The Black Swan

Nassim Nicholas Taleb’s The Black Swan has filled a summer of discussion at our house. Since everyone knows that “all swans are white” the discovery of black swans in Australia challenged millennia of assumptions about swans merely because no one had seen a black swan. Our assumptions and what we call “the truth” are severely limited, often critically so, by the limitations of our experiences and our knowledge. The author’s friend keeps a 30,000 book library, not to show off what he knows but to be reminded of what he does not know. The future is controlled much more by a combination of luck and what we do not know than by the facts in our limited vision.

Taleb says that Black Swans have three essential characteristics: first they are outliers, outside our prior experience and expectations, second they have a large impact, and third they are, after the fact justified with explanations that make them seem predictable. Taleb believes that wars are frequently Black Swans, events set in motion with predictions of future results based on the past which is actually a poor predictor.

In Taleb’s experience life is non-linear, and experience is a rebuke to both the empirical certainties of Hume and the portfolio managers. The author grew up in Lebanon where cultures mixed more or less easily until fighting broke out in 1975. Everyone assumed the fighting would last a couple of weeks as had prior clashes among the sects. 17 years later with their society essentially destroyed some form of peace came to Lebanon, wholly unanticipated results later explained by “experts”. September 11 was a Black Swan, totally outside of our experience, unpredicted, and having an enormous impact. After the fact talking heads could review writings of Al Qaeda, the 1993 bombing of the World Trade Center and make sense of it all, but as a Black Swan, no one had actually said anything on September 10 that would have left anyone thinking that the country was in imminent danger.

Game theory economists, portfolio managers and TV talking heads are Taleb’s principal targets. Each of them make projections that assume “rational behavior” and that future events will look like recent past events and always be distributed within 2 standard deviations on the bell curve. Both assumptions may be true for a very small sampling, but as the sample sizes get larger the larger number of irrational actors are on the scene, and an events outside the 2 standard deviations are more common with greater impact. Being the beneficiary of or ruined by a Black Swan is mostly a matter of luck.

Barack Obama is a Black Swan. Did anyone believe or predict that a convention speech in 2004 could propel an unknown junior senator to leapfrog the entire Democratic Party establishment? Now, of course everyone knows it was obvious, but it was not obvious at all. It was in fact unpredicted and highly unpredictable, outside the normal margin or error and yet so significant. The talking heads after 2004 were wrong, wrong, wrong in everything they said, and still we watch them as if they know something. What they “know” is that each can reinforce what the others say, and what we know is that the future events will be controlled by events the talking heads cannot even imagine.

I have been reasonably lucky avoiding predictions in these writings. The only attempt I recall, “Iraq” in April 2007 appears in September 2008 to have been almost wholly wrong, precisely because I lacked knowledge of events on the ground, changes of positions, and a million other factors invisible from an armchair. Iraq has been non-linear in many ways, apparently, as of the moment, to our advantage. Waiting for some other Black Swan to appear.