Nobody Expects the Spanish Inquisition—or Do They?
A look at Nassim Taleb's The Black Swan.
Oddly, Taleb's argument is weakest in the area he knows best, namely finance. Only on Wall Street do people seem to give proper credence—not too much, not too little—to very unlikely events. It is easy enough to use hindsight to identify the black swans Wall Street has missed, such as stock-price crashes. But it is harder to argue that the market undervalues surprise more generally. Stock and bond markets offer simple ways to bet on black swans. In financial terminology, you can purchase an option that is "deeply out of the money"; for instance, you can bet that Google shares will rise or fall in value an enormous amount over the next three months. These investments pay off precisely when the rest of the market does not anticipate the scope for surprise. Yet "long-shot" strategies are well-studied, and they do not yield extra profit. In other words, organized securities markets track rare and unpredictable events as well as the current state of knowledge will allow. If you don't believe me, it is easy enough to bet on the Los Angeles Clippers to win the 2008 NBA title, or to bet on the longest odds at the racetrack. Such actions are hardly the path to either happiness or riches.
The Black Swan also encounters some problems when it attempts to map out a metaphysical philosophy. The prologue tells us that "[a] small number of Black Swans explain almost everything in our world. …" In Taleb's view, "ordinary events, the ones we study and discuss and try to predict from reading the newspapers, have become increasingly inconsequential."
Promoting the supreme nature of the extraordinary seems to this (ordinary) reviewer a largely semantic point. Virtually by definition, the bulk of what goes on is ordinary events determined by ordinary processes—mixed in, of course, with some extraordinary influences. Shakespeare, George Washington, and Osama Bin Laden have shaped history, but the lives of billions of ordinary people matter, too, and they shape history as well, although not always in obvious ways. Elevating the importance of the extraordinary alone is more rhetorical posturing than insight. Even genius depends more on years of concentrated hard work than on unique momentary inspiration, as evidenced by studies that show the effects of practice on top-tier musicians and composers. Taleb is a talented writer, and often offers up a brilliant sentence or a clever, darting aphorism; he has a harder time developing a systematic message that is not only true but also original.
Taleb does insist on the originality of his work—regarding it as a black swan, of course—and refers to opposing views as the "GIF: Great Intellectual Fraud." Nonetheless, the idea of a Power Law as a deeply skewed and asymmetric distribution is well-known, and the statistical notion of "ergodicity" (roughly, the idea that the initial state of a system does not predict its end state very well) has been around for a long time. In 1921, economist Frank Knight drew a distinction between unquantifiable and radical uncertainty and the risk of flipping a coin or playing a roulette wheel. If these ideas have not always been part of the mainstream, it is because they can quickly prove intractable, not because they have been suppressed by an arrogant scientific community.
The Black Swan is a kaleidic book—to borrow Shackle's term—full of surprising examples, and in that sense the medium is true to the message. Yet Taleb's previous book Fooled by Randomness was unpredictable as well. So, his latest effort—however thought-provoking—is not a black swan in every way. Taleb may disagree, but he should take heart. Incremental progress is a hard enough achievement, and it is to be applauded with vigor.
Tyler Cowen is professor of economics at George Mason University and author of An Economist Gets Lunch: New Rules for Everyday Foodies