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The Black Swan
Stephen Kinsella
∗
April 28, 2008
1 How old is the earth?
In his
Histoire Naturelle
, J. M. de Bu
ff
on, the renowned 18th Century naturalist, produced a series of calculations designed to determine the age of the Earth.Whilst setting up forges for smelting iron for another purpose, de Bu
ff
on began to experiment with thecooling of iron spheres. He theorized if the earth had originated as a ball of molten lava, he could calculatethe length of time required for su
ffi
cient cooling to form a solid surface which would support life at presentday temperatures. de Bu
ff
on made a scale model of the earth from iron, and cooled it. Using a simple ratiosargument, de Bu
ff
on’s calculations showed the Earth to be at least 75,000 years old, and probably a gooddeal more ancient.From this grossly inaccurate calculation, de Bu
ff
on created a theory of species adaptation to environmentswhich changed over time due to planetary cooling. His theory was a shock to the accepted view of the ageof the Earth, calculated separately by Lightfoot and Ussher, at 4004 BCE, by adding up all the ages of theprophets in the King James BibleDalrymple(1991);Ussher(2003/1650).
Nassim Taleb’s
The Black Swan
is, for me, an example of de Bu
ff
on-like tinkering with reality, fused withde Bu
ff
on-like erudition, and de Bu
ff
on-like ambition—just inverted.Like de Bu
ff
on, Taleb skewers the false precision pretended to by Lightfoot and Ussher, and like de Bu
ff
on,Taleb uses his own experience as the organising principle of his book. Like de Bu
ff
on, Taleb’s scholarship isdeep, wide ranging, and thorough.The similarities end there. de Bu
ff
on wanted to know
everything
with encyclopedic certainty. Taleb isconvinced we can know very, very little about anything with any certainty, and spends his readers’ timeexplaining this conviction throughout the 329 pages of his book. Taleb’s central argument is concernedwith asking how human beings cope in the presence of so much uncertainty.
The Black Swan
is a personalessay, a meditation on a subject, relating Taleb’s specific experiences of extreme events like war, cancer, andstock market crashes to the more general philosophical, epistemological, and practical issues of inductionand choice under uncertainty. The book itself is an inductive leap from the specific to the general. Talebconcludes we should be more aware of the limits of our knowledge, more skeptical regarding the empiricaldata we have in our possession, and more conservative about the predictions we make based on that data.Above all, we should simply recognise the world for what it is: a Black Swan-dominated system rather thana Gaussian-dominated system, and adjust our behaviour accordingly.So: how do human beings cope with these highly improbable, yet improbably important events, whichTaleb calls Black Swans?Taleb’s answer: not very well. Human psychology is designed to ignore them, constructing the illusionof certainty where none exists. A legion of ‘empty suit’ experts
enshrine this ignorance as ‘fact’. For me,Taleb echoes J.S. Mill in this regardMill(1869,Chapter II, pgs. 6–7):
∗
Department of Economics, Kemmy Business School, University of Limerick, Ireland. Email:stephen.kinsella@ul.ie,www.stephenkinsella.net.
1
on(1984). Fulltext available athttp://faculty.njcu.edu/fmoran/bu
2
Neoclassical economics definitely falls under the empty suit category for Taleb.
1
There is no such thing as absolute certainty, but there is assurance su
ffi
cient for the purposes of human life. We may, and must, assume our opinion to be true for the guidance of our own conduct:and it is assuming no more when we forbid bad men to pervert society by the propagation of opinions which we regard as false and pernicious. I answer, that it is assuming very much more.There is the greatest di
ff
erence between presuming an opinion to be true, because, with everyopportunity for contesting it, it has not been refuted, and assuming its truth for the purpose of not permitting its refutation. Complete liberty of contradicting and disproving our opinion, isthe very condition which justifies us in assuming its truth for purposes of action; and on no otherterms can a being with human faculties have any rational assurance of being right.The consequences of ignoring the existence of Black Swans–—any high impact, low probability event—–can be disastrous. 9/11 was a Black Swan, the success of the Harry Potter series was a Black Swan, a taxidriver receiving a 100 dollar tip on a five dollar fare is a Black Swan. These events are rare enough to behighly improbable, but, coming from a power-law infested world as we do, the events are more common thanthe ‘empty suits’ suppose in their Gaussian-driven models. Taleb avers the course of history itself is drivenand directed by Black Swans, and, thanks to globalisation, mass communication, and sheer chance, theirimpacts are driving history forward at an unprecedented rate.In the spirit of announcing the limits to our knowledge, this review is not without its problems.
TheBlack Swan
deliberately defies compression or truncated description, and the ideas lodged within its coversare deep, and quite scary. Taleb himself is disquieted by them. He writes on page 215:I have spent my entire life studying randomness, practicing randomness, hating randomness. Themore that time passes, the worse things seem to me, the more scared I get, the more disgusted Iam with Mother Nature.Therefore any review of this book (and there have been many) will be partial, less a guide or a summary,and more a smattering of impressions, thoughts, and questions on certain aspects of the book. To the readerI apologise.The book begins with Taleb’s story, coming from the Levant, living through a war, cancer, and stockmarket crashes. We, the readers, are then given an overview of Taleb’s arguments about scaling and nonscaling distributions, as well as an introduction to the problem of induction, of which a Black Swan is asymptom. We are told to consider the fate of the turkey. Three days before he is to die, the turkey hasno inkling of his fate, and assumes his fattening will go on forever. To the turkey, his death is a BlackSwan event, given the way he has been treated up to the moment of his death. Taleb urges us not to beturkeys, and shows us why we continue to behave like them in our daily lives. First, humans are blessedand cursed with biases which mask the presence of Black Swans. We seek evidence to confirm our opinions,and once we find that evidence regardless of whether it happens to be the truth, we cling to that evidenceas ‘fact’. We seek simple, linear stories to fit the complex chain of events which has just occurred. Weignore silent evidence, and choose to believe we live in a nice, safe world—Gaussian-dominated—rather thanthe power-law dominated world we actually see. Taleb writes on page
xix
,“[i]t is easy to see that life is thecumulative e
ff
ect of a handful of significant shocks”. There are no outliers—just observations we don’t haveexplanations for. The result of these blind spots is a failure to predict with any accuracy over long timehorizons. The ‘expert’, then, becomes just another shaman dancing in the dust, because his science cannotdo much better than prayer in predicting what will happen in complex environments like the macroeconomy.We are given a snapshot of what to do when we cannot predict, of which more below, and the book closeswith an exhortation not to be a sucker by simply
acknowledging
the presence of Black Swans, and actingaccordingly. It is your actions which should change in the light of this new knowledge, not your thinking.
2 Who are your heroes?
Your heroes define you, in a certain sense. Their stories, behaviours, and achievements constitute a theoreticalupper bound to one’s own activities, especially in the professional realm.2
If I were smarter, luckier, or more hard-working, I would be more like Richard Feynman, or Alan Turing,or Adam Smith. My heroes tell you something about me. Among Nassim Taleb’s heroes are Karl Popper,G.L.S. Shackle, and Sextus Empiricus. Each hero resonates with a di
ff
erent part of Taleb’s argument.Karl Popper exposed the crucial problem of induction in a world where the transition from specificevidence to general claim through a simple causal story is fundamentally flawed. Taleb sums the positionup nicely on page 55: “Alas, with tools and fools, anything can be easy to find. You can take past instancesthat corroborate your theories and you treat them as evidence”.George Lennox Sherman Shackle focused on the role of uncertainty and expectations in economic pro-cesses, identifying, in some sense, the role of un-knowledge in economicsShackle(1990 [1949],1972);Koppl
(2001). Shackle’s lesson to Taleb is to ditch the search for general theories of economic behaviour (Taleb,
2007, pg. 185), in favour of some measure of ‘un-knowledge’. Taleb o
ff
ers us the vision of Paul Samuelson asknowing only a little mathematics, and this little knowledge, applied in an overly didactic and confident way,can sway a discipline if the expositor is in the right place (a reputed wunderkind, at MIT, leading textbookwriter, etc, etc).Sextus Empiricus belonged to a school of thinkers who trained themselves to doubt everything “and thusattain a level of serenity”(Taleb,2007,pg. 46). The school believed that any dogma was incorrect, because
any dogma requires belief in a stable system. From Sextus Empiricus, Taleb takes the lesson of relentlesstrial and error in the face of unquantifiable uncertainty.Taleb cites the work of other scholars as well. Taleb dedicates the book to Benoit Mandelbrot, the fatherof fractal geometry, and lionises Algazel, Bastiat, Bayle, and to a lesser extent, Hume ((Taleb,2007, pgs.
43-50)). So Taleb is in good company for his exploration of e
ff
ects of uncertainty on normal life.
3 Statistics of the Black Swan
Taleb’s central argument is that in a world dominated by extreme events, uncertainty does not diminishunder averaging as the sample size increases, as it does in a Gaussian world. Taleb’s world is a power-lawdominated world, where the chances of a truly extreme event are much greater. The real world, whensampled, can be made to look like a Gaussian world, but the relation is specious, because over time largedeviations become more and more likely, suggesting an extreme distribution fits the data better, asDeVanyand Walls(1996) have found in the movie industry.
The generating (or probability mass) function for the series of discrete observations we can record in thereal world (if there is such a thing) is what we as social scientists would like to find. Scientists would like tohave the explanation of where these fluctuations come from to be able to predict, and therefore hedge away,the e
ff
ects of these fluctuations. But Taleb’s argument (flowing from his heroes Shackle, Sextus Empiricus,and Popper) skewers the scientists’ hope of finding that function. In a world of unmeasurable un-knowledge,there is no chance, in finite time, of discovering the One True Theory. The quest for the general theorymust be abandoned, and the search for the predictive engine called o
ff
. We cannot predict anything withcertainty—-doing so under false assumptions only makes things worse when people over commit to the ideaof a stable, predictable future that can’t exist, and get caught out when their stable future refuses to emerge.That is the real tragedy of living in a Black Swan world.Mill’s quote above highlights the central human dilemma Taleb’s book explores. Sensible people
must
predict, they must look forward by looking backward, and they must make decisions based on partialinformation in the presence of un-knowledge. People in the real world cannot grasp this fact, Taleb argues,because of epistemic arrogance about the quality of their knowledge, predictive tools based on incorrectGaussian assumptions, and inbuilt psychological biases working against the would-be predictor, blindingthem to the presence of uncertainty lying just outside the artificial intellectual categories they create tohouse their concepts. What then, to do? The key to living sensibly in a Black Swan world, according toTaleb, is to practice for uncertain events by exposing oneself to them through trial and error, thus allowing agreater role for blind luck to play its part. Seize any opportunity, or anything that looks like an opportunity,because one of them will pay o
ff
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