The Black Swan

by Nassim Nicholas Taleb

  * There is a difference between stressors and toxic exposure that weakens organisms, like the radiation I discussed in Chapter 8 with the story of the rats.

  † There is a sociology-of-science dimension to the problem. The science writer Gary Taubes has convinced me that the majority of dietary recommendations (about lowering fats in diets) stand against the evidence. I can understand how one can harbor beliefs about natural things without justifying them empirically; I fail to understand beliefs that contravene both nature and scientific evidence.

  * The financial equations used by the villains for the “random walk” is based on heat diffusion.

  * The argument often heard about primitive people living on average less than thirty years ignores the distribution around that average; life expectancy needs to be analyzed conditionally. Plenty died early, from injuries; many lived very long—and healthy—lives. This is exactly the elementary “fooled by randomness” mistake, relying on the notion of “average” in the presence of variance, that makes people underestimate risks in the stock market.

  III

  MARGARITAS ANTE PORCOS*

  How to not sell books in airports—Mineral water in the desert—How to denigrate other people’s ideas and succeed at it

  Let me start again. The Black Swan is about consequential epistemic limitations, both psychological (hubris and biases) and philosophical (mathematical) limits to knowledge, both individual and collective. I say “consequential” because the focus is on impactful rare events, as our knowledge, both empirical and theoretical, breaks down with those—the more remote the events, the less we can forecast them, yet they are the most impactful. So The Black Swan is about human error in some domains, swelled by a long tradition of scientism and a plethora of information that fuels confidence without increasing knowledge. It covers the expert problem—harm caused by reliance on scientific-looking charlatans, with or without equations, or regular noncharlatanic scientists with a bit more confidence about their methods than the evidence warrants. The focus is in not being the turkey in places where it matters, though there is nothing wrong in being a fool where that has no effect.

  MAIN ERRORS IN UNDERSTANDING THE MESSAGE

  I will briefly state some of the difficulties in understanding the message and the ideas of this book, typically perpetrated by professionals, though, surprisingly, less by the casual reader, the amateur, my friend. Here is a list.

  1) Mistaking the Black Swan (capitalized) for the logical problem. (Mistake made by U.K. intellectuals—intellectuals in other countries do not know enough analytical philosophy to make that mistake.)*

  2) Saying the maps we had were better than having no maps. (People who do not have experience in cartography, risk “experts,” or worse, employees of the Federal Reserve Bank of the United States.)

  This is the strangest of errors. I know few people who would board a plane heading for La Guardia airport in New York City with a pilot who was using a map of Atlanta’s airport “because there is nothing else.” People with a functioning brain would rather drive, take the train, or stay home. Yet once they get involved in economics, they all prefer professionally to use in Extremistan the measures made for Mediocristan, on the ground that “we have nothing else.” The idea, well accepted by grandmothers, that one should pick a destination for which one has a good map, not travel and then find “the best” map, is foreign to PhDs in social science.

  3) Thinking that a Black Swan should be a Black Swan to all observers. (Mistake made by people who have not spent a lot of time in Brooklyn and lack the street smarts and social intelligence to realize that some people are suckers.)

  4) Not understanding the value of negative advice (“Don’t do”) and writing to me to ask me for something “constructive” or a “next step.” (Mistake usually made by chairmen of large companies and those who would like someday to become such chairmen.)†

  5) Not understanding that doing nothing can be much more preferable to doing something potentially harmful. (Mistake made by most people who are not grandmothers.)

  6) Applying to my ideas labels (skepticism, fat tails, power laws) off a supermarket shelf and equating those ideas with inadequate research traditions (or, worse, claiming it was dealt with by “modal logic,” “fuzzy logic,” or whatever the person has vaguely heard of). (Mistake made by those with graduate degrees from both coasts.)

  7) Thinking that The Black Swan is about the errors of using the bell curve, which supposedly everyone knew about, and that the errors can be remedied by substituting a number from the Mandelbrotian in place of another. (Mistake made by the pseudoscientific brand of tenured finance professors, like, say, Kenneth French.)

  8) Claiming that “we knew all this” and “there is nothing new” in my idea during 2008, then, of course, going bust during the crisis. (Mistake made by the same type of tenured finance professors as before, but these went to work on Wall Street, and are now broke.)

  9) Mistaking my idea for Popper’s notion of falsification—or taking any of my ideas and fitting them in a prepackaged category that sounds familiar. (Mistakes mostly made by sociologists, Columbia University political science professors, and others trying to be multidisciplinary intellectuals and learning buzzwords from Wikipedia.)

  10) Treating probabilities (of future states) as measurable, like the temperature or your sister’s weight. (People who did a PhD at MIT or something like that, then went to work somewhere, and now spend time reading blogs.)

  11) Spending energy on the difference between ontic and epistemic randomness—true randomness, and randomness that arises from incomplete information—instead of focusing on the more consequential difference between Mediocristan and Extremistan. (People with no hobby, no personal problems, no love, and too much free time.)

  12) Thinking I am saying “Do not forecast” or “Do not use models,” rather than “Do not use sterile forecasts with huge error” and “Do not use models in the Fourth Quadrant.” (Mistake made by most people who forecast for a living.)

  13) Mistaking what I say for “S**t happens” rather than “this is where s**t happens.” (Many former bonus earners.)*

  Indeed, the intelligent, curious, and open-minded amateur is my friend. A pleasant surprise for me was to discover that the sophisticated amateur who uses books for his own edification, and the journalist (unless, of course, he was employed by The New York Times), could understand my idea much better than professionals. Professional readers, less genuine, either read too quickly or have an agenda. When reading for “work” or for the purpose of establishing their status (say, to write a review), rather than to satisfy a genuine curiosity, readers who have too much baggage (or perhaps not enough) tend to read rapidly and efficiently, scanning jargon terms and rapidly making associations with prepackaged ideas. This resulted early on in the squeezing of the ideas expressed in The Black Swan into a commoditized well-known framework, as if my positions could be squeezed into standard skepticism, empiricism, essentialism, pragmatism, Popperian falsificationism, Knightian uncertainty, behavioral economics, power laws, chaos theory, etc. But the amateurs saved my ideas. Thank you, reader.

  As I wrote, missing a train is only painful if you are running after it. I was not looking to have a bestseller (I thought I had already had one with my previous book, and just wanted to produce a real thing), so I had to deal with a spate of harrying side effects. I watched as the book was initially treated, owing to its bestseller status, like the nonfiction “idea books,” journalistic through and through, castrated by a thorough and “competent” copy editor, and sold in airports to “thinking” businessmen. Giving these enlightened Bildungsphilisters, commonly called idea-book readers, a real book is like giving vintage Bordeaux to drinkers of Diet Coke and listening to their comments about it. Their typical complaint is that they want diet-book-style “actionable steps” or “better forecasting tools,” satisfying the profile of the eventual Black Swan victim. We will see further that, in an ailment similar to
confirmation bias, charlatans provide the much demanded positive advice (what to do), as people do not value negative advice (what not to do). Now, “how not to go bust” does not appear to be valid advice, yet, given that over time only a minority of companies do not go bust, avoiding death is the best possible—and most robust—advice. (It is particularly good advice after your competitors get in trouble and you can go on legal pillages of their businesses.)* Also, many readers (say, those who work in forecasting or banking) do not often understand that the “actionable step” for them is to simply quit their profession and do something more ethical.

  In addition to playing into our mental biases, and telling people what they want to hear, these “idea books” often have an abhorrent definitive and investigative tone to their messages, like the reports of management consultants trying to make you believe that they told you more than they actually did. I came up with a simple compression test using a version of what is called Kolmogorov complexity, a measure of how much a message can be reduced without losing its integrity: try to reduce a book to the shortest length possible without losing any of its intended message or aesthetic effects. My friend the novelist Rolf Dobelli (he does not seem to like to walk slowly and drags me on hikes in the Alps), an owner of a firm that abstracts books and sells the summaries to busy businesspeople, convinced me that his firm has a lofty mission, as almost all business books can be reduced to a few pages without any loss of their message and essence; novels and philosophical treatments cannot be compressed.

  So a philosophical essay is a beginning, not an end. To me the very same meditation continues from book to book, compared to the work of a nonfiction writer, who will, say, move to another distinct and journalistically confined topic. I want my contribution to be a new way of viewing knowledge, the very beginning of a long investigation, the start of something real. Indeed, I am glad at the time of writing, a few years into the life of the book, to see the idea spread among thoughtful readers, inspiring like-minded scholars to go beyond it and seeding research in epistemology, engineering, education, defense, operations research, statistics, political theory, sociology, climate studies, medicine, law, aesthetics, and insurance (though not so much in the area in which The Black Swan found Black Swan–style near instant vindication, economics).

  I was lucky that it only took a couple of years (and a severe financial crisis) for the Republic of Letters to realize that The Black Swan was a philosophical tale.

  How to Expunge One’s Crimes

  My ideas went through two distinctive stages after the release of the book. In the first, as the book hit the bestseller list in almost every single country where it was published, many social scientists and finance practitioners fell into the trap of refuting me with the sole argument that I was selling too many books and that my book was accessible to readers; hence it could not reflect original and systematic thought, it was just a “popularization,” not worth reading let alone commenting upon.

  The first change of regime came with the release of my more difficult mathematical, empirical, and scholarly work in a dozen articles in a variety of journals in an attempt to expiate my crime of having sold too many books.* Then, silence.

  Still no refutation at the time of this writing; indeed, my paper on the Fourth Quadrant in the International Journal of Forecasting (which I simplify in this essay) produced incontrovertible evidence that most (perhaps all) “rigorous” papers in economics using fancy statistics are just hot air, partaking of a collective scam (with diffusion of responsibility), unusable for any form of risk management. Clearly, so far, in spite of a few smear campaigns, or, rather, attempts at a smear campaign (typically conducted by former Wall Street persons or Diet Coke drinkers), nobody has managed to present a formal (or even informal) refutation of the idea—neither of the logical-mathematical arguments nor of the empirical arguments.

  But meanwhile I figured out something valuable in the packaging of the Black Swan idea. Just as in Fooled by Randomness I had argued (initially from personal experience) that a “70 percent chance of survival” is vastly different from a “30 percent chance of death,” I found out that telling researchers “This is where your methods work very well” is vastly better than telling them “This is what you guys don’t know.” So when I presented to what was until then the most hostile crowd in the world, members of the American Statistical Association, a map of the four quadrants, and told them: your knowledge works beautifully in these three quadrants, but beware of the fourth one, as this is where the Black Swans breed, I received instant approval, support, offers of permanent friendship, refreshments (Diet Coke), invitations to come present at their sessions, even hugs. Indeed, that is how a series of research papers started using my work on where the Fourth Quadrant is located, etc. They tried to convince me that statisticians were not responsible for these aberrations, which come from people in the social sciences who apply statistical methods without understanding them (something I verified later, in formal experiments, to my great horror, as we will see further down).

  The second change of regime came with the crisis of 2008. I kept getting invited to debates, but I stopped obliging, as it became hard for me to hear complicated arguments and restrain a smile, sometimes a smirk. Why a smile? Well, the vindication. Not the intellectual vindication of winning an argument, no: academia, I discovered, does not change its mind voluntarily, except perhaps in some real sciences such as physics. It was a different feeling: it is hard to focus on a conversation, especially when it is mathematical, when you have just personally earned several hundreds of times the annual salary of the researcher trying to tell you that you are “wrong,” by betting against his representation of the world.

  A Desert Crossing

  For I had undergone a difficult psychological moment, after the publication of The Black Swan, what the French call traversée du désert, when you go through the demoralizing desiccation and disorientation of crossing a desert in search of an unknown destination, or a more or less promised land. I had a rough time, shouting “Fire! Fire! Fire!” about the hidden risks in the system, and hearing people ignore the content and instead just criticize the presentation, as if they were saying “your diction in shouting ‘Fire!’ is bad.” For example, the curator of a conference known as TED (a monstrosity that turns scientists and thinkers into low-level entertainers, like circus performers) complained that my presentation style did not conform to his taste in slickness and kept my lecture on Black Swans and fragility off the Web. Of course, he subsequently tried to claim credit for my warnings voiced before the crisis of 2008.*

  Most of the arguments offered were that “times are different,” invoking “the great moderation” by one Ben Bernanke (chairman of the Federal Reserve at the time of writing) who fell for the turkey-before-Thanksgiving trap of not understanding that moving into Extremistan comes through a drop in daily volatility.

  Also when I was railing against models, social scientists kept repeating that they knew it and that there is a saying, “all models are wrong, but some are useful”—not understanding that the real problem is that “some are harmful.” Very harmful. As Fat Tony would say, “Tawk is cheap.” So Mark Spitznagel and I restarted the business of “robustifying” clients against the Black Swan (helping people get closer to the barbell of Chapter 11). We were convinced that the banking system was going to collapse under the weight of hidden risks—that such an event would be a white swan. It was moving from gray to white in color as the system was accumulating risks. The longer we had to wait for it, the more severe it would be. The collapse took place about a year and a half after the publication of the book. We had been expecting it and betting against the banking system for a long time (and protecting clients by making them Black Swan robust), but the reception of the Black Swan—and the absence of refutation that was not ad hominem—made us vastly more worried about the need for protection than ever before.

  Like Antaeus, who lost strength when separated from contact with the ear
th, I needed connection to the real world, something real and applied, instead of focusing on winning arguments and trying to convince people of my point (people are almost always only convinced of what they already know). Sticking my neck out in the real world, lining up my life with my ideas by getting involved in trading, had a therapeutic effect, even apart from the vindication; just having a trade on the books gave me strength to not care. A few months before the onset of the crisis of 2008, I was attacked at a party by a Harvard psychologist who, in spite of his innocence of probability theory, seemed to have a vendetta against me and my book. (The most vicious and bitter detractors tend to be those with a competing product on the bookstore shelves.) Having a trade on allowed me to laugh at him—or, what is even worse, made me feel some complicity with him, thanks to his anger. I wonder what would have happened to the psychological state of another author, identical to me in all respects except that he had no involvement with trading and risk taking. When you walk the walk, whether successful or not, you feel more indifferent and robust to people’s opinion, freer, more real.