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

I promised not to discuss any of the details of the casino’s sophisticated surveillance system; all I am allowed to say is that I felt transported into a James Bond movie—I wondered if the casino was an imitation of the movies or if it was the other way around. Yet, in spite of such sophistication, their risks had nothing to do with what can be anticipated knowing that the business is a casino. For it turned out that the four largest losses incurred or narrowly avoided by the casino fell completely outside their sophisticated models.

First, they lost around $100 million when an irreplaceable performer in their main show was maimed by a tiger (the show, Siegfried and Roy , had been a major Las Vegas attraction). The tiger had been reared by the performer and even slept in his bedroom; until then, nobody suspected that the powerful animal would turn against its master. In scenario analyses, the casino had even conceived of the animal jumping into the crowd, but nobody came near to the idea of insuring against what happened.

Second, a disgruntled contractor was hurt during the construction of a hotel annex. He was so offended by the settlement offered him that he made an attempt to dynamite the casino. His plan was to put explosives around the pillars in the basement. The attempt was, of course, thwarted (otherwise, to use the arguments in Chapter 8, we would not have been there), but I shivered at the thought of possibly sitting above a pile of dynamite.

Third, casinos must file a special form with the Internal Revenue Service documenting a gambler’s profit if it exceeds a given amount. The employee who was supposed to mail the forms hid them, instead, for completely unexplainable reasons, in boxes under his desk. This went on for years without anyone noticing that something was wrong. The employee’s refraining from sending the documents was truly impossible to predict. Tax violations (and negligence) being serious offences, the casino faced the near loss of a gambling license or the onerous financial costs of a suspension. Clearly they ended up paying a monstrous fine (an undisclosed amount), which was the luckiest way out of the problem.

Fourth, there was a spate of other dangerous scenes, such as the kidnapping of the casino owner’s daughter, which caused him, in order to secure cash for the ransom, to violate gambling laws by dipping into the casino coffers.

Conclusion: A back-of-the-envelope calculation shows that the dollar value of these Black Swans, the off-model hits and potential hits I’ve just outlined, swamp the on-model risks by a factor of close to 1,000 to 1. The casino spent hundreds of millions of dollars on gambling theory and high-tech surveillance while the bulk of their risks came from outside their models.

All this, and yet the rest of the world still learns about uncertainty and probability from gambling examples.

WRAPPING UP PART ONE

The Cosmetic Rises to the Surface

All of the topics in Part One are actually only one. You can think about a subject for a long time, to the point of being possessed by it. Somehow you have a lot of ideas, but they do not seem explicitly connected; the logic linking them remains concealed from you. Yet you know deep down that all these are the same idea. Meanwhile, what Nietzsche calls bildungsphilisters , *or learned philistines, blue collars of the thinking business, tell you that you are spread out between fields; you reply that these disciplines are artificial and arbitrary, to no avail. Then you tell them that you are a limousine driver, and they leave you alone—you feel better because you do not identify with them, and thus you no longer need to be amputated to fit into the Procrustean bed of the disciplines. Finally, a little push and you see that it was all one single problem.

One evening I found myself at a cocktail party in Munich at the apartment of a former art historian who had more art books in its library than I thought existed. I stood drinking excellent Riesling in the spontaneously formed English-speaking corner of the apartment, in the hope of getting to a state where I would be able to start speaking my brand of fake German. One of the most insightful thinkers I know, the computer entrepreneur Yossi Vardi, prompted me to summarize “my idea” while standing on one leg. It was not too convenient to stand on one leg after a few glasses of perfumed Riesling, so I failed in my improvisation. The next day I experienced staircase wit. I jumped out of bed with the following idea: the cosmetic and the Platonic rise naturally to the surface . This is a simple extension of the problem of knowledge. It is simply that one side of Eco’s library, the one we never see, has the property of being ignored. This is also the problem of silent evidence. It is why we do not see Black Swans: we worry about those that happened, not those that may happen but did not. It is why we Platonify, liking known schemas and well-organized knowledge—to the point of blindness to reality. It is why we fall for the problem of induction, why we confirm . It is why those who “study” and fare well in school have a tendency to be suckers for the ludic fallacy.

And it is why we have Black Swans and never learn from their occurrence, because the ones that did not happen were too abstract. Thanks to Vardi, I now belonged to the club of single-idea people.

We love the tangible, the confirmation, the palpable, the real, the visible, the concrete, the known, the seen, the vivid, the visual, the social, the embedded, the emotionally laden, the salient, the stereotypical, the moving, the theatrical, the romanced, the cosmetic, the official, the scholarly-sounding verbiage (b******t), the pompous Gaussian economist, the mathematicized crap, the pomp, the Académie Française, Harvard Business School, the Nobel Prize, dark business suits with white shirts and Ferragamo ties, the moving discourse, and the lurid. Most of all we favor the narrated .

Alas, we are not manufactured, in our current edition of the human race, to understand abstract matters—we need context. Randomness and uncertainty are abstractions. We respect what has happened, ignoring what could have happened. In other words, we are naturally shallow and superficial—and we do not know it. This is not a psychological problem; it comes from the main property of information. The dark side of the moon is harder to see; beaming light on it costs energy. In the same way, beaming light on the unseen is costly in both computational and mental effort.

Distance from Primates

There have been in history many distinctions between higher and lower forms of humans. For the Greeks, there were the Greeks and the barbarians, those people of the north who uttered amorphous sentences similar, to the Attic ear, to an animal’s shrieks. For the English, a higher form of life was the gentleman’s—contrary to today’s definition, a gentleman’s life was practiced through idleness and a code of behavior that included, along with a set of manners, the avoidance of work beyond the necessities of comfortable subsistence. For New Yorkers, there are those with a Manhattan zip code and those with such a thing as a Brooklyn or, worse, Queens address. For the earlier Nietzsche, there was the Apollonian compared to the Dionysian; for the better-known Nietzsche, there was the Übermensch, something his readers interpret however it suits them. For a modern stoic, a higher individual subscribes to a dignified system of virtue that determines elegance in one’s behavior and the ability to separate results from efforts. All of these distinctions aim at lengthening the distance between us and our relatives among other primates. (I keep insisting that, when it comes to decision making, the distance between us and these hairy cousins is far shorter than we think.)