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

Caravaggio’s The Fortune-Teller . We have always been suckers for those who tell us about the future. In this picture the fortune-teller is stealing the victim’s ring.

Sadly, all this knowledge would not help the reader to forecast what is to happen tomorrow. Actually, it might decrease his ability to forecast.

There is another aspect to the problem of prediction: its inherent limitations, those that have little to do with human nature, but instead arise from the very nature of information itself. I have said that the Black Swan has three attributes: unpredictability, consequences, and retrospective explainability. Let us examine this unpredictability business. *

* The book you have in your hands is approximately and “unexpectedly” fifteen months late.

* While forecast errors have always been entertaining, commodity prices have been a great trap for suckers. Consider this 1970 forecast by U.S. officials (signed by the U.S. Secretaries of the Treasury, State, Interior, and Defense): “the standard price of foreign crude oil by 1980 may well decline and will in any event not experience a substantial increase.” Oil prices went up tenfold by 1980. I just wonder if current forecasters lack in intellectual curiosity or if they are intentionally ignoring forecast errors.

Also note this additional aberration: since high oil prices are marking up their inventories, oil companies are making record bucks and oil executives are getting huge bonuses because “they did a good job”—as if they brought profits by causing the rise of oil prices.

* I owe the reader an answer concerning Catherine’s lover count. She had only twelve.

Chapter Eleven

HOW TO LOOK FOR BIRD POOP

Popper’s prediction about the predictors—Poincaré plays with billiard balls—Von Hayek is allowed to be irreverent—Anticipation machines—Paul Samuelson wants you to be rational—Beware the philosopher—Demand some certainties .

We’ve seen that a) we tend to both tunnel and think “narrowly” (epistemic arrogance), and b) our prediction record is highly overestimated—many people who think they can predict actually can’t.

We will now go deeper into the unadvertised structural limitations on our ability to predict. These limitations may arise not from us but from the nature of the activity itself—too complicated, not just for us, but for any tools we have or can conceivably obtain. Some Black Swans will remain elusive, enough to kill our forecasts.

HOW TO LOOK FOR BIRD POOP

In the summer of 1998 I worked at a European-owned financial institution. It wanted to distinguish itself by being rigorous and farsighted. The unit involved in trading had five managers, all serious-looking (always in dark blue suits, even on dress-down Fridays), who had to meet throughout the summer in order “to formulate the five-year plan.” This was supposed to be a meaty document, a sort of user’s manual for the firm. A five-year plan? To a fellow deeply skeptical of the central planner, the notion was ludicrous; growth within the firm had been organic and unpredictable, bottom-up not top-down. It was well known that the firm’s most lucrative department was the product of a chance call from a customer asking for a specific but strange financial transaction. The firm accidentally realized that they could build a unit just to handle these transactions, since they were profitable, and it rapidly grew to dominate their activities.

The managers flew across the world in order to meet: Barcelona, Hong Kong, et cetera. A lot of miles for a lot of verbiage. Needless to say they were usually sleep-deprived. Being an executive does not require very developed frontal lobes, but rather a combination of charisma, a capacity to sustain boredom, and the ability to shallowly perform on harrying schedules. Add to these tasks the “duty” of attending opera performances.

The managers sat down to brainstorm during these meetings, about, of course, the medium-term future—they wanted to have “vision.” But then an event occurred that was not in the previous five-year plan: the Black Swan of the Russian financial default of 1998 and the accompanying meltdown of the values of Latin American debt markets. It had such an effect on the firm that, although the institution had a sticky employment policy of retaining managers, none of the five was still employed there a month after the sketch of the 1998 five-year plan.

Yet I am confident that today their replacements are still meeting to work on the next “five-year plan.” We never learn.

Inadvertent Discoveries

The discovery of human epistemic arrogance, as we saw in the previous chapter, was allegedly inadvertent. But so were many other discoveries as well. Many more than we think.

The classical model of discovery is as follows: you search for what you know (say, a new way to reach India) and find something you didn’t know was there (America).

If you think that the inventions we see around us came from someone sitting in a cubicle and concocting them according to a timetable, think again: almost everything of the moment is the product of serendipity. The term serendipity was coined in a letter by the writer Hugh Walpole, who derived it from a fairy tale, “The Three Princes of Serendip.” These princes “were always making discoveries by accident or sagacity, of things which they were not in quest of.”

In other words, you find something you are not looking for and it changes the world, while wondering after its discovery why it “took so long” to arrive at something so obvious. No journalist was present when the wheel was invented, but I am ready to bet that people did not just embark on the project of inventing the wheel (that main engine of growth) and then complete it according to a timetable. Likewise with most inventions.

Sir Francis Bacon commented that the most important advances are the least predictable ones, those “lying out of the path of the imagination.” Bacon was not the last intellectual to point this out. The idea keeps popping up, yet then rapidly dying out. Almost half a century ago, the bestselling novelist Arthur Koestler wrote an entire book about it, aptly called The Sleepwalkers . It describes discoverers as sleepwalkers stumbling upon results and not realizing what they have in their hands. We think that the import of Copernicus’s discoveries concerning planetary motions was obvious to him and to others in his day; he had been dead seventy-five years before the authorities started getting offended. Likewise we think that Galileo was a victim in the name of science; in fact, the church didn’t take him too seriously. It seems, rather, that Galileo caused the uproar himself by ruffling a few feathers. At the end of the year in which Darwin and Wallace presented their papers on evolution by natural selection that changed the way we view the world, the president of the Linnean society, where the papers were presented, announced that the society saw “no striking discovery,” nothing in particular that could revolutionize science.

We forget about unpredictability when it is our turn to predict. This is why people can read this chapter and similar accounts, agree entirely with them, yet fail to heed their arguments when thinking about the future.