The Black Swan:
The Impact of the Highly Improbable
by Nassim Nicholas Taleb.
The issues in this book are not new (the author cites as his heroes Montaigne and Mandelbrot), but they are important, widely ignored, and very well expressed here. They concern the limits of knowledge, the preposterousness of prognostications, and the shortcomings of the bell curve.
Taleb points out that it is human nature to expect more of the same; thus we are perpetually unprepared for the unexpected. He tells the parable of the turkey, who has been fed and treated well for a thousand days - until the day before Thanksgiving. That day is a Black Swan for the turkey. But not, of course, for the butcher, who saw it coming. 9/11 was a Black Swan for us, but not for OBL.
Another example he uses is the Las Vegas gambling industry. The casinos spend huge high-tech resources and manpower to protect against what they see as their biggest threats: (1) cheaters; and (2) high rollers breaking the bank. Yet in recent years there have been four actual or potential threats with thousands of times greater impact than the ones they worry about:
Taleb points out that we need to distinguish between Mediocristan, where the bell curve applies, and Extremistan, where it doesn't. An example of the former is human heights, weights or IQ, where the variance between the largest and smallest members of the set will be at most a single-digit factor. Compare this with the chart of the incomes of American adults, from the poorest to Bill Gates, where the difference between the smallest and largest is a factor in the millions. Because of the complexity of the modern world, we live more and more in Extremistan, and yet we behave as though we live in Mediocristan. Taleb offers exercises to increase your awareness of "scalability," as he refers to the difference, and he presents the math to back up his ideas.
Taleb made his "f*** you money," as he calls it (enough to provide independence from having to please bosses or clients), as a market trader, and his ideas are particularly important to anyone with money in the stock or bond markets. His scorn for academics is amusing and refreshing.