Black Swan is a sort of sequel
Taleb's earlier book, Fooled by Randomness, and
it Taleb's more thorough explanation of his thoughts on the nature of
randomness and the implications of how to deal with that. He
first discusses two fictional nations, Mediocristan and
Extremistan. In Mediocristan events are Gaussian, which is to say
that most things cluster about the mean, with rare outliers.
Weight is from Mediocristan; the heaviest people are not going to
be substantially heavier than the mean. Another way of saying
this would be that removing one sample from the pool does not
meaningfully change the result; even if you remove the heaviest
person from a very large group of people, the mean weight does not
change.
However, in Extremistan, events are not Gaussian. One rare event
may dwarf all other events. Book authors are from
Extremistan: the best-selling author sells way more books than
the second best-selling author, and a handful of authors account for
most of the sales. In Extremistan, removing one sample can
potentially change mean very drastically. In an extreme example,
he considers a turkey. Every day of the year the family brings him
food and he is happy and well fed. But on Thanksgiving Day
morning, there is no food and he is killed and eaten for dinner.
Whether the turkey includes Thanksgiving Day in his sample drastically
alters his outcome.
It turns out that many events that we think are from Mediocristan are
really from Extremistan. Events are Mediocristan are defined by a
certain "gravity:" a force that acts to limit deviations from the
norm; there are simply serious practial factors that limit how
heavy a person can realistically get (access to food, money for food,
the weight-bearing capacity of our muscular-skeleto system,
etc.). Events in Extremistan do not have this gravity.
Individual book buyers, for instance, are free to all buy the same book
if they wish; in fact, many do. As it turns out, instead of
a Gaussian distribution clustered about a mean, the distribution in
Extremistan is often more like a power law: the most frequent
events drop off quickly and sharply, leaving a long tail of fairly
unlikely events. Effectively, the popular events are wildly
popular, and all the rest are pretty much unknown.
There are several practical consequences to this. First, it seems
that we as humans tend to assume that randomness takes a Gaussian
shape, that things revert to their mean. For events in
Extremistan we must not assume this; we must assume that there
may be an unlikely event that, if it happens, dominates everything
else. If you are a book author, that unlikely event is becoming a
best-seller, so do not count on being the rare event. Assume that
you will be the normal, low-selling long tail. If you are a book
publisher and you have a best-seller, assume that the next will not be.
The second practical consequence is to limit your exposure to unlikely
events that have a serious negative downside and expose yourself to
unlikely events that have are large upside. In the late 1990s a
hedge fund called Long-Term Capital Management assumed that price
differences were Gaussian (because the math is tractable that
way; there are no formulae that work in Extremistan). One
day the price difference were not Gaussian for long enough that LTCM
lost more money than it had made in it's history. It went
bankrupt and nearly took the U.S. financial system with it. They
were exposed to a negative event that was unlikely, but
catastropic. Some unlikely events are good, though, and it may be
worth having a steady, but small, drain if every so often one of those
exposures gives you a huge gain.
The third consequence is that we cannot necessarily take credit for our
successes (or give credit to others). We may have simply been
riding the coat-tails of a rare event that catapaulted us to
greatness. The successful may not be successful because of what
they did (although their diligence, discipline, hard work, etc. enabled
them to capitalize on the opportunity); much of success is simply
luck.
Taleb does not give any good method of determining if a particular
process is in Extremistan. However, it is known that a power law
distribution occurs whenever individual actors can choose what to
do. The sizes of cities, for example, follow a power law.
People can choose which cities to live in, and people often choose to
live in a city because of what other people have already chosen.
So if choice is involved, the process is likely from Extremistan.
On the other hand, if natural processes are involved, there is some
"gravity" and it is likely to be from Mediocristan.
Black Swan is an interesting a
readable discussion of probability and the mistakes we often make in
dealing with randomness. However, it has a number of serious
flaws. The foremost is that the book is steeped with Taleb's
intellectual arrogance. Part of that makes for fun reading, as he
skewers pretty much every well-known school of thought. Equally
strong, however, is the belief that skeptical rationalism is the one
true religion, that anyone who looks at the world otherwise is full of
themselves. Taleb makes sure the reader understands that he only
hangs out with the enlightened intellectuals, not the deluded
wannabes. Ironically, this leads to a sense that it is Taleb who
is full of himself and prone to be ignoring something big
himself. The ideas are useful to incorporate, but perhaps choose
someone else as a role model: it seems awful lonely up at the
pinnacle of intellectual thought.
Ultimately, Black Swan comes
down to several fairly simple ideas (even though Taleb cautions us to
not attempt to pull out a cohesive, sure-to-be-oversimplified
idea). First, the unlikely, unpredictable events can dominate our
fortunes. Second, Extremistan is more frequent than we
think. When distilled down to this, the book seems rather
obvious, yet while in some sense we intuitively know this, we still
live our lives assuming things will revert to normalcy. Taleb's
work is a very readable discussion showing that we need to get over
that idea.
Review: 8
Informative, but a little hand-wavy
(especially for someone so enamored with skepticism). This is
hardly a ground-breaking treatise, but it does serve to awaken one's
thinking to the idea that our life is often shaped by the big events
and that we should be aware of their existence, even if we are unable
to predict them. The intellectual arrogance is somewhat
troublesome, but it is an easy read.
Copyright © 2010 by Geoffrey Prewett