The Black Swan

by Nassim Nicholas Taleb

  A Brooklyn Frenchman

  When I started trading foreign exchange, I befriended a fellow named Vincent who exactly resembled a Brooklyn trader, down to the mannerisms of Fat Tony, except that he spoke the French version of Brooklynese. Vincent taught me a few tricks. 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.”

  There were theories when I was a child about class warfare and struggles by innocent individuals against powerful monster-corporations capable of swallowing the world. Anyone with intellectual hunger was fed these theories, which were inherited from the Marxist belief that the tools of exploitation were self-feeding, that the powerful would grow more and more powerful, furthering the unfairness of the system. But one had only to look around to see that these large corporate monsters dropped like flies. Take a cross section of the dominant corporations at any particular time; many of them will be out of business a few decades later, while firms nobody ever heard of will have popped onto the scene from some garage in California or from some college dorm.

  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?

  In other words, if you leave companies alone, they tend to get eaten up. Those in favor of economic freedom claim that beastly and greedy corporations pose no threat because competition keeps them in check. What I saw at the Wharton School convinced me that the real reason includes a large share of something else: chance.

  But when people discuss chance (which they rarely do), they usually only look at their own luck. The luck of others counts greatly. Another corporation may luck out thanks to a blockbuster product and displace the current winners. Capitalism is, among other things, the revitalization of the world thanks to the opportunity to be lucky. Luck is the grand equalizer, because almost everyone can benefit from it. The socialist governments protected their monsters and, by doing so, killed potential newcomers in the womb.

  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.

  In the arts, fads do the same job. A newcomer may benefit from a fad, as followers multiply thanks to a preferential attachment–style epidemic. Then, guess what? He too becomes history. It is quite interesting to look at the acclaimed authors of a particular era and see how many have dropped out of consciousness. It even happens in countries such as France where the government supports established reputations, just as it supports ailing large companies.

  When I visit Beirut, I often spot in relatives’ homes the remnants of a series of distinctively white-leather-bound “Nobel books.” Some hyperactive salesman once managed to populate private libraries with these beautifully made volumes; many people buy books for decorative purposes and want a simple selection criterion. The criterion this series offered was one book by a Nobel winner in literature every year—a simple way to build the ultimate library. The series was supposed to be updated every year, but I presume the company went out of business in the eighties. I feel a pang every time I look at these volumes: Do you hear much today about Sully Prudhomme (the first recipient), Pearl Buck (an American woman), Romain Rolland, Anatole France (the last two were the most famous French authors of their generations), St. John Perse, Roger Martin du Gard, or Frédéric Mistral?

  The Long Tail

  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.

  This idea was recently revived by Chris Anderson, one of a very few who get the point that the dynamics of fractal concentration has another layer of randomness. He packaged it with his idea of the “long tail,” about which in a moment. Anderson is lucky not to be a professional statistician (people who have had the misfortune of going through conventional statistical training think we live in Mediocristan). He was able to take a fresh look at the dynamics of the world.

  True, the Web produces acute concentration. A large number of users visit just a few sites, such as Google, which, at the time of this writing, has total market dominance. At no time in history has a company grown so dominant so quickly—Google can service people from Nicaragua to southwestern Mongolia to the American West Coast, without having to worry about phone operators, shipping, delivery, and manufacturing. This is the ultimate winner-take-all case study.

  People forget, though, that before Google, Alta Vista dominated the search-engine market. I am prepared to revise the Google metaphor by replacing it with a new name for future editions of this book.

  What Anderson saw is that the Web causes something in addition to concentration. The Web enables the formation of a reservoir of proto-Googles waiting in the background. It also promotes the inverse Google, that is, it allows people with a technical specialty to find a small, stable audience.

  Recall the role of the Web in Yevgenia Krasnova’s success. Thanks to the Internet, she was able to bypass conventional publishers. Her publisher with the pink glasses would not even have been in business had it not been for the Web. Let’s assume that Amazon.com does not exist, and that you have written a sophisticated book. Odds are that a very small bookstore that carries only 5,000 volumes will not be interested in letting your “beautifully crafted prose” occupy premium shelf space. And the megabookstore, such as the average American Barnes & Noble, might stock 130,000 volumes, which is still not sufficient to accommodate marginal titles. So your work is stillborn.

  Not so with Web vendors. A Web bookstore can carry a near-infinite number of books since it need not have them physically in inventory. Actually, nobody needs to have them physically in inventory since they can remain in digital form until they are needed in print, an emerging business called print-on-demand.

  So as the author of this little book, you can sit there, bide your time, be available in search engines, and perhaps benefit from an occasional epidemic. In fact, the quality of readership has improved markedly over the past few years thanks to the availability of these more sophisticated books. This is a fertile environment for diversity.*

  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.

  The long tail’s contribution is not yet numerical; it is still confined to the Web and its small-scale
online commerce. But consider how the long tail could affect the future of culture, information, and political life. It could free us from the dominant political parties, from the academic system, from the clusters of the press—anything that is currently in the hands of ossified, conceited, and self-serving authority. The long tail will help foster cognitive diversity. One highlight of the year 2006 was to find in my mailbox a draft manuscript of a book called 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.

  Naïve Globalization

  We are gliding into disorder, but not necessarily bad disorder. This implies that we will see more periods of calm and stability, with most problems concentrated into a small number of Black Swans.

  Consider the nature of past wars. The twentieth century was not the deadliest (in percentage of the total population), but it brought something new: the beginning of the Extremistan warfare—a small probability of a conflict degenerating into total decimation of the human race, a conflict from which nobody is safe anywhere.

  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.* The increased concentration among banks seems to have the effect of making financial crisis less likely, but when they happen they are more global in scale and hit us very hard. We have moved 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 blackout experienced in the northeastern United States during August 2003, with its consequential mayhem, is a perfect example of what could take place if one of the big banks went under today.

  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.

  REVERSALS AWAY FROM EXTREMISTAN

  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. Indeed, the rules of society can be easily rewritten by those at the bottom of the pyramid to prevent concentration from hurting them. But it does not require voting to do so—religion could soften the problem. 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 unsettling implications), is the absence of a role for the average in intellectual production. The disproportionate share of the 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 it could not eliminate the superstar system in intellectual life.

  It has even been shown, by Michael Marmot of the Whitehall Studies, that those at the top of the pecking order live longer, even when adjusting for disease. Marmot’s impressive project shows how social rank alone can affect longevity. It was calculated that actors who win an Oscar tend to live on average about five years longer than their peers who don’t. People live longer in societies that have flatter social gradients. Winners kill their peers as those in a steep social gradient live shorter lives, regardless of their economic condition.

  I do not know how to remedy this (except through religious beliefs). Is insurance against your peers’ demoralizing success possible? Should the Nobel Prize be banned? Granted the Nobel medal in economics has not been good for society or knowledge, but even those rewarded for real contributions in medicine and physics too rapidly displace others from our consciousness, and steal longevity away from them. Extremistan is here to stay, so we have to live with it, and find the tricks that make it more palatable.

  * 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)
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  * Much of the perception of the importance of precocity in the career of researchers can be owed to the misunderstanding of the perverse role of this effect, especially when reinforced by bias. Enough counterexamples, even in fields like mathematics meant to be purely a “young man’s game,” illustrate the age fallacy: simply, it is necessary to be successful early, and even very early at that.

  * The Web’s bottom-up feature is also making book reviewers more accountable. While writers were helpless and vulnerable to the arbitrariness of book reviews, which can distort their messages and, thanks to the confirmation bias, expose small irrelevant weak points in their text, they now have a much stronger hand. In place of the moaning letter to the editor, they can simply post their review of a review on the Web. If attacked ad hominem, they can reply ad hominem and go directly after the credibility of the reviewer, making sure that their statement shows rapidly in an Internet search or on Wikipedia, the bottom-up encyclopedia.

  * As if we did not have enough problems, banks are now more vulnerable to the Black Swan and the ludic fallacy than ever before with “scientists” among their staff taking care of exposures. The giant firm J. P. Morgan put the entire world at risk by introducing in the nineties RiskMetrics, a phony method aiming at managing people’s risks, causing the generalized use of the ludic fallacy, and bringing Dr. Johns into power in place of the skeptical Fat Tonys. (A related method called “Value-at-Risk,” which relies on the quantitative measurement of risk, has been spreading.) Likewise, the government-sponsored institution Fanny Mae, when I look at their risks, seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup. But not to worry: their large staff of scientists deemed these events “unlikely.”