Нассим Талеб - The Black Swan. The Impact of the Highly Improbable

Finally, I got something out of my debates: the evidence that Black Swan events are largely caused by people using measures way over their heads, instilling false confidence based on bogus results. In addition to my befuddlement concerning why people use measures from Mediocristan outside those measures’ applicability, and believe in them, I had the inkling of a much larger problem: that almost none of the people who worked professionally with probabilistic measures knew what they were talking about, which was confirmed as I got into debates and panels with many hotshots, at least four with “Nobels” in economics. Really. And this problem was measurable, very easily testable. You could have finance “quants,” academics, and students use and write papers and papers using the notion of “standard deviation,” yet not understand intuitively what it meant, so you could trip them up by asking them elementary questions about the nonmathematical, real conceptual meaning of their numbers. And trip them up we did. Dan Goldstein and I ran experiments on professionals using probabilistic tools, and were shocked to see that up to 97 percent of them failed elementary questions. *Emre Soyer and Robin Hogarth subsequently took the point and tested it in the use of an abhorrent field called econometrics (a field that, if any scientific scrutiny was applied to it, would not exist)—again, most researchers don’t understand the tools they are using.

Now that the book’s reception is off my chest, let us move into more analytical territory.

* In Latin: “pearls before swine.”

* Most intellectuals keep attributing the black swan expression to Popper or Mill, sometimes Hume, in spite of the quote by Juvenal. The Latin expression niger cygnus might even be more ancient, possibly of Etruscan origin.

† One frequent confusion: people believe that I am suggesting that agents should bet on Black Swans taking place, when I am saying that they should avoid blowing up should a Black Swan take place. As we will see in section IV, I am advocating omission, not commission. The difference is enormous, and I have been completely swamped by people wondering if one can “bleed to death” making bets on the occurrence of Black Swans (like Nero, Giovanni Drogo, or the poor scientist with a rich brother-in-law). These people have made their choice for existential reasons, not necessarily economic ones, although the economics of such a strategy makes sense for a collective.

* If most of the people mixed up about the message appear to be involved in economics and social science, while a much smaller share of readers come from those segments, it is because other members of society without such baggage get the book’s message almost immediately.

* For instance, one anecdote that helps explain the crisis of 2008. One Matthew Barrett, former Chairman of Barclays Bank and Bank of Montreal (both of which underwent blowups from exposures to Extremistan using risk management methods for Mediocristan) complained, after all the events of 2008 and 2009, that The Black Swan did not tell him “what should I do about that?” and he “can’t run a business” worrying about Black Swan risks. The person has never heard of the notion of fragility and robustness to extreme deviations—which illustrates my idea that evolution does not work by teaching, but destroying.

* So far, about fourteen scholarly (but very, very boring) articles. (They are boring both to read and to write!) The number keeps growing, though, and they are being published at a pace of three a year. Taleb (2007), Taleb and Pilpel (2007), Goldstein and Taleb (2007), Taleb (2008), Taleb (2009), Taleb, Goldstein and Spitznagel (2009), Taleb and Pilpel (2009), Mandelbrot and Taleb (2010), Makridakis and Taleb (2010), Taleb (2010), Taleb and Tapiero (2010a), Taleb and Tapiero (2010b), Taleb and Douady (2010), and Goldstein and Taleb (2010).

* Although his is a bit extreme, this phoniness is not uncommon at all. Many intellectually honest people I had warned, and who had read my book, later blamed me for not telling them about the crisis—they just could not remember it. It is hard for a newly enlightened pig to recall that he has seen a pearl in the past but did not know what it was.

* Dan Goldstein and I have been collaborating and running experiments about human intuitions with respect to different classes of randomness. He does not walk slowly.

IV

ASPERGER AND THE ONTOLOGICAL BLACK SWAN

Are nerds more blind to swans? Social skills in Extremistan—On the immortality of Dr. Greenspan

If The Black Swan is about epistemic limitations, then, from this definition, we can see that it is not about some objectively defined phenomenon, like rain or a car crash—it is simply something that was not expected by a particular observer.

So I was wondering why so many otherwise intelligent people have casually questioned whether certain events, say the Great War, or the September 11, 2001, attack on the World Trade Center, were Black Swans, on the grounds that some predicted them. Of course the September 11 attack was a Black Swan to those victims who died in it; otherwise, they would not have exposed themselves to the risk. But it was certainly not a Black Swan to the terrorists who planned and carried out the attack. I have spent considerable time away from the weight-lifting room repeating that a Black Swan for the turkey is not a Black Swan for the butcher .

The same applies to the crisis of 2008, certainly a Black Swan to almost all economists, journalists, and financiers on this planet (including, predictably, Robert Merton and Myron Scholes, the turkeys of Chapter 17), but certainly not to this author. (Incidentally, as an illustration of another common mistake, almost none of those—very few—who seemed to have “predicted” the event predicted its depth. We will see that, because of the atypicality of events in Extremistan, the Black Swan is not just about the occurrence of some event but also about its depth and consequences.)

ASPERGER PROBABILITY

This consideration of an objective Black Swan, one that would be the same to all observers, aside from missing the point completely, seems dangerously related to the problem of underdevelopment of a human faculty called “theory of mind” or “folk psychology.” Some people, otherwise intelligent, have a deficiency of that human ability to impute to others knowledge that is different from their own. These, according to researchers, are the people you commonly see involved in engineering or populating physics departments. We saw one of them, Dr. John, in Chapter 9.

You can test a child for underdevelopment of the theory of mind using a variant of the “false-belief task.” Two children are introduced. One child puts a toy under the bed and leaves the room. During his absence, the second child—the subject—removes it and hides it in a box. You ask the subject: Where, upon returning to the room, will the other child look for the toy? Those under, say, the age of four (when the theory of mind starts developing), choose the box, while older children correctly say that the other child will look under the bed. At around that age, children start realizing that another person can be deprived of some of the information they have, and can hold beliefs that are different from their own. Now, this test helps detect mild forms of autism: as high as one’s intelligence may be, it can be difficult for many to put themselves in other people’s shoes and imagine the world on the basis of other people’s information. There is actually a name for the condition of a person who can be functional but suffers from a mild form of autism: Asperger syndrome.