The Black Swan by Nassim Nicholas Taleb
A small number of Black Swans explain almost everything in our world, from the success of ideas and religions, to the dynamics of historical events, to elements of our own personal lives.
This combination of low predictably and large impact makes the Black Swan a great puzzle.
It is easy to see that life is the cumulative effect of a handful of significant shocks.
Isn’t it strangle to see an event happening precisely because it was not supposed to happen? It may be odd that, in such a strategic game, what you know can be truly inconsequential.
The payoff of a human venture is, in general, inversely proportional to what it is expected to be.
The inability to predict outliers implies the inability to predict the course of history. We act as though we are able to predict historical events, or, even worse, as if we are able to change the course of history. What is surprising is not the magnitude of our forecast errors, but our absence of awareness of it.
Our inability to predict in environments subjected to the Black Swan, coupled with a general lack of the awareness of this state of affairs, means that certain professionals, while believing they are experts, are in fact not. Based on their empirical record, they do not know more about their subject matter than the general population, but they are much better at narrating - or worse, at smoking you with complicated mathematical models. They are also more likely to wear a tie.
Contrary to social-science wisdom, almost no discovery, no technologies of note, came from design and planning - they were just Black Swans. The strategy for the discoverers and entrepreneurs is to rely less on top-down planning and focus on maximum tinkering and recognizing opportunities when they present themselves. The reason free markets work is because they allow people to be lucky, thanks to aggressive trail and error, not by giving rewards or “incentives” for skill. The strategy is, then, to tinker as much as possible and try to collect as many Black Swan opportunities as you can.
We tend to learn the precise, not the general.
There are two possible ways to approach phenomena. The first is to rule out the extraordinary and focus on the “normal.” The examiner leaves aside “outliers” and studies ordinary cases. The second approach is to consider that in order to understand a phenomenon, one needs first to consider the extremes - particularly if, like the Black Swan, they carry an extraordinary cumulative effect.
Living on our planet, today, requires a lot more imagination than we are made to have. We lack imagination and repress it in others.
Anyone looking for confirmation will find enough of it to deceive himself - and no doubt his peers. It is also naive empiricism to provide, in support of some argument, series of eloquent confirmatory quotes by dead authorities. By searching, you can always find someone who made a well-sounding statement that confirms your point of view - and, on every topic, it is possible to find another dead thinker who said the exact opposite.
A private library is not an ego-boosting appendage but a search tool. Read books are far less valuable than unread ones. The library should contain as much of what you do not know. You will accumulate more knowledge and more books as you grow older, and the growing number of unread books on the shelves will look at you menacingly. Indeed, the more you know, the larger the rows of unread books. Let us call this collection of unread books an antilibrary.
The Black Swan comes from our misunderstanding of the likelihood of surprises, those unread books, because we take what we know a little too seriously.
It is one thing to be cosmetically defiant of authority by wearing unconventional clothes - what social scientists and economists call “cheap signaling” - and another to prove willingness to translate belief into action.
History and societies do not crawl. They make jumps. They go from fracture to fracture, with a few vibrations in between.
What is interesting to me as a probabilist is that some random event makes one group that initially supports an issue ally itself with another group that supports another issue, thus causing the two items to fuse and unify… until the surprise of the separation.
Categorizing always produces reduction to true complexity.
I had developed a precise but strange specialty: betting on rare and unexpected events, those that were on the Platonic fold, and considered “inconceivable” by the Platonic “experts.” Recall that the Platonic fold is where our representation of reality ceases to apply - but we do not know it.
I studied the flaws and the limits of these models, looking for the Platonic fold where they break down. Also I engaged in speculative trading. I was convinced that I was totally incompetent in predicting market prices - but that others were generally incompetent also but did not know it, or did not know that they were taking massive risks.
To slowly distill my single idea, I wanted to become a flaneur, a professional meditator, sits in cafes, lounge, unplugged to desks and organization structures, sleep as long as I needed, read voraciously, and not owe any explanation to anybody. I wanted to be left alone in order to build, small steps at a time, an entire system of thought.
The next time someone pesters you with unneeded advice, gently remind him of the fate of the monk who Ivan the Terrible put to death for delivering uninvited (and moralizing) advice. It works as a short-term cure.
Get a profession that is “scalable,” that is, one in which you are not paid by the hour and thus subject to the limitations of the amount of your labor.
In these professions, no matter how highly paid, your income is subject to gravity. Your revenue depends on your continuous efforts more than on the quality of your decisions. Moreover, this kind of work is largely predicable: it will vary, but not to the point of making the income of a single day more significant than that of the rest of your life. In other words, it will not be Black Swan driven.
I separated the “idea” person, who sells an intellectual product in the form of a transaction or a piece of work, from the “labor” person, who sells you his work.
If you are an idea person, you do not have to work hard, only think intensely. You do the same work whether you produce a hundred unites or a thousand.
So the distinction between writer and baker, speculator and doctor, fraudster and prostitute, is a helpful way to look at the world of activities. It separates those professions which one can add zeroes of income with no greater labor from those in which one needs to add labor and time (both of which are in limited supply) - in other words, those subjected to gravity.
A scalable profession is good only if you are successful; they are more competitive, produce monstrous inequalities, and are far more random, with huge disparities between efforts and rewards - a few can take a large share of the pie, leaving others out entirely at no fault of their own.
Evolution is scalable: the DNA that wins (whether by luck or survival advantage) will reproduce itself, like a bestselling book or a successful record, and become pervasive. Other DNA will vanish. Just consider the difference between us humans (excluding financial economists and businessmen) and other living beings on our planet.
What we call “talent” generally comes from success, rather than its opposite.
Much of what we ascribe to skills is an after-the-fact attribution.
It is hard for us to accept that people do not fall in love with words of art only for their own sake, but also in order to feel that they belong to a community. Bu imitating, we get closer to others - that is, other imitators. It fights solitude.
It so happens that America is currently far, far more creative than these nations of museum goers and equation solvers. It is also far more tolerant of bottom-up tinkering and undirected trial and error. And globalization has allowed the United States to specialize in the creative aspect of things, the production of concepts and ideas, that is, the scalable part of the products, and, increasingly, by exporting jobs, separate the less scalable components and assign them to those happy to be paid by the hour. There is more money in designing a shoe than in actually making it: Nike, Dell, and Boeing can get paid for just thinking, organizing, and leveraging their know-how and ideas while subcontracted factories in developing countries do the grunt work and engineers in cultured and mathematical states do the noncreative technical grind. The American economy has leveraged itself heavily on the idea generation, which explains why losing manufacturing jobs can be coupled with a rising standard of living. Clearly the drawback of a world economy where the payoff goes to ideas is higher inequality among the idea generators together with a greater role for both opportunity and luck.
When your sample is large, no single instance will significantly change the aggregate or the total. The largest observation will remain impressive, but eventually insignificant, to the sum.
In Extremistan, inequalities are such that one single observation can disproportionately impact the aggregate, or the total.
Social quantities are informational, not physical: you cannot touch them. Money in the back account is something important, but certainly not physical. As such it can take any value without necessitating the expenditure of energy. It is just a number!
Extremistan can produce Black Swans, and does, since a few occurrence have had huge influencers on history.
In Extremistan, one unit can easily affect the total in a disproportionate way. In this world, you should always be always be suspicious of the knowledge you derive from data. This is a very simple test of uncertainty that allows you to distinguish between the two kinds of randomness. What you can know from data in Mediocristan augments very rapidly with the supply of information. But knowledge in Extremistan grows slowly and erratically with the addition of data, some of it extreme, possibly at an unknown rate.
Mediocristan is where we must endure the tyranny of the collective, the routine, the obvious, and the predicted; Extremistan is where we are subjected to the tyranny of the singular, the accidental, the unseen, and the unpredicted.
There are no physical constraints on what a number can be.
How can we know the future, given knowledge of the past; or, more generally, how can we figure out properties of the (infinite) unknown based on the (finite) known?
The same hand that feeds you can be the one that wrings your neck.
Consider that the feeling of safety reached its maximum when the risk was at the highest!
Any event can have an infinity of possible causes.
Inability to automatically transfer knowledge and sophistication from one situation to another, or from theory to practice, is a quite disturbing attribute of human nature.
“We” are the empirical decision makers who hold that uncertainty is our discipline, and that understanding how to act under conditions of incomplete information is the highest and most urgent human pursuit.
Scientists believe that it is the search for their own weakness that makes them good chess players, not the practice of chess that turns them into skeptics. Similarly, the speculator George Soros, when making a financial bet, keeps looking for instances that would prove his initial theory wrong. This, perhaps, is true self-confidence: the ability to look at the world without the need to find signs that stroke one’s ego.
The narrative fallacy addressed our limited ability to look at sequences of facts without weaving an explanation into them, or, equivalently, forcing a logical link, an arrow of relationship, upon them. Explanations hind facts together. They make them all the more easily remembered; they help them make more sense. Where this propensity can go wrong is when it increases our impression of understanding.
Elders are repositories of complicated inductive learning that includes information about rare events.
We like to think about specific and known Black Swans when in fact the very nature of randomness lies in its abstraction.
As Stalin, who knew something about the business or morality, supposedly said, “One death is a tragedy; a million is a statistic.” Statistics stay silent in us.
Our misunderstanding of the Black Swan can be largely attributed to our using System 1, i.e., narratives, and the sensational - as well as the emotional - which imposes on us a wrong man of the likelihood of events.
The way to avoid the ills of the narrative fallacy is to favor experimentation over storytelling, experience over history, and clinical knowledge over theories.
The person involved in such gambles is paid in a currency other than material success: hope.
To have a pleasant life you should spread these small “affects” across time as evenly as possible. Plenty of middle good news is preferable to one single lump of great news.
Mother Nature destined us to derive enjoyment from a steady flow of pleasant small, but frequent, rewards.
The problem, of course, is that we do not live in an environment where results are delivered in a steady manner.
I am not saying causes do not exist; do not use this argument to avoid trying to learn from history. All I am saying is that it is not so simple; be suspicious of the “because” and handle it with care - particularly in situations where you suspect silent evidence.
The appearance of busyness reinforces the perception of causality, of the link between results and one’s role in them.
The more information you give someone, the more hypotheses they will formulate along the way, and the worse off they will be. They see more random noise and mistake it for information. The problem is that our ideas are sticky: once we produce a theory, we are not likely to change our minds - so those who delay developing their theories are better off. When you develop your opinion on the basis of weak evidence, you will have difficulty interpreting subsequent information that contradicts these opinions, even if this new information is obviously more accurate. Two mechanisms are at play here: confirmation bias, and belief perseverance, the tendency not to reverse opinions you already have. Remember that we treat ideas like possessions, and it will be hard for us to part with them.
Listening to the news on the radio every hour is far worse for you than reading a weekly magazine, because the longer intervals allows information to be filtered a bit.
No matter what anyone tells you, it is a good idea to question the error rate of an expert’s procedure. Do not question his procedure, only his confidence.
We humans are the victims of an asymmetry in the perception of random events. We attribute our successes to our skills, and our failures to external events outside our control, namely randomness. We feel responsible for the good stuff, but not for the bad. This causes us to think that we are better than others at whoever we do for the living.
Many of the prediction failures come from hedgehogs who are mentally married to a single big Black Swan event, a big bet that is not likely to play out. The hedgehog is someone focusing on a single, improbable, and consequential event, falling for the narrative fallacy that makes us so blinded by one single outcome that we cannot imagine others.
Be a fox with an open mind.
The policies we need to make decisions on should depend far more on the range of possible outcomes than on the expected final number.
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.
Discoverers are as sleepwalkers stumbling upon results, not realizing what they have in their hands.
As happens so often in discovery, those looking for evidence did not find it; those not looking for it found it and were hailed as discoverers.
When new technology emerges, we either grossly underestimate or severely overestimate its importance.
Engineers tend to develop tools for the pleasure of developing tools, not to induce nature to yield its secrets.
We build toys. Some of those toys change the world.
My hosts, scientists at heart, understood that research involves a large element of serendipity, which can pay off big as long as one knows how serendipitous the business can be and structures it around that fact.
The best way to get maximal exposure is to keep researching. Collect opportunities.
To understand the future to the point of being able to predict it, you need to incorporate elements from this future itself.
Know how to rank beliefs not according to their plausibility but by the harm they may cause.
Maximize the serendipity around you.
Remember that for an event to be a Black Swan, it does not just have to be rare, or just wild; it has to be unexpected, has to lie outside our tunnel of possibilities. You must be a sucker for it.
Every morning the world appears to me more random than it did the day before, and humans seem to be even more fooled by it than they were the previous day.
The problem here is the notion of “better,” this focus on skills as leading to success. Random outcomes, or an arbitrary situation, can also explain success, and provide the initial push that leads to a winner-take-all result. A person can get slightly ahead for entirely random reasons; because we like to imitate one another, we will flock to him.
The long tail implies that the small guys, collectively, should control a large segment of culture and commerce, thanks to the niches and subspecialties that can now survive thanks to the Internet. But, strangely, it can also imply a large measure of inequality: a large base of small guys and a very small number of supergiants, together representing a share of the world’s culture - with some of the small guys, on occasion, rising to knock out the winners. (This is the “double tail”: a large tail of the small guys, a small tail of the big guys.) The role of the long tail is fundamental in changing the dynamics of success, destabilizing the well-seated winner, and bringing about another winner.
The main point of the Gaussian, as I’ve said, is that most observations hover around the mediocre, the average; the odds of a deviation decline faster and faster (exponentially) as you move away from the average. If you must have only one single piece of information, this is the one: the dramatic increase in the speed of decline in the odds as you move away from the center, or the average.
The Gaussian-bell curve variations face a headwind that makes probabilities drop at a faster and faster rate as you move away from the means, while “scalable,” or Mandelbrotian variations, do not have such a restriction.
In the Gaussian framework, inequality decreases as the deviations get larger - caused by the increase in the rate of decrease. Not so with the scalable; inequality stays the same throughout.
Measures of uncertainty that are based on the bell curve simply disregard the possibility, and the impact, of sharp jumps or discontinuities and are, therefore, inapplicable in Extremistan. Using them is like focusing on the grass and missing out on the (gigantic) trees. Although unpredictable large deviations are rare, they cannot be dismissed as outliers because, cumulatively, their impact is so dramatic. The traditional Gaussian way of looking at the world begins by focusing on the ordinary, and the deals with exceptions or so-called outliers as ancillaries.
The rarer the event, the higher the error in our estimation of its probability - even when using the Gaussian. The Gaussian bell curve sucks randomness out of life - which is why it is popular. We like it because it allows certainties! How? Through averaging.
Standard deviations do not exist outside the Gaussian, or if they do exist they do not matter and do not explain much.
In medio stat virtue, “virtue lies in moderation.”
Many people accepted my Black Swan idea but could not take it to its local conclusion, which is that you cannot use one single measure for randomness, called standard deviation (and call it “risk”0: you cannot expect a simple answer to characterize uncertainty.
In the end it is those who derive consequences and seize the importance of the ideas, seeing their real value, who win the day. They are the ones who can talk about the subject.
Triangles, squares, circles, and the other geometric concepts that made many of us yawn in the classroom may be beautiful and pure notions, but they seem more present in the minds of architects, design artists, modern art buildings, and schoolteachers that in nature itself. That’s fine, except that most of us aren’t aware of this. Mountains are not triangles pr pyramids; trees are not circles; straight lines are almost never seen anywhere. Mother Nature did not attend high school geometry courses or read the books of Euclid of Alexandria. Her geometry is jagged, but with a logic of its own and one that is easy to understand. We seem naturally inclined to Platonify, and to think exclusively in terms of studied materials: nobody, whether a bricklayer or a natural philosopher, can easily escape the enslavement of such conditioning.
Fractuality is the repetition of geometric patterns at different scales, revealing smaller and smaller version of themselves. Small parts resemble to some degree, the whole.
There is no qualitative change when an object changes size. Mandelbrot designed the mathematical object now known as the Mandelbrot set, the most famous object in the history of mathematics. It became popular with followers of chaos theory because it generates pictures of ever increasing complexity by using a deceptively minuscule recursive rule; recursive means that something can be reapplied to itself infinitely. You can look at the set at smaller and smaller resolutions without ever reaching the limit; you will continue to see recognizable shapes. The shapes are never the same, yet they bear an affinity to one another, a strong family resemblance.
Fractal randomness is a way to reduce these surprises, to make some of the swans appear possible, so to speak, to make us aware of their consequence, to make them gray. But fractal randomness does not yield precise answers.
The sterilized randomness of games does not resemble randomness to real life.
Snub your destiny. I have taught myself to resist running to keep on schedule. This may seem a very small piece of advice, but it registered. In refusing to run to catch trains, I have felt the true value of elegance and aesthetics in behavior, a sense of being in control of my time, my schedule, and my life. Missing a train is only painful if you run after it! Likewise, not matching the idea of success others expect from you is only painful if that’s what you are seeking. You stand above the rat race and the pecking order, not outside of it, if you do so by choice.