The Black Swan: The Impact of the Highly Improbable (Incerto, #2)

by Nassim Nicholas Taleb

What people call “memes,” ideas that spread and that compete with one another using people as carriers, are not truly like genes. Ideas spread because, alas, they have for carriers self-serving agents who are interested in them, and interested in distorting them in the replication process. You do not make a cake for the sake of merely replicating a recipe—you try to make your own cake, using ideas from others to improve it. We humans are not photocopiers. So contagious mental categories must be those in which we are prepared to believe, perhaps even programmed to believe. To be contagious, a mental category must agree with our nature.

I said earlier that randomness is bad, but it is not always so. Luck is far more egalitarian than even intelligence. If people were rewarded strictly according to their abilities, things would still be unfair—people don’t choose their abilities. Randomness has the beneficial effect of reshuffling society’s cards, knocking down the big guy.

Plenty of people have called me to discuss the idea of the long tail, which seems to be the exact opposite of the concentration implied by scalability. The long tail implies that the small guys, collectively, should control a large segment of culture and commerce, thanks to the niches and subspecialties that can now survive thanks to the Internet. But, strangely, it can also imply a large measure of inequality: a large base of small guys and a very small number of supergiants, together representing a share of the world’s culture—with some of the small guys, on occasion, rising to knock out the winners. (This is the “double tail”: a large tail of the small guys, a small tail of the big guys.) The role of the long tail is fundamental in changing the dynamics of success, destabilizing the well-seated winner, and bringing about another winner. In a snapshot this will always be Extremistan, always ruled by the concentration of type-2 randomness; but it will be an ever-changing Extremistan.

I spoke about globalization in Chapter 3; it is here, but it is not all for the good: it creates interlocking fragility, while reducing volatility and giving the appearance of stability. In other words it creates devastating Black Swans. We have never lived before under the threat of a global collapse. Financial institutions have been merging into a smaller number of very large banks. Almost all banks are now interrelated. So the financial ecology is swelling into gigantic, incestuous, bureaucratic banks (often Gaussianized in their risk measurement)—when one falls, they all fall.

But banks are in a far worse situation than the Internet. The financial industry has no significant long tail! We would be far better off if there were a different ecology, in which financial institutions went bust on occasion and were rapidly replaced by new ones, thus mirroring the diversity of Internet businesses and the resilience of the Internet economy. Or if there were a long tail of government officials and civil servants coming to reinvigorate bureaucracies.

There is, inevitably, a mounting tension between our society, full of concentration, and our classical idea of aurea mediocritas, the golden mean, so it is conceivable that efforts may be made to reverse such concentration. We live in a society of one person, one vote, where progressive taxes have been enacted precisely to weaken the winners.

Fairness is not exclusively an economic matter; it becomes less and less so when we are satisfying our basic material needs. It is pecking order that matters! The superstars will always be there.

Remember this: the Gaussian–bell curve variations face a headwind that makes probabilities drop at a faster and faster rate as you move away from the mean, while “scalables,” or Mandelbrotian variations, do not have such a restriction.

Have you ever heard of the 80/20 rule? It is the common signature of a power law—actually

As far as axioms go, this one wasn’t phrased to impress you the most: it could easily be called the 50/01 rule, that is, 50 percent of the work comes from 1 percent of the workers. This formulation makes the world look even more unfair, yet the two formulae are exactly the same. How? Well, if there is inequality, then those who constitute the 20 percent in the 80/20 rule also contribute unequally—only a few of them deliver the lion’s share of the results. This trickles down to about one in a hundred contributing a little more than half the total.

The veins in leaves look like branches; branches look like trees; rocks look like small mountains. There is no qualitative change when an object changes size. If you look at the coast of Britain from an airplane, it resembles what you see when you look at it with a magnifying glass. This character of self-affinity implies that one deceptively short and simple rule of iteration can be used, either by a computer or, more randomly, by Mother Nature, to build shapes of seemingly great complexity. This can come in handy for computer graphics, but, more important, it is how nature works.

it is contagion that determines the fate of a theory in social science, not its validity.

Just keep your composure, smile, focus on analyzing the speaker not the message, and you’ll win the argument. An ad hominem attack against an intellectual, not against an idea, is highly flattering. It indicates that the person does not have anything intelligent to say about your message.

In the end this is a trivial decision making rule: I am very aggressive when I can gain exposure to positive Black Swans—when a failure would be of small moment—and very conservative when I am under threat from a negative Black Swan. I am very aggressive when an error in a model can benefit me, and paranoid when the error can hurt.

In refusing to run to catch trains, I have felt the true value of elegance and aesthetics in behavior, a sense of being in control of my time, my schedule, and my life. Missing a train is only painful if you run after it! Likewise, not matching the idea of success others expect from you is only painful if that’s what you are seeking. You stand above the rat race and the pecking order, not outside of it, if you do so by choice.

Most people, alas, walk too fast, mistaking walking for exercise, not understanding that walking is to be done slowly, at such a pace that one forgets one is walking—so

Mother Nature does not develop Alzheimer’s—actually there is evidence that even humans would not easily lose brain function with age if they followed a regimen of stochastic exercise and stochastic fasting, took long walks, avoided sugar, bread, white rice, and stock market investments, and refrained from taking economics classes or reading such things as The New York Times.

The exact opposite of redundancy is naïve optimization.

Globalization might give the appearance of efficiency, but the operating leverage and the degrees of interaction between parts will cause small cracks in one spot to percolate through the entire system.

The same idea applies to debt—it makes you fragile, very fragile under perturbations, particularly when we switch from the assumption of Mediocristan to that of Extremistan.

We have documents since the Babylonians showing the ills of debt; Near Eastern religions banned debt. This tells me that one of the purposes of religion and tradition has been to enforce interdicts—simply to protect people against their own epistemic arrogance. Why? Debt implies a strong statement about the future, and a high degree of reliance on forecasts.

My Scandal of Prediction (i.e., bogus predictions that seem to be there to satisfy psychological needs) is compounded by the Scandal of Debt: borrowing makes you more vulnerable to forecast errors.

Mother Nature does not limit the interactions between entities; it just limits the size of its units. (Hence my idea is not to stop globalization and ban the Internet; as we will see, much more stability would be achieved by stopping governments from helping companies when they become large and by giving back advantages to the small guy.)

To those who say “We have no proof that we are harming nature,” a sound response is “We have no proof that we are not harming nature, either;” the burden of the proof is not on the ecological conservationist, but on someone disrupting an old system.

Once again, I am not saying that we need to stop globalization and prevent travel. We just need to be aware of the side effects, the trade-offs—and few people are. I see the risks of a very strange acute virus spreading throughout the planet.

anything that has a secondary use, and one you did not pay for, will present an extra opportunity should a heretofore unknown application emerge or a new environment appear. The organism with the largest number of secondary uses is the one that will gain the most from environmental randomness and epistemic opacity!

Objects seem to have invisible but significant auxiliary functions that we are not aware of consciously, but that allow them to thrive—and

when you have a lot of functional redundancies, randomness helps on balance, but under one condition—that you can benefit from the randomness more than you can be hurt by it (an argument I call more technically convexity to uncertainty)

He alerted me to a phrase philosophers use: “distinction without a difference.” Then I realized the following: that there are distinctions philosophers use that make sense philosophically, but do not seem to make sense in practice, but that may be necessary if you go deeper into the idea, and may make sense in practice under a change of environment. For consider the opposite: differences without a distinction. They can be brutally misleading. People use the same term, measuring, for measuring a table using a ruler, and for measuring risk—when the second is a forecast, or something of the sort. And the word measuring conveys an illusion of knowledge that can be severely distorting: we will see that we are psychologically very vulnerable to terms used and how things are framed.

Over the past twenty-five hundred years of recorded ideas, only fools and Platonists (or, worse, the species called central bankers) have believed in engineered utopias. We will see in the section on the Fourth Quadrant that the idea is not to correct mistakes and eliminate randomness from social and economic life through monetary policy, subsidies, and so on. The idea is simply to let human mistakes and miscalculations remain confined, and to prevent their spreading through the system, as Mother Nature does. Reducing volatility and ordinary randomness increases exposure to Black Swans—it creates an artificial quiet.

If you deprive an organism of stressors, you affect its epigenetics and gene expression—some genes are up-regulated (or down-regulated) by contact with the environment. A person who does not face stressors will not survive should he encounter them.

So the main idea is to trade duration for intensity—for a hedonic gain.

Hunger (or episodic energy deficit) strengthens the body and the immune system and helps rejuvenate brain cells, weaken cancer cells, and prevent diabetes.

By the same argument we can lower 90 percent of Black Swan risks in economic life … by just eliminating speculative debt.

Extremistan is characterized by both polar extremes, a high share of low impact, a low share of high impact. Consider that the presence of concentration, here energy expenditure, necessitates that a high number of observations do not contribute to anything except to the dilution. Just as the condition that makes market volatility explained by bursts (say one day in five years represents half the variance) requires that most other days remain exceedingly quiet.

Which brings me to another organism: economic life. Our aversion to variability and desire for order, and our acting on those feelings, have helped precipitate severe crises. Making something artificially bigger (instead of letting it die early if it cannot survive stressors) makes it more and more vulnerable to a very severe collapse—as I showed with the Black Swan vulnerability associated with an increase in size. Another thing we saw in the 2008 debacle: the U.S. government (or, rather, the Federal Reserve) had been trying for years to iron out the business cycle, leaving us exposed to a severe disintegration. This is my argument against “stabilization” policies and the manufacturing of a nonvolatile environment.

the Black Swan corresponds mainly to an incomplete map of the world,

we in real life do not care about simple, raw probability (whether an event happens or does not happen); we worry about consequences (the size of the event; how much total destruction of lives or wealth, or other losses, will come from it; how much benefit a beneficial event will bring).

What I can rapidly say about the Fourth Quadrant is that all the skepticism associated with the Black Swan problem should be focused there. A general principle is that, while in the first three quadrants you can use the best model or theory you can find, and rely on it, doing so is dangerous in the Fourth Quadrant: no theory or model should be better than just any theory or model. In other words, the Fourth Quadrant is where the difference between absence of evidence and evidence of absence becomes acute.

To paraphrase Danny Kahneman, for psychological comfort some people would rather use a map of the Pyrénées while lost in the Alps than use nothing at all. They do not do so explicitly, but they actually do worse than that while dealing with the future and using risk measures. They would prefer a defective forecast to nothing. So providing a sucker with a probabilistic measure does a wonderful job of making him take more risks.

Simply, don’t get yourself into the Fourth Quadrant, the Black Swan Domain.

How do you live long? By avoiding death. Yet people do not realize that success consists mainly in avoiding losses, not in trying to derive profits.

at some point we need to give up on elegance to focus on something that was given short shrift for a very long time: the maps showing what current knowledge and current methods do not do for us; and a rigorous study of generalized scientific iatrogenics, what harm can be caused by science (or, better, an exposition of what harm has been done by science).