Nobody Expects the Spanish Inquisition—or Do They?
A look at Nassim Taleb's The Black Swan.
Before the discovery of Australia, it was generally assumed that swans were always white. Suddenly, black swans turned up, unsettling people's expectations. In his new book, The Black Swan, Nassim Nicholas Taleb asks why this discovery seemed so surprising. And in response he argues that it is because we are hard-wired to find order in randomness, to turn scattered points into a coherent narrative, and to expect identified patterns to last forever. We become emboldened by our successes, and we think that we achieved control or at least can see what is coming next. The search for patterns and order can be a dangerous trap, distracting us from "the impact of the highly improbable," to cite the book's subtitle. Taleb, a long-standing financial analyst and investor, is the author of Fooled by Randomness, a book about our tendency to mistake luck for skill. In The Black Swan, he preaches a bracing sermon in favor of an angst-ridden, but socially beneficial, plunge into wrestling with the unknown.
The Black Swan works best as an advice book. In part, that's because the unpredictable is most undervalued in our personal lives. Too many of us are caught up in routine, or a "status quo bias," as it is labeled by economists and psychologists. We are afraid to move house or change jobs or even to imagine alternative paths. It is disquieting to think we might be making bad choices, so we close off options and we shut down self-critical reasoning, whether subconsciously or by active choice. For instance, we're likely to buy certain commercial products simply because they are familiar and therefore comforting; that is why branding and advertising so influence consumers.
The best parts of The Black Swan come when Taleb mixes financial economics and biology to explain just how much his message runs contrary to human nature. For instance, humans have evolved to draw quick but useful inferences from repeated situations, partly for self-preservation: When you see a tiger approach, run away fast. This tendency once served us. But it now makes us less well-equipped to deal with a more innovative world. We're not always ready to embrace a new paradigm or abandon an old but failed way of doing business. In Taleb's view, the winners of the evolutionary process are mostly lucky. They are not especially well-equipped to deal with the next set of challenges, such as making the right investments or responding appropriately to a terrorist attack.
Another human failing stems from the nature of happiness. In the short run, people's happiness is often shaped more by how many "positive events" occur in their day than by the arrival of one important piece of good news. Winning $100,000 in the lottery feels almost as good as winning $1 million. We therefore look, consciously or not, for small but repeated successes when we should be shooting for "one large win." It's easy to see why: Big payoffs come only rarely, and perhaps late in life; in the meantime, who wants to keep on feeling like a loser?
Nonetheless, getting out of our comfort zones is good for innovation and thus good for the economy. Young entrepreneur Ben Casnocha, in his recent memoir, My Start-Up Life, offers similar business advice: "Expose yourself to as much randomness as possible. Attend conferences no one else [in your field] is attending. Read books no one else is reading. Talk to people no one else is talking to." The late G.L.S. Shackle, a Scottish economist and one of Taleb's heroes, insisted that capitalism was driven by entrepreneurs' abilities to imagine a radically different future. Shackle argued that we live in a "kaleidic society, interspersing its moments or intervals of order, assurance and beauty with sudden disintegration and a cascade into a new pattern."
Along the way, Taleb explains why you should not mimic Casanova (he was lucky to escape the danger inherent in each romantic adventure he took), why venture capitalists make more than inventors (inventors pursue black swans, but they often die too soon to see the biggest payoffs), why you should become a speculator rather than a prostitute (the former is more scalable, in case your career really takes off), and why the self-critical Montaigne is the most important philosopher (he is one of the few writers who understood the limitations of human knowledge).
And Taleb points out, crucially, that when people do see a black swan, they usually overreact. They again focus on the immediately known—namely, the last black swan—and they fail to imagine the next generation of black swans. For instance, we are far too fearful of terrorist strikes or campus shootings, rare but publicity-rich events. If a "black swan" such as 9/11 is broadcast on TV, or if a "black swan" like a rare disease happens to our brother, it suddenly acquires an unrealistically strong hold on our imagination.
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