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

by Nassim Nicholas Taleb

Aside from the movies, examples of positive–Black Swan businesses are: some segments of publishing, scientific research, and venture capital. In these businesses, you lose small to make big. You have little to lose per book and, for completely unexpected reasons, any given book might take off. The downside is small and easily controlled. The problem with publishers, of course, is that they...

Don’t look for the precise and the local. Simply, do not be narrow-minded. The great discoverer Pasteur, who came up with the notion that chance favors the prepared, understood that you do not look for something particular every morning but work hard to let contingency enter your working life. As Yogi Berra, another great thinker,

said, “You got to be very careful if you don’t know where you’re going, because you might not get there.”

These thinkers advocate the opposite: invest in preparedness, not in prediction. Remember that infinite vigilance is just not possible.

Seize any opportunity, or anything that looks like opportunity. They are rare, much rarer than you think. Remember that positive Black Swans have a necessary first step: you need to be exposed to them. Many people do not realize that they are getting a lucky break in life when they get it. If a big publisher (or a big art dealer or a movie executive or a hotshot banker or a big thinker) suggests an appointment, cancel anything you have planned: you may never see such a window open up again. I am sometimes shocked at how little people realize that these opportunities do not grow on trees. Collect as many free nonlottery tickets (those with open-ended payoffs) as you can, and, once they start paying off, do not discard them. Work hard, not in grunt work, but in chasing such opportunities and maximizing exposure to them. This makes living in big cities invaluable because you increase the odds of serendipitous encounters—you gain exposure to the envelope of serendipity. The idea of settling in a rural area on grounds that one has good communications “in the age of the Internet” tunnels out of such sources of positive uncertainty.

Go to parties! If you’re a scientist, you will chance upon a remark that might spark new research. And if you are autistic, send your associates to these events.

Beware of precise plans by governments. As discussed in Chapter 10, let governments predict (it makes officials feel better about themselves and justifies their existence) but do not set much store by what they say. Remember that the interest of these civil servants is to survive and self-perpetuate—not to get to the truth. It does not mean that governments are useless, only that you need to keep a vigilant eye on their side effects.

“There are some people who, if they don’t already know, you can’t tell ’em,” as the great philosopher of uncertainty Yogi Berra once said. Do not waste your time trying to fight forecasters, stock analysts, economists, and social scientists, except to play pranks on them. They are considerably easy to make fun of, and many get angry quite readily. It is ineffective to moan about unpredictability: people will continue to predict foolishly, especially if they are paid for it, and you cannot put an end to institutionalized frauds. If you ever do have to heed a forecast, keep in mind that its accuracy degrades rapidly as you extend it through time.

The Great Asymmetry All these recommendations have one point in common: asymmetry. Put yourself in situations where favorable consequences are much larger than unfavorable ones.

Indeed, the notion of asymmetric outcomes is the central idea of this book: I will never get to know the unknown since, by definition, it is unknown. However, I can always guess how it might affect me, and I should base my decisions around that. This idea is often erroneously called Pascal’s wager, after the philosopher and (thinking) mathematician Blaise Pascal. He presented it something like this: I do not know whether God exists, but I know that I have nothing to gain from being an atheist if he does not exist, whereas I have plenty to lose if he does. Hence, this justifies my belief in God.

Pascal’s argument is severely flawed theologically: one has to be naïve enough to believe that God would not penalize us for false belief. Unless, of course, one is taking the quite restrictive view of a naïve God. (Bertrand Russell was reported to have claimed tha...

The probabilities of very rare events are not computable; the effect of an event on us is considerably easier to ascertain (the rarer the event, the fuzzier the odds). We can have a clear idea of the consequences of an event, even if we do not know how likely it is to occur. I don’t know the odds of an earthquake, but I can imagine how San Francisco might be affected by one. This idea that in order to make a decision you need to focus on the consequences (which you can know) rather than the probability (which you can’t know) is the central idea of uncertainty.

Much of my life is based on it.

Effectively, if free markets have been successful, it is precisely because they allow the trial-and-error process I call “stochastic tinkering” on the part of competing individual operators who fall for the narrative fallacy—but are effectively collectively partaking of a grand project. We are increasingly learning to practice stochastic tinkering without knowing it—thanks to overconfident entrepreneurs, naïve investors, greedy investment bankers, and aggressive venture capitalists brought together by the free-market system. The next chapter shows why I am optimistic that the academy is losing its power and ability to put knowledge in straitjackets and that more out-of-the-box knowledge will be generated Wiki-style.

In the end we are being driven by history, all the while thinking that we are doing the driving.

Remember that for an event to be a Black Swan, it does not just have to be rare, or just wild; it has to be unexpected, has to lie outside our tunnel of possibilities.

You must be a sucker for it. As it happens, many rare events can yield their structure to us: it is not easy to compute their probability, but it is easy to get a general idea about the possibility of their occurrence. We can turn these Black Swans into Gray Swans, so to speak, reducing their surprise effect. A person aware of the possibility of such events can come to belong to the non-sucker variety.

The World Is Unfair Is the world that unfair? I have spent my entire life studying randomness, practicing randomness, hating randomness. The more that time passes, the worse things seem to me, the more scared I get, the more disgusted I am with Mother Nature. The more I think about my subject, the more I see evidence that the world

we have in our minds is different from the one playing outside. Every morning the world appears to me more random than it did the day before, and humans seem to be even more fooled by it than they were the previous day. It is becoming unbearable. I find writing these lines painful; I find the world revolting.

Let me start with the economist Sherwin Rosen. In the early eighties, he wrote papers about “the economics of superstars.” In one of the papers he conveyed his sense of outrage that a basketball player could earn $1.2 million a year, or a television celebrity could make $2 million. To get an idea of how this concentration is increasing—i.e., of how we are moving away from Mediocristan—consider that

television celebrities and sports stars (even in Europe) get contracts today, only two decades later, worth in the hundreds of millions of dollars! The extreme is about (so far) twenty times higher than it was two decades ago!

According to Rosen, this inequality comes from a tournament effect: someone who is marginally “better” can easily win the entire pot, leaving the others with nothing. Using an argument from Chapter 3, people prefer to pay $10.99 for a recording featuring Horowitz to $9.99 for a struggling pianist. Would you rather read Kundera for $13.99 or some unknown author for $1? So it looks like a tournament, where the winner grabs the whole thing—and he does not have to win by much. But the role of luck is missing in Rosen’s beautiful argument. The problem here is the notion of “better,” this focus on skills as leading to success. Random outcomes, or an arbitrary situation, can also explain success, and provide the initial push that leads to a winner-take-all result. A person can get slightly ahead for entirely random reasons; because we like to imitate one another, we will flock to him. The world of...

Let’s say someone writes an academic paper quoting fifty people who have worked on the subject and provided background materials for his study; assume, for the sake of simplicity, that all fifty are of equal merit. Another researcher working on the exact same subject will randomly cite three of those fifty in his bibliography. Merton showed that many academics cite references without having read

the original work; rather, they’ll read a paper and draw their own citations from among its sources. So a third researcher reading the second article selects three of the previously referenced authors for his citations. These three authors will receive cumulatively more and more attention as their names become associated more tightly with the subject at hand. The difference between the winning three and the other members of the original cohort is mostly luck: they were initially chosen not for their greater skill, but simply for the way their names appeared in the prior bibliography. Thanks to their reputations, these successful academics will go on writing papers and their work will be easily accepted for publication. Academic success is partly (but significantly) a lottery.*

For an anecdotal example read Fire the Bastards!, whose author, Jack Green, goes systematically through the reviews of William Gaddis’s novel The Recognitions. Green shows clearly how book reviewers anchor on other reviews and reveals powerful mutual influence, even in their wording. This phenomenon is reminiscent of the herding of financial analysts I discussed in Chapter 10.

The scientists J. C. Willis and G. U. Yule published a landmark paper in Nature in 1922

called “Some Statistics of Evolution and Geographical Distribution in Plants and Animals, and Their Significance.” Willis and Yule noted the presence in biology of the so-called power laws, tractable versions of the scalable randomness that I discussed in Chapter 3. These power laws (on which more technical information in the following chapters) had been noticed earlier by Vilfredo Pareto, who found that they applied to the distribution of income. Later, Yule presented a simple model showing how power laws can be generated. His point was as follows: Let’s say species split in two at some constant rate, so that new species arise. The richer in species a genus is, the richer it will tend to get, with the same logic as the Matthew effect. Note the following caveat: in Yule’s model the species never die out.

This explains why out of the sixty thousand main words in English, only a few hundred constitute the bulk of what is used in writings, and even fewer appear regularly in conversation. Likewise, the more people aggregate in a particular city, the more likely a stranger will be to pick that city as his destination. The big get bigger and the small stay small, or get relatively smaller.

The anthropologist, cognitive scientist, and philosopher Dan Sperber has proposed the following idea on the epidemiology of representations. 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.

Among his sayings were “Trading may have princes, but nobody stays a king” and “The people you meet on the way up, you will meet again on the way down.”

Consider the following sobering statistic. Of the five hundred largest U.S. companies in 1957, only seventy-four were still part of that select group, the Standard and Poor’s 500, forty years later. Only a few had disappeared in mergers; the rest either shrank or went bust.

Interestingly, almost all these large corporations were located in the most capitalist country on earth, the United States. The more socialist a country’s orientation, the easier it was for the large corporate monsters to stick around. Why did capitalism (and not socialism) destroy these ogres?

Everything is transitory. Luck both made and unmade Carthage; it both made and unmade Rome.

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.

I have said that nobody is safe in Extremistan. This has a converse: nobody is threatened with complete extinction either. Our current environment allows the little guy to bide his time in the antechamber of success—as long as there is life, there is hope.

Cognitive Diversity: How Our Individual Differences Produce Collective Benefits, by Scott Page. Page examines the effects of cognitive diversity on problem solving and shows how variability in views and methods acts like an engine for tinkering. It works like evolution. By subverting the big structures we also get rid of the Platonified one way of doing things—in the end, the bottom-up theory-free empiricist should prevail.

In sum, the long tail is a by-product of Extremistan that makes it somewhat less unfair: the world is made no less unfair for the little guy, but it now becomes extremely unfair for the big man. Nobody is truly established. The little guy is very subversive.

A similar effect is taking place in economic life. 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.*

from a diversified ecology of small banks, with varied lending policies, to a more homogeneous framework of firms that all resemble one another. True, we now have fewer failures, but when they occur … I shiver at the thought. I rephrase here: we will have fewer but more severe crises. The rarer the event, the less we know about its odds. It means that we know less and less about the possibility of a crisis.

And we have some idea how such a crisis would happen. A network is an assemblage of elements called nodes that are somehow connected to one another by a link; the world’s airports constitute a network, as does the World Wide Web, as do social connections and electricity grids. There is a branch of research called “network theory” that studies the organization of such networks and the links between their nodes, with such researchers as Duncan Watts, Steven Strogatz, Albert-Laszlo Barabasi, and many more. They all understand Extremistan mathematics and the inadequacy of the Gaussian bell curve. They have uncovered the following property of networks: there is a concentration among a few nodes that serve as central connections. Networks have

a natural tendency to organize themselves around an extremely concentrated architecture: a few nodes are extremely connected; others barely so. The distribution of these connections has a scalable structure of the kind we will discuss in Chapters 15 and 16. Concentration of this kind is not limited to the Internet; it appears in social life (a small number of people are connected to others), in electricity grids, in communications networks. This seems to make networks more robust: random insults to most parts of the network will not be consequential since they are likely to hit a poorly connected spot. But it also makes networks more vulnerable to Black Swans. Just consider what would happen if there is a problem with a major node. The electricity...

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 w...

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 ...

Consider that before Christianity, in many societies the powerful had many wives, thus preventing those at the bottom from accessing wombs, a condition that is not too different from the reproductive exclusivity of

alpha males in many species. But Christianity reversed this, thanks to the one man–one woman rule. Later, Islam came to limit the number of wives to four. Judaism, which had been polygenic, became monogamous in the Middle Ages. One can say that such a strategy has been successful—the institution of tightly monogamous marriage (with no official concubine, as in the Greco-Roman days), even when practiced the “French way,” provides social stability since there is no pool of angry, sexually deprived men at the bottom fomenting a revolution just so they can have the chance to mate.

But I find the emphasis on economic inequality, at the expense of other types of inequality, extremely bothersome. 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. The Soviets may have flattened the economic structure, but they encouraged their own brand of übermensch. What is poorly understood, or denied (owing to its unset...

very few in intellectual influence is even more unsettling than the unequal distribution of wealth—unsettling because, unlike the income gap, no social policy can eliminate it. Communism could conceal or compress income discrepancies, but i...

* These scalable laws were already discussed in the scriptures: “For onto everyone that hath shall be given, and he shall have abundance; but from him that hath not shall be taken away even that which he hath.” Matthew (Matthew 25:29, King James Version).

THE GAUSSIAN AND THE MANDELBROTIAN I was transiting through the Frankfurt airport in December 2001, on my way from Oslo to Zurich. I had time to kill at the airport and it was a great opportunity for me to buy dark European chocolate, especially since I have managed to successfully convince myself that airport calories don’t count. The cashier handed me,

among other things, a ten deutschmark bill, an (illegal) scan of which can be seen on the next page. The deutschmark banknotes were going to be put out of circulation in a matter of days, since Europe was switching to the euro. I kept it as a valedictory. Before the arrival of the euro, Europe had plenty of national currencies, which was good for printers, money changers, and of course currency traders like this (more or less) humble author. As I was eating my dark European chocolate and wistfully looking at the bill, I almost choked. I suddenly noticed, for the first time, that there was something curious about it. The bill bore the portrait of Carl Friedrich Gauss and a picture of his Gaussian bell curve.