Book Review: The Black Swan

Contributed by Nikhil Gavankar (Batch of 2000)

David Hume the father of modern empiricism famously said that the phrase ‘All Swans are white’ is based upon a certain number of observations where in all observed swans are seen to be white and hence the rule above is created which infers that the unobserved swans will also turn out to be white.

Before the discovery of Australia, people in the old world were convinced that all swans were white, an unassailable belief as it seemed completely confirmed by empirical evidence.

The sighting of the first black swan might have been an interesting surprise for a few ornithologists but that is not where the significance of the story lies. It illustrates a severe limitation to our learning from observations or experience and the fragility of our knowledge. One single observation can invalidate a general statement derived from millennia of confirmatory sightings of millions of white swans. All you need is one single black bird.

What we call here a Black Swan is an event with the following three attributes:
• First, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility.
• Second, it carries an extreme impact.
• Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable.

To summarize the Black Swan: rarity, extreme impact, and retrospective (though not prospective) predictability. 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.

Just imagine how little your understanding of the world on the eve of the events of1939 would have helped you guess what was to happen next. How about the rise of Gandhi and India’s independence could have been predicted in 1900? How about the precipitous demise of the Soviet bloc? How about the rise of Islamic fundamentalism? How about the spread of the Internet? How about the market crash of 1987 (and the more unexpected recovery)? All follow these Black Swan dynamics. Literally, just about everything of significance around you might qualify. This combination of low predictability and large impact makes the Black Swan a great puzzle; but that is not yet the core concern of this book. Add to this phenomenon the fact that we tend to act as if it does not exist! All "social scientists" for over a century, have operated under the false belief that their tools could measure uncertainty. For the applications of the sciences of uncertainty to real-world problems has had ridiculous effects; the author has been privileged to see it in finance and economics. Go ask your portfolio manager for his definition of "risk," and odds are that he will supply you with a measure that excludes the possibility of the Black Swan-hence one that has no better predictive value for assessing the total risks than astrology but is getting dressed up as mathematics. This problem is endemic in social matters.

The central idea of this book concerns human blindness with respect to randomness, particularly the large deviations: Why do people, scientists or nonscientists, tend to see the pennies instead of the dollars? Why do we keep focusing on the minutiae, not the possible significant large events, in spite of the obvious evidence of their huge influence? And, as the author says, why does reading the newspaper actually decrease your knowledge of the world?
It is easy to see that life is the cumulative effect of a handful of significant shocks. It is not so hard to identify the role of Black Swans, from your armchair (or bar stool).

If we did look into our own existence and count the significant events, the technological changes, and the inventions that have taken place in our environment since we were born and compare them to what was expected before their advent. How many of them came on a schedule? Look into our own personal life, to our choice of profession, say, or meeting your mate, the betrayals you faced, your sudden enrichment or impoverishment. How often did these things occur according to plan?

In the world of the Black Swan what you don't know is far more relevant than what you do know? Think of the terrorist attack of September 11, 2001: had the risk been reasonably conceivable on September 10, it would not have happened. If such a possibility were deemed worthy of attention, fighter planes would have circled the sky above the twin towers, airplanes would have had locked bulletproof doors and the attack would not have taken place, period.
Isn't it strange to see an event happening precisely because it was not supposed to happen? What kind of defense do we have against that? Whatever you come to know (that New York is an easy terrorist target, for instance) may become inconsequential if your enemy knows that you know it. It may be odd to realize that, in such a strategic game, what you know can be truly inconsequential. This extends to all businesses. Think about the "secret recipe" to making a killing in the restaurant business. If it were known and obvious then someone next door would have already come up with the idea and it would have become generic. The next killing in the restaurant industry needs to be an idea that is not easily conceived of by the current population of restaurateurs. It has to be at some distance from expectations. The more unexpected the success of such a venture, the smaller the number of competitors, and the more successful is the entrepreneur who implements the idea. The same applies to the shoe and the book businesses-or any kind of entrepreneurship. The same applies to scientific theories-nobody has interest in listening to trivialities. The payoff of a human venture is, in general, inversely proportional to what it is expected to be.
Consider the Indian tsunami of December 2007. Had it been expected, it would not have caused the damage it did-the areas affected would have been less populated, an early warning system would have been put in place. What you know cannot really hurt you.

THE HOLLOWNESS OF EXPERTS

The inability to predict outliers implies the inability to predict the course of history, given the share of these events in the dynamics of events. But 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. We produce thirty year projections of economic data without realizing that we cannot even predict these for next summer-our cumulative prediction errors for political and economic events are so monstrous that if we seriously retrospect we should stop forecasting. What is surprising is not the magnitude of our forecast errors, but our absence of awareness of it. This is all the more worrisome when we engage in deadly conflicts: wars are fundamentally unpredictable (and we do not know it). Owing to this misunderstanding of the casual chains between policy and actions, we can easily trigger Black Swans thanks to aggressive ignorance-like a child playing with a chemistry kit.


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.

Black Swans being unpredictable, we need to adjust to their existence (rather than naively try to predict them). There are so many things we can do if we focus on anti-knowledge, or what we do not know.
Another related human impediment comes from excessive focus on what we do know: we tend to learn the precise, not the general.

What did people learn from the 9/11 episode? Did they learn that some events, owing to their dynamics, stand largely outside the realm of the predictable? No.

We do not spontaneously learn that we don't learn that we don't learn. The problem lies in the structure of our minds: we don't learn rules, just facts, and only facts. Metarules (such as the rule that we have a tendency to not learn rules) we don't seem to be good at getting. We scorn the abstract; we scorn it with passion.
Why? It is necessary here, as it is my agenda in the rest of this book, both to stand conventional wisdom on its head and to show how inapplicable it is to our modern, complex, and increasingly recursive environment.
But there is a deeper question: What are our minds made for? It looks as if we have the wrong user's manual. Our minds do not seem made to think and introspect; if they were, things would be easier for us today, but then we would not be here today and I would not have been here to talk about it-my counter factual, introspective, and hard-thinking ancestor would have been eaten by a tiger while his non-thinking, but faster-reacting cousin would have run for cover. Consider that thinking is time-consuming and generally a great waste of energy, that our predecessors spent more than a hundred million years as non-thinking mammals and that in the blip in our history during which we have used our brain we have used it on subjects too peripheral to matter. Evidence shows that we do much less thinking than we believe we do-except, of course, when we think about it.

A NEW KIND OF INGRATITUDE

It is quite saddening to think of those people who have been mistreated by history. But there are even more mistreated heroes-the very sad category of those who we do not know were heroes, who saved our lives, who helped us avoid disasters. They left no traces and did not even know that they were making a contribution. We remember the martyrs who died for a cause that we knew about, never those no less effective in their contribution but whose cause we were never aware-precisely because they were successful.

And yet, recognition can be quite a pump. Even those who genuinely claim that they do not believe in recognition, and that they separate labor from the fruits of labor, actually get a serotonin kick from it. See how the silent hero is rewarded: even his own hormonal system will conspire to offer no reward.

Now consider again the events of 9/11. In their aftermath, who got the recognition?
Those you saw in the media, on television performing heroic acts, and those whom you saw trying to give you the impression that they were performing heroic acts. The latter category includes someone like the New York Stock Exchange Chairman Richard Grasso, who "saved the stock exchange" and received a huge bonus for his contribution (the equivalent of several thousand average salaries). All he had to do was be there to ring the opening bell on television-the television that, we will see, is the carrier of unfairness and a major cause of Black Swan blindness. Who gets rewarded, the central banker who avoids a recession or the one who comes to "correct" his predecessors' faults and happens to be there during some economic recovery? Who is more valuable, the politician who avoids a war or the one who starts a new one (and is lucky enough to win)?

It is the same logic reversal we saw earlier with the value of what we don't know; everybody knows that you need more prevention than treatment, but few reward acts of prevention. We glorify those who left their names in history books at the expense of those contributors about whom our books are silent. We humans are not just a superficial race (this may be curable to some extent); we are a very unfair one.

LIFE IS VERY UNUSUAL

This is a book about uncertainty; for the author, the rare event equals uncertainty. 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 to first consider the extremes particularly if, like the Black Swan, they carry an extraordinary cumulative effect.
If you want to get an idea of a friend's temperament, ethics, and personal elegance, you need to look at him under the tests of severe circumstances, not under the regular rosy glow of daily life. Can you assess the danger a criminal poses by examining only what he does on an ordinary day? Can we understand health without considering wild diseases and epidemics? Indeed the normal is often irrelevant. Almost everything in social life is produced by rare but consequential shocks and jumps; all the while almost everything studied about social life focuses on the "normal," particularly with "bell curve" methods of inference that tell you close to nothing. Why? Because the bell curve ignores large deviations, cannot handle them, yet makes us confident that we have tamed uncertainty. Its nickname in this book is GIF, Great Intellectual Fraud. . . .