What turkeys can teach us about risk

I was recently rereading The Black Swan by Nassim Taleb—a personal favorite of mine.

- By KEITH LIM

In one chapter, he offers an interesting parable, which I will loosely adapt here.

A group of turkeys is raised with great care on a farm. They get food every day, they have unlimited water, and they have guard dogs to ward off predators. Some of the turkeys kept records of how their lives were going, and these records showed an uptrend over time: the amount of food they received kept increasing. And so the turkeys made a prediction: “Because our lives have been on an uptrend in the past, surely things will continue to get better in the future! We will get more food, more safety, and more shelter moving forward!” Then the Thanksgiving season arrives. The farmer takes all the turkeys to a shed and slaughters them.

This story warns us about the risks of relying solely on past data for future projections. After all, the turkeys were so wrong about their predictions that they had the highest confidence right before disaster. When it comes to handling our investments, there are many lessons we can draw from this story.