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

by Nassim Nicholas Taleb

Furthermore, the sources of Black Swans today have multiplied beyond measurability.* In the primitive environment they were limited to newly encountered wild animals, new enemies, and abrupt weather changes. These events were repeatable enough for us to have built an innate fear of them. This instinct to make inferences rather quickly, and to “tunnel” (i.e., focus on a small number of sources of uncertainty, or causes of known Black Swans) remains rather ingrained in us. This instinct, in a word, is our predicament.

Post hoc rationalization. In an experiment, psychologists asked women to select from among twelve pairs of nylon stockings the ones they preferred. The researchers then asked the women their reasons for their choices. Texture, “feel,” and color featured among the selected reasons. All the pairs of stockings were, in fact, identical. The women supplied backfit, post hoc explanations. Does this suggest that we are better at explaining than at understanding? Let us see.

Split-brain patients have no connection between the left and the right sides of their brains, which prevents information from being shared between the two cerebral hemispheres. These patients are jewels, rare and invaluable for researchers. You literally have two different persons, and you can communicate with each one of them separately; the differences between the two individuals give you some indication about the specialization of each of the hemispheres. This splitting is usually the result of surgery to remedy more serious conditions like severe epilepsy; no, scientists in Western countries (and most Eastern ones) are no longer allowed to cut human brains in half, even if it is for the pursuit of knowledge and wisdom.

It tends to see the gestalt (the general, or the forest), in a parallel mode, while the left brain is concerned with the trees, in a serial mode.

my point is that there is a physical and neural correlate to such operation and that our minds are largely victims of our physical embodiment. Our minds are like inmates, captive to our biology, unless we manage a cunning escape. It is the lack of our control of such inferences that I am stressing.

With so many brain cells—one hundred billion (and counting)—the attic is quite large, so the difficulties probably do not arise from storage-capacity limitations, but may be just indexing problems. Your conscious, or working, memory, the one you are using to read these lines and make sense of their meaning, is considerably smaller than the attic. Consider that your working memory has difficulty holding a mere phone number longer than seven digits. Change metaphors slightly and imagine that your consciousness is a desk in the Library of Congress: no matter how many books the library holds, and makes available for retrieval, the size of your desk sets some processing limitations. Compression is vital to the performance of conscious work.

To view the potency of narrative, consider the following statement: “The king died and the queen died.” Compare it to “The king died, and then the queen died of grief.” This exercise, presented by the novelist E. M. Forster, shows the distinction between mere succession of information and a plot. But notice the hitch here: although we added information to the second statement, we effectively reduced the dimension of the total. The second sentence is, in a way, much lighter to carry and easier to remember; we now have one single piece of information in place of two. As we can remember it with less effort, we can also sell it to others, that is, market it better as a packaged idea. This, in a nutshell, is the definition and function of a narrative.

REMEMBRANCE OF THINGS NOT QUITE PAST Our tendency to perceive—to impose—narrativity and causality are symptoms of the same disease—dimension reduction. Moreover, like causality, narrativity has a chronological dimension and leads to the perception of the flow of time. Causality makes time flow in a single direction, and so does narrativity.

So we pull memories along causative lines, revising them involuntarily and unconsciously. We continuously renarrate past events in the light of what appears to make what we think of as logical sense after these events occur.

Consider the behavior of paranoid people. I have had the privilege to work with colleagues who have hidden paranoid disorders that come to the surface on occasion. When the person is highly intelligent, he can astonish you with the most far-fetched, yet completely plausible interpretations of the most innocuous remark. If I say to them, “I am afraid that …,” in reference to an undesirable state of the world, they may interpret it literally, that I am experiencing actual fright, and it triggers an episode of fear on the part of the paranoid person. Someone hit with such a disorder can muster the most insignificant of details and construct an elaborate and coherent theory of why there is a conspiracy against him. And if you gather, say, ten paranoid people, all in the same state of episodic delusion, the ten of them will provide ten distinct, yet coherent, interpretations of events.

This does not mean that we cannot talk about causes; there are ways to escape the narrative fallacy. How? By making conjectures and running experiments, or as we will see in Part Two (alas), by making testable predictions.

Patients who spend fifteen minutes every day writing an account of their daily troubles feel indeed better about what has befallen them. You feel less guilty for not having avoided certain events; you feel less responsible for it. Things appear as if they were bound to happen.

Besides narrative and causality, journalists and public intellectuals of the sound-bite variety do not make the world simpler. Instead, they almost invariably make it look far more complicated than it is. The next time you are asked to discuss world events, plead ignorance, and give the arguments I offered in this chapter casting doubt on the visibility of the immediate cause. You will be told that “you overanalyze,” or that “you are too complicated.” All you will be saying is that you don’t know!

The economist Hyman Minsky sees the cycles of risk taking in the economy as following a pattern: stability and absence of crises encourage risk taking, complacency, and lowered awareness of the possibility of problems. Then a crisis occurs, resulting in people being shell-shocked and scared of investing their resources. Strangely, both Minsky and his school, dubbed Post-Keynesian, and his opponents, the libertarian “Austrian” economists, have the same analysis, except that the first group recommends governmental intervention to smooth out the cycle, while the second believes that civil servants should not be trusted to deal with such matters. While both schools of thought seem to fight each other, they both emphasize fundamental uncertainty and stand outside the mainstream economic departments (though they have large followings among businessmen and nonacademics). No doubt this emphasis on fundamental uncertainty bothers the Platonifiers.

As Stalin, who knew something about the business of mortality, supposedly said, “One death is a tragedy; a million is a statistic.” Statistics stay silent in us.

Next I will go beyond narrative to discuss the more general attributes of thinking and reasoning behind our crippling shallowness. These defects in reasoning have been cataloged and investigated by a powerful research tradition represented by a school called the Society of Judgment and Decision Making (the only academic and professional society of which I am a member, and proudly so; its gatherings are the only ones where I do not have tension in my shoulders or anger fits). It is associated with the school of research started by Daniel Kahneman, Amos Tversky, and their friends, such as Robyn Dawes and Paul Slovic. It is mostly composed of empirical psychologists and cognitive scientists whose methodology hews strictly to running very precise, controlled experiments (physics-style) on humans and making catalogs of how people react, with minimal theorizing.

The way to avoid the ills of the narrative fallacy is to favor experimentation over storytelling, experience over history, and clinical knowledge over theories.

Only a diamond can cut a diamond; we can use our ability to convince with a story that conveys the right message—what storytellers seem to do.

You work on a project that does not deliver immediate or steady results; all the while, people around you work on projects that do. You are in trouble. Such is the lot of scientists, artists, and researchers lost in society rather than living in an insulated community or an artist colony.

Many people labor in life under the impression that they are doing something right, yet they may not show solid results for a long time. They need a capacity for continuously adjourned gratification to survive a steady diet of peer cruelty without becoming demoralized. They look like idiots to their cousins, they look like idiots to their peers, they need courage to continue. No confirmation comes to them, no validation, no fawning students, no Nobel, no Shnobel. “How was your year?” brings them a small but containable spasm of pain deep inside, since almost all of their years will seem wasted to someone looking at their life from the outside. Then bang, the lumpy event comes that brings the grand vindication. Or it may never come.

Furthermore, we think that if, say, two variables are causally linked, then a steady input in one variable should always yield a result in the other one. Our emotional apparatus is designed for linear causality. For instance, if you study every day, you expect to learn something in proportion to your studies. If you feel that you are not going anywhere, your emotions will cause you to become demoralized. But modern reality rarely gives us the privilege of a satisfying, linear, positive progression: you may think about a problem for a year and learn nothing; then, unless you are disheartened by the emptiness of the results and give up, something will come to you in a flash.

These nonlinear relationships are ubiquitous in life. Linear relationships are truly the exception; we only focus on them in classrooms and textbooks because they are easier to understand. Yesterday afternoon I tried to take a fresh look around me to catalog what I could see during my day that was linear.

You play tennis every day with no improvement, then suddenly you start beating the pro. Your child does not seem to have a learning impediment, but he does not seem to want to speak. The schoolmaster pressures you to start considering “other options,” namely therapy. You argue with her to no avail (she is supposed to be the “expert”). Then, suddenly, the child starts composing elaborate sentences, perhaps a bit too elaborate for his age group. I will repeat that linear progression, a Platonic idea, is not the norm.

We favor the sensational and the extremely visible. This affects the way we judge heroes. There is little room in our consciousness for heroes who do not deliver visible results—or those heroes who focus on process rather than results.

The hippocampus is the structure where memory is supposedly controlled. It is the most plastic part of the brain; it is also the part that is assumed to absorb all the damage from repeated insults like the chronic stress we experience daily from small doses of negative feelings—as opposed to the invigorating “good stress” of the tiger popping up occasionally in your living room. You can rationalize all you want; the hippocampus takes the insult of chronic stress seriously, incurring irreversible atrophy. Contrary to popular belief, these small, seemingly harmless stressors do not strengthen you; they can amputate part of your self.

Humans will believe anything you say provided you do not exhibit the smallest shadow of diffidence; like animals, they can detect the smallest crack in your confidence before you express it. The trick is to be as smooth as possible in personal manners. It is much easier to signal self-confidence if you are exceedingly polite and friendly; you can control people without having to offend their sensitivity.

We call this the problem of silent evidence. The idea is simple, yet potent and universal. While most thinkers try to put to shame those who came before them, Cicero puts to shame almost all empirical thinkers who came after him, until very recently.

It is so easy to avoid looking at the cemetery while concocting historical theories. But this is not just a problem with history. It is a problem with the way we construct samples and gather evidence in every domain. We shall call this distortion a bias, i.e., the difference between what you see and what is there. By bias I mean a systematic error consistently showing a more positive, or negative, effect from the phenomenon, like a scale that unfailingly shows you a few pounds heavier or lighter than your true weight, or a video camera that adds a few sizes to your waistline. This

As drowned worshippers do not write histories of their experiences (it is better to be alive for that), so it is with the losers in history, whether people or ideas. Remarkably, historians and other scholars in the humanities who need to understand silent evidence the most do not seem to have a name for it (and I looked hard). As for journalists, fuhgedaboudit! They are industrial producers of the distortion.

Sir Francis Bacon is an interesting and endearing fellow in many respects. He harbored a deep-seated, skeptical, nonacademic, antidogmatic, and obsessively empirical nature, which, to someone skeptical, nonacademic, antidogmatic, and obsessively empirical, like this author, is a quality almost impossible to find in the thinking business. (Anyone can be skeptical; any scientist can be overly empirical—it is the rigor coming from the combination of skepticism and empiricism that’s hard to come by.) The problem is that his empiricism wanted us to confirm, not disconfirm; thus he introduced the problem of confirmation, that beastly corroboration that generates the Black Swan.

Does crime pay? Newspapers report on the criminals who get caught. There is no section in The New York Times recording the stories of those who committed crimes but have not been caught. So it is with cases of tax evasion, government bribes, prostitution rings, poisoning of wealthy spouses (with substances that do not have a name and cannot be detected), and drug trafficking.

A ramification of the idea concerns our decision making under a cloud of possibilities. We see the obvious and visible consequences, not the invisible and less obvious ones. Yet those unseen consequences can be—nay, generally are—more meaningful.

Frédéric Bastiat was a nineteenth-century humanist of a strange variety, one of those rare independent thinkers—independent to the point of being unknown in his own country, France,

since his ideas ran counter to French political orthodoxy (he joins another of my favorite thinkers, Pierre Bayle, in being unknown at home and in his own language). But he has a large number of followers in America. In his essay “What We See and What We Don’t See,” Bastiat offered the following idea: we can see what governments do, and therefore sing their praises—but we do not see the alternative. But there is an alternative; it is less obvious and remains unseen. Recall the confirmation fallacy: governments are great at telling you what they did, but not what they did not do. In fact, they engage in what could be labeled as phony “philanthropy,” the activity of helping people in a visible and sensational way without taking into account the unseen cemetery of invisible consequences. Bastiat inspired libertarians by attacking the usual arguments that showed the benefits of governments. But his ideas can be generalized to apply to both the Right and the Left. Bastiat goes a bit deeper. If both the positive and the negative consequences of an action fell on its author, our learning would be fast. But often an action’s positive consequences benefit only its author, since they are ...

A life saved is a statistic; a person hurt is an anecdote. Statistics are invisible; anecdotes are salient. Likewise, the risk of a Black Swan is invisible.*

The adventurer Giacomo Casanova, later self-styled Jacques, Chevalier de Seingalt, the wannabe intellectual and legendary seducer of

women, seems to have had a Teflon-style trait that would cause envy on the part of the most resilient of Mafia dons: misfortune did not stick to him. Casanova, while known for his seductions, viewed himself as some sort of a scholar. He aimed at literary fame with his twelve-volume History of My Life, written in bad (charmingly bad) French. In addition to the extremely useful lessons on how to become a seducer, the History provides an engrossing account of a succession of reversals of fortune. Casanova felt that every time he got into difficulties, his lucky star, his étoile, would pull him out of trouble. After things got bad for him, they somehow recovered by some invisible hand, and he was led to believe that it was his intrinsic property to recover from hardships by running every time into a new opportunity. He would somehow meet someone in extremis who offered him a financial transaction, a new patron that he had not betrayed in the past, or someone generous enough and with a weak enough memory to forget past betrayals. Could Casanova have been selected by destiny to bounce back from all hardships?

Once again, I am not dismissing the idea of risk taking, having been involved in it myself. I am only critical of the encouragement of uninformed risk taking. The überpsychologist Danny Kahneman has given us evidence that we generally take risks not out of bravado but out of ignorance and blindness to probability! The next few chapters will show in more depth how we tend to dismiss outliers and adverse outcomes when projecting the future.

First, justification of overoptimism on grounds that “it brought us here” arises from a far more serious mistake about human nature: the belief that we are built to understand nature and our own nature and that our decisions are, and have been, the result of our own choices. I beg to disagree. So many instincts drive us. Second, a little more worrisome than the first point: evolutionary fitness is something that is continuously touted and aggrandized by the crowd who takes it as gospel. The more unfamiliar someone is with the wild Black Swan–generating randomness, the more he or she believes in the optimal working of evolution. Silent evidence is not present in their theories. Evolution is a series of flukes, some good, many bad. You only see the good. But, in the short term, it is not obvious which traits are really good for you, particularly if you are in the Black Swan–generating environment of Extremistan.

A recent wave of philosophers and physicists (and people combining the two categories) has been examining the self-sampling assumption, which is a generalization of the principle of the Casanova bias to our own existence. Consider our own fates. Some people reason that the odds of any of us being in existence are so low that our being here cannot be attributed to an accident of fate. Think of the odds of the parameters being exactly where they need to be to induce our existence (any deviation from the optimal calibration would have made our world explode, collapse, or simply not come into existence). It is often said that the world seems to have been built to the specifications that would make our existence possible. According to such an argument, it could not come from luck.

The reference point argument is as follows: do not compute odds from the vantage point of the winning gambler (or the lucky Casanova, or the endlessly bouncing back New York City, or the invincible Carthage), but from all those who started in the cohort. Consider once again the example of the gambler. If you look at the population of beginning gamblers taken as a whole, you can be close to certain that one of them (but you do not know in advance which one) will show stellar results just by luck.

My biggest problem with the educational system lies precisely in that it forces students to squeeze explanations out of subject matters and shames them for withholding judgment, for uttering the “I don’t know.” Why did the Cold War end? Why did the Persians lose the battle of Salamis? Why did Hannibal get his behind kicked? Why did Casanova bounce back from hardship? In each of these examples, we are taking a condition, survival, and looking for the explanations, instead of flipping the argument on its head and stating that conditional on such survival, one cannot read that much into the process, and should learn instead to invoke some measure of randomness (randomness, in practice, is what we don’t know; to invoke randomness is to plead ignorance). It is not just your college professor who gives you bad habits. I showed in Chapter 6 how newspapers need to stuff their texts with causal links to make you enjoy the narratives. But have the integrity to deliver your “because” very sparingly; try to limit it to situations where the “because” is derived from experiments, not backward-looking history.

Note here that I am not saying causes do not exist; do not use this argument to avoid trying to learn from history. All I am saying is that it is not so simple; be suspicious of the “because” and handle it with care—particularly in situations where you suspect silent evidence.

A nerd is simply someone who thinks exceedingly inside the box.

The people in front of me were not the people who initiate wars. Indeed, for many, the successful defense policy is the one that manages to eliminate potential dangers without war, such as the strategy of bankrupting the Russians through the escalation in defense spending. When I expressed my amazement to Laurence, another finance person who was sitting next to me, he told me that the military collected more genuine intellects and risk thinkers than most if not all other professions. Defense people wanted to understand the epistemology of risk.

Military people can understand such things, and the idea became recently prevalent in military circles with the expression unknown unknown (as opposed to the known unknown). But I had prepared my talk (on five restaurant napkins, some stained) and was ready to discuss a new phrase I coined for the occasion: the ludic fallacy. I intended to tell them that I should not be speaking at a casino because it had nothing to do with uncertainty.

My prepared statement was this: “The casino is the only human venture I know where the probabilities are known, Gaussian (i.e., bell-curve), and almost computable.” You cannot expect the casino to pay out a million times your bet, or to change the rules abruptly on you during the game—there are never days in which “36 black” is designed to pop up 95 percent of the time.* In real life you do not know the odds; you need to discover them, and the sources of uncertainty are not defined. Economists, who do not consider what was discovered by noneconomists worthwhile, draw an artificial distinction between Knightian risks (which you can compute) and Knightian uncertainty (which you cannot compute), after one Frank Knight, who rediscovered the notion of unknown uncertainty and did a lot of thinking but perhaps never took risks, or perhaps lived in the vicinity of a casino. Had he taken economic or financial risks he would have realized that these “computable” risks are largely absent from real life! They are laboratory contraptions! Yet

Those who spend too much time with their noses glued to maps will tend to mistake the map for the territory. Go buy a recent history of probability and probabilistic thinking; you will be showered with names of alleged “probability thinkers” who all base their ideas on these sterilized constructs. I recently looked at what college students are taught under the subject of chance and came out horrified; they were brainwashed with this ludic fallacy and the outlandish bell curve.

Furthermore, assuming chance has anything to do with mathematics, what little mathematization we can do in the real world does not assume the mild randomness represented by the bell curve, but rather scalable wild randomness. What can be mathematized is usually not Gaussian, but Mandelbrotian.

Before Western thinking drowned in its “scientific” mentality, what is arrogantly called the Enlightenment, people prompted their brain to think—not compute.