June/July/Aug 2007

Swan's Way

Nicholas Taleb explores the truly random occurrence

James Surowiecki


Americans are enamored of the practice of prediction. Pundits, policy wonks, Wall Street analysts, hedge-fund managers: Their careers and their fortunes derive, in one sense or another, from their ability to forecast the future. And yet when you look at studies of expert judgment, what you find is remarkably little evidence that individual experts have any clue about what the future will hold. (In his 2005 book Expert Political Judgment: How Good Is It? How Can We Know?, for instance, the political scientist Philip E. Tetlock showed that, in predicting consequential events in their fields of study, most political experts did no better than a coin flip.) And recent history is replete with examples of unforeseen events—most obviously, 9/11—that had a massive impact. One explanation of these failures is that there’s something wrong with the experts, that they need a better predictive process. But in The Black Swan: The Impact of the Highly Improbable, Nassim Nicholas Taleb offers a different explanation. Experts, he argues, are certainly flawed—overconfident, narrowminded, overly committed to a particular picture of the world. But the fundamental reason for their failure is that they are playing an impossible game. The future—or at least those parts of it that really matter— is, by its nature, genuinely unpredictable. We can’t read the tea leaves because they don’t exist.

Taleb is a former options trader who, in 2001, published Fooled by Randomness: The Hidden Role of Chance in the Markets and in Life, a powerful critique of our underappreciation of the reality of chance and our tendency to see pattern and causality where neither exists. In his new book, he extends that critique into a broader theory of history and society and an attack on our faith in induction. Because we believe that the future will be much like the past, Taleb argues, we believe that we can extrapolate from historical patterns and evidence in order to understand what will happen. The problem, he argues, is that history is not, fundamentally, the story of predictable, incremental change, in which the past is a reliable guide to the future. Instead, what really matters in history is what he calls “the black swan”—the radical outlier that takes place “outside the realm of regular expectations” and that has an extreme impact. (The term is an allusion to the fact that because all swans in the West are white, it was assumed that black swans could not exist, until Westerners went to Australia and found out they were wrong.) Taleb sees black swans in pop culture, market behavior, military history, foreign policy, and so on, so that Harry Potter, the invention of the Internet, the advent of World War I, and the rise of Islamism all qualify. Black swans are, by definition, rare, but for Taleb they are also essential—they account, he writes, for “just about everything of significance around you.”

To explain why black swans are at once incredibly important and genuinely unforeseeable, Taleb suggests that life is divided into two worlds, which he calls Mediocristan and Extremistan. In Mediocristan, life is governed by the bell curve. In this world, most things that happen are close to the middle. There are few outliers, and crucially, those that exist don’t have an outsize impact on the whole. If you look, for instance, at a graph plotting the height and population of American men, what you find is that most are close to the median. There are only a few very tall or very short men, and even if you put all the tall ones together, they account for only a small percentage of the total height (as it were) of the adult-male population. In Extremistan, by contrast, the rules are different. Here, the bell curve does not exist. There is not a continuous distribution of qualities. And the outliers that exist are far more important. If, for instance, you look at a graph plotting the wealth and population of Americans, you still have people concentrated in the middle. But in this case, the few very rich people account for a huge percentage of the total wealth of the population. And in fact, if you graph just rich people, you find that a huge percentage of their wealth is accounted for by the superrich. And this is true, Taleb suggests, in myriad fields: best sellers, stock-market returns, technological innovations, casualties of war. In all these cases, the impact of the rare outweighs everything else.

Black swans are unpredictable, Taleb argues, because by their nature they represent a break with what has come before. And because most experts at least implicitly believe that the bell curve governs most domains, they keep getting surprised by these outliers. Taleb shows in great detail how bad the predictions of experts have been historically, reveals the judgment flaws that magnify their failures, and offers a sharp critique of their inability (or refusal) to learn from their errors. He also argues that one of the problems with black swans is that, although they are prospectively unpredictable, in retrospect they look like they could have been foreseen. This is a point made by Roberta Wohlstetter in her work on Pearl Harbor, which after the fact people insisted should have been predicted and averted. Wohlstetter sifted through all the information available before December 7, 1941, and showed that although there were clues as to what was going to happen, those clues were indistinguishable, in advance, from all the other noise that the intelligence community was getting. (The same was arguably true of 9/11.)

Our failure to accept the reality of black swans, Taleb suggests, actually magnifies their impact, because it leaves us unprepared for the possibility of radical change and deludes us into believing we understand the risks we’re taking in a given pursuit. If we were more aware of the limits of our knowledge and more cognizant of the real risks we run, we could do two things: limit our exposure to fields where potential catastrophes are possible and maximize our exposure to potential windfalls. (Not all black swans are bad: Some of them, like the rise of the Internet, are fantastically good.) For Taleb, there is no way to get rid of black swans. But we can turn some of them gray.

Taleb’s critique of our current pretensions to knowledge, and of our unwarranted faith in our understanding of things like risk and change, is both rigorous and convincing. And The Black Swan is a terrifically engaging book, sophisticated without being inaccessible. But there are a couple of questions worth asking about his overall thesis. The first is whether black swans really are responsible for “just about everything of significance” in history, and whether radical, unpredictable breaks with the past, rather than incremental, relatively continuous changes, are what really matter. There is, obviously, no external perspective from which to judge this, no rating system for historical events we can look to. But while black swans are certainly eye-catching and are the things on which our attention naturally lands—stock-market crashes, wars, terrorist events, and so on—it’s not self-evident that they are for that reason all-important. At least in a country like the United States, one might reasonably wonder whether life today really is—as Taleb’s thesis might suggest—radically different for most Americans than people imagined it would be thirty or forty years ago. Obviously, much of what has happened has been unanticipated, from oil crises to war in the Middle East to the myriad inventions that we rely on in our day-to-day lives. But it’s far from clear that everyday life for most Americans truly has been more defined by radical breaks with history than by ongoing processes of change—like globalization, secularization, the rise of suburbia—and by deeper continuities, like the persistence of religion and the dominance of the free market. There isn’t a simple answer to this question. The point is that deciding what really counts in history is harder than Taleb suggests.

At the same time, even if we were to accept that black swans really are the drivers of history, would that necessarily mean that they are unpredictable? Taleb is certainly right that we can’t use the bell curve to anticipate black swans, but theoretically, at least, we don’t need it to make intelligent predictions. The unpredictability of black swans is not a metaphysical truth—Taleb’s argument for it is fundamentally an empirical one, based on the inability of past experts to anticipate radical change. So The Black Swan, paradoxically, is an inductive critique of induction. That doesn’t make it wrong. But it also means that it’s theoretically possible that we could, in fact, come up with better tools and better methods—ones, for instance, that rely less on individual experts and more on collective wisdom—that allow us to see the future more clearly. (The invention of these tools would be, in its own way, a black swan.) Until that day comes, though, we’d do well to heed Taleb’s advice, avoiding modern soothsayers and realizing that the first step to wisdom really is admitting our own ignorance.

James Surowiecki contributes the Financial Page column to the New Yorker. He is the author of The Wisdom of Crowds: Why the Many Are Smarter than the Few and How Collective Wisdom Shapes Business, Economies, Societies, and Nations (Doubleday, 2004).

Igu Soni

June 16, 2009
2:25 pm

Quote:
At the same time, even if we were to accept that black swans really are the drivers of history, would that necessarily mean that they are unpredictable?

Taleb's point is that if something is predictable, it will be easy to mitigate by good planning. It is because they are unpredictable that they are the major drivers of history.

seanoleary

May 26, 2013
4:37 pm

The black swan thesis is full of holes. Essay here: http://www.geocities.ws/blackswan

Comments are open to registered bookforum.com users only. Please login to post.
Don't have an account yet? Please click here to register for a free account.

Advertisement