Everyone’s an idiot and all correct predictions are just sheer dumb luck

“The Black Swan: The Impact of the Highly Improbable” by Nassim Nicholas Taleb

This is not a book about how to spot a Black Swan event, but rather a book that is trying to prove that we’re all helpless in the face of a Black Swan event.

The concept of Black Swan comes from the discovery of a literal black-coloured swan in Australia, that destroyed the common believe among ornithologists that all swans are white. Before this discovery even the empirical evidence were all pointed to swans being only white, which, according to the author, Nassim Nicholas Taleb, “illustrates a severe limitation to our learning from observations or experience and the fragility of our knowledge.”

He then continues, “One single observation can invalidate a general statement derived from millennia of confirmatory sightings of millions of white swans. All you need is one single (and, I am told, quite ugly) black bird.”

This is the core premise of the book, the highly unexpected occasion when our widely held perceptions are destroyed into pieces in an instance, and we have to bear the consequences of the risk associated with it. The book covers Black Swans in many different areas of life, including psychology, business, finance, and natural science, among others; analysing limitations, how humans deal with knowledge, when smart people are dumb, even the unpredictability of war.

Taleb (or what he likes to refer himself to as NNT, even use NNT to talk about himself in a third person’s point of view, which was weird) expands this thesis by categorising events into 2 camps: Mediocristan vs. Extremistan.

Mediocristan is an utopian province where particular events do not contribute much individually, but only collectively. The idea behind it is “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.” Weight, height, and calorie consumption are from Mediocristan, so do income for a baker, a small restaurant owner, an orthodontist, a prostitute, or random statistics such as gambling profits, mortality rate, IQ, or car accidents. “Mediocristan”, as NNT remarks, “is where we must endure the tyranny of the collective, the routine, the obvious, and the predicted.”

Meanwhile, Extremistan is a place where inequalities are such that one single observation can highly impact the aggregate or the total. Almost all social matters are from Extremistan, such as wealth, income, name recognition as a celebrity, book sales per author, book citation per author, number of references on Google, populations of cities, number of speakers per language, uses of words in a vocabulary, damages caused by earthquakes, sizes of planets, sizes of companies, stock ownership, height between species, financial markets, commodity prices, inflation rates, economic data, deaths in war, deaths from terrorist incidents, and so much more.

Interestingly, before the advances of modern technology wars used to belong to Mediocristan, as it can only occur locally and it is quite difficult to kill so many people at once. But today, with weapons of mass destructions, all it takes is a button, a crazy person, or a small error to wipe out a population. As NNT remarks, “Extremistan is where we are subjected to the tyranny of the singular, the accidental, the unseen, and the unpredicted.” This is where Black Swans live.

Moreover, NNT also introduce the concept of the turkey problem. As he explains, “Consider a turkey that is fed every day. Every single feeding will firm up the bird’s belief that it is the general rule of life to be fed every day by friendly members of the human race “looking out for its best interests,” as a politician would say. On the afternoon of the Wednesday before Thanksgiving, something unexpected will happen to the turkey [getting slaughtered]. It will incur a revision of belief.”

Indeed, this is another core argument of the book, that we’re all living life like the turkey, being conditioned to the daily routine under the illusion that everything is normal and becoming oblivion to the huge risks that are facing us.

The book also teaches us to see the other side of the coin, to be a successful turkey – so to speak – where our victories or achievements are actually the result of dumb luck or a streak or dumb lucks that cannot be replicated anymore even with huge efforts (AKA, positive Black Swan). And after about 30% of the book, after all the important theories have been discussed, that’s all that NNT is talking about, the stupidity of people.

In what becomes a tiringly repetitive and bulky rants, he then proceeded to provide “examples” when experts from many different fields are wrong. For instance, he is mocking those who predicted a landslide win of Al Gore against George W. Bush (but Gore did win the popular vote by a landslide, but then Bush + Fox cheat through the electoral college recount in Florida – ironically THIS will be a Black Swan moment, one that NNT failed to address and instead blame it on the economic failures of the Clinton-Gore era).

He also mocks the bell curve as an intellectual fraud, and dedicate one whole chapter 15 about it. He insulted Nobel Prize winners in economics Harry Markowitz and William Sharpe for creating the Modern Portfolio Theory (which he called phony), insulted another Nobel Prize winners in economics pair of Myron Scholes and Robert C. Merton, he even mocks Plato for creating the “Platonic fold” to understand reality (and use “Platonic” word as a derogatory term throughout the book), while also disagreeing with [the followers of] Karl Marx and Adam Smith.

Meanwhile, throughout the book he also tries so hard to portray himself as an intellectual, by inserting stories about him being invited to multiple intellectual gatherings, which reminds me of the behaviour of the Sophist in Ancient Greek, that would do anything they can to appear sophisticated by any means necessary other than their actual intellectual arguments.

Because what is his intellectual argument, really? His basic premise is all experts whether it’s scientists, economists, bankers, investors, are all successful not because of their skills, but down to luck. Except for him and his favourite philosophers (of course). He even use Orwell’s 1984 as a failed prediction over the future (who’s going to tell him?).

Surely not all experts or all predictions are just dumb luck? There are patterns, early signs, and experts that can predict a Black Swan before it happened. Like Paul Tudor Jones famously predicted the Black Monday 1987 crash during the weekend, highlighting a pure competency. Or those traders who placed a huge sums of put options starting from 5 September 2001 all the way to 10 September 2001, before 9/11 occurred, highlighting insider information that were not readily available to the rest of the world.

To be fair, NNT did somewhat address this, in what he call a reverse turkey move: “From the standpoint of the turkey, the nonfeeding of the one thousand and first day is a Black Swan. For the butcher, it is not, since its occurrence is not unexpected. So you can see here that the Black Swan is a sucker’s problem. In other words, it occurs relative to your expectation. You realize that you can eliminate a Black Swan by science (if you’re able), or by keeping an open mind.”

But still, rather than teaching us how to spot a Black Swan event early (maybe by diving deeper into those who did predict the 1987 crash or who were in the know of 9/11 beforehand), he dedicate the entire book to ridicule experts for being unaware of Black Swan events and unable to cope with them.

Ironically, he himself said in the book that when pressed by the press to provide examples of the upcoming Black Swans, he couldn’t answer it. He even tell the story when one time a business was trying to hire him to be a forecaster of events, but he said he doesn’t do forecasting, in which the business promptly dropped him (and he mocks them for being closed minded when it comes to predictions). Oh the huge ego on this fragile diva.

NNT’s thesis reminds me of the Efficient Market Hypothesis, which argues that asset prices always reflect all available information, making it hard to achieve return in excess of the market’s average. It is an utopian view of the market, a good benchmark but not a realistic view in the real life where in reality human behaviour matters more in the ever inefficient market that can produce higher returns for those who understand market psychology.

Likewise, in his thesis NNT failed to highlight those who have inside information, the perpetrator, or even the early receiver of the information, – AKA all the reverse turkeys – over the upcoming Black Swan. This makes him similar like the Efficient Market Hypothesis hardliners that refuse to budge, even during the market meltdown in 2008 that was not supposed to happen in an efficient market.

Which is a bit of an anti-climax for the book. Because NNT doesn’t provide any way to spot a Black Swan, and instead only encourages us to adopt a mindset that accepts the randomness of reality, get comfortable in uncertainty, and prepare for the unexpected. Because by doing so, we get to minimize the impact of any Black Swans. In this regard, just like the Efficient Market Hypothesis supporters, he really is a Black Swan purist that is unwilling to compromise his utopian thesis.

But still, what can we learn from a person we grow to disagree? When we strip away the ego and the intellectual douchebaggery, quite a lot, actually. Here are some of the better insights from him, on the fascinating world of randomness:

The dynamics of the Lebanese conflict had been patently unpredictable, yet people’s reasoning as they examined the events showed a constant: almost all those who cared seemed convinced that they understood what was going on. Every single day brought occurrences that lay completely outside their forecast, but they could not figure out that they had not forecast them. Much of what took place would have been deemed completely crazy with respect to the past. Yet it did not seem that crazy after the events.
I repeat that we are explanation-seeking animals who tend to think that everything has an identifiable cause and grab the most apparent one as the explanation. Yet there may not be a visible “because”; to the contrary, frequently there is nothing, not even a spectrum of possible explanations. But silent evidence masks this fact.
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.
Matters should be seen on some relative, not absolute, timescale: earthquakes last minutes, 9/11 lasted hours, but historical changes and technological implementations are Black Swans that can take decades. In general, positive Black Swans take time to show their effect while negative ones happen very quickly—it is much easier and much faster to destroy than to build.
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. You take past instances that corroborate your theories and you treat them as evidence. For instance, a diplomat will show you his “accomplishments,” not what he failed to do. Mathematicians will try to convince you that their science is useful to society by pointing out instances where it proved helpful, not those where it was a waste of time, or, worse, those numerous mathematical applications that inflicted a severe cost on society owing to the highly unempirical nature of elegant mathematical theories.
The fallacy is associated with our vulnerability to overinterpretation and our predilection for compact stories over raw truths. It severely distorts our mental representation of the world; it is particularly acute when it comes to the rare event.
We, members of the human variety of primates, have a hunger for rules because we need to reduce the dimension of matters so they can get into our heads. Or, rather, sadly, so we can squeeze them into our heads.
The more random information is, the greater the dimensionality, and thus the more difficult to summarize. The more you summarize, the more order you put in, the less randomness. Hence the same condition that makes us simplify pushes us to think that the world is less random than it actually is. And the Black Swan is what we leave out of simplification.
Think of the world around you, laden with trillions of details. Try to describe it and you will find yourself tempted to weave a thread into what you are saying. A novel, a story, a myth, or a tale, all have the same function: they spare us from the complexity of the world and shield us from its randomness. Myths impart order to the disorder of human perception and the perceived “chaos of human experience.”
People in professions with high randomness (such as in the markets) can suffer more than their share of the toxic effect of look-back stings: I should have sold my portfolio at the top; I could have bought that stock years ago for pennies and I would now be driving a pink convertible; et cetera. If you are a professional, you can feel that you “made a mistake,” or, worse, that “mistakes were made,” when you failed to do the equivalent of buying the winning lottery ticket for your investors, and feel the need to apologize for your “reckless” investment strategy (that is, what seems reckless in retrospect).
How can you get rid of such a persistent throb? Don’t try to willingly avoid thinking about it: this will almost surely backfire. A more appropriate solution is to make the event appear more unavoidable. Hey, it was bound to take place and it seems futile to agonize over it. How can you do so? Well, with a narrative. 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.
If you work in a randomness-laden profession, as we see, you are likely to suffer burnout effects from that constant second-guessing of your past actions in terms of what played out subsequently. Keeping a diary is the least you can do in these circumstances.
It happens all the time: a cause is proposed to make you swallow the news and make matters more concrete. After a candidate’s defeat in an election, you will be supplied with the “cause” of the voters’ disgruntlement. Any conceivable cause can do. The media, however, go to great lengths to make the process “thorough” with their armies of fact-checkers. It is as if they wanted to be wrong with infinite precision (instead of accepting being approximately right, like a fable writer).
Adding the “because” makes these matters far more plausible, and far more likely. Cancer from smoking seems more likely than cancer without a cause attached to it—an unspecified cause means no cause at all.
The first question about the paradox of the perception of Black Swans is as follows: How is it that some Black Swans are overblown in our minds when the topic of this book is that we mainly neglect Black Swans? The answer is that there are two varieties of rare events: a) the narrated Black Swans, those that are present in the current discourse and that you are likely to hear about on television, and b) those nobody talks about, since they escape models—those that you would feel ashamed discussing in public because they do not seem plausible. I can safely say that it is entirely compatible with human nature that the incidences of Black Swans would be overestimated in the first case, but severely underestimated in the second one.
We learn from repetition—at the expense of events that have not happened before. Events that are nonrepeatable are ignored before their occurrence, and overestimated after (for a while). After a Black Swan, such as September 11, 2001, people expect it to recur when in fact the odds of that happening have arguably been lowered.
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.
Terrorism kills, but the biggest killer remains the environment, responsible for close to 13 million deaths annually. But terrorism causes outrage, which makes us overestimate the likelihood of a potential terrorist attack—and react more violently to one when it happens. We feel the sting of man-made damage far more than that caused by nature.
He tells you that his cousin (with whom he will celebrate the holidays) worked in a law office with someone whose brother-in-law’s business partner’s twin brother was mugged and killed in Central Park. Indeed, Central Park in glorious New York City. That was in 1989, if he remembers it well (the year is now 2007). The poor victim was only thirty-eight and had a wife and three children, one of whom had a birth defect and needed special care at Cornell Medical Center. Three children, one of whom needed special care, lost their father because of his foolish visit to Central Park. Well, you are likely to avoid Central Park during your stay. You know you can get crime statistics from the Web or from any brochure, rather than anecdotal information from a verbally incontinent salesman. But you can’t help it. For a while, the name Central Park will conjure up the image of that poor, undeserving man lying on the polluted grass. It will take a lot of statistical information to override your hesitation.
Now, I do not disagree with those recommending the use of a narrative to get attention. Indeed, our consciousness may be linked to our ability to concoct some form of story about ourselves. It is just that narrative can be lethal when used in the wrong places.
The way to avoid the ills of the narrative fallacy is to favor experimentation over storytelling, experience over history, and clinical knowledge over theories.
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.
Making $1 million in one year, but nothing in the preceding nine, does not bring the same pleasure as having the total evenly distributed over the same period, that is, $100,000 every year for ten years in a row. The same applies to the inverse order—making a bundle the first year, then nothing for the remaining period.
Let us separate the world into two categories. Some people are like the turkey, exposed to a major blowup without being aware of it, while others play reverse turkey, prepared for big events that might surprise others.
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.
In fact, economic growth comes from such risk taking. But some fool might argue the following: if someone followed reasoning such as mine, we would not have had the spectacular growth we experienced in the past. This is exactly like someone playing Russian roulette and finding it a good idea because he survived and pocketed the money.
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.
I insist on the following: that we got here by accident does not mean that we should continue to take the same risks.
We have been playing Russian roulette; now let’s stop and get a real job.
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.
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. This is like looking at rich gamblers coming out of the casino and claiming that a taste for gambling is good for the species because gambling makes you rich! Risk taking made many species head for extinction!
Worse, in a Black Swan environment, where one single but rare event can come shake up a species after a very long run of “fitness,” the foolish risk takers can also win in the long term!

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