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

Once again, beware of history.

ROBUSTNESS AND FRAGILITY

Upon the completion of The Black Swan , I spent some time meditating on the items I raised in Chapter 14 on the fragility of some systems with large concentration and illusions of stability—which had left me convinced that the banking system was the mother of all accidents waiting to happen. I explained in Chapter 6, with the story of the old elephants, that the best teachers of wisdom are naturally the eldest, simply because they may have picked up invisible tricks and heuristics that escape our epistemic landscape, tricks that helped them survive in a world more complex than the one we think we can understand. So being old implies a higher degree of resistance to Black Swans, though, as we saw with the turkey story, it is not a guaranteed proof—older is almost always more solid, but older is not necessarily perfect. But a few billion years is vastly more proof than a thousand days of survival, and the oldest system around is clearly Mother Nature.

That was, in a way, the reasoning behind the epilogism argument of the medical empiricists of the post-classical Levant (like Menodotus of Nicomedia), who were the only practitioners to merge skepticism and decision-making in the real world. They are also the only group of people to use philosophy for anything useful. They proposed historia: maximal recording of facts with minimal interpretation and theorizing, describing of facts without the why , and resisting universals. Their form of nontheoretical knowledge was degraded by the medieval Scholastics, who favored more explicit learning. Historia , just the recording of facts, was inferior to philosophia or scientia . Even philosophy, until then, had more to do with decision-making wisdom than it does today, not with impressing a tenure committee, and medicine was where such wisdom was practiced (and learned): Medicina soror philosophiae: “Medicine, sister of Philosophy.” *

Giving an ancillary status to a field that prefers particulars to universals is what formalized knowledge since the Scholastics has been doing, which necessarily gives short shrift to experience and age (too much accumulation of particulars), in favor of those who hold a PhD like Dr. John. This may work in classical physics, but not in the complex domain; it has killed a lot of patients in the history of medicine, particularly before clinical medicine was born, and is causing a lot of damage in the social domain, particularly at the time of writing.

The central things the old teachers communicate to you are, to use religious terms, dogmas (rules you need to execute without necessarily understanding them) not kerygmas (rules you can understand and that have a purpose clear to you).

Mother Nature is clearly a complex system, with webs of interdependence, nonlinearities, and a robust ecology (otherwise it would have blown up a long time ago). It is an old, very old person with an impeccable memory. Mother Nature does not develop Alzheimer’s—actually there is evidence that even humans would not easily lose brain function with age if they followed a regimen of stochastic exercise and stochastic fasting, took long walks, avoided sugar, bread, white rice, and stock market investments, and refrained from taking economics classes or reading such things as The New York Times .

Let me summarize my ideas about how Mother Nature deals with the Black Swan, both positive and negative—it knows much better than humans how to take advantage of positive Black Swans.

Redundancy as Insurance

First, Mother Nature likes redundancies , three different types of redundancies. The first, the simplest to understand, is defensive redundancy, the insurance type of redundancy that allows you to survive under adversity, thanks to the availability of spare parts. Look at the human body. We have two eyes, two lungs, two kidneys, even two brains (with the possible exception of corporate executives)—and each has more capacity than needed in ordinary circumstances. So redundancy equals insurance, and the apparent inefficiencies are associated with the costs of maintaining these spare parts and the energy needed to keep them around in spite of their idleness.

The exact opposite of redundancy is naïve optimization. I tell everyone to avoid attending (orthodox) economics classes and say that economics will fail us and blow us up (and, as we will see, we have proofs that it failed us; but, as I kept saying in the original text, we did not need them; all we needed was to look at the lack of scientific rigor—and of ethics). The reason is the following: It is largely based on notions of naïve optimization, mathematized (poorly) by Paul Samuelson—and this mathematics contributed massively to the construction of an error-prone society. An economist would find it inefficient to maintain two lungs and two kidneys: consider the costs involved in transporting these heavy items across the savannah. Such optimization would, eventually, kill you, after the first accident, the first “outlier.” Also, consider that if we gave Mother Nature to economists, it would dispense with individual kidneys: since we do not need them all the time, it would be more “efficient” if we sold ours and used a central kidney on a time-share basis. You could also lend your eyes at night since you do not need them to dream.

Almost every major idea in conventional economics (though a lesser number of minor ones) fails under the modification of some assumption, or what is called “perturbation,” when you change one parameter, or take a parameter heretofore assumed by the theory to be fixed and stable, and make it random. We call this “randomization” in the jargon. This is called the study of model error and examination of the consequences of such changes (my official academic specialty is now model error or “model risk”). For instance, if a model used for risk assumes that the type of randomness under consideration is from Mediocristan, it will ignore large deviations and encourage the building of a lot of risk that ignores large deviations; accordingly, risk management will be faulty. Hence the metaphor of “sitting on a barrel of dynamite” I used concerning Fannie Mae (now bust).

For another example of egregious model error, take the notion of comparative advantage supposedly discovered by Ricardo and behind the wheels of globalization. The idea is that countries should focus, as a consultant would say, on “what they do best” (more exactly, on where they are missing the smallest number of opportunities); so one country should specialize in wine and the other in clothes, although one of them might be better at both. But do some perturbations and alternative scenarios: consider what would happen to the country specializing in wine if the price of wine fluctuated. Just a simple perturbation around this assumption (say, considering that the price of wine is random, and can experience Extremistan-style variations) makes one reach a conclusion the opposite of Ricardo’s. Mother Nature does not like overspecialization, as it limits evolution and weakens the animals.

This also explains why I found current ideas on globalization (such as those promoted by the journalist Thomas Friedman) one step too naïve, and too dangerous for society—unless one takes into account side effects. Globalization might give the appearance of efficiency, but the operating leverage and the degrees of interaction between parts will cause small cracks in one spot to percolate through the entire system. The result would be like a brain experiencing an epileptic seizure from too many cells firing at the same time. Consider that our brain, a well-functioning complex system, is not “globalized,” or, at least, not naïvely “globalized.”