The Black Swan: The Impact of the Highly Improbable

by Nassim Nicholas Taleb

stop and summarize the triplet: rarity, extreme impact, and retrospective (though not prospective) predictability.

This combination of low predictability and large impact makes the Black Swan a great puzzle;

The inability to predict outliers implies the inability to predict the course of history

The strategy for the discoverers and entrepreneurs is to rely less on top-down planning and focus on maximum tinkering and recognizing opportunities when they present themselves. So I disagree with the followers of Marx and those of Adam Smith: the reason free markets work is because they allow people to be lucky, thanks to aggressive trial and error, not by giving rewards or “incentives” for skill. The strategy is, then, to tinker as much as possible and try to collect as many Black Swan opportunities as you can.

We do not spontaneously learn that we don’t learn that we don’t learn. The problem lies in the structure of our minds: we don’t learn rules, just facts, and only facts. Metarules (such as the rule that we have a tendency to not learn rules) we don’t seem to be good at getting. We scorn the abstract; we scorn it with passion.

Quotable

This is a book about uncertainty; to this author, the rare event equals uncertainty.

The Platonic fold is the explosive boundary where the Platonic mindset enters in contact with messy reality, where the gap between what you know and what you think you know becomes dangerously wide. It is here that the Black Swan is produced.

History and societies do not crawl. They make jumps. They go from fracture to fracture, with a few vibrations in between. Yet we (and historians) like to believe in the predictable, small incremental progression.

While we have a highly unstable memory, a diary provides indelible facts recorded more or less immediately; it thus allows the

fixation of an unrevised perception and enables us to later study events in their own context. Again, it is the purported method of description of the event, not its execution, that was important.

technical baggage that comes with being a quant (a mixture of applied mathematics, engineering, and statistics), in addition to the immersion in practice, turned out to be very useful for someone wanting to be a philosopher.* First, when you spend a couple of decades doing mass-scale empirical work with data and taking risks based on such studies, you can easily spot elements in the texture of the world that the Platonified “thinker” is too brainwashed, or threatened, to see. Second, it allowed me to become formal and systematic in my thinking instead of wallowing in the anecdotal. Finally, both the philosophy of history and epistemology (the philosophy of knowledge) seemed inseparable from the empirical study of times series data, which is a succession of numbers in time, a sort of historical document containing numbers instead of words.

Note that the designation f*∗∗ you corresponds to the exhilarating ability to pronounce that compact phrase before hanging up the phone.

I stayed in the quant and trading businesses (I’m still there), but organized myself to do minimal but intense (and entertaining) work, focus only on the most technical aspects, never attend business “meetings,” avoid the company of “achievers” and people in suits who don’t read books, and take a sabbatical year for every three on average to fill up gaps in my scientific and philosophical culture. To slowly distill my single idea, I wanted to become a flâneur, a professional meditator, sit in cafés, lounge, unglued to desks and organization structures, sleep as long as I needed, read voraciously, and not owe any explanation to anybody.

The American economy has leveraged itself heavily on the idea generation, which explains why losing manufacturing jobs can be coupled with a rising standard of living. Clearly the drawback of a world economy where the payoff goes to ideas is higher inequality among the idea generators together with a greater role for both opportunity and luck—

I can state the supreme law of Mediocristan as follows: When your sample is large, no single instance will significantly change the aggregate or the total. The largest observation will remain impressive, but eventually insignificant, to the sum.

In Extremistan, inequalities are such that one single observation can disproportionately impact the aggregate, or the total.

The epistemological consequence is that with Mediocristan-style randomness it is not possible* to have a Black Swan surprise such that a single event can dominate a phenomenon. Primo, the first hundred days should reveal all you need to know about the data. Secondo, even if you do have a surprise, as we saw in the case of the heaviest human, it would not be consequential.

Mediocristan is where we must endure the tyranny of the collective, the routine, the obvious, and the predicted; Extremistan is where we are subjected to the tyranny of the singular, the accidental, the unseen, and the unpredicted.

They are near–Black Swans. They are somewhat tractable scientifically—knowing about their incidence should lower your surprise; these events are rare but expected. I call this special case of “gray” swans Mandelbrotian randomness. This category encompasses the randomness that produces phenomena commonly known by terms such as scalable, scale-invariant, power laws, Pareto-Zipf laws, Yule’s law, Paretian-stable processes, Levy-stable,

high frequency. Many are quite spectacular. In fact, the entire knowledge-seeking enterprise is based on taking conventional wisdom and accepted scientific beliefs and shattering them into pieces with new counterintuitive evidence, whether at a micro scale (every scientific discovery is an attempt to produce a micro–Black Swan) or at a larger one (as with Poincaré’s and Einstein’s relativity).

überphilosopher Bertrand Russell presents a particularly toxic variant of my surprise jolt in his illustration of what people in his line of business call the Problem of Induction or Problem of Inductive Knowledge (capitalized for its seriousness)—certainly the mother of all problems in life. How can we logically go from specific instances to reach general conclusions? How do we know what we know? How do we know that what we have observed from given objects and events suffices to enable us to figure out their other properties? There are traps built into any kind of knowledge gained from observation.

Mistaking a naïve observation of the past as something definitive or representative of the future is the one and only cause of our inability to understand the Black Swan.

the ancient skeptics advocated learned ignorance as the first step in honest inquiries toward truth, later medieval skeptics, both Moslems and Christians, used skepticism as a tool to avoid accepting what today we call science.

Let me insist that erudition is important to me. It signals genuine intellectual curiosity. It accompanies an open mind and the desire to probe the ideas of others. Above all, an erudite can be dissatisfied with his own knowledge, and such dissatisfaction is a wonderful shield against Platonicity, the simplifications of the five-minute manager, or the philistinism of the overspecialized scholar. Indeed, scholarship without erudition can lead to disasters.

Now, there are other themes arising from our blindness to the Black Swan: We focus on preselected segments of the seen and generalize from it to the unseen: the error of confirmation. We fool ourselves with stories that cater to our Platonic thirst for distinct patterns: the narrative fallacy. We behave as if the Black Swan does not exist: human nature is not programmed for Black Swans. What we see is not necessarily all that is there. History hides Black Swans from us and gives us a mistaken idea about the odds of these events: this is the distortion of silent evidence. We “tunnel”: that is, we focus on a few well-defined sources of uncertainty, on too specific a list of Black Swans (at the expense of the others that do not easily come to mind).

a simple confusion of absence of evidence of the benefits of mothers’ milk with evidence of absence of the benefits (another case of Platonicity as “it did not make sense” to breast-feed when we could simply use bottles).

By a mental mechanism I call naïve empiricism, we have a natural tendency to look for instances that confirm our story and our vision of the world—these instances are always easy to find. Alas, with tools, and fools, anything can be easy to find.

The good news is that there is a way around this naïve empiricism. I am saying that a series of corroborative facts is not necessarily evidence.

The very same desire for order, interestingly, applies to scientific pursuits—it is just that, unlike art, the (stated) purpose of science is to get to the truth, not to give you a feeling of organization or make you feel better. We tend to use knowledge as therapy.