (via 800-CEO-Read):

Just imagine how little your understanding of the world on the eve of the events of 1914 would have helped you guess what was to happen next. (Don’t cheat by using the explanations drilled into your cranium by your dull high school teacher). How about the rise of Hitler and the subsequent war? How about the precipitous demise of the Soviet bloc? How about the rise of Islamic fundamentalism? How about the spread of the Internet? How about the market crash of 1987 (and the more unexpected recovery)? Fads, epidemics, fashion, ideas, the emergence of art genres and schools. All follow these Black Swan dynamics. Literally, just about everything of significance around you might qualify.

This combination of low predictability and large impact makes the Black Swan a great puzzle; but that is not yet the core concern of this book…The central idea of this book concerns our blindness with respect to randomness, particularly the large deviations: Why do we, scientists or nonscientists, hotshots or regular Joes, tend to see the pennies instead of the dollars? Why do we keep focusing on the minutiae, not the possible significant large events, in spite of the obvious evidence of their huge influence? And, if you follow my argument, why does reading the newspaper actually decrease your knowledge of the world?

It is easy to see that life is the cumulative effect of a handful of significant shocks. It is not so hard to identify the role of Black Swans, from your armchair (or bar stool). Go through the following exercise. Look into your own existence. Count the significant events, the technological changes, and the inventions that have taken place in our environment since you were born and compare them to what was expected before their advent. How many of them came on a schedule? Look into your own personal life, to your choice of profession, say, or meeting your mate, your exile from your country of origin, the betrayals you faced, your sudden enrichment or impoverishment. How often did these things occur according to plan?

Black Swan logic makes what you don’t know far more relevant than what you do know. Consider that many Black Swans can be caused and exacerbated by their being unexpected.
…
Our world is dominated by the extreme, the unknown, and the very improbable (improbable according our current knowledge)–and all the while we spend our time engaged in small talk, focusing on the known, and the repeated. This implies the need to use the extreme event as a starting point and not treat it as an exception to be pushed under the rug. I also make the bolder (and more annoying) claim that in spite of our progress and the growth in knowledge, or perhaps because of such progress and growth, the future will be increasingly less predictable, while both human nature and social “science” seem to conspire to hide the idea from us.

One of the books I have been eagerly looking forward to reading is Nassim Taleb’s “The BlackSwan.” I first came across Nassim Taleb in one of our Book Club meetings, via Chetan Parikh. I then read “Fooled by Randomness”, Taleb’s first book. I also have made references to the Black Swan in a number of my blog posts and Tech Talks (here is one) in the past. And so, it was with great eagerness that I picked up Taleb’s new book. I recommend you do the same. In this Tech Talk series, I will take you through what various people (including Taleb) have to say about Black Swans.

Let’s start with a definition of Black Swan from the book: “What we call here a Black Swan (and capitalize it) is an event with the following three attributes. First, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility. Second, it carries an extreme impact. Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable…[It can be summarized as a triplet]: rarity, extreme impact, and retrospective (though not prospective) predictability.”

Business World spoke to Nassim Taleb. Excerpts from the interview:

What is a Black Swan?
Medieval Europeans had only ever seen white swans. In fact, any impossible event was termed a ‘black swan’. So, when the first settlers reached Australia, they were shocked to find black swans all over! Taleb's black swans are those events that were once thought impossible, but when they occur, hit hard. In this extract, he writes about how we create narratives after ‘black swan’ events; making them seem predictable after they occur.
…
Why are black swans important?
People say “Taleb wants us to worry about meteorites hitting Earth.” I want to help people navigate in a world where we don’t have a clear understanding of reality. Black Swan is essentially a map of how to deal with such a reality. The book distinguished between [two imaginary places] Mediocristan and Extremistan. In Mediocristan, variations in any sample do not result in large deviations from the average. The question, then, is which domains or areas have highly consequential variables? These places are Extremistan.
…
What are some of the classic examples of black swan events?
A classic black swan event is the First War (World War I). It was not as predictable as people believe it was. Then you have all this technology — computers, lasers. Their future uses could never be predicted when they were invented.

With better models and more computational power, won't we get better at predicting Black Swans?
We know from chaos theory that even if you had a perfect model of the world, you'd need infinite precision in order to predict future events. With sociopolitical or economic phenomena, we don't have anything like that. And things are getting worse, not better, because the growing complexity of the world dwarfs any improvement in sophistication or computational power.

So what do we do? If we can't forecast the really important things, how do we act?
You need to ask, "If the Black Swan hits me, will it help me or hurt me?" You cannot figure out the probability of a Black Swan hitting. But if you're in a business that's prone to negative Black Swans, like catastrophe insurance, I advise you not to take your forecasting seriously — and to think about getting into a different business. You don't want to be a sucker. What you want are situations where you can have as much of the good uncertainty as possible, where nothing too bad can happen to you, and where you have what I call free options. All of technology, really, is about maximizing free options. It's like venture capital: Most of the money you make is from things you weren't looking for. But you find them only if you search.

Tomorrow: Book Excerpt