The Black Swan
Two great pleasures in life are enjoying intelligent reading and sharing with others.
The first reading in this section of the blog is The Black Swan, by Nassim Nicholas Taleb, a self-styled trader-mathematician-philosopher-writer who enjoys badgering people who take themselves and the quality of their knowledge too seriously, as well as those who don’t have the courage to answer with a simple “I don’t know.”
Human behavior in the face of uncertainty is one of the biggest mysteries that psychologists, sociologists and even economists have tried to solve —the latter have the worst batting average, according to Taleb.
One of the consequences of human interaction with uncertainty is the Black Swan, which is simply a metaphor: before the discovery of Australia, people from the Old World were absolutely convinced that all swans were white. This was “proven” at the time by empirical evidence. When the first black swan was discovered, it caused amazement among the experts.
The “Black Swan” illustrates in a simple way a severe limitation in our ability to learn through experience and the fragility of our knowledge. Just looking at a black swan can invalidate in a pen stroke the knowledge acquired over thousands of years of observing white swans.
So, the phenomenon of the Black Swan 1) is an aberrant observation; 2) has an extreme impact; and, 3) human psychology always finds an explanation after the fact. According to the author, a small number of Black Swans explains almost everything in our world…while daily events, the things we read in the newspapers, have become almost irrelevant.
Using the book’s logic, what you don’t know is much more relevant than what you do know because, paradoxically, not knowing is a possible phenomenon that favors its existence. It is an event that occurs precisely because it was not expected; very clear examples are the 9/11 attacks on the Twin Towers or World War I and II. These are aberrant, extremely high-impact observations that can be easily foreseen…after the event.
One of the author’s main arguments is that the very human condition that tends to simplify things is what leads us to think that the world is less random than it really is, so that we ourselves give rise to Black Swans.
Mediocristan and Extremistan
To illustrate his point, the author talks about two worlds, Mediocristan and Extremistan. Mediocristan is the standard world, where atypical observations do not exist and where the normal probability curve, the Gauss bell curve, applies perfectly. In Mediocristan, when the sample is big enough, no individual event affects the aggregate result.
By contrast, Extremistan is the world of extreme data, where people five centimeters tall live together with three-meter-tall giants, and a few people are a kilometer tall. In Extremistan, the inequalities are such that a simple observation can disproportionately affect the sum of the whole.
Mediocristan completely excludes the possibility of a Black Swan. Nevertheless, the modern world we live in is increasingly represented by Extremistan, where a Black Swan can change the course of history.
Extremistan is the product of scalability and globalization. Scalability makes it possible for a writer like J.K. Rowling to sell millions of copies of Harry Potter books, while most authors are content to distribute a few hundred copies. Harry Potter is an unexpected phenomenon —even by his creator— a Black Swan, which, by the way can be beneficial, like in this case.
Taleb’s reflections on business are interesting. He says that if you head up a public company, things used to be great before your stocks were on the market, when you and your partners were the only owners, with a few stockholders who understood the nature of your business and the possibility of extreme results. But now you’re facing a slow-learning financial analyst who “judges” your results and doesn’t know how to interpret them. He wants routine payment, and that’s the last thing your company can do.
Now I understand: we entrepreneurs are from Extremistan, and some analysts have always lived in Mediocristan.
In Extremistan, it is impossible to predict. However, economists and financial analysts sell us projections that rarely pan out. For Taleb, in this dynamic, investment banks spend their time picking up pennies from between the railway tracks, making themselves vulnerable to a potentially disastrous Black Swan. The current mortgage crisis is a magnificent example of this point.
In this modern world, Taleb recommends an attitude like that of Karl Popper, the philosopher who argued for an open society, a society that promotes skepticism and empirical knowledge and rejects absolute truths.
Finally, he recommends: 1) an abundance of data does not confirm anything, but a contradictory piece of information must make you change your opinion; 2) not worrying about small failures and looking ahead to the disastrous consequences of your actions; 3) ignoring the big risks that sensationalist scaremongers tell you about and thinking instead about hidden dangers; 4) focusing on what you can change instead of problems you can’t solve; 5) being aggressive when you are exposed to positive Black Swans, and very conservative when you’re exposed to negative ones.
To conclude, never run after a train. Feel the true elegance of exercising control over your time and your life. Missing a train is only disastrous if you run after it. Also, a failure to achieve the “success” that others establish only hurts if that is what you are looking for. You have more control if you decide for yourself and set your own criteria. In terms of the Black Swan, you’re more exposed to the improbable only if you let it control you.