The Blank Swan: The End of Probability

April 30, 2011 07:00 PM
Book Review

The Blank Swan: The End of Probability
By Elie Ayache
Wiley, 2010
$39.95, 476 pages

Elie Ayache’s book, "The Blank Swan," has been hailed by one reviewer as "a joke…written in pseudo-philosophical jargon." But another writes that it is a must-read for philosophers and quants because of its deep insight into the "materialization of contingency as a price."

It’s a hard book to read, but try. If you do, you will probably accept "the philosophical understanding of contingency" as Nassim Taleb, author of "The Black Swan" puts it. Ayache introduces his subject by claiming that a book is to a writer as a market is to a trader – both are made up of "contingent claims."

You save time by reading the introduction, then skipping to part IV, the last 121 pages, titled "Conversion of Credit into Equity, or the Genesis of the Market."

Ayache argues that market making and trading are similar to writing because neither "take place in possibility or probability." Thus, they are outside stochastic modeling of price prediction. (Stochastic modeling can estimate the probability of outcomes given seemingly random variables set within historical price data.)

The concept of contingent claims is critically important. Consider the market as a collection of contingency writers; the "medium of contingent claims which transmits them and translates them into prices – the market is of the nature of writing therefore cannot be ‘covered’ by probability theory or derivative valuation theory." Markets cannot be explained in terms or white swans or black swans (probability birds), only in terms of a blank swan.

What makes this book so irritatingly difficult to read are continual references to the metaphysics of markets; metaphysics being a branch of philosophy that seeks to shed light on the fundamental nature of subjective aspects of the self and the world.

What makes it even more difficult are constant references to contemporary philosophers like Alain Badiou, Gilles Deleuze, Quentin Meillassaux and Francois Zourabichvili – four of Ayache’s favorites who are obscure or unknown to most of us.

In the author’s words, "The reason why probability or prediction doesn’t apply to the market isn’t that the market is too complex or too human or too chaotic…The reason is simply that the market should be the alternative to prediction in matters relating to the future. It remains to say, of course, how we can relate to the future outside prediction. Trying to answer this question is the stuff my (neither white nor black, but blank) swan is made of."

Despite these difficulties, you will not have wasted your time reading at least the introduction and part IV, as mentioned earlier. Elie Ayache confesses early on that "There are outer reaches of this exploration that even I do not yet quite understand."

Perhaps none of us ever will fully, but reading "The Blank Swan," regardless of how one might think the market works, will bring a better understanding of how it actually does work.

Desmond MacRae is a New York-based business writer specializing in banking, finance and investments. E-mail him at

About the Author
Desmond MacRae is a New-York-based free-lance writer specializing in institutional banking, finance and investments.