Taleb - The Black Swan

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Unformatted text preview: THE B L A C K S WAN The I mpact of the HIGHLY IM PROBABLE Nassim N icholas Taleb U.S.A. $ 26.95 Canada $34.95 is a highly improbable event with three principal characteristics: It is unpre­ dictable; it carries a massive impact; and, after the fact, we concoct an explanation that makes it appear less random, and more predictable, than it w as. T he astonishing success of Google was a black swan; so was 9 / 1 1 . For Nassim Nicholas T aleb, b lack swans underlie almost everything about our world, from the rise of religions to events in our own personal lives. A BLACK SWAN Why do we not acknowledge the phenomenon of black swans until after they occur? Part of the answer, according to Taleb, is that humans are hardwired to learn specifics when they should be focused on generalities. We concentrate on things we already know and time and time again fail to take into consideration what we don't know. We are, therefore, unable to truly estimate oppor­ tunities, too vulnerable to the impulse to simplify, narrate, and categorize, and not open enough to rewarding those who can imagine the "impossible." For years, Taleb has studied how we fool our­ selves into thinking we know more than we actually d o. W e restrict our thinking to the irrelevant and inconsequential, while large events continue to surprise us and shape our world. Now, in this reve­ latory book, Taleb explains everything we know about what we don't know. He offers surprisingly simple tricks for dealing with black swans and b en­ efiting from them. Elegant, startling, and universal in its applica­ tions, The Black Swan w ill change the way you look at the world. Taleb is a vastly entertaining writer, with wit, irreverence, and unusual stories to t ell. H e has a polymathic command of subjects ranging from cognitive science to business to probability theory. The Black Swan is a landmark book—itself a black swan. h as devoted his life to immersing himself in problems of luck, uncertainty, probability, and knowledge. Part literary essayist, part empiricist, part no-nonsense mathematical trader, he is currently taking a break by serving as the Dean's Professor in the Sciences of Uncer­ tainty at the University of Massachusetts at Amherst. His last book, the bestseller Fooled by Randomness, has been published in twenty l an­ guages. Taleb lives mostly in New York. N A S S I M N ICHOLAS TALEB Jacket design: Thomas Beck Stvan Jacket art: £ Photodisk/Getty Images Join our nonfiction e-newsletter by visiting www.rh-newsletters.com Random House New York, N.Y. c 2007 by Random House, Inc. A dvance p raise for The Black Swan "A masterpiece." —CHRIS ANDERSON, editor in c hief of Wired, author of The Long Tail "Recalls the best of scientist/essayists like Richard Dawkins and Stephen Jay Gould." — M I C H A E L S C H R A G E , author of Serious Play "A beautifully reflective and opinionated book, illustrated with Calvinolike fables, about the inevitable failure of attempts to reduce the complex­ ity of the real world to simple black-and-white formulas." — EMANUEL DERMAN, author of My Life as a Quant "A f ascinating and challenging critique . . . I thoroughly enjoyed this remarkable author's outside-the-box mix of thought experiments, stories, and epistemology." — El) W A R I ) 0 . T H O R P , author of Beat the Dealer "Nassim Taleb challenges us, his readers, to be as fearless as he is in punc­ turing phony expertise. . . . Read this book." — P H I L I P E. TETLOCK, author of Expert Political Judgment " There's more about the ways of the real world between the covers of The Black Swan than in the contents of a dozen libraries." — T O M P E T E R S , a uthor of M Search of Excellence P raise f or Fooled by Randomness "[Fooled by Randomness] is to conventional Wall Street wisdom approxi­ mately what Martin Luther's ninety-five theses were to the Catholic Church." — M A L C O L M G L A D W E L L , author of Blink "Fascinating . . . Taleb will grab you." — P E T E R L. B E R N S T E I N , author of Against the Gods ISBN 978-1-4000-6351-2 ALSO BY N A S S I M NICHOLAS TALEB Fooled by Randomness THE BLACK SWAN RANDOM HOUSE ÛÏQ NEW YORK Copyright © 2 007 by Nassim Nicholas Taleb All rights reserved. Published in the United States by Random House, an imprint of The Random House Publishing Group, a division of Random House, Inc., New York. R ANDOM H O U S E and colophon are registered trademarks of Random House, Inc. ISBN 9 78-1-4000-6351-2 L IBRARY O F C ONGRESS C ATALOGING-IN-PUBLICATION DATA Taleb, Nassim. The black swan: the impact of the highly improbable / Nassim Nicholas Taleb. p. cm. Includes bibliographical references and index. Contents: Part one—Umberto Eco's antilibrary, or how we seek validation—Part two—We just can't predict—Part three— Those gray swans of extremistan—Part four—The end. ISBN 9 78-1-4000-6351-2 1. Uncertainty (Information theory)—Social aspects. 2 . Forecasting. I. Title. Q 375.T35 2 007 0 03'.54—dc22 2 006051093 Printed in the United States of America on acid-free paper www.atrandom.com 98 76 Book design by Casey Hampton To Benoît Mandelbrot, a Greek among Romans C ONTENTS Prologue x vii On the Plumage of Birds What You Do Not Know Experts and "Empty Suits" Learning to Learn A New Kind of Ingratitude Life Is Very Unusual Plato and the Nerd Too Dull to Write About The Bottom Line Chapters Map xvii xix XX xxi xxii xxiv X XV xxvi xxvii xxviii PART O NE: U MBERTO E CO'S A NTILIBRARY, O R HOW WE S EEK V ALIDATION 1 C hapter 1 : T he Apprenticeship of an Empirical Skeptic 3 Anatomy of a Black Swan On Walking Walks "Paradise" Evaporated The Starred Night History and the Triplet of Opacity Nobody Knows What's Going On History Does Not Crawl, It Jumps 3 6 7 7 8 9 10 x CONTENTS Dear Diary: On History Running Backward Education in a Taxicab Clusters Where Is the Show? 8 /4 Lbs Later The Four-Letter Word of Independence Limousine Philosopher 3 12 14 15 17 18 20 21 23 C hapter 2: Y evgenia's Black S wan C hapter 3: The Speculator and the Prostitute 26 The Best (Worst) Advice Beware the Scalable The Advent of Scalability Scalability and Globalization Travels Inside Mediocristan The Strange Country of Extremistan Extremistan and Knowledge Wild and Mild The Tyranny of the Accident C hapter 4: One Thousand and One Days, or How Not to Be a Sucker 26 28 29 31 32 33 34 35 35 38 How to Learn from the Turkey Trained to Be Dull A Black Swan Is Relative to Knowledge A Brief History o f the Black Swan Problem Sextus the (Alas) Empirical Algazel The Skeptic, Friend of Religion J Don't Want to Be a Turkey They Want to Live in Mediocristan C hapter 5: Confirmation Shmonfirmation! 40 43 44 45 46 47 48 49 49 51 Zoogles Are Not All Boogies Evidence Negative Empiricism Counting to Three Saw Another Red Mini! 53 55 56 58 59 Not Everything Back to Mediocristan C hapter 6: The N arrative F allacy On the Causes of My Rejection of Causes Splitting Brains A Little More Dopamine Andrey Nikolayevich's Rule A Better Way to Die Remembrance o f Things Not Quite Past The Madman's Narrative Narrative and Therapy To Be Wrong with Infinite Precision Dispassionate Science The Sensational and the Black Swan Black Swan Blindness The Pull of the Sensational The Shortcuts Beware the Brain How to Avert the Narrative Fallacy C hapter 7: Living in the A ntechamber of Hope Peer Cruelty Where the Relevant Is the Sensational Nonlinearities Process over Results Human Nature, Happiness, and Lumpy Rewards The Antechamber of Hope Inebriated by Hope The Sweet Trap of Anticipation When You Need the Bastiani Fortress El desierto de los târtaros Bleed or Blowup C hapter 8: G iacomo C asanova's U nfailing Luck: T he Problem of Silent E vidence The Story o f the Drowned Worshippers The Cemetery o f Letters xii CONTENTS How to Become a Millionaire in Ten Steps A Health Club for Rats Vicious Bias More Hidden Applications The Evolution of the Swimmer's Body W hat You See and What You Don't See Doctors The Teflon-style Protection of Giacomo Casanova "I Am a Risk Taker" I Am a Black Swan: The Anthropic Bias The Cosmetic Because C hapter 9: The L udic F allacy, or T he Uncertainty o f the Nerd Fat Tony Non-Brooklyn John Lunch at Lake Como The Uncertainty of the Nerd Gambling with the Wrong Dice Wrapping Up Part One The Cosmetic Rises to the Surface Distance from Primates PART T WO: WE J UST C AN'T P REDICT From Yogi Berra to Henri Poincaré C hapter 10: The Scandal of P rediction On the Vagueness of Catherine's Lover Count Black Swan Blindness Redux Guessing and Predicting Information Is Bad for Knowledge The Expert Problem, or the Tragedy of the Empty Suit What Moves and What Does Not Move How to Have the Last Laugh Events Are Outlandish Herding Like Cattle I Was "Almost" Right Reality? What For? " Other Than That," It Was Okay C O N T E N T S xiii The Beauty of Technology: Excel Spreadsheets The Character of Prediction Errors Don't Cross a River if It Is (on Average) Four Feet Deep Get Another Job At JFK C hapter 11 : How to Look for B ird P oop 158 159 1 60 163 163 165 How to Look for Bird Poop Inadvertent Discoveries A Solution Waiting for a Problem Keep Searching How to Predict Your Predictions! The Nth Billiard Ball Third Republic-Style Decorum The Three Body Problem They Still Ignore Hayek How Not to Be a Nerd A cademic Libertarianism Prediction and Free Will The Grueness o f Emerald That Great Anticipation Machine C hapter 12: E pistemocracy, a D ream 1 65 166 169 170 1 71 174 174 176 179 181 183 183 1 85 1 89 190 Monsieur de Montaigne, Epistemocrat Epistemocracy The Past's Past, and the Past's Future Prediction, Misprediction, and Happiness Helenus and the Reverse Prophecies The Melting Ice Cube Once Again, Incomplete Information What They Call Knowledge C hapter 13: A ppelles t he Painter, or W hat Do You Do if You C annot Predict? 191 192 1 93 194 195 196 197 198 201 Advice Is Cheap, Very Cheap Being a Fool in the Right Places Be Prepared The Idea of Positive Accident Volatility and Risk of Black Swan 2 01 2 03 2 03 2 03 2 04 xiv CONTENTS Barbell Strategy "Nobody Knows Anything" The Great Asymmetry PART T HREE: T HOSE GRAY SWANS OF E XTREMISTAN C hapter 14: F rom Mediocristan t o E xtremistan, a nd Back The World Is Unfair The Matthew Effect Lingua Franca Ideas and Contagions Nobody Is Safe in Extremistan A Brooklyn Frenchman The Long Tail Naïve Globalization Reversals Away from Extremistan C hapter 15: The B ell Curve, That G reat Intellectual F raud The Gaussian and the Mandelbrotian The Increase in the Decrease The Mandelbrotian What to Remember Inequality Extremistan and the 80/20 Rule Grass and Trees How Coffee Drinking Can Be Safe Love of Certainties How to Cause Catastrophes Quételet's Average Monster Golden Mediocrity God's Error Poincaré to the Rescue Eliminating Unfair Influence "The Greeks Would Have Deified It" "Yes/No" Only Please A (Literary) Thought Experiment on Where the Bell Curve Comes From CONTENTS xv Those Comforting Assumptions "The Ubiquity of the Gaussian" C hapter 16: The Aesthetics of Randomness 2 50 2 51 253 The Poet o f Randomness The Platonicity o f Triangles The Geometry of Nature Fractality A Visual Approach to Extremistan/Mediocristan Pearls to Swine The Logic of Fractal Randomness (with a Warning) The Problem of the Upper Bound Beware the Precision The Water Puddle Revisited From Representation to Reality Once Again, Beware the Forecasters Once Again, a Happy Solution Where Is the Gray Swan? C hapter 17: Locke's M admen, or Bell Curves in the Wrong Places 2 53 2 56 2 56 257 2 59 2 60 2 62 2 66 2 66 2 67 2 68 2 70 2 70 2 72 274 Only Fifty Years The Clerks' Betrayal Anyone Can Become President More Horror Confirmation It Was Just a Black Swan How to "Prove" Things C hapter 18: The Uncertainty of the Phony 275 275 277 2 78 2 81 2 81 2 82 286 Ludic Fallacy Redux Find the Phony Can Philosophers Be Dangerous to Society? The Problem of Practice How Many Wittgensteins Can Dance on the Head o f a Pin? Where Is Popper When You Need Him? The Bishop and the Analyst Easier Than You Think: The Problem of Decision Under Skepticism 2 86 2 87 2 88 2 89 2 89 2 90 2 91 2 92 xvi CONTENTS PART F OUR: THE E ND 293 295 297 297 2 99 301 307 311 331 3 59 C hapter 19: Half and Half, o r How t o G et Even with the Black Swan When Missing a Train Is Painless The End E pilogue: Yevgenia's White Swans A cknowledgments G lossary N otes B ibliography I ndex P ROLOGUE O N T HE P LUMAGE O F B IRDS Before t he discovery of Australia, people in the Old World were convinced t hat all swans were white, an unassailable b elief 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 (and oth­ ers extremely concerned with the coloring of birds), but t hat is not where the significance of the story lies. I t illustrates a severe limitation to our learning from observations or experience and the fragility of our knowl­ edge. O ne single observation can invalidate a general statement derived from m illennia of confirmatory sightings of millions of white swans. All you need is one single (and, I am told, quite ugly) black bird.* I push o ne step beyond this philosophical-logical question into an em­ pirical reality, and one t hat has obsessed me since childhood. What we c all here a B lack Swan (and capitalize it) is an event with the following three attributes. F irst, it is an outlier, as it lies outside the realm of regular expectations, because n othing in the past can convincingly point to its possibility. S ec­ ond, it carries an extreme impact. Third, in spite of its outlier status, * The spread of camera cell phones has afforded me a large collection of pictures of black swans sent by traveling readers. Last Christmas I also got a case of Black Swan Wine (not my favorite), a videotape (I don't watch videos), and two books. I prefer the pictures. xviii P R O L O G U E h uman n ature m akes us concoct explanations for its occurrence after the f act, m aking it explainable and predictable. I s top and summarize the triplet: rarity, extreme impact, and retrospec­ tive ( though not prospective) predictability.* A small number of B lack S wans e xplain 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. Ever since we left the Pleistocene, some ten millennia a go, t he effect o f these B lack S wans has been increasing. It started acceler­ ating during t he industrial revolution, as the world started getting more c omplicated, w hile ordinary events, the ones we study a nd discuss and try to predict from reading the newspapers, have become increasingly i nconsequential. J ust i magine how little your u nderstanding o f the world on the eve of the events of 1 9 1 4 w ould have helped you guess what was to happen n ext. ( Don't c heat by using the explanations drilled into your cranium by your dull high school teacher.) How about the rise of Hitler and the subsequent war? How about the precipitous demise of the Soviet b loc? H ow about the rise o f Islamic fundamentalism? How about the spread of the Internet? How about the market crash of 1 9 8 7 (and the more unexpected recov­ ery)? F ads, epidemics, fashion, ideas, the emergence of art genres and s chools. All follow these B lack S wan dynamics. Literally, just about every­ thing of significance around you might qualify. T his c ombination of low predictability and large impact makes the B lack S wan a great puzzle; but that is not yet the core concern of this b ook. Add to this phenomenon the fact that we tend to act as if it does not e xist! I d on't mean just you, your cousin J oey, a nd me, but almost all "so­ cial s cientists" who, for over a century, have operated under t he false be­ lief t hat their tools could measure uncertainty. For the applications of the s ciences o f uncertainty to real-world problems has had ridiculous effects; I h ave been privileged to see it in finance and economics. Go ask your p ortfolio m anager for his definition of "risk," and odds are that he will supply you with a measure t hat excludes t he possibility of the B lack S wan—hence o ne that has no better predictive value for assessing the total r isks t han a strology (we will see how they dress up the intellectual fraud with mathematics). This problem is endemic in social matters. * T he highly expected not happening is also a B lack S wan. N ote t hat, by symmetry, the occurrence of a highly improbable event is the equivalent of the nonoccurrence o f a highly probable one. PROLOGUE xix T he c entral idea of this book concerns our blindness with respect to randomness, particularly the large deviations: Why do we, scientists or n onscientists, h otshots or regular J oes, t end 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 influ­ ence? A nd, if you follow my argument, why does reading the newspaper a ctually decrease y our knowledge of the world? It is easy to see that life is the cumulative effect o f a handful of signifi­ cant s hocks. It is not so h ard t o identify the role of B lack S wans, from your armchair (or bar s tool). G o t hrough t he following e xercise. L ook i nto your own existence. Count the significant events, the technological c hanges, and the inventions that have taken place in our environment since y ou were born and compare them to what was expected before their advent. How many of them came on a schedule? L ook i nto your own per­ sonal life, t o your c hoice o f profession, say, or meeting your mate, your exile from your country of origin, the betrayals you faced, your sudden en­ richment or impoverishment. How often did these things occur according to plan? What You Do Not Know B lack Swan l ogic m akes what you don't know e xacerbated by their being r easonably conceivable unexpected. far more relevant t han w hat you do know. Consider that many B lack S wans can be caused and T hink o f the terrorist attack of September 1 1 , 2 0 0 1 : h ad the risk been o n September 1 0 , 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 l ocked b ulletproof doors, and the attack would not have taken place, pe­ riod. Something else might have taken place. What? I d on't k now. I sn'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? W hatever you come to know (that New Y ork is an easy terrorist target, for i nstance) may become inconsequential if your enemy knows that you know it. It may be odd that, in such a strategic game, what you know can be truly inconsequential. T his e xtends to all businesses. Think about the "secret recipe" to mak­ ing a killing in the restaurant business. If it were known and obvious, then s omeone n ext door would have already come up with the idea and it xx PROLOGUE w ould have become generic. The next killing in the restaurant industry needs to be an idea that is not easily conceived of by the current popula­ tion 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 c ompetitors, a nd the more successful 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 t heories—nobody has interest in listening to trivialities. The p ayoff o f a h uman venture is, in g eneral, inversely proportional to what it is expected to be. C onsider t he Pacific t sunami of December 2 0 0 4 . H ad it been expected, it w ould not have caused the damage it did—the a reas affected would have been less populated, an early warning system would have been put in p lace. W hat you know cannot really h urt y ou. Experts and "Empty Suits" 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. B ut w e act as though we are able to predict historical events, or, even w orse, as if we are able to change the course of history. We produce thirtyyear p rojections of s ocial s ecurity deficits and oil prices without realizing that we cannot even predict these for next summer—our cumulative pre­ diction errors for political and economic events are so monstrous that every t ime I look at the empirical record I have to pinch myself t o verify that I am not dreaming. What is surprising is not the magnitude of our f orecast e rrors, but our absence of awareness of it. This is all the more worrisome when we engage in deadly c onflicts: w ars are fundamentally unpredictable (and we do not know it). Owing to this misunderstanding o f t he causal chains between policy and actions, we can easily trigger B lack S wans thanks to aggressive ignorance—like a child playing with a c hemistry k it. Our inability to predict in environments subjected to the B lack S wan, coupled with a general l ack o f the awareness of this state of affairs, means that certain professionals, while believing they are experts, are in fact n ot. B ased o n their empirical record, they do not know more about their s ubject m atter t han t he general population, but they are much better at narrating—or, worse, at smoking you with complicated mathematical m odels. T hey are also more likely to wear a tie. B lack S wans being unpredictable, we need to adjust to their existence PROLOGUE xxi (rather t han naively try to predict them). There are so many things we can do if we focus on antiknowledge, or what we do not know. Among many other benefits, you can set yourself up to c ollect s erendipitous B lack S wans (of the positive kind) by maximizing your exposure to them. Indeed, in some domains—such as scientific discovery and venture capital investments— there is a disproportionate p ayoff from the unknown, since you typically have little to lose and plenty to gain from a rare event. We will see that, contrary to s ocial-science w isdom, almost no discovery, no technologies of note, came from design and planning—they were just B lack S wans. The strategy for the discoverers and entrepreneurs is to rely less on t op-down planning and focus on maximum tinkering and recognizing opportunities when they present themselves. So I disagree with the followers of M a r x and those of Adam Smith: the reason free markets work is because they a llow people to be lucky, thanks to aggressive trial and error, not by giv­ ing rewards or "incentives" for skill. The strategy is, then, to tinker as much as possible and try to c ollect as many B lack S wan opportunities as you can. Learning to Learn A nother related h uman i mpediment 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 pre­ dictable? N o. Did they learn the built-in defect of conventional wisdom? N o. W hat did they figure out? They learned precise rules for avoiding Is­ lamic p rototerrorists and tall buildings. Many keep reminding me that it is i mportant for us to be practical and take tangible steps rather t han t o "theorize" about knowledge. The story of the Maginot Line shows how we are conditioned to be specific. T he French, after the Great War, built a wall along the previous German invasion route to prevent reinvasion— Hitler just (almost) effortlessly went around it. The French had been ex­ cellent students of history; they just learned with too much precision. They were too practical and exceedingly focused for their own safety. We d o not spontaneously learn that we don't learn that we don't learn. T he p roblem lies in the structure of our minds: we d on't l earn rules, just f acts, and only f acts. M etarules (such as the rule that we have a tendency to not learn rules) we d on't seem to be good at getting. We scorn the ab­ stract; we scorn it with passion. xxii P R O L O G U E W hy? I t 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.* B ut t here 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 counterfactual, introspective, and hard-thinking ancestor would have been eaten by a lion while his nonthinking but faster-reacting c ousin w ould have run for cover. C onsider that thinking is time-consuming and generally a great waste of energy, that our predecessors spent more t han a h undred m illion years as nonthinking mammals and that in the blip in our history during w hich we have used our brain we have used it on subjects too peripheral to matter. Evidence shows that we do much less t hinking t han w e believe we do—except, of course, when we think about it. A N EW K IND O F I NGRATITUDE I t is quite saddening to think of those people who have been mistreated by history. There were the poètes maudits, like Edgar Allan Poe or Arthur R imbaud, s corned by society and later worshipped and force-fed to schoolchildren. (There are even schools named after high school dropouts.) A las, this recognition came a little too late for the poet to get a serotonin k ick o ut of it, or to p rop up his romantic life o n earth. But there are even more mistreated heroes—the very sad category of those who we do not know were heroes, who saved our lives, w ho helped us avoid disasters. They left n o traces and did not even know that they were making a contribution. W e r emember 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 * Recursive here means that the world in which we live has an increasing number of feedback loops, causing events to be the cause of more events (say, people buy a book because other people bought it), thus generating snowballs and arbitrary and unpredictable planet-wide winner-take-all effects. We live in an environment where information flows too rapidly, accelerating such epidemics. Likewise, events can happen because they are not supposed to happen. (Our intuitions are made for an environment with simpler causes and effects and slowly moving information.) This type of randomness did not prevail during the Pleistocene, as socioeconomic life was far simpler then. PROLOGUE xxiii a ware of—precisely because they were successful. Our ingratitude toward the poètes maudits fades completely in front of this other type of thanklessness. T his is a far more vicious kind of ingratitude: the feeling of uselessness o n the p art o f the silent hero. I will illustrate with the following thought experiment. Assume that a legislator with courage, influence, intellect, vision, and perseverance manages to enact a law that goes into universal effect a nd employment on September 10, 2 0 0 1 ; i t imposes the continuously locked bulletproof d oors in every cockpit (at high costs to the struggling airlines)— j ust in case terrorists decide to use planes to attack the World Trade Center in New Y ork City. I know this is lunacy, but it is just a thought experiment (I am aware that there may be no such thing as a legislator with intellect, courage, vision, and perseverance; this is the point of the thought experiment). The legislation is not a popular measure among the airline personnel, as it complicates their lives. But it would certainly have prevented 9 / 1 1 . T he person who imposed locks on cockpit doors gets no statues in public squares, not so much as a quick mention of his contribution in his obituary. "Joe Smith, who helped avoid the disaster of 9 /11, died of complications of liver disease." Seeing how superfluous his measure was, and how it squandered resources, the public, with great help from airline pilots, might well boot him out of office. Vox clamantis in deserto. H e will retire depressed, with a great sense of failure. He will die with the impression of having done nothing useful. I wish I could go attend his funeral, but, reader, I can't find him. And yet, recognition can be quite a p ump. B elieve m e, 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 n o reward. Now consider again the events of 9 /11. In their aftermath, who got the r ecognition? T hose you saw in the media, on television performing heroic a cts, 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 Y ork S tock E xchange chairman Richard Grasso, who "saved the s tock e xchange" and received a huge bonus for his contribution (the equivalent of several thousand a verage 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 B lack S wan blindness. W ho gets rewarded, the central banker who avoids a recession or the xxiv PROLOGUE o ne who comes to "correct" his predecessors' faults and happens to be there during s ome economic recovery? Who is more valuable, the politi­ cian w ho 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 t han t reat­ ment, 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 c urable to some extent); we are a very unfair one. L IFE I S V ERY U NUSUAL T his is a book about uncertainty; to this author, the rare event equals u ncertainty. This may seem like a strong statement—that we need to prin­ cipally study t he rare and extreme events in order to figure out com­ mon ones—but I will make m yself c lear as follows. 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 c ases. T he second approach is to consider that in order to u nderstand a p henomenon, one needs first to consider the extremes— particularly if, like the B lack S wan, they carry an extraordinary cumula­ tive effect. I d on't particularly care about the usual. If you want to get an idea of a friend's temperament, ethics, and personal elegance, you need to look at him u nder t he tests of severe circumstances, not under t he regular rosy g low o f daily life. C an you assess the danger a criminal poses by examin­ ing only what he does on an ordinary day? Can we understand h ealth without considering wild diseases and epidemics? Indeed the normal is often i rrelevant. A lmost e verything in social life is produced by rare but consequential s hocks a nd jumps; all the while almost everything studied about social life focuses o n the "normal," particularly with "bell curve" methods of infer­ ence t hat tell you close to nothing. Why? Because the bell curve ignores large d eviations, cannot handle them, yet makes us confident that we have tamed uncertainty. Its nickname in this book is GIF, Great Intellectual Fraud. PROLOGUE xxv P LATO A ND T HE N ERD At the start of the Jewish revolt in the first century of our era, much of the J ews' a nger was caused by the Romans' insistence on p utting a s tatue o f C aligula in their temple in Jerusalem in exchange for placing a statue of the Jewish god Yahweh in Roman temples. The Romans did not realize that what the Jews (and the subsequent Levantine monotheists) meant by god w as abstract, all embracing, and had nothing to do with the anthro­ pomorphic, too h uman r epresentation that Romans had in mind when they said deus. C ritically, the Jewish god did not lend h imself t o symbolic representation. Likewise, what many people commoditize and label as "unknown," "improbable,"or "uncertain" is not the same thing to me; it is n ot a concrete and precise category of knowledge, a nerdified field, but its opposite; it is the lack (and limitations) of knowledge. It is the exact contrary of knowledge; one should learn to avoid using terms made for knowledge to describe its opposite. What I c all Platonicity, after the ideas (and personality) of the philoso­ pher Plato, is our tendency to mistake the map for the territory, to focus on pure and well-defined "forms," whether o bjects, like triangles, or social notions, like Utopias (societies built according to some blueprint of what "makes s ense"), even nationalities. When these ideas and crisp constructs inhabit our minds, we privilege them over other less elegant o bjects, t hose with messier and less tractable structures (an idea that I will elaborate pro­ gressively t hroughout this b ook). P latonicity is what makes us think that we u nderstand m ore t han w e actually do. But this does not h appen e verywhere. I am not saying that P latonic forms don't exist. Models and constructions, these intellectual maps of reality, are not always wrong; they are wrong only in some spe­ cific a pplications. The difficulty is that a) you do not know beforehand (only after the f act) where t he map will be wrong, and b) the mistakes can lead to severe consequences. These models are like potentially helpful medicines that carry random but very severe side effects. T he Platonic fold is the explosive boundary where the Platonic mind­ set enters in contact with messy reality, where the gap between what you know and what you think you know becomes dangerously wide. It is here that the B lack Swan is produced. xxvi P R O L O G U E T OO DULL TO WRITE A BOUT I t w as said that the artistic filmmaker Luchino Visconti made sure that when actors pointed at a closed box meant to contain j ewels, there were r eal j ewels inside. It could be an effective way to make actors live their p art. I t hink that V isconti's gesture may also come out of a plain sense of a esthetics a nd a desire for authenticity—somehow it may not feel right to f ool t he viewer. T his is an essay expressing a primary idea; it is neither the recycling nor repackaging of other people's thoughts. An essay is an impulsive medi­ tation, not science reporting. I apologize if I skip a few obvious topics in this book out of the conviction that what is too dull for me to write about might be too dull for the reader to read. ( Also, t o avoid dullness may help to filter out the nonessential.) Talk is cheap. S omeone who took too many philosophy classes in c ol­ lege ( or perhaps not enough) might o bject t hat the sighting of a B lack S wan does not invalidate the theory that all swans are white since such a b lack bird is not technically a swan since whiteness to him may be the es­ sential p roperty of a swan. Indeed those who read too much Wittgenstein (and writings about comments about Wittgenstein) may be under the im­ pression that language problems are important. They may certainly be im­ portant to attain prominence in philosophy departments, but they are something we, practitioners and decision makers in the real world, leave for the weekend. As I explain in the chapter called "The Uncertainty of the Phony," for all of their intellectual appeal, these niceties have no serious i mplications M onday to Friday as opposed to more substantial (but ne­ glected) m atters. People in the classroom, not having faced many true sit­ uations of decision making under u ncertainty, do not realize what is important and what is not—even those who are scholars of uncertainty (or particularly t hose who are scholars of uncertainty). What I c all the p ractice o f uncertainty can be piracy, commodity speculation, professional gambling, working in some branches of the Mafia, or just plain serial en­ trepreneur ship. Thus I rail against "sterile skepticism," the kind we can do nothing about, and against the exceedingly theoretical language problems that have made much of modern philosophy largely irrelevant to what is derisively c alled the "general public." (In the past, for better or worse, those rare philosophers and thinkers who were not self-standing depended on a patron's s upport. T oday academics in abstract disciplines depend on one another's opinion, without external c hecks, w ith the severe occasional P R O L O G U E xxvii p athological result of t urning t heir pursuits i nto insular prowess-showing c ontests. W hatever the shortcomings of the old system, at least it enforced some s tandard of relevance.) T he p hilosopher Edna Ullmann-Margalit detected an inconsistency in this book and asked me to justify the use of the precise metaphor of a B lack Swan t o describe the unknown, the abstract, and imprecise uncertain— white ravens, pink elephants, or evaporating denizens of a remote planet orbiting Tau Ceti. Indeed, she caught me red handed. There is a contradiction; this book is a story, and I prefer to use stories and vignettes to illustrate our gullibility about stories and our preference for the dangerous compression of narratives. Y ou need a story to displace a story. Metaphors and stories are far more potent ( alas) t han ideas; they are also easier to remember and more fun to read. If I have to go after what I c all t he narrative disciplines, my best t ool is a narrative. Ideas come and go, stories stay. T HE B OTTOM L INE T he beast in this book is not just the bell curve and the self-deceiving statistician, n or the Platonified scholar who needs theories to fool h imself w ith. It is the drive to "focus" on what makes sense to us. Living on our planet, today, requires a lot more imagination t han w e are made to have. We l ack imagination and repress it in others. Note that I am not relying in this book on the beastly method of c ollecting selective "corroborating evidence." For reasons I explain in Chapter 5, I c all this overload of examples naïve empiricism—successions of anecdotes selected to fit a story do not constitute evidence. Anyone looking for confirmation will find enough of it to deceive himself—and no doubt his peers.* The B lack S wan idea is based on the structure of randomness in empirical reality. T o summarize: in this (personal) essay, I stick my neck out and make a c laim, against many of our habits of thought, that our world is dominated by the extreme, the unknown, and the very improbable (improbable ac* It is also naïve empiricism to provide, in support of some argument, series of eloquent confirmatory quotes by dead authorities. By searching, you can always find someone who made a well-sounding statement that confirms your point of view— and, on every topic, it is possible to find another dead thinker who said the exact opposite. Almost all of my non-Yogi Berra quotes are from people I disagree with. xxviii PROLOGUE c ording our current knowledge)—and all the while we spend our time en­ gaged in small talk, focusing on the known, and the repeated. This implies the need to use the extreme event as a starting point and not treat it as an e xception t o be pushed under t he rug. I also make the bolder (and more a nnoying) c laim that in spite of our progress and the growth in knowl­ edge, o r perhaps because o f such progress and growth, the future will be i ncreasingly less predictable, while both h uman n ature and social " sci­ ence" seem to conspire to hide the idea from us. Chapters Map T he s equence of this book follows a simple l ogic; it flows from what can be l abeled purely literary (in subject and treatment) to what can be deemed entirely scientific (in subject, though not in treatment). Psychology will be mostly present in Part One and in the early p art o f Part Two; busi­ ness a nd natural s cience will be dealt with mostly in the second h alf o f Part T wo a nd in Part Three. Part One, "Umberto E co's A ntilibrary," is mostly about how we perceive historical and current events and what distortions are present in such perception. Part Two, "We Just Can't Predict," is about our errors in dealing with the future and the unadvertised limita­ tions of some "sciences"—and what to do about these limitations. Part T hree, " Those Gray Swans of Extremistan," goes deeper into the topic of e xtreme e vents, explains how the bell curve (that great intellectual fraud) is g enerated, and reviews the ideas in tlie natural and social sciences l oosely lumped under t he label "complexity." Part Four, "The End," will be very short. I derived an unexpected amount of enjoyment writing this book—in fact, it j ust wrote itself—and I hope that the reader will experience the same. I c onfess t hat I got hooked on this withdrawal into pure ideas after the con­ straints of an active and transactional life. After this book is published, my aim is to spend time away from the clutter of public activities in order to think about my philosophical-scientific idea in total tranquillity. ssssff—-' he writer Umberto Eco belongs to that small class of scholars who are e ncyclopedic, insightful, and nondull. He is the owner of a large per­ sonal l ibrary (containing thirty thousand b ooks), a nd separates visi­ tors into two categories: those who react with "Wow! Signore professore dottore E co, w hat a library you have! How many of these books have you r ead?" a nd the others—a very small minority—who get the point that a private library is not an ego-boosting appendage but a research tool. Read b ooks a re far less valuable t han u nread ones. The library should contain as much of what you do not know as your financial means, mortgage r ates, a nd the currently tight real-estate market allow you to put there. Y ou will accumulate more knowledge and more books as you grow older, and the growing number of unread books on the shelves will look at you menacingly. I ndeed, the more you know, the larger the rows of unread b ooks. Let us c all this collection of unread books an antilibrary. W e tend to treat our knowledge as personal property to be protected and defended. It is an ornament that allows us to rise in the pecking order. So this tendency to offend E co's l ibrary sensibility by focusing on the known is a h uman b ias that extends to our mental operations. People d on't w alk around with anti-résumés telling you what they have not stud­ ied o r experienced (it's the job of their competitors to do that), but it would be nice if they did. Just as we need to stand library logic on its head, we will work on standing knowledge i tself on its head. Note that the B lack 2 UMBERTO ECO'S ANTILIBRARY S wan c omes from our misunderstanding of the likelihood of surprises, those unread books, because we take what we know a little too seriously. L et us c all a n antischolar—someone who focuses on the unread books, and makes an attempt not to treat his knowledge as a treasure, or even a possession, or even a self-esteem enhancement device—a skeptical empiri­ cist. T he c hapters in this section address the question of how we humans deal with knowledge—and our preference for the anecdotal over the empirical. Chapter 1 presents the B lack S wan as grounded in the story of my own ob­ session. I will make a central distinction between the two varieties of ran­ domness in Chapter 3. After that, Chapter 4 briefly r eturns t o the B lack S wan p roblem in its original form: how we tend to generalize from what we see. Then I present the three facets of the same B lack S wan problem: a) The error of confirmation, o r how we are likely to undeservedly scorn the virgin p art o f the library (the tendency to look at what confirms our knowledge, not our ignorance), in Chapter 5; b) the narrative fallacy, o r how we fool ourselves with stories and anecdotes (Chapter 6); c) how emotions get in the way of our inference (Chapter 7); and d) the problem of silent evidence, o r the tricks history uses to hide B lack Swans from us (Chapter 8). Chapter 9 discusses the lethal fallacy of building knowledge from the world of games. Chapter One THE A PPRENTICESHIP OF AN E MPIRICAL S KEPTIC Anatomy of a Black Swan—The triplet of opacity—Reading books back­ ward—The rearview mirror—Everything becomes explainable—Always talk to the driver (with caution)—History doesn't crawl; it jumps—"It was so unexpected"—Sleeping for twelve hours T his is not an autobiography, so I will skip the scenes of war. Actually, even if it were an autobiography, I would still skip the scenes of war. I can­ not compete with action movies or memoirs of a dventurers m ore accom­ plished t han myself, so I will stick to my specialties of chance and uncertainty. A NATOMY O F A B LACK S WAN F or m ore t han a m illennium the eastern Mediterranean seaboard called Syria L ibanensis, or Mount Lebanon, had been able to accommodate at least a dozen different sects, ethnicities, and beliefs—it worked like magic. T he p lace resembled major cities of the eastern Mediterranean (called the L evant) m ore t han it did the other p arts in the interior of the Near East (it was easier to move by ship t han by land t hrough t he mountainous ter­ rain). T he Levantine cities were mercantile in nature; people dealt with one another according to a clear protocol, preserving a peace conducive 4 UMBERTO ECO'S ANTILIBRARY t o commerce, and they socialized quite a bit across communities. This millennium of peace was interrupted only by small occasional friction within M oslem and Christian communities, rarely between Christians and M oslems. W hile the cities were mercantile and mostly Hellenistic, the mountains had been settled by all manner of religious minorities who c laimed t o have fled both the Byzantine and Moslem orthodoxies. A mountainous terrain is an ideal refuge from the mainstream, except that your enemy is the other refugee competing for the same type of rugged real e state. T he mosaic of cultures and religions there was deemed an example o f c oexistence: C hristians of all varieties (Maronites, Armenians, GrecoSyrian B yzantine Orthodox, even Byzantine Catholic, in addition to the few R oman Catholics left over from the Crusades); Moslems (Shiite and S unni); D ruzes; and a few J ews. I t was taken for granted that people learned to be tolerant there; I recall how we were t aught in school how far more civilized and wiser we were t han t hose in the Balkan communities, where not only did the locals refrain from bathing but also fell prey to fractious fighting. Things appeared to be in a state of stable equilibrium, evolving out of a historical tendency for betterment and tolerance. The terms balance a nd equilibrium w ere often used. B oth sides of my family came from the Greco-Syrian community, the last Byzantine outpost in northern Syria, which included what is now c alled L ebanon. Note that the Byzantines called themselves "Romans"— Roumi (plural Roum) in the local languages. We originate from the olivegrowing area at the base of Mount Lebanon—we chased the Maronite Christians into the mountains in the famous battle of Amioun, my ances­ tral village. S ince t he Arab invasion in the seventh century, we had been living in mercantile peace with the Moslems, with only some occasional harassment by the Lebanese Maronite Christians from the mountains. By some (literally) Byzantine arrangement between the Arab rulers and the B yzantine e mperors, we managed to pay taxes to both sides and get pro­ tection f rom both. We thus m anaged to live in peace for more t han a mil­ lennium almost devoid of bloodshed: our last t rue p roblem was the later troublemaking crusaders, not the Moslem Arabs. The Arabs, who seemed interested only in warfare (and poetry) and, later, the Ottoman Turks, who seemed only concerned with warfare (and pleasure), left to us the un­ interesting p ursuit o f commerce and the less dangerous one of scholarship (like t he translation of Aramaic and Greek t exts). B y a ny s tandard t he country called Lebanon, to which we found our­ selves suddenly incorporated after the fall of the Ottoman Empire, in the THE APPRENTICESHIP OF AN EMPIRICAL SKEPTIC 5 early twentieth century, appeared to be a stable paradise; it was also cut in a w ay to be predominantly Christian. People were suddenly brainwashed to believe in the nation-state as an entity. * T he Christians convinced themselves t hat they were at the origin and center of what is loosely called Western culture yet with a window on the East. In a classical case of static t hinking, nobody took into account the differentials in birthrate between communities and it was assumed that a slight Christian majority would remain permanent. Levantines had been granted Roman citizenship, which allowed Saint Paul, a Syrian, to travel freely t hrough t he ancient w orld. People felt connected to everything they felt was worth connecting to; the place was exceedingly open to the world, with a vastly sophisticated lifestyle, a prosperous economy, and temperate weather just like C alifornia, with snow-covered mountains jutting above the Mediterranean. It attracted a collection of spies (both Soviet and Western), prostitutes (blondes), writers, poets, drug d ealers, adventurers, compulsive gamblers, tennis players, après-skiers, and merchants—all professions that complement one another. Many people acted as if they were in an old J ames B ond movie, or the days when playboys smoked, d rank, a nd, instead of going to the gym, cultivated relationships with good tailors. T he m ain attribute of paradise was there: cabdrivers were said to be polite (though, from what I remember, they were not polite to me). True, with hindsight, the place may appear more Elysian in the memory of people t han i t actually was. I w as too young to taste the pleasures of the place, as I became a rebellious idealist and, very early on, developed an ascetic taste, averse to the ostentatious signaling of wealth, allergic to Levantine culture's overt pursuit o f luxury and its obsession with things monetary. As a teenager, I could not wait to go settle in a metropolis with fewer J ames B ond types a round. Y et I recall something that felt special in the intellectual air. I attended the French lycée that had one of the highest success rates for the French baccalauréat (the high school degree), even in the subject o f the French language. French was spoken there with some purity: as in prerevolutionary Russia, the Levantine Christian and Jewish patrician class (from Istanbul to Alexandria) spoke and wrote formal French as a language of distinction. The most privileged were sent to school in * It is remarkable how fast and how effectively you can c onstruct a nationality with a flag, a few speeches, and a national anthem; to this day I avoid the label "Lebanese," preferring the less restrictive "Levantine" designation. 6 UMBERTO ECO'S ANTILIBRARY F rance, as both my grandfathers were—my paternal namesake in 1912 and my mother's father in 1 929. T wo thousand years earlier, by the same i nstinct o f linguistic distinction, the snobbish Levantine patricians wrote in Greek, not the vernacular Aramaic. (The New Testament was written in the bad l ocal p atrician Greek of our capital, Antioch, prompting Nietz­ sche t o shout that "God spoke bad Greek.") And, after Hellenism de­ clined, t hey took up Arabic. So in addition to being called a "paradise," the place was also said to be a miraculous crossroads of what are superfi­ cially t agged "Eastern" and "Western" cultures. On Walking Walks M y e thos was shaped when, at fifteen, I was put in j ail for (allegedly) at­ tacking a p oliceman with a slab of concrete during a student riot—an in­ cident with strange ramifications since my grandfather was then the minister of the interior, and the person who signed the order to crush our revolt. One of the rioters was shot dead when a policeman who had been hit on the head with a stone panicked and randomly opened fire on us. I r ecall being at the center of the riot, and feeling a huge satisfaction upon m y capture while my friends were scared of both prison and their parents. W e frightened the government so much that we were granted amnesty. T here w ere some obvious benefits in showing one's ability to act oh one's opinions, and not compromising an inch to avoid "offending" or bothering others. I was in a state of rage and d idn't c are what my parents (and grandfather) thought of me. This made them quite scared of me, so I c ould n ot afford to back down, or even blink. Had I concealed my partici­ pation in the riot (as many friends did) and been discovered, instead of being openly defiant, I am certain that I would have been treated as a b lack s heep. It is one thing to be cosmetically defiant of authority by wear­ ing unconventional clothes—what social scientists and economists c all " cheap signaling"—and another to prove willingness to translate belief i nto action. M y p aternal uncle was not too bothered by my political ideas (these c ome a nd go); he was outraged that I used them as an excuse to dress slop­ pily. T o him, inelegance on the p art o f a c lose family member was the mor­ tal offense. P ublic k nowledge of my capture had another major benefit: it allowed me to avoid the usual outward signs of teenage rebellion. I discovered that THE APPRENTICESHIP OF AN EMPIRICAL SKEPTIC 7 it is much more effective to act like a nice guy and be "reasonable" if you prove willing to go beyond just verbiage. You can afford to be compassionate, lax, and courteous if, once in a while, when it is least expected of you, but completely justified, you sue someone, or savage an enemy, just to show that you can walk the walk. "Paradise" Evaporated T he L ebanese "paradise" suddenly evaporated, after a few bullets and mortar shells. A few months after my j ail e pisode, after close to thirteen centuries of remarkable ethnic.coexistence, a B lack S wan, coming out of nowhere, transformed the place from heaven to hell. A fierce civil w ar began between Christians and Moslems, including the Palestinian refugees who took the Moslem side. It was brutal, since the combat zones were in the center of the town and most of the fighting took place in residential areas (my high school was only a few h undred feet from the war zone). T he conflict lasted more t han a d ecade and a half. I will not get too descriptive. It may be that the invention of gunfire and powerful weapons turned w hat, in the age of the sword, would have been just tense conditions into a spiral of uncontrollable tit-for-tat warfare. Aside from the physical destruction (which t urned o ut to be easy to reverse with a few motivated contractors, bribed politicians, and naïve bondholders), the war removed much of the crust of sophistication that had made the Levantine cities a continuous center of great intellectual refinement for t hree thousand years. Christians had been leaving the area since O ttoman times—those who moved to the West took Western first names and melded in. Their exodus accelerated. The number of cultured people dropped b elow some critical level. Suddenly the place became a vacuum. Brain d rain is h ard t o reverse, and some of the old refinement may be lost forever. The Starred Night T he n ext time you experience a blackout, take some solace by looking at the sky. You will not recognize it. Beirut had frequent power s hutdowns during the war. B efore p eople bought their own generators, one side of the sky was clear at night, owing to the absence of light pollution. That was the side of town farthest from the combat zone. People deprived of televi- 8 UMBERTO ECO'S ANTIUBRARY s ion d rove to watch the e rupting lights of nighttime battles. They ap­ peared to prefer the risk of being blown up by mortar shells to the bore­ dom of a dull evening. S o y ou could see the stars with great clarity. I had been told in high s chool t hat the planets are in something called equilibrium, so we did not have to worry about the stars hitting us unexpectedly. To me, that eerily r esembled t he stories we were also told about the "unique historical sta­ bility" o f Lebanon. The very idea of assumed equilibrium bothered me. I l ooked a t the constellations in the sky and did not know what to believe. H ISTORY A ND T HE T RIPLET O F O PACITY H istory is opaque. You see what comes out, not the script that produces e vents, t he generator of history. There is a fundamental incompleteness in your grasp of such events, since you do not see what's inside the box, how the mechanisms work. What I c all t he generator of historical events is dif­ ferent f rom the events themselves, much as the minds of the gods cannot be r ead just by witnessing their deeds. You are very likely to be fooled about their intentions. T his d isconnect is similar to the difference between the food you see on the table at the restaurant and the process you can observe in the kitchen. ( The l ast time I brunched at a certain Chinese restaurant on Canal Street in downtown Manhattan, I saw a rat coming out of the kitchen.) T he h uman m ind suffers from three ailments as it comes into contact with history, what I c all t he triplet of opacity. T hey are: a. the illusion of understanding, or how everyone thinks he knows what is going on in a world that is more complicated (or random) t han t hey realize; b . t he retrospective distortion, or how we can assess matters only after t he f act, as if they were in a rearview mirror (history seems c learer a nd more organized in history books t han in empirical real­ ity); a nd c . t he overvaluation of factual information and the handicap of authoritative and learned people, particularly when they create categories—when they "Platonify." THE A P P R E N T I C E S H I P OF AN E M P I R I C A L SKEPTIC 9 Nobody Knows What's Going On T he first leg of the triplet is the pathology of thinking that the world in which we live is more understandable, more explainable, and therefore more predictable t han it actually is. I w as constantly told by adults t hat the war, which ended up lasting c lose t o seventeen years, was going to end in "only a matter of days." T hey seemed quite confident in their forecasts of d uration, as can be evi­ denced by the number of people who sat waiting in hotel rooms and other temporary quarters in Cyprus, Greece, France, and elsewhere for the war to finish. One uncle kept telling me how, some thirty years earlier, when the rich Palestinians fled to Lebanon, they considered it a very temporary s olution (most of those still alive are still there, six decades later). Yet when I asked him if it was going to be the same with our conflict, he replied, "No, of course not. This place is different; it has always been dif­ ferent." Somehow what he detected in others did not seem to apply to him. T his d uration blindness in the middle-aged e xile is quite a widespread disease. Later, when I decided to avoid the exile's obsession with his roots ( exiles' r oots penetrate their personalities a bit too deeply), I studied e xile literature precisely to avoid the t raps o f a consuming and obsessive nostal­ gia. T hese exiles seemed to have become prisoners of their memory of idyl­ lic origin—they sat together with other prisoners of the past and spoke about the old country, and ate their traditional food while some of their folk music played in the background. They continuously ran counterfac­ tuals in their minds, generating alternative scenarios that could have hap­ pened and prevented these historical r uptures, such as " i f the Shah had not named this incompetent man as prime minister, we would still be there." It was as if the historical r upture h ad a specific cause, and that the catastrophe could have been averted by removing that specific cause. So I pumped every displaced person I could find for information on their be­ havior during e xile. A lmost all act in the same way. One hears endless stories of Cuban refugees with suitcases still h alf p acked who came to Miami in the 1 960s for "a matter of a few days" after the installation of the Castro regime. And of Iranian refugees in Paris and London who fled the Islamic Republic in 1 9 7 8 thinking that their ab­ sence w ould be a b rief v acation. A few are still waiting, more t han a q uar­ ter century later, for the r eturn. M any Russians who left in 1 9 1 7 , such as 10 UMBERTO ECO'S ANTIUBRARY t he writer Vladimir Nabokov, settled in B erlin, p erhaps t o be close enough for a q uick r eturn. N abokov himself lived all his life in temporary hous­ ing, in both indigence and luxury, ending his days at the Montreux Palace hotel on Lake Geneva. T here w as, of course, some wishful thinking in all of these forecasting errors, the blindness of hope, but there was a knowledge problem as well. T he d ynamics of the Lebanese conflict had been patently unpredictable, yet p eople's reasoning as they examined the events showed a constant: al­ most all those who cared seemed convinced that they understood what was going on. Every single day brought occurrences that lay completely outside their forecast, but they could not figure out that they had not fore­ cast t hem. Much of what took place would have been deemed completely c razy w ith respect to the past. Yet it did not seem that crazy after the e vents. T his retrospective plausibility causes a discounting of the rarity and conceivability of the event. I later saw the exact same illusion of un­ derstanding in business success and the financial markets. History Does Not Crawl, It Jumps L ater, u pon r eplaying the wartime events in my memory as I formulated my ideas on the perception of random events, I developed the governing impression that our minds are wonderful explanation machines, capable o f m aking sense out of almost anything, capable of mounting explana­ tions for all manner of phenomena, and generally incapable of accepting the idea of unpredictability. These events were unexplainable, but intelli­ gent people thought they were capable of providing convincing expla­ nations for them—after the fact. Furthermore, the more intelligent the person, the better sounding the explanation. What's more worrisome is that all these beliefs and accounts appeared to be logically coherent and devoid of inconsistencies. S o I left the place called Lebanon as a teenager, but, since a large num­ ber o f my relatives and friends remained there, I kept coming back to visit, e specially during t he hostilities. The war was not continuous: there were periods of fighting interrupted by "permanent" solutions. I felt closer to my roots d uring t imes of trouble and experienced the urge to come back and show s upport t o those left behind who were often demoralized by the d epartures—and e nvious of the fair-weather friends who could seek e co­ nomic a nd personal safety only to r eturn for vacations during these o cca­ sional lulls in the conflict. I was unable to work or read when I was T H E A P P R E N T I C E S H I P O F A N E M P I R I C A L S K E P T I C 11 outside Lebanon while people were dying, but, paradoxically, I was less concerned by the events and able to pursue m y intellectual interests guiltfree when I was inside L ebanon. Interestingly, people partied quite heavily during t he war and developed an even bigger taste for luxuries, making the visits quite attractive in spite of the fighting. T here were a few difficult questions. How could one have predicted that people who seemed a model of tolerance could become the p urest o f barbarians overnight? Why was the change so abrupt? I initially thought that perhaps the Lebanese war was truly not possible to predict, unlike other c onflicts, a nd that the Levantines were too complicated a race to figure out. Later I slowly realized, as I started to consider all the big events in history, that their irregularity was not a l ocal p roperty. T he L evant has been something of a mass producer of consequential events nobody saw coming. Who predicted the rise of Christianity as a dominant religion in the Mediterranean basin, and later in the Western world? The Roman chroniclers of that period did not even take note of the new religion—historians of Christianity are baffled by the absence of contemporary mentions. Apparently, few of the big guns took the ideas of a seemingly heretical Jew seriously enough to think that he would leave traces for posterity. We only have a single contemporary reference to Jesus o f N azareth—in The Jewish Wars o f Josephus—which i tself m ay have been added l ater by a devout copyist. How about the competing religion that emerged seven centuries later; who forecast that a collection of horsemen would spread their empire and Islamic law from the Indian subcontinent to Spain in just a few years? Even more t han t he rise of Christianity, it w as the spread of Islam (the third edition, so to speak) that carried full unpredictability; many historians looking at the record have been taken a back by the swiftness of the change. Georges Duby, for one, expressed his amazement about how quickly c lose t o ten centuries of Levantine Hellenism were blotted out "with a strike of a sword." A later holder of the same history chair at the Collège de France, Paul V eyne, a ptly talked about religions spreading "like bestsellers"—a comparison that indicates unpredictability. These kinds of discontinuities in the chronology of events did not make the historian's profession too easy: the studious examination o f the past in the greatest of detail does not teach you much about the mind of History; it only gives you the illusion of u nderstanding i t. History and societies do not crawl. They make jumps. They go from fracture to fracture, with a few vibrations in between. Yet we (and historians) like to believe in the predictable, small incremental progression. 12 U M B E R T O E C O ' S ANTIUBRARY I t s truck me, a b elief t hat has never left me since, that we are just a great machine for looking backward, and that humans are great at selfdelusion. Every year that goes by increases my b elief in this distortion. Dear Diary: On History Running Backward E vents p resent themselves to us in a distorted way. Consider the n ature o f information: of the millions, maybe even trillions, of small facts that pre­ vail b efore an event occurs, only a few will t urn o ut to be relevant later to your u nderstanding o f what happened. Because your memory is limited and filtered, you will be inclined to remember those data that subsequently match the f acts, unless you are like the eponymous Funes in the short story b y J orge Luis B orges, " Funes, the Memorious," who forgets nothing and seems c ondemned to live with the b urden o f the accumulation of un­ processed i nformation. (He does not manage to live too long.) I h ad my first exposure to the retrospective distortion as follows. Dur­ ing my childhood I had been a voracious, if unsteady, reader, but I spent the first phase of the war in a basement, diving body and soul into all man­ ner of books. S chool w as closed and it was raining mortar shells. It is dreadfully boring to be in basements. My initial worries were mostly about how to fight boredom and what to read next*—though being f orced t o read for lack of other activities is not as enjoyable as reading out o f o ne's own volition. I wanted to be a philosopher (I still do), so I felt that I needed to make an investment by forcibly studying others' ideas. Cir­ cumstances m otivated me to study t heoretical and general accounts of wars and conflicts, trying to get into the guts of History, to get into the workings of that big machine that generates events. Surprisingly, t he book that influenced me was not written by someone in the thinking business but by a journalist: William Shirer's Berlin Diary: The Journal of a Foreign Correspondent, 1934-1941. Shirer was a radio correspondent, famous for his book The Rise and Fall of the Third Reich. I t o ccurred to me that the Journal offered an unusual p erspective. I had al­ ready read (or read about) the works of Hegel, Marx, Toynbee, Aron, and F ichte o n the philosophy of history and its properties and thought that I had a vague idea of the notions of dialectics, to the extent that there was * Benoît Mandelbrot, who had a similar experience at about the same age, though close to four decades earlier, remembers his own war episode as long stretches of painful boredom punctuated by brief m oments of e xtreme fear. T H E A P P R E N T I C E S H I P O F A N E M P I R I C A L S K E P T I C 13 s omething to u nderstand in these theories. I did not grasp much, except that history had some logic and that things developed t hrough c ontradic­ tion (or opposites) in a way that elevated mankind into higher forms of s ociety—that k ind of thing. This sounded awfully similar to the theorizing around me about the war in Lebanon. To this day I surprise people who put the ludicrous question to me about what books "shaped my thinking" by telling them that this book t aught m e (albeit inadvertently) the most about philosophy and theoretical history—and, we will see, about s cience as well, since I learned the difference between forward and backward p rocesses. H ow? Simply, the diary p urported t o describe the events as they were taking place, n ot after. I was in a basement with history audibly unfolding a bove me (the sound of mortar shells kept me up all night). I was a teenager attending the funerals of c lassmates. I w as experiencing a nontheoretical unfolding of History and I was reading about someone apparently e xperiencing h istory as it went along. I made efforts to mentally produce a m ovielike representation of the future and realized it was not so obvious. I realized that if I were to start writing about the events later they would seem m ore . . . historical. T here was a difference between the before a nd the after. T he j ournal was p urportedly w ritten without Shirer knowing what was going to h appen n ext, when the information available to him was not corrupted by the subsequent outcomes. S ome c omments here and there were quite illuminating, particularly those concerning the French b elief t hat Hitler was a transitory phenomenon, which explained their l ack o f preparation and subsequent rapid capitulation. At no time was the extent o f the ultimate devastation deemed possible. W hile we have a highly unstable memory, a diary provides indelible facts r ecorded more or less immediately; it t hus a llows the fixation of an unrevised perception and enables us to later study events in their own c ontext. A gain, it is the p urported m ethod of description of the event, not its execution, that was important. In f act, it is likely that Shirer and his editors did some cheating, since the book was published in 1 9 4 1 and publishers, I am told, are in the business of delivering texts to the general public instead of providing faithful depictions of the authors' mind-sets stripped of retrospective distortions. (By "cheating," I mean re­ moving at the time of publication elements that did not t urn o ut to be relevant to what happened, t hus e nhancing those that may interest the public. Indeed the editing process can be severely distorting, particu- 14 UMBERTO ECO'S ANTILIBRARY l arly w hen the author is assigned what is called a "good editor.") Still, e ncountering Shirer's book provided me with an intuition about the work­ ings of history. One would suppose that people living through the begin­ ning of W WII h ad an inkling that something momentous was taking p lace. N ot at all.* S hirer's diary turned out to be a training program in the dynamics of uncertainty. I wanted to be a philosopher, not knowing at the time what most professional philosophers did for a living. The idea led me to adven­ ture (rather to the adventurous practice of uncertainty) and also to math­ ematical a nd scientific p ursuits i nstead. Education in a Taxicab I will introduce the third element of the triplet, the curse of learning, as f ollows. I c losely watched my grandfather, who was minister of defense, and later minister of the interior and deputy p rime minister in the early days of the war, before the fading of his political role. In spite of his posi­ tion he did not seem to know what was going to happen any more than did his driver, Mikhail. But unlike my grandfather, Mikhail used to repeat " God k nows" as his main commentary on events, transferring the task of understanding higher up. I n oticed that very intelligent and informed persons were at no advan­ tage over cabdrivers in their predictions, but there was a crucial differ­ ence. C abdrivers did not believe that they understood as much as learned people—really, they were not the experts and they knew it. Nobody knew anything, but elite thinkers thought that they knew more than the rest be­ cause t hey were elite thinkers, and if you're a member of the elite, you au­ tomatically k now more than the nonelite. It is not just knowledge but information that can be of dubious value. It c ame to my notice that almost everybody was acquainted with current events in their smallest details. The overlap between newspapers was so * T he historian Niall Ferguson showed t hat, despite all the standard accounts of the buildup to the Great War, which describe "mounting tensions" and "escalating crises," the conflict c ame as a surprise. Only retrospectively was it seen as unavoid­ able by backward-looking historians. Ferguson used a clever empirical argument t o make his point: he looked at the prices of imperial bonds, which normally in­ clude investors' anticipation o f government's financing needs and decline in expec­ tation o f conflicts since w ars cause severe deficits. But bond prices did not reflect the anticipation of war. N ote t hat this study illustrates, in addition, how working with prices can provide a good understanding o f history. T H E A P P R E N T I C E S H I P O F A N E M P I R I C A L S K E P T I C 15 large that you would get less and less information the more you read. Yet everyone was so eager to become familiar with every f act t hat they read every freshly printed document and listened to every radio station as if the great answer was going to be revealed to them in the next bulletin. People b ecame e ncyclopedias of who had met with whom and which politician said what to which other politician (and with what tone of v oice: " Was he more friendly t han u sual?"). Yet to no avail. C LUSTERS I a lso noticed during t he Lebanese war that journalists tended to cluster not necessarily a round t he same opinions but frequently a round t he same framework of analyses. They assign the same importance to the same sets o f c ircumstances and cut reality into the same categories—once again the manifestation of Platonicity, the desire to cut reality into crisp shapes. What Robert F isk c alls " hotel journalism" further increased the mental contagion. While Lebanon in earlier journalism was p art o f the Levant, i.e., the eastern Mediterranean, it now suddenly became p art o f the Mid­ dle East, as if someone had managed to transport it closer to the sands of Saudi Arabia. The island of Cyprus, a round s ixty miles from my village in northern Lebanon, and with almost identical food, churches, and habits, suddenly became p art o f Europe (of course the natives on both sides be­ came s ubsequently conditioned). While in the past a distinction had been d rawn between Mediterranean and non-Mediterranean ( i.e., b etween the olive oil and the butter), in the 1 970s t he distinction suddenly became that between Europe and non-Europe. Islam being the wedge between the two, one does not know where to place the indigenous Arabic-speaking Chris­ tians (or J ews) in that story. Categorizing is necessary for humans, but it b ecomes p athological when the category is seen as definitive, preventing people from considering the fuzziness of boundaries, let alone revising their categories. Contagion was the culprit. If you selected one h undred independent-minded journalists capable of seeing factors in isolation from one another, you would get one h undred different opinions. But the process of having these people report in lockstep caused the dimensional­ ity o f the opinion set to shrink considerably—they converged on opinions and used the same items as causes. For instance, to d epart f rom Lebanon for a m oment, all reporters now refer to the "roaring eighties," assuming that there was something particularly distinct about that exact decade. And during t he Internet bubble of the late 1 990s, j ournalists agreed on 16 UMBERTO ECO'S ANTILIBRARY c razy i ndicators as explanatory of the quality of worthless companies that everyone wanted very badly.* I f y ou want to see what I mean by the arbitrariness of c ategories, c heck t he situation of polarized politics. The next time a Martian visits earth, try to explain to him why those who favor allowing the elimination of a fetus in the mother's womb also oppose capital punishment. Or try to explain to him why those who accept abortion are supposed to be favorable to high taxation but against a strong military. Why do those who prefer s ex­ ual freedom need to be against individual economic liberty? I n oticed the absurdity of clustering when I was quite young. By some f arcical t urn o f events, in that civil w ar of Lebanon, Christians became pro-free market and the capitalistic system—i.e., what a journalist would c all " the Right"—and the Islamists became socialists, getting support f rom C ommunist regimes {Pravda, t he organ of the Communist regime, c alled t hem "oppression fighters," though subsequently when the R us­ sians invaded Afghanistan, it was the Americans who sought association with bin Laden and his Moslem peers). T he b est way to prove the arbitrary character of these categories, and the contagion effect t hey produce, is to remember how frequently these c lusters reverse in history. Today's alliance between Christian fundamen­ talists a nd the Israeli lobby would certainly seem puzzling to a nineteenthcentury intellectual—Christians used to be anti-Semites and Moslems were the protectors of the J ews, w hom they preferred to Christians. L iber­ tarians used to be left-wing. What is interesting to me as a probabilist is that some random event makes one g roup t hat initially supports an issue ally i tself w ith another g roup t hat s upports a nother issue, thus causing the two items to fuse and unify . . . until the surprise of the separation. C ategorizing a lways produces reduction in true c omplexity. It is a manifestation of the B lack S wan generator, that unshakable Platonicity that I defined in the Prologue. Any reduction of the world around us can have explosive consequences since it rules out some sources of uncer­ tainty; it drives us to a misunderstanding of the fabric of the world. For in­ stance, y ou may think that radical Islam (and its values) are your allies against the threat of Communism, and so you may help them develop, until they send two planes into downtown Manhattan. * We will see in Chapter 1 0 some clever quantitative tests done to prove such herding; they show t hat, in many subject m atters, the distance between opinions is remark­ ably n arrower t han the distance between the average o f opinions and truth. T H E A P P R E N T I C E S H I P O F A N E M P I R I C A L S K E P T I C 17 It was a few years after the beginning of the Lebanese war, as I was at­ tending the Wharton S chool, a t the age of twenty-two, that I was hit with the idea of efficient markets—an idea that holds that there is no way to de­ rive profits from t raded securities since these instruments have automati­ cally i ncorporated all the available information. Public information can therefore be useless, particularly to a businessman, since prices can al­ ready "include" all such information, and news shared with millions gives you no real advantage. O dds a re that one or more of the h undreds o f mil­ lions o f other readers of such information will already have bought the security, thus pushing up the price. I then completely gave up reading news­ papers and watching television, which freed up a considerable amount of time (say one hour or more a day, enough time to read more t han a hun­ dred a dditional books per year, which, after a couple of decades, starts mounting). But this argument was not quite the entire reason for my dic­ tum in this book to avoid the newspapers, as we will see further benefits in avoiding the toxicity of information. It was initially a great excuse to avoid keeping up with the minutiae of business, a perfect alibi since I found nothing interesting about the details of the business world—inelegant, dull, pompous, greedy, unintellectual, selfish, and boring. Where Is the Show? W hy s omeone with plans to become a "philosopher" or a "scientific philosopher of history" would wind up in business school, and the Whar­ ton S chool n o less, still escapes me. There I saw that it was not merely some i nconsequential politician in a small and antique country (and his philosophical driver Mikhail) who did not know what was going on. After all, people in small countries are supposed to not know w hat is going on. W hat I saw was that in one of the most prestigious business schools in the world, in the most potent country in the history of the world, the execu­ tives o f the most powerful corporations were coming to describe what they did for a living, and it was possible that they too did not know what was going on. As a matter of fact, in my mind it was far more t han a p os­ sibility. I felt in my spine the weight of the epistemic arrogance of the h uman r ace.* I b ecame obsessive. At the time, I started becoming conscious of my * I then realized that the great strength o f the free-market system is the fact t hat c om­ pany executives don't need to know what's going on. 18 UMBERTO ECO'S ANTILIBRARY s ubject—the highly improbable consequential event. And it was not only well-dressed, testosterone-charged corporate executives who were usually f ooled b y this concentrated luck, but persons of great learning. This awareness t urned m y B lack S wan from a problem of lucky or unlucky people in business into a problem of knowledge and s cience. M y idea is that not only are some scientific results useless in real life, b ecause they un­ derestimate the impact of the highly improbable (or lead us to ignore it), but that many of them may be actually creating B lack S wans. These are not just taxonomic errors that can make you flunk a class in ornithology. I s tarted to see the consequences of the idea. 8V4 L BS L ATER F our a nd a h alf y ears after my graduation from Wharton (and 8 /4 pounds h eavier), o n October 1 9 , 1 9 8 7 , 1 w alked home from the offices o f the in­ vestment bank Credit Suisse First Boston in Midtown Manhattan to the Upper East S ide. I w alked slowly, as I was in a bewildered state. T hat day saw a traumatic financial event: the largest market d rop in (modern) history. It was all the more traumatic in that it took place at a time when we thought we had become sufficiently sophisticated with all these intelligent-talking Platonified economists (with their phony bell curve-based equations) to prevent, or at least forecast and control, big s hocks. T he d rop w as not even the response to any discernible news. The o ccurrence o f the event lay outside anything one could have imagined on the previous day—had I pointed out its possibility, I would have been c alled a l unatic. It qualified as a B lack S wan, but I did not know the ex­ pression then. I r an into a colleague of mine, Demetrius, on Park Avenue, and, as I started talking to him, an anxiety-ridden woman, losing all inhibitions, jumped into the conversation: "Hey, do the two of you know what's going o n?" P eople on the sidewalk looked dazed. Earlier I had seen a few adults silently s obbing in the t rading r oom of First Boston. I had spent the day at the epicenter of the events, with shell-shocked people r unning a round like rabbits in front of headlights. When I got home, my cousin Alexis called to tell me that his neighbor committed suicide, jumping from his upperfloor a partment. It did not even feel e erie. It felt like Lebanon, with a twist: having seen both, I was struck that financial distress could be more demor­ alizing t han w ar (just consider that financial problems and the accompa- 3 T H E A P P R E N T I C E S H I P O F A N E M P I R I C A L S K E P T I C 19 nying humiliations can lead to suicide, but war doesn't appear to do so di­ rectly). I feared a Pyrrhic victory: I had been vindicated intellectually, but I was afraid of being too right and seeing the system crumble u nder m y feet. I did not really want to be that r ight. I will always remember the late J immy P. who, seeing his net worth in the process of melting d own, k ept half-jokingly begging the price on the screen to stop moving. But I realized then and there that I did not give a hoot about the money. I experienced the strangest feeling I have ever had in my life, this deafening t rumpet signaling to me that I was right, so loudly that it made my bones vibrate. I have never had it since and will never be able to explain it to those who have never experienced it. It was a physical sensa­ tion, perhaps a m ixture of joy, p ride, and terror. And I felt v indicated? How? During the one or two years after my arrival at Wharton, I had devel­ oped a precise but strange specialty: betting on rare and unexpected events, those that were on the Platonic fold, a nd considered "inconceiv­ able" by the Platonic "experts." R ecall t hat the Platonic fold is where our representation of reality ceases to apply—but we do not know it. F or I w as early to embrace, as a day job, the profession of "quantita­ tive finance." I became a " quant" a nd trader at the same time—a q uant is a b rand of industrial scientist who applies mathematical models of uncer­ tainty to financial (or socioeconomic) data and complex financial instru­ ments. E xcept t hat I was a q uant e xactly in reverse: I studied the flaws and the limits of these models, looking for the Platonic fold w here they break d own. A lso I engaged in speculative trading, not "just tawk," which was rare for quants since they were prevented from "taking risks," their role being confined to analysis, not decision making. I was convinced that I was totally incompetent in predicting market prices—but that others were generally incompetent also but did not know it, or did not know that they were taking massive risks. Most t raders w ere just "picking pennies in front of a streamroller," exposing themselves to the high-impact rare event yet sleeping like babies, unaware of it. Mine was the only job you could do if you thought of yourself as risk-hating, risk-aware, and highly ignorant. A lso, the technical baggage that comes with being a q uant (a mixture o f applied mathematics, engineering, and statistics), in addition to the im­ mersion in practice, t urned o ut to be very useful for someone wanting to 20 UMBERTO ECO'S ANTILIBRARY be a p hilosopher. * F irst, when you spend a couple of decades doing massscale e mpirical work with data and taking risks based on such studies, you c an easily spot elements in the texture of the world that the Platonified "thinker" is too brainwashed, or threatened, to see. Second, it allowed me to become formal and systematic in my thinking instead of wallowing in the anecdotal. Finally, both the philosophy of history and epistemology (the philosophy of knowledge) seemed inseparable from the empirical study o f times series data, which is a succession of numbers in time, a sort o f h istorical document containing numbers instead of words. And num­ bers are easy to process on computers. Studying historical data makes you c onscious t hat history r uns f orward, not backward, and that it is messier t han n arrated accounts. Epistemology, the philosophy of history, and sta­ tistics a im at u nderstanding t ruths, investigating the mechanisms that gen­ erate them, and separating regularity from the coincidental in historical matters. They all address t he question of what one knows, except that they are all to be found in different buildings, so to speak. The Four-Letter Word of Independence T hat n ight, on October 1 9 , 1 9 8 7 , 1 slept for twelve h ours s traight. It w as h ard t o tell my friends, all h urt in some manner by the crash, about this feeling of vindication. Bonuses at the time were a fraction of what they are today, but if my employer, First Boston, and the financial system survived until year-end, I would get the equivalent of a fellowship. T his is sometimes called " f*** y ou money," which, in spite of its coarse­ ness, m eans that it allows you to act like a Victorian gentleman, free from slavery. It is a psychological buffer: the capital is not so large as to make you spoiled-rich, but large enough to give you the freedom to choose a * I specialized in complicated financial instruments called "derivatives," those that required advanced mathematics—but for which the errors for using the wrong m athematics were the greatest. T he subject was new and attractive enough for me t o get a d octorate in it. Note t hat I w as not able to build a career just by betting on Black Swans— there were not enough tradable opportunities. I could, on the other hand, avoid being exposed to them by protecting my portfolio against large losses. So, in order t o eliminate the dependence on randomness, I focused on technical inefficiencies between complicated instruments, and on exploiting these opportunities without e xposure t o the r are event, before they disappeared as my competitors became technologically a dvanced. L ater on in my career I discovered the easier (and less randomness laden) business of protecting, insurance-style, large portfolios against the Black Swan. T H E A P P R E N T I C E S H I P O F A N E M P I R I C A L S K E P T I C 21 new occupation without excessive consideration of the financial rewards. It shields you from prostituting your mind and frees you from outside authority—any outside authority. (Independence is person-specific: I have always been taken aback at the high number of people in whom an aston­ ishingly high income led to additional sycophancy as they became more dependent on their clients and employers and more addicted to making even more money.) While not substantial by some standards, it literally cured me of all financial ambition—it made me feel a shamed whenever I diverted time away from study for the p ursuit o f material wealth. Note that the designation /"*** you c orresponds to the exhilarating ability to pronounce that compact phrase before h anging up the phone. T hese were the days when it was extremely common for t raders t o b reak phones when they lost money. S ome r esorted to destroying chairs, t ables, o r whatever would make noise. Once, in the Chicago pits, another trader tried to strangle me and it took four security g uards t o d rag h im away. He was irate because I was standing in what he deemed his "terri­ tory." Who would want to leave such an environment? Compare it to lunches in a d rab university cafeteria with gentle-mannered professors dis­ cussing the latest departmental intrigue. So I stayed in the q uant a nd t rad­ ing businesses (I'm still there), but organized m yself t o do minimal but intense (and entertaining) work, focus only on the most technical aspects, never attend business "meetings," avoid the company of "achievers" and people in suits who d on't r ead books, and take a sabbatical year for every three on average to fill up gaps in my scientific a nd philosophical culture. T o slowly distill my single idea, I wanted to become a flâneur, a profes­ sional m editator, sit in c afés, l ounge, unglued to desks and organization structures, sleep as long as I needed, read voraciously, and not owe any ex­ planation to anybody. I wanted to be left a lone in order to build, small steps at a time, an entire system of thought based on my B lack S wan idea. Limousine Philosopher T he w ar in Lebanon and the crash of 1 9 8 7 seemed identical phenomena. It b ecame obvious to me that nearly everyone had a mental blindspot in acknowledging the role of such events: it was as if they were not able to see these mammoths, or that they rapidly forgot about them. The answer was looking straight at me: it was a psychological, p erhaps even biologi­ cal, blindness; the problem lay not in the n ature o f events, but in the way we perceived them. 22 UMBERTO ECO'S ANTILIBRARY I end this autobiographical prelude with the following story. I had no defined specialty (outside of my day j ob), a nd wanted none. When people at cocktail parties asked me what I did for a living, I was tempted to an­ swer, "I am a skeptical empiricist a nd a flaneur-reader, someone committed to getting very deep into an idea," but I made things simple by saying that I w as a limousine driver. O nce, o n a transatlantic flight, I found m yself upgraded to first class n ext t o an expensively dressed, high-powered lady dripping with gold and j ewelry w ho continuously ate nuts ( low-carb diet, perhaps), insisted on drinking only Evian, all the while reading the European edition of The Wall Street Journal. She kept trying to start a conversation in broken F rench, s ince she saw me reading a book (in French) by the sociologistphilosopher Pierre Bourdieu—which, ironically, dealt with the marks of s ocial d istinction. I informed her (in English) that I was a limousine driver, proudly insisting that I only drove "very upper-end" cars. An icy silence lasted the whole flight, and, although I could feel the tension, it allowed me to read in peace. C h a p t e r T wo YEVGENIA'S BLACK SWAN Pink glasses and success—How Yevgenia stops marrying philosophers—I told you so Five years ago, Yevgenia Nikolayevna Krasnova was an obscure and un­ published novelist, with an unusual b ackground. She was a neuroscientist with an interest in philosophy (her first three h usbands h ad been philoso­ phers), and she got it into her stubborn Franco-Russian head to express her research and ideas in literary form. She dressed up her theories as sto­ ries, and mixed them with all manner of autobiographical commentary. She avoided the journalistic prevarications of contemporary narrative nonfiction ( "On a clear April morning, John Smith left his house. . . . " ) . Foreign dialogue was always written in the original language, with trans­ lations appended like movie subtitles. She refused to dub into bad English conversations that took place in bad Italian.* No publisher would have given her the time of day, except that there was, at the time, some interest in those rare scientists who could manage to express themselves in semi-understandable sentences. A few publishers agreed to speak with her; they hoped that she would grow up and write a "popular science b ook on consciousness." She received enough attention * H er third husband was an Italian philosopher. 24 UMBERTO ECO'S ANTILIBRARY t o get the courtesy of rejection letters and occasional insulting comments instead of the far more insulting and demeaning silence. Publishers were confused by her manuscript. She could not even an­ swer their first question: "Is this fiction or nonfiction?" Nor could she re­ spond to the "Who is this book written f or?" o n the publishers' book proposal forms. She was told, "You need to u nderstand w ho your audi­ ence i s" and "amateurs write for themselves, professionals write for oth­ ers." She was also told to conform to a precise genre because "bookstores do not like to be confused and need to know where to place a book on the s helves." O ne editor protectively a dded, " This, my dear friend, will only sell t en copies, including those bought by your ex-husbands and family m embers." She h ad attended a famous writing workshop five years earlier and c ame o ut nauseated. "Writing well" seemed to mean obeying arbitrary rules that had grown into gospel, with the confirmatory reinforcement of what we c all " experience." The writers she met were learning to retrofit what was deemed successful: they all tried to imitate stories that had ap­ peared in past issues of The New Yorker—not realizing that most of what is new, by definition, cannot be modeled on past issues of The New Yorker. Even the idea of a "short story" was a me-too concept to Yevgenia. T he workshop instructor, gentle but firm in his delivery, told her that her case was utterly hopeless. Yegvenia ended up posting the entire manuscript of her main book, A Story of Recursion, o n the W eb. T here it found a small audience, which in­ cluded the shrewd owner of a small unknown publishing house, who wore pink-rimmed glasses and spoke primitive Russian (convinced that he was fluent). H e offered to publish her, and agreed to her condition to keep her t ext c ompletely unedited. He offered her a fraction of the s tandard r oyalty rate in r eturn for her editorial stricture—he had so little to lose. She ac­ cepted since she had no c hoice. It t ook five years for Yevgenia to g raduate from the "egomaniac with­ out anything to justify it, stubborn and difficult to deal with" category to "persevering, resolute, painstaking, and fiercely independent." For her b ook s lowly caught fire, b ecoming one of the great and strange successes in literary history, selling millions of copies and d rawing so-called critical a cclaim. T he s tart-up h ouse has since become a big corporation, with a ( polite) r eceptionist to greet visitors as they enter the main office. H er b ook h as been translated into forty languages (even French). You see her picture everywhere. She is said to be a pioneer of something called the Y E V G E N I A ' S B L A C K S W A N 25 C onsilient S chool. P ublishers now have a theory that "truck drivers who read books do not read books written for truck drivers" and hold that "readers despise writers who p ander t o them." A scientific paper, it is now understood, can hide trivialities or irrelevance with equations and jargon; c onsilient p rose, by exposing an idea in raw form, allows it to be judged by the public. Today, Yevgenia has stopped marrying philosophers (they argue too m uch), and she hides from the press. In classrooms, literary scholars dis­ cuss the many clues indicating the inevitability of the new style. The dis­ tinction between fiction and nonfiction is considered too archaic to withstand the challenges of modern society. It was so evident that we needed to remedy the fragmentation between art and s cience. After the fact, her talent was so obvious. M any o f the editors she later met blamed her for not coming to them, c onvinced t hat they would have immediately seen the merit in her work. In a few years, a literary scholar will write the essay "From Kundera to K rasnova," showing how the seeds of her work can be found in Kundera— a p recursor who mixed essay and metacommentary (Yevgenia never read Kundera, but did see the movie version of one of his books—there was no commentary in the movie). A prominent scholar will show how the influ­ ence o f Gregory Bateson, who injected autobiographical scenes into his s cholarly r esearch papers, is visible on every page (Yevgenia has never heard of B ateson). Yevgenia's b ook is a B lack S wan. Chapter Three T HE S PECULATOR AND THE PROSTITUTE On the critical difference between speculators and prostitutes—Fairness, un­ fairness, and Black Swans—Theory of knowledge and professional incomesHow Extremistan is not the best place to visit, except, perhaps, if you are a winner Y evgenia's rise from the second basement to s uperstar is possible in only one environment, which I c all E xtremistan.* I will soon introduce the cen­ tral distinction between the B lack S wan-generating province of Extremis­ tan and the tame, quiet, and uneventful province of Mediocristan. T HE B EST ( WORST) A DVICE W hen I play back in my mind all the "advice" people have given me, I see t hat o nly a couple of ideas have stuck w ith m e for life. T he rest has been mere words, and I am glad t hat I did not heed most of it. Most consisted o f r ecommendations such as "be measured and reasonable in your state­ ments," contradicting the B lack S wan idea, since empirical reality is not "measured," and its own version of "reasonableness" does not corre- * To those readers w ho Googled Yevgenia K rasnova, I a m sorry t o say that she is (of­ ficially) a fictional c haracter. T H E S P E C U L A T O R A N D T H E P R O S T I T U T E 27 spond to the conventional middlebrow definition. To be genuinely empiri­ cal is to reflect reality as faithfully as possible; to be honorable implies not fearing the appearance and consequences of being outlandish. The next time someone pesters you with unneeded advice, gently remind him of the fate o f the monk whom Ivan the Terrible put to d eath for delivering unin­ vited (and moralizing) advice. It works as a short-term cure. T he m ost important piece of advice was, in retrospect, bad, but it was a lso, p aradoxically, the most consequential, as it pushed m e deeper into the dynamics of the B lack S wan. It came when I was twenty-two, one F eb­ ruary a fternoon, in the corridor of a building at 3 4 0 0 W alnut Street in Philadelphia, where I lived. A second-year Wharton s tudent t old me to get a profession that is "scalable," that is, one in which you are not paid by the hour and t hus s ubject to the limitations of the amount of your labor. It was a very simple way to discriminate among professions and, from t hat, t o generalize a separation between types of uncertainty—and it led me to the major philosophical problem, the problem of induction, which is the technical name for the B lack S wan. It allowed me to t urn t he B lack Swan from a logical impasse into an easy-to-implement solution, and, as we will see in the next chapters, to ground it in the texture of empirical reality. How did career advice lead to such ideas about the n ature o f uncer­ tainty? S ome p rofessions, such as dentists, consultants, or massage profes­ sionals, c annot be scaled: there is a cap on the number of patients or clients you can see in a given period of time. If you are a prostitute, you work by the hour and are (generally) paid by the hour. Furthermore, your presence is (I assume) necessary for the service you provide. If you open a fancy r estaurant, you will at best steadily fill up the room (unless you fran­ chise i t). In these professions, no matter how highly paid, your income is subject t o gravity. Y our revenue depends o n your continuous efforts more t han on the quality of your decisions. Moreover, this kind of work is largely predictable: it will vary, but not to the point of making the income o f a single day more significant t han t hat of the rest of your life. In other words, it will not be B lack S wan driven. Yevgenia Nikolayevna would not have been able to cross the chasm between u nderdog a nd supreme hero overnight had she been a tax accountant or a hernia specialist (but she would not have been an u nderdog e ither). Other professions allow you to add zeroes to your o utput (and your in­ come), if you do well, at little or no extra effort. Now being lazy, consid­ ering laziness as an asset, and eager to free up the maximum amount of 28 UMBERTO ECO'S ANTILIBRARY t ime in my day to meditate and read, I immediately (but mistakenly) drew a c onclusion. I separated the "idea" person, who sells an intellectual prod­ uct in the form of a transaction or a piece of work, from the "labor" per­ son, who sells you his work. I f y ou are an idea person, you do not have to work hard, only think intensely. You do the same work whether you produce a hundred units or a t housand. In quant trading, the same amount of work is involved in buy­ ing a h undred s hares as in buying a h undred t housand, or even a million. It is the same phone c all, t he same computation, the same legal document, the same expenditure of brain c ells, t he same effort in verifying that the transaction is right. Furthermore, you can work from your bathtub or from a bar in R ome. Y ou can use leverage as a replacement for work! W ell, o kay, I was a little wrong about trading: one cannot work from a bathtub, but, when done right, the job allows considerable free time. T he s ame property applies to recording artists or movie actors: you let the sound engineers and projectionists do the work; there is no need to show up at every performance in order to perform. Similarly, a writer ex­ pends the same effort to attract one single reader as she would to capture several h undred m illion. J . K. Rowling, the author of the Harry Potter b ooks, does not have to write each book again every time someone wants to read it. But this is not so for a baker: he needs to bake every single piece o f b read in order to satisfy each additional customer. S o t he distinction between writer and baker, speculator and doctor, fraudster and prostitute, is a helpful way to look at the world of activities. It s eparates those professions in which one can add zeroes of income with no greater labor from those in which one needs to add labor and time (both of which are in limited supply)—in other words, those subjected to gravity. B EWARE T HE SCALABLE B ut w hy was the advice from my fellow student bad? I f t he advice was helpful, and it was, in creating a classification for ranking uncertainty and knowledge, it was a mistake as far as choices of profession went. It might have paid off for me, but only because I was l ucky a nd happened to be "in the right place at the right time," as the say­ ing goes. If I m yself h ad to give advice, I would recommend someone pick a p rofession that is not s calable! A scalable profession is good only if you are successful; they are more competitive, produce monstrous inequalities, T H E S P E C U L A T O R A N D T H E P R O S T I T U T E 29 and are far more random, with huge disparities between efforts and rewards—a few can take a large share of the pie, leaving others out en­ tirely at no fault of their own. O ne c ategory of profession is driven by the mediocre, the average, and the middle-of-the-road. In it, the mediocre is c ollectively c onsequential. T he o ther has either giants or dwarves—more precisely, a very small num­ ber o f giants and a huge number of dwarves. L et us see what is behind the formation of unexpected giants—the B lack S wan formation. The Advent of Scalability C onsider the fate of G iaccomo, a n opera singer at the end of the nine­ teenth century, before sound recording was invented. Say he performs in a small a nd remote town in central Italy. He is shielded from those big egos at La S cala in Milan and other major opera houses. He feels safe as his v ocal c ords will always be in demand somewhere in the district. There is no way for him to export his singing, and there is no way for the big guns to export theirs and threaten his l ocal f ranchise. It is not yet possible for him to store his work, so his presence is needed at every performance, just as a barber is (still) needed today for every haircut. So the total pie is un­ evenly split, but only mildly so, much like your calorie consumption. It is cut in a few pieces and everyone has a share; the big guns have larger au­ diences and get more invitations t han t he small guy, but this is not too worrisome. Inequalities exist, but let us c all t hem mild. T here is no s cala­ bility yet, no way to double the largest in-person audience without having to sing twice. Now consider the effect o f the first music recording, an invention that introduced a great deal of injustice. Our ability to reproduce and repeat performances allows me to listen on my laptop to hours of background music of the pianist Vladimir Horowitz (now extremely dead) performing R achmaninoff's Preludes, i nstead of to the l ocal R ussian émigré musician (still living), w ho is now reduced to giving piano lessons to generally untalented children for c lose t o minimum wage. Horowitz, though dead, is putting the poor man out of business. I would rather listen to Vladimir Horowitz or Arthur Rubinstein for $ 1 0 . 9 9 a C D t han p ay $ 9 . 9 9 f or one by some unknown (but very talented) g raduate o f the Juilliard S chool o r the Prague Conservatory. If you ask me why I select H orowitz, I will an­ swer that it is because of the order, rhythm, or passion, when in f act t here 30 UMBERTO ECO'S ANTIUBRARY a re probably a legion of people I have never heard about, and will never hear about—those who did not make it to the stage, but who might play j ust as well. S ome p eople naively believe that the process of unfairness started with the gramophone, according to the logic that I just presented. I disagree. I am convinced that the process started much, much earlier, with our DNA, which stores information about our selves and allows us to repeat our per­ formance w ithout our being there by spreading our genes down the genera­ tions. E volution is scalable: t he DNA that wins (whether by luck or survival advantage) will reproduce itself, like a bestselling book or a suc­ cessful r ecord, and become pervasive. Other DNA will vanish. Just con­ sider the difference between us humans (excluding financial economists and businessmen) and other living beings on our planet. Furthermore, I believe that the big transition in s ocial life c ame not with the gramophone, but when someone had the great but unjust idea to invent the alphabet, thus a llowing us to store information and reproduce it. I t accelerated further when another inventor had the even more danger­ ous and iniquitous notion of starting a printing press, thus p romoting t exts a cross boundaries and triggering what ultimately grew into a winnertake-all e cology. N ow, what was so unjust about the spread of books? The alphabet allowed stories and ideas to be replicated with high fidelity and without limit, without any additional expenditure of energy on the au­ thor's p art for the subsequent performances. He didn't even have to be alive f or them—death is often a good career move for an author. This im­ plies t hat those who, for some reason, start getting some attention can q uickly r each more minds t han o thers and displace the competitors from the bookshelves. In the days of bards and troubadours, everyone had an audience. A storyteller, like a baker or a coppersmith, had a market, and the assurance that none from far away could dislodge him from his territory. Today, a few take almost everything; the rest, next to nothing. B y t he same mechanism, the advent of the cinema displaced neighbor­ hood actors, p utting t he small guys out of business. But there is a differ­ ence. In p ursuits t hat have a technical component, like being a pianist or a brain surgeon, talent is easy to ascertain, with subjective opinion playing a r elatively small p art. T he inequity comes when someone perceived as b eing m arginally better gets the whole pie. In t he arts—say the cinema—things are far more vicious. What we call " talent" generally comes from success, rather t han its opposite. A great deal of empiricism has been done on the subject, most notably by Art De T H E S P E C U L A T O R A N D T H E P R O S T I T U T E 31 Vany, an insightful and original thinker who singlemindedly studied wild uncertainty in the movies. He showed that, sadly, much of what we as­ cribe t o skills is an after-the-fact attribution. The movie makes the actor, he claims—and a large dose of nonlinear luck makes the movie. T he success of movies depends severely on contagions. Such contagions do not just apply to the movies: they seem to affect a w ide range of cul­ tural products. It is hard for us to accept that people do not fall in love with works of art only for their own sake, but also in order to feel t hat they belong to a community. By imitating, we get closer to others—that is, other imitators. It fights solitude. T his discussion shows the difficulty in predicting outcomes in an envi­ ronment of concentrated success. So for now let us note that the division between professions can be used to understand the division between types o f r andom variables. Let us go further into the issue of knowledge, of in­ ference a bout the unknown and the properties of the known. S CALABILITY A ND G LOBALIZATION W henever y ou hear a snotty (and frustrated) European middlebrow pre­ senting his stereotypes about Americans, he will often describe them as "uncultured," "unintellectual," and "poor in math" because, unlike his peers, Americans are not into equation drills and the constructions mid­ dlebrows c all " high culture"—like knowledge of Goethe's inspirational (and central) t rip t o Italy, or familiarity with the Delft s chool of painting. Yet the person making these statements is likely to be addicted to his iPod, wear blue j eans, a nd use Microsoft Word to jot down his "cultural" state­ ments on his PC, with some Google searches here and there interrupting his composition. W ell, it so happens that America is currently far, far more creative t han these nations of museumgoers and equation solvers. It is also far m ore tolerant of bottom-up tinkering and undirected trial and error. And globalization has allowed the United States to specialize in the c re­ ative aspect of things^ the production of concepts and ideas, that is, the s calable p art o f the products, and, increasingly, by exporting j obs, s epa­ rate the less scalable components and assign them to those happy to be paid by the hour. There is more money in designing a shoe than in actually making it: Nike, D ell, a nd B oeing c an get paid for just thinking, organiz­ ing, a nd leveraging their know-how and ideas while subcontracted f acto­ ries in developing countries do the g runt w ork and engineers in cultured and mathematical states do the noncreative technical grind. The American 32 UMBERTO ECO'S ANTILIBRARY e conomy h as leveraged i tself heavily on the idea generation, which ex­ plains why losing manufacturing j obs c an be coupled with a rising stan­ dard o f living. Clearly the drawback of a world economy where the payoff g oes t o ideas is higher inequality among the idea generators together with a g reater role for both opportunity and luck—but I will leave the s ocio­ economic d iscussion for Part Three and focus here on knowledge. T RAVELS I NSIDE MEDIOCRISTAN T his s calable/nonscalable distinction allows us to make a clear-cut differ­ entiation between two varieties of uncertainties, two types of randomness. L et's play the following thought experiment. Assume that you r ound up a thousand people randomly selected from the general population and have them stand next to one another in a stadium. You can even include F renchmen ( but please, not too many out of consideration for the others in the group), Mafia members, non-Mafia members, and vegetarians. I magine t he heaviest person you can think of and add him to that sam­ ple. A ssuming he weighs three times the average, between four hundred a nd five h undred p ounds, he will rarely represent more t han a very small f raction o f the weight of the entire population (in this c ase, a bout a h alf o f a p ercent). Y ou c an get even more aggressive. If you picked the heaviest biologi­ cally p ossible h uman o n the planet (who yet can still be called a human), he would not represent more than, say, 0.6 percent of the total, a very neg­ ligible i ncrease. And if you had ten thousand persons, his contribution would be vanishingly small. In t he Utopian province o f M ediocristan, p articular events d on 't c on­ tribute much individually—only collectively. I c an state the supreme law o f M ediocristan as follows: When your sample is large, no single instance will significantly change the aggregate or the total. T he largest observation w ill r emain impressive, but eventually insignificant, to the sum. I 'll b orrow another example from my friend Bruce Goldberg: your c aloric c onsumption. Look at how much you consume per y ear—if you are classified as h uman, c lose to eight hundred t housand calories. No sin­ gle day, not even Thanksgiving at your great-aunt's, will represent a large share of that. Even if you tried to kill yourself by eating, that day's c alo­ ries w ould not seriously affect y our yearly consumption. Now, if I told you that it is possible to run into someone who weighs T H E S P E C U L A T O R A N D T H E P R O S T I T U T E 33 several t housand tons, or stands several h undred miles tall, you would be perfectly justified in having my frontal lobe examined, or in suggesting that I switch to science-fiction writing. But you cannot so easily rule out e xtreme v ariations with a different brand of quantities, to which we t urn n ext. The Strange Country of Extremistan C onsider by comparison the net worth of the thousand people you lined up in the stadium. Add to them the wealthiest person to be found on the planet—say, Bill G ates, the founder of Microsoft. Assume his net worth to be c lose to $ 8 0 billion—with the total capital of the others around a few m illion. H ow much of the total wealth would he represent? 9 9 . 9 percent? Indeed, all the others would represent no more t han a r ounding e rror for his net worth, the variation of his personal portfolio over the past second. F or s omeone's weight to represent such a share, he would need to weigh fifty million p ounds! T ry it again with, say, book sales. Line up a thousand authors (or peo­ ple begging to get published, but calling themselves authors instead of w aiters), and check their book sales. Then add the living writer who (cur­ rently) has the most readers. J . K . Rowling, the author of the Harry Potter series, with several hundred m illion books sold, will dwarf the remaining thousand authors with, say, collectively, a few h undred t housand readers at most. Try it also with academic citations (the mention of one academic by another academic in a formal publication), media references, income, company size, and so on. Let us c all t hese social m atters, as they are manmade, as opposed to physical ones, like the size of waistlines. In Extremistan, inequalities are such that one single observation can disproportionately impact the aggregate, or the total. So while weight, height, and calorie consumption are from Mediocristan, wealth is not. Almost all social matters are from Extremistan. An­ other way to say it is that social quantities are informational, not physical: you cannot touch them. Money in a bank account is something important, but certainly not physical. As such it can take any value without necessi­ tating the expenditure of energy. It is just a number! Note that before the advent of modern technology, wars used to belong to Mediocristan. It is h ard t o kill many people if you need to slaughter 34 UMBERTO EÇO'S ANTILIBRARY t hem one at the time. Today, with tools of mass destruction, all it takes is a b utton, a nutcase, or a small error to wipe out the planet. L ook a t the implication for the B lack S wan. Extremistan can produce B lack S wans, and does, since a few occurrences have had huge influences on history. This is the main idea of this book. Extremistan and Knowledge W hile this distinction (between Mediocristan and Extremistan) has severe r amifications for both social fairness and the dynamics of events, let us see its a pplication to knowledge, which is where most of its value lies. I f a Martian came to earth and engaged in the business of measuring the heights of the denizens of this happy planet, he could safely stop at a hun­ dred humans to get a good picture of the average height. If you live in M ediocristan, y ou can be comfortable with what you have measured— provided that you know for sure that it comes from Mediocristan. You c an a lso be comfortable with what you have learned from the data. The e pistemological c onsequence is that with Mediocristan-style randomness it is not possible* t o have a B lack S wan surprise such that a single event c an d ominate a phenomenon. Primo, t he first h undred days should reveal all y ou need to know about the data. Secondo, even if you do have a sur­ prise, as we saw in the case of the heaviest human, it would not be conse­ quential. I f y ou are dealing with quantities from Extremistan, you will have trouble figuring out the average from any sample since it can depend so much on one single observation. The idea is not more difficult than that. In E xtremistan, one unit can easily affect t he total in a disproportionate way. In this world, you should always be suspicious of the knowledge you derive from data. This is a very simple test of uncertainty that allows you to distinguish between the two kinds of randomness. Capish? W hat y ou can know from data in Mediocristan augments very rapidly with the supply of information. But knowledge in Extremistan grows s lowly a nd erratically with the addition of data, some of it extreme, possi­ bly a t an unknown rate. * I emphasize possible because the c hance o f these occurrences is typically in the o rder o f one in several trillion trillion, as close to impossible as it gets. T H E S P E C U L A T O R A N D T H E P R O S T I T U T E 35 Wild and Mild I f we follow my distinction of scalable versus nonscalable, we can see clear differences shaping up between Mediocristan and Extremistan. Here are a few e xamples. Matters that seem to belong to Mediocristan ( subjected to what we c all type 1 randomness): height, weight, calorie consumption, income for a baker, a small restaurant owner, a prostitute, or an orthodontist; gambling profits (in the very special c ase, assuming the person goes to a casino and maintains a constant betting s ize), c ar accidents, mortality rates, " I Q " (as measured). Matters that seem to belong to Extremistan ( subjected to what we c all type 2 randomness): wealth, income, book sales per author, book citations per author, name recognition as a "celebrity," number of references on G oogle, p opulations of c ities, uses of w ords in a vocabulary, numbers of speakers per language, damage caused by earthquakes, deaths in war, deaths from terrorist incidents, sizes of planets, sizes of companies, stock ownership, height between species (consider elephants and m ice), f inancial markets (but your investment manager does not know it), commodity p rices, inflation rates, economic data. The Extremistan list is much longer t han the prior one. The Tyranny of the Accident A nother way to rephrase the general distinction is as follows: Medioc­ ristan is where we must endure t he tyranny of the c ollective, t he routine, the obvious, and the predicted; Extremistan is where we are subjected to the tyranny of the singular, the accidental, the unseen, and the unpredicted. As h ard as you try, you will never lose a lot of weight in a single day; you need the collective effect o f many days, weeks, even months. L ikewise, i f you work as a dentist, you will never get rich in a single day—but y ou can do very well over thirty years of motivated, diligent, dis­ ciplined, a nd regular attendance to teeth-drilling sessions. If you are sub­ ject t o Extremistan-based speculation, however, you can gain or lose your fortune in a single minute. T able 1 summarizes the differences between the two dynamics, to which I will refer in the rest of the book; confusing the left column with the right one can lead to dire (or extremely lucky) consequences. 36 UMBERTO ECO'S ANTILIBRARY T ABLE 1 Mediocristan Nonscalable Mild or type 1 randomness Extremistan Scalable Wild (even superwild) or type 2 randomness The most "typical" is either giant or dwarf, i.e., there is no typical member Winner-take-almost-all effects The most typical member is mediocre Winners get a small segment of the to­ tal pie Example: audience of an opera singer before the gramophone More likely to be found in our ances­ tral environment Impervious to the Black Swan Subject to gravity Today's audience for an artist More likely to be found in our modern environment Vulnerable to the Black Swan There are no physical constraints on what a number can be Corresponds to numbers, say, wealth Corresponds (generally) to physical quantities, i.e., height As close to Utopian equality as reality can spontaneously deliver Total is not determined by a single in­ stance or observation When you observe for a while you can get to know what's going on Tyranny of the collective Easy to predict from what you see and extend to what you do not see History crawls Events are distributed* according to the "bell curve" (the GIF) or its varia­ tions Dominated by extreme winner-takeall inequality Total will be determined by a small number of extreme events It takes a long time to know what's going on Tyranny of the accidental Hard to predict from past information History makes jumps The distribution is either Mandelbrotian "gray" Swans (tractable scientifically) or totally intractable Black Swans * W hat I call " probability d istribution" h ere is the model used to c alculate t he odds of different e vents, h ow they are d istributed. W hen I say that an event is d istributed according to the "bell curve," I m ean t hat the Gaussian bell curve (after C. F. Gauss; more on him later) can help pro­ vide probabilities of v arious o ccurrences. T H E S P E C U L A T O R A N D T H E P R O S T I T U T E 37 T his f ramework, showing that Extremistan is where most of the B lack Swan a ction is, is only a rough approximation—please do not Platonify it; d on't simplify it beyond what's necessary. Extremistan does not always imply B lack S wans. Some events can be rare and consequential, but somewhat predictable, particularly to those who are prepared for them and have the tools to u nderstand t hem (instead o f listening to statisticians, economists, and charlatans of the bell-curve v ariety). T hey are near-Black Swans. They are somewhat tractable scientifically—knowing a bout their incidence should lower your surprise; these events are rare but expected. I c all t his special case of "gray" swans Mandelbrotian randomness. This category encompasses the randomness that produces phenomena commonly known by terms such as scalable, scale-invariant, power laws, Pareto-Zipf laws, Yule's law, Paretian-stable processes, Levy-stable, a nd fractal laws, a nd we will leave them aside for now since they will be covered in some d epth in Part Three. They are s cal­ able, a ccording to the logic of this chapter, but you can know a little more about how they scale since they share much with the laws of nature. Y ou c an still experience severe B lack S wans in Mediocristan, though not easily. How? You may forget that something is random, think that it is deterministic, then have a surprise. Or you can tunnel and miss on a source of uncertainty, whether mild or wild, owing to lack of imagination—most B lack S wans result from this "tunneling" disease, which I will discuss in Chapter 9. T his has been a "literary" overview of the central distinction of this book, offering a t rick to distinguish between what can belong in Mediocristan and what belongs in Extremistan. I said that I will get into a more thor­ ough examination in Part Three, so let us focus on epistemology for now and see how the distinction affects our knowledge. Chapter Four O NE THOUSAND AND ONE DAYS, OR HOW NOT TO BE A S UCKER Surprise, surprise—Sophisticated methods for learning from the future—Sextus was always ahead—The main idea is not to be a sucker—Let us move to Mediocristan, if we can find it W hich b rings us to the B lack S wan Problem in its original form. I magine s omeone of authority and rank, operating in a place where rank matters—say, a government agency or a large corporation. He could be a v erbose political commentator on Fox News stuck in front of you at the health club (impossible to avoid looking at the s creen), the chairman o f a c ompany discussing the "bright future ahead," a Platonic medical doctor who has categorically ruled out the utility of mother's milk (be­ cause he did not see anything special in it), or a Harvard Business S chool p rofessor w ho does not laugh at your j okes. H e takes what he knows a lit­ tle t oo seriously. Say t hat a prankster surprises him one day by surreptitiously sliding a thin feather up his nose during a m oment of relaxation. How would his dignified pompousness fare after the surprise? Contrast his authoritative demeanor with the shock of being hit by something totally unexpected that he does not understand. For a b rief m oment, before he regains his b earings, y ou will see disarray in his f ace. I c onfess having developed an incorrigible taste for this kind of prank ONE T H O U S A N D A N D O N E D A Y S , O R H O W N O T T O B E A S U C K E R 39 during my first sleepaway summer camp. Introduced into the nostril of a sleeping camper, a feather would induce sudden p anic. I spent p art o f my childhood practicing variations on the prank: in place of a thin feather you can roll the corner of a tissue to make it long and narrow. I got some p ractice o n my younger brother. An equally effective prank would be to d rop an ice cube d own s omeone's collar when he expects it least, say dur­ ing an official dinner. I had to stop these pranks as I got deeper into a dult­ hood, of course, but I am often involuntarily hit with such an image when bored out of my wits in meetings with serious-looking businesspersons (dark suits and standardized minds) theorizing, explaining things, or talk­ ing about random events with plenty of "because" in their conversation. I z oom in on one of them and imagine the ice cube sliding d own his back— it w ould be less fashionable, though certainly more spectacular, if you put a living mouse there, particularly if the person is ticklish and is wearing a t ie, w hich would block the rodent's normal route of exit.* Pranks can be compassionate. I remember in my early t rading d ays, at age twenty-five or so, when money was starting to become easy. I would take taxis, and if the driver spoke skeletal English and looked particularly depressed, I'd give him a $ 1 0 0 bill as a tip, just to give him a little j olt a nd get a k ick out of his surprise. I'd watch him unfold the bill and look at it with some degree of consternation ($1 million certainly would have been better but it was not within my means). It was also a simple hedonic ex­ periment: it felt elevating to make someone's day with the trifle of $ 1 0 0 . 1 eventually stopped; we all become stingy and calculating when our wealth grows and we start taking money seriously. I d on't need much help from fate to get larger-scale entertainment: re­ ality provides such forced revisions of beliefs at quite a high frequency. M any are quite spectacular. In fact, the entire knowledge-seeking enter­ prise is based on taking conventional wisdom and accepted scientific be­ liefs and shattering them into pieces with new counterintuitive evidence, whether at a micro scale (every scientific discovery is an attempt to pro­ duce a micro-Black Swan) or at a larger one (as with Poincaré's and Ein­ stein's relativity). Scientists may be in the business of laughing at their p redecessors, b ut owing to an array of h uman m ental dispositions, few re­ alize t hat someone will laugh at their beliefs in the (disappointingly near) future. In this c ase, my readers and I are laughing at the present s tate of s ocial k nowledge. These big guns do not see the inevitable overhaul of * I am safe since I never wear ties (except at funerals). 40 UMBERTO ECO'S ANTIUBRARY t heir work coming, which means that you can usually count on them to be in for a surprise. H OW TO L EARN F ROM THE T URKEY T he ù berphilosopher Bertrand Russell presents a particularly toxic variant o f m y surprise j olt in his illustration of what people in his line of business c all t he Problem of Induction or Problem of Inductive Knowledge (capitalized for its seriousness)—certainly the mother of all problems in life. H ow c an w e logically g o from specific instances to reach general conclusions? How do we know what we know? How do we know that what we have observed from given objects and events suffices to enable us to figure out their other properties? There are t raps b uilt into any kind of knowledge gained from observation. Consider a turkey that is fed every day. Every single feeding will firm up the bird's b elief t hat it is the general rule of life t o be fed every day by friendly members of the h uman r ace "looking out for its best interests," as a p olitician would say. On the afternoon of the Wednesday before Thanksgiving, something unexpected incur a revision of belief.* T he r est of this chapter will outline the B lack S wan problem in its original form: How can we know the future, given knowledge of the past; or, more generally, how can we figure out properties of the (infinite) unknown based on the (finite) known? Think of the feeding again: What can a turkey learn about what is in store for it tomorrow from the events of yesterday? A lot, perhaps, but certainly a little less t han it thinks, and it is just that "little l ess" t hat may make all the difference. T he t urkey problem can be generalized to any situation where the same hand that feeds you can be the one that wrings your neck. C onsider the case of the increasingly integrated German Jews in the 1 930s—or my description in Chapter 1 of how the population of Lebanon got lulled into a false sense of security by the appearance of m utual friendliness and t olerance. L et us go one step further and consider induction's most worrisome aspect: learning backward. Consider that the turkey's experience may have, rather t han n o value, a negative v alue. It learned from observation, as we will h appen t o the turkey. It will * Since Russell's original example used a chicken, this is the enhanced North American a daptation. O N E T H O U S A N D A N D O N E D A Y S , O R H O W N O T T O B E A S U C K E R 41 FIGURE 1 : ONE T HOUSAND A ND ONE DAYS O F H ISTORY A turkey before and after Thanksgiving. The history of a process over a thousand days tells you nothing about what is t o happen next. This naïve projection of the f uture from the past can be applied t o anything. are all advised to do (hey, after all, this is what is believed to be the scientific m ethod). Its confidence increased as the number of friendly feedings grew, and it felt increasingly safe even though the slaughter was more and more imminent. Consider that the feeling of safety reached its maximum when the risk was at the highest! But the problem is even more general than t hat; it strikes at the n ature o f empirical knowledge itself. Something has worked in the past, until—well, it unexpectedly no longer does, and what we have learned from the past t urns o ut to be at best irrelevant or false, at worst viciously misleading. Figure 1 provides the prototypical case of the problem of induction as encountered in real life. Y ou observe a hypothetical variable for one thousand days. It could be anything (with a few mild transformations): book sales, b lood pressure, crimes, your personal income, a given stock, the interest on a loan, or Sunday attendance at a specific Greek Orthodox church. You subsequently derive solely from past data a few conclusions c oncerning the properties of the p attern w ith projections for the next thousand, even five thousand, days. On the one thousand and first day—boom! A big change takes place that is completely u nprepared for by the past. C onsider the surprise of the Great War. After the Napoleonic conflicts, the world had experienced a period of peace that would lead any observer to believe in the disappearance of severely destructive conflicts. Yet, sur- 42 UMBERTO ECO'S ANTILIBRARY p rise! It t urned o ut to be the deadliest conflict, up until then, in the history o f m ankind. Note that after the event you start predicting the possibility of other outliers happening locally, that is, in the process you were just surprised by, but not elsewhere. After the stock market crash of 1 9 8 7 h alf o f Amer­ ica's t raders b raced for another one every October—not taking into ac­ count that there was no antecedent for the first one. We worry too l ate—ex p ost. Mistaking a naive observation of the past as something de­ finitive o r r epresentative of the future is the one and only cause of our in­ ability t o u nderstand t he B lack S wan. It w ould appear to a quoting dilettante—i.e., one of those writers and scholars who fill up their texts with phrases from some dead authority— that, as phrased by Hobbes, "from like antecedents flow like conse­ quents." Those who believe in the unconditional mous ship's captain: But in all my experience, I have never been in any accident. . . of any sort worth speaking about. I have seen but one vessel in distress in all my years at sea. I never saw a wreck and never have been wrecked nor was I ever in any predicament that threatened to end in disaster of any sort. E . J . Smith, 1907, Captain, R MS Titanic benefits of past e xperience s hould consider this pearl of wisdom allegedly voiced by a fa­ C aptain Smith's ship sank in 1 9 1 2 in what became the most talkedabout shipwreck in history. * * Statements like those of C aptain Smith are so common t hat it is not even funny. In September 2 0 0 6 , a fund called A maranth, ironically named after a flower that "never dies," had to shut down after it lost close to $7 billion in a few days, the m ost impressive loss in trading history (another irony: I shared office space with the t raders). A few days prior t o the event, the company made a statement to the effect t hat investors should not w orry because they had twelve risk managers— people who use models of the past to produce risk measures on the odds of such an event. Even if they had one hundred and twelve risk managers, there would be n o meaningful difference; they still would have blown up. Clearly you cannot m anufacture m ore information than the past can deliver; if you buy one hundred copies of The New York Times, I a m not too certain t hat it would help you gain in­ cremental knowledge of the future. We just don't know how much information there is in the past. O N E T H O U S A N D A N D O N E D A Y S , O R H O W N O T T O B E A S U C K E R 43 Trained to Be Dull Similarly, t hink of a bank chairman whose institution makes steady prof­ its over a long time, only to lose everything in a single reversal of fortune. T raditionally, b ankers of the lending variety have been pear-shaped, clean­ shaven, and dress in possibly the most comforting and boring manner, in dark suits, white shirts, and red ties. Indeed, for their lending business, banks hire dull p eople and train them to be even more dull. But this is for show. If they look conservative, it is because their loans only go bust on rare, very rare, occasions. There is no way to gauge the effectiveness of their lending activity by observing it over a day, a week, a month, or . . . even a century! In the summer of 1 982, l arge American banks lost c lose t o all their past earnings (cumulatively), about everything they ever made in the history of American banking—everything. They had been lending to South and Central American countries that all defaulted at the same time—"an event of an exceptional nature." So it took just one summer to figure out that this was a sucker's business and that all their earnings came from a very risky game. All that while the bankers led everyone, especially themselves, i nto believing that they were "conservative." They are not c onservative; j ust phenomenally skilled at self-deception by burying the p ossibility o f a large, devastating loss u nder t he rug. In f act, t he travesty repeated itself a decade later, with the "risk-conscious" large banks once again under financial strain, many of them near-bankrupt, after the realestate collapse of the early 1 990s in which the now defunct savings and loan industry r equired a taxpayer-funded bailout of more t han h alf a t ril­ lion d ollars. The Federal Reserve bank protected them at our expense: when "conservative" bankers make profits, they get the benefits; when they are h urt, w e pay the c osts. After g raduating from Wharton, I initially went to work for Bankers Trust (now defunct). There, the chairman's office, r apidly forgetting about the story of 1 9 8 2 , broadcast the results of every quarter with an an­ nouncement explaining how smart, profitable, conservative (and good l ooking) they were. It was obvious that their profits were simply cash bor­ rowed from destiny with some random payback time. I have no problem with risk taking, just please, please, do not c all y ourself conservative and a ct superior to other businesses who are not as vulnerable to B lack S wans. Another recent event is the almost-instant bankruptcy, in 1 9 9 8 , o f a fi­ nancial i nvestment company (hedge fund) called Long-Term Capital Man- 44 UMBERTO ECO'S ANTILIBRARY a gement ( LTCM), w hich used the methods and risk expertise of two "Nobel economists," who were called "geniuses" but were in fact using phony, bell curve-style mathematics while managing to convince them­ selves that it was great science and thus t urning t he entire financial estab­ lishment into suckers. One of the largest t rading losses ever in history took place in almost the blink of an eye, with no warning signal (more, much more on that in Chapter 1 7 ) . * A Black Swan Is Relative to Knowledge F rom the standpoint of the turkey, the nonfeeding of the one thousand and first day is a B lack S wan. For the butcher, it is not, since its occurrence is n ot unexpected. So you can see here that the B lack S wan is a sucker's problem. In other words, it occurs relative to your expectation. You real­ ize t hat you can eliminate a B lack S wan by science (if you're able), or by keeping an open mind. O f course, like the L TCM p eople, you can create B lack S wans with science, by giving people confidence that the B lack Swan cannot happen—this is when science t urns n ormal citizens into suckers. Note that these events do not have to be instantaneous surprises. Some o f t he historical fractures I mention in Chapter 1 have lasted a few decades, like, say, the computer that brought consequential effects on so­ ciety w ithout its invasion of our lives being noticeable from day to day. S ome B lack S wans can come from the slow building up of incremental changes in the same direction, as with books that sell large amounts over years, never showing up on the bestseller lists, or from technologies that creep up on us slowly, but surely. Likewise, the growth of Nasdaq stocks in the late 1 990s t ook a few years—but the growth would seem sharper if you were to plot it on a long historical line. Matters should be seen on some relative, not absolute, timescale: earthquakes last minutes, 9/11 lasted hours, but historical changes and technological implementations * T he main tragedy of the high impact-low probability event comes from the mis­ match between the time taken to compensate someone and the time one needs to be comfortable t hat he is not making a bet against the r are event. People have an incentive to bet against it, or to game the system since they can be paid a bonus re­ flecting their yearly performance when in fact all they are doing is producing illu­ sory profits t hat they will lose back one day. Indeed, the tragedy of capitalism is t hat since the quality of the returns is not observable from past d ata, owners of c ompanies, namely shareholders, can be taken for a ride by the managers who show returns and cosmetic profitability but in fact might be taking hidden risks. ONE THOUSAND A N D O N E D A Y S , O R H O W N O T T O B E A S U C K E R 45 are B lack S wans that can take decades. In general, positive B lack S wans take time to show their effect w hile negative ones h appen very quickly— it is much easier and much faster to destroy t han t o build. (During the L ebanese war, my parents' house in Amioun and my grandfather's house in a nearby village were destroyed in just a few hours, dynamited by my grandfather's enemies who controlled the area. It took seven thousand times longer—two years—to rebuild them. This asymmetry in timescales e xplains t he difficulty in reversing time.) A B RIEF H ISTORY O F T HE BLACK SWAN PROBLEM T his t urkey problem (a.k.a. the problem of induction) is a very old one, but for some reason it is likely to be called "Hume's problem" by your l ocal p hilosophy professor. People i magine us skeptics and empiricists to be morose, paranoid, and tortured in our private lives, w hich may be the e xact o pposite of what his­ tory (and my private experience) reports. L ike m any of the skeptics I hang around with, Hume was j ovial a nd a bon vivant, eager for literary fame, s alon c ompany, and pleasant conversation. His life w as not devoid of a necdotes. H e once fell i nto a swamp near the house he was building in Edinburgh. Owing to his reputation among the locals as an atheist, a woman refused to pull him out of it until he recited the Lord's Prayer and the Belief, w hich, being practical-minded, he did. But not before he argued with her about whether Christians were obligated to help their enemies. Hume looked unprepossessing. "He exhibited that preoccupied stare of the thoughtful scholar that so commonly impresses the undiscerning as i mbecile," writes a biographer. Strangely, H ume during his day was not mainly known for the works that generated his current reputation—he became rich and famous t hrough writing a bestselling history of England. Ironically, when Hume was alive, his philosophical works, to which we now attach his fame, " fell d eadborn off the presses," while the works for which he was famous at the time are now harder to find. Hume wrote with such clarity that he puts t o shame a lmost all current thinkers, and certainly the entire German g raduate c ur­ riculum. Unlike Kant, F ichte, S chopenhauer, and Hegel, Hume is the kind o f t hinker who is sometimes r ead by the person mentioning his work. I often hear "Hume's problem" mentioned in connection with the problem of induction, but the problem is old, older t han t he interesting 46 UMBERTO ECO'S ANTILIBRARY S cotsman, p erhaps as old as philosophy itself, maybe as old as olive-grove c onversations. L et us go back into the past, as it was formulated with no less p recision by the ancients. Sextus the (Alas) Empirical T he v iolently antiacademic writer, and antidogma activist, Sextus Empiricus o perated close to a millennium and a h alf before Hume, and formu­ lated the turkey problem with great precision. We know very little about him; we do not know whether he was a philosopher or more of a copyist o f p hilosophical texts by authors obscure to us today. We surmise that he lived in Alexandria in the second century of our era. He belonged to a s chool o f medicine called "empirical," since its practitioners doubted the­ ories a nd causality and relied on past experience as guidance in their treat­ ment, though not p utting m uch t rust in it. Furthermore, they did not trust t hat anatomy revealed function too obviously. The most famous propo­ nent of the empirical school, Menodotus of Nicomedia, who merged em­ piricism a nd philosophical skepticism, was said to keep medicine an art, not a " science," a nd insulate its practice from the problems of dogmatic s cience. T he practice of medicine explains the addition of empiricus ( "the e mpirical") t o Sextus's name. S extus r epresented and jotted d own t he ideas of the school of the Pyrrhonian skeptics who were after some form of intellectual therapy re­ sulting from the suspension of belief. Do you face t he possibility of an ad­ verse event? Don't worry. Who knows, it may t urn o ut to be good for you. Doubting the consequences of an outcome will allow you to remain im­ perturbable. The Pyrrhonian skeptics were docile citizens who followed customs and traditions whenever possible, but t aught themselves to sys­ tematically d oubt e verything, and thus a ttain a level of serenity. But while c onservative in their habits, they were rabid in their fight against dogma. Among the surviving works of Sextus's is a diatribe with the beautiful t itle Adversos Mathematicos, s ometimes translated as Against the Profes­ sors. M uch of it could have been written last Wednesday night! W here S extus is mostly interesting for my ideas is in his rare mixing of philosophy and decision making in his practice. He was a doer, hence c las­ sical s cholars d on't say nice things about him. The methods of empirical m edicine, relying on seemingly purposeless trial and error, will be central to my ideas on planning and prediction, on how to benefit from the B lack S wan. ONE T H O U S A N D A N D O N E D A Y S , O R H O W N O T T O B E A S U C K E R 47 In 1998, w hen I went out on my own, I called my research laboratory and t rading firm Empirica, not for the same antidogmatist reasons, but on account of the far more depressing reminder that it took at least another fourteen centuries after the works of the school of empirical medicine be­ fore medicine changed and finally became adogmatic, suspicious of theo­ rizing, profoundly skeptical, and evidence-based! Lesson? That awareness o f a p roblem does not mean much—particularly when you have special in­ terests and self-serving institutions in play. Algazel T he third major thinker who dealt with the problem was the eleventhcentury Arabic-language skeptic Al-Ghazali, known in Latin as Algazel. His name for a class of dogmatic scholars was ghabi, l iterally "the imbe­ ciles," an Arabic form that is funnier t han " moron" and more expressive t han " obscurantist." Algazel wrote his own Against the Professors, a dia­ tribe called Tahafut al falasifa, w hich I translate as "The Incompetence of Philosophy." It was directed at the school called falasifah—the Arabic in­ tellectual e stablishment was the direct heir of the classical philosophy of the academy, and they managed to reconcile it with Islam t hrough r atio­ nal argument. Algazel's a ttack on "scientific" knowledge started a debate with Averroës, the medieval philosopher who ended up having the most profound influence o f any medieval thinker (on Jews and Christians, though not on M oslems). T he debate between Algazel and Averroës was finally, but sadly, won by both. In its aftermath, many Arab religious thinkers inte­ grated and exaggerated Algazel's skepticism of the scientific method, pre­ ferring to leave causal considerations to God (in fact it was a stretch of his i dea). T he West embraced Averroës's rationalism, built u pon A ristotle's, which survived t hrough A quinas and the Jewish philosophers who called themselves Averroan for a long time. Many thinkers blame the Arabs' later abandonment of scientific method on Algazel's huge influence. He ended up fueling Sufi m ysticism, in which the worshipper attempts to enter into communion with God, severing all connections with earthly matters. All of this came from the B lack S wan problem. 48 UMBERTO ECO'S ANTILIBRARY The Skeptic, Friend of Religion W hile t he ancient skeptics advocated learned ignorance as the first step in honest inquiries toward t ruth, l ater medieval skeptics, both Moslems and C hristians, used skepticism as a tool to avoid accepting what today we c all s cience. B elief in the importance of the B lack S wan problem, worries about induction, and skepticism can make some religious arguments more appealing, though in s tripped-down, a nticlerical, theistic form. This idea o f relying on faith, not reason, was known as fideism. So there is a tradi­ tion of B lack S wan skeptics who found solace in religion, best represented by P ierre B ayle, a F rench-speaking Protestant erudite, philosopher, and t heologian, w ho, exiled in Holland, built an extensive philosophical archi­ tecture related to the Pyrrhonian skeptics. B ayle's writings exerted some c onsiderable influence on Hume, introducing him to ancient skepticism— to the point where Hume took ideas wholesale from B ayle. Bayle's Diction­ naire historique et critique w as the most read piece of scholarship of the eighteenth century, but like many of my French heroes (such as Frédéric B astiat), B ayle does not seem to be p art o f the French curriculum and is nearly impossible to find in the original French language. Nor is the fourteenth-century Algazelist Nicolas of Autrecourt. Indeed, it is not a well-known fact that the most complete exposition o f t he ideas of skepticism, until recently, remains the work of a powerful C atholic b ishop who was an august member of the French Academy. P ierre-Daniel H uet wrote his Philosophical Treatise on the Weaknesses of the Human Mind in 1 690, a r emarkable book that tears t hrough dogmas and questions h uman p erception. Huet presents arguments against causal­ ity t hat are quite potent—he states, for instance, that any event can have an infinity of possible causes. B oth H uet and B ayle w ere erudites and spent their lives reading. Huet, who lived into his nineties, had a servant follow him with a book to read aloud to him during m eals and breaks and thus a void lost time. He was deemed the most read person in his day. Let me insist that erudition is im­ portant t o me. It signals genuine intellectual curiosity. It accompanies an open mind and the desire to probe the ideas of others. Above all, an eru­ dite can be dissatisfied with his own knowledge, and such dissatisfaction is a wonderful shield against Platonicity, the simplifications of the fiveminute manager, or the philistinism of the overspecialized scholar. Indeed, scholarship without erudition can lead to disasters. O N E T H O U S A N D A N D O N E D A Y S , O R H O W N O T T O B E A S U C K E R 49 / Don't Want to Be a Turkey B ut p romoting philosophical skepticism is not quite the mission of this b ook. I f awareness of the B lack S wan problem can lead us into with­ drawal and extreme skepticism, I take here the exact opposite direction. I am interested in deeds and t rue e mpiricism. So, this book was not written by a Sufi m ystic, or even by a skeptic in the ancient or medieval sense, or even (we will see) in a philosophical sense, but by a practitioner whose principal aim is to not be a sucker in things that matter, period. Hume was radically skeptical in the philosophical cabinet, but aban­ doned such ideas when it came to daily life, s ince he could not handle them. I am doing here the exact opposite: I am skeptical in matters that have implications for daily life. In a way, all I care about is making a deci­ sion without being the turkey. Many middlebrows have asked me over the past twenty years, "How do you, T aleb, c ross the street given your extreme risk consciousness?" or have stated the more foolish "You are asking us to take no r isks." O f course I am not advocating total risk phobia (we will see that I favor an aggressive type of risk taking): all I will be showing you in this book is how to avoid crossing the street blindfolded. They Want to Live in Mediocristan I have just presented the B lack S wan problem in its historical form: the central difficulty of generalizing from available information, or of learning from the past, the known, and the seen. I have also presented the list of those who, I believe, are the most relevant historical figures. Y ou c an see that it is extremely convenient for us to assume that we live in Mediocristan. Why? Because it allows you to rule out these B lack Swan surprises! The B lack S wan problem either does not exist or is of small consequence if you live in Mediocristan! Such an assumption magically drives away the problem of induction, which since Sextus Empiricus has been plaguing the history of thinking. T he s tatistician can do away with epistemology. Wishful t hinking! We do not live in Mediocristan, so the B lack S wan needs a different mentality. As we cannot push t he problem u nder t he rug, we will have to dig deeper into it. This is not a terminal difficulty—and we c an even benefit from it. 50 UMBERTO ECO'S ANTILIBRARY N ow, there are other themes arising from our blindness to the B lack S wan: a. We focus on preselected segments of the seen and generalize from it to the unseen: the error of confirmation. b . W e fool ourselves with stories that cater to our Platonic thirst for distinct patterns: the narrative fallacy. c . W e behave as if the B lack S wan does not exist: h uman n ature is not programmed for B lack S wans. d. What we see is not necessarily all that is there. History hides B lack S wans from us and gives us a mistaken idea about the odds o f these events: this is the distortion of silent evidence. e. We "tunnel": that is, we focus on a few well-defined sources of un­ certainty, on too specific a list of B lack S wans (at the expense of the others that do not easily come to mind). I will discuss each of the points in the next five chapters. Then, in the conclusion of Part One, I will show how, in effect, they are the same t opic. C h a p t e r F ive C ONFIRMATION S HMONFIRMATION! / have so much evidence—Can Zoogles be (sometimes) Boogies?— Corroboration shmorroboration—Popper's idea As m uch as it is ingrained in our habits and conventional wisdom, confir­ mation can be a dangerous error. Assume I told you that I had evidence that the football player O. J . Simpson (who was accused of killing his wife in the 1 990s) w as not a c riminal. L ook, the other day I had breakfast with him and he didn't kill anybody. I a m serious, I did not see him kill a single person. Wouldn't that confirm his innocence? If I said such a thing you would certainly c all a s hrink, an ambulance, or p erhaps even the police, since you might think that I spent too much time in t rading r ooms or in cafés thinking about this B lack S wan topic, and that my logic may represent such an immediate danger to society that I m yself need to be locked up immediately. Y ou w ould have the same reaction if I told you that I took a nap the other day on the railroad track in New R ochelle, N ew Y ork, a nd was not killed. Hey, look at me, I am alive, I would say, and that is evidence that lying on train tracks is risk-free. Yet consider the following. Look again at Figure 1 in Chapter 4 ; someone who observed the turkey's first thousand days (but not the shock of the thousand and first) would tell you, and rightly so, that there is no evidence o f the possibility of large events, i.e., 52 UMBERTO ECO'S ANTILIBRARY B lack S wans. You are likely to confuse that statement, however, particu­ larly if you do not pay close attention, with the statement that there is evidence of no possible B lack S wans. Even though it is in fact vast, the l ogical d istance between the two assertions will seem very narrow in your mind, so that one can be easily substituted for the other. Ten days from now, if you manage to remember the first statement at all, you will be l ikely t o retain the second, inaccurate version—that there is proof of no Black Swans. I c all t his confusion the r ound-trip fallacy, since these state­ ments are not interchangeable. S uch c onfusion of the two statements partakes of a trivial, very trivial (but crucial), logical error—but we are not immune to trivial, logical er­ rors, nor are professors and thinkers particularly immune to them (com­ plicated e quations do not tend to cohabit happily with clarity of mind). Unless w e concentrate very h ard, we are likely to unwittingly simplify the problem because our minds routinely do so without our knowing it. It is worth a deeper examination here. M any p eople confuse the statement "almost all terrorists are Moslems" with "almost all Moslems are terrorists." Assume that the first statement is t rue, that 9 9 percent of terrorists are Moslems. This would mean that o nly a bout .001 percent of Moslems are terrorists, since there are more t han o ne billion Moslems and only, say, ten thousand terrorists, one in a h undred t housand. So the logical mistake makes you (unconsciously) overestimate the odds o f a randomly d rawn individual Moslem person ( between t he age of, say, fifteen and fifty) being a terrorist by close to fifty thousand times! T he r eader might see in this r ound-trip f allacy the unfairness of stereotypes—minorities in u rban a reas in the United States have suffered f rom t he same confusion: even if most criminals come from their ethnic subgroup, most of their ethnic subgroup are not criminals, but they still suffer from discrimination by people who should know better. " I never meant to say that the Conservatives are generally stupid. I m eant to say that stupid p eople are generally Conservative," John Stuart M ill o nce complained. This problem is chronic: if you tell people that the key t o success is not always skills, they think that you are telling them that it is never skills, always luck. Our inferential machinery, that which we use in daily life, is not made for a c omplicated environment in which a statement changes markedly when its wording is slightly modified. Consider that in a primitive envi­ ronment there is no consequential difference between the statements most CONFIRMATION SHMONFIRMATION! 53 killers are wild animals a nd most wild animals are killers. T here is an error here, but it is almost inconsequential. Our statistical intuitions have not evolved for a habitat in which these subtleties can make a big differ­ ence. Zoogles Are Not All Boogies All zoogles are boogies. You saw a boogie. Is it a zoogle? N ot necessarily, since not all boogies are zoogles; a dolescents who make a mistake in an­ swering this kind of question on their SAT test might not make it to c ol­ lege. Y et another person can get very high scores on the SATs a nd still feel a chill of fear when someone from the wrong side of town steps into the elevator. This inability to automatically transfer knowledge and sophisti­ cation from one situation to another, or from theory to practice, is a quite disturbing attribute of h uman n ature. Let us c all it the domain specificity o f our reactions. By domain-specific I mean that our reactions, our mode of thinking, our intuitions, depend on the context in which the matter is presented, what evolutionary psycholo­ gists c all the "domain" of the o bject o r the event. The classroom is a do­ main; real life is another. We react to a piece of information not on its logical m erit, but on the basis of which framework s urrounds i t, and how it registers with our social-emotional system. Logical problems ap­ proached one way in the classroom might be treated differently in daily life. Indeed they are t reated differently in daily life. K nowledge, even when it is exact, does not often lead to appropriate actions because we tend to forget what we know, or forget how to process it properly if we do not pay attention, even when we are experts. Statisti­ cians, it has been shown, tend to leave their brains in the classroom and engage in the most trivial inferential errors once they are let out on the streets. In 1 9 7 1 , t he psychologists Danny Kahneman and Amos Tversky plied professors of statistics with statistical questions not phrased as sta­ tistical q uestions. One was similar to the following (changing the example for c larity): Assume that you live in a town with two hospitals—one large, the other small. On a given day 6 0 percent of those born in one of the two hospitals are boys. Which hospital is it likely to be? Many statisticians made the equivalent of the mistake (during a casual conversation) of choosing the larger hospital, when in fact the very basis of statistics is that large samples are more stable and should fluctuate less from the long-term average—here, 5 0 percent for each of the sexes—than smaller samples. 54 UMBERTO ECO'S ANTILIBRARY T hese s tatisticians would have flunked their own exams. During my days as a q uant I c ounted h undreds o f such severe inferential mistakes made by s tatisticians w ho forgot that they were statisticians. F or a nother illustration of the way we can be ludicrously domainspecific in daily life, g o to the luxury Reebok Sports Club in New Y ork City, a nd look at the number of people who, after riding the escalator for a c ouple of floors, head directly to the StairMasters. T his d omain specificity of our inferences and reactions works both w ays: s ome problems we can u nderstand in their applications but not in t extbooks; o thers we are better at capturing in the textbook t han in the p ractical a pplication. People can manage to effortlessly solve a problem in a s ocial situation but struggle when it is presented as an abstract logical problem. We tend to use different mental machinery—so-called modules— in different situations: our brain lacks a central all-purpose computer that starts with logical rules and applies them equally to all possible situa­ tions. A nd as I've said, we can commit a logical mistake in reality but not in the classroom. T his asymmetry is best visible in cancer detection. Take doctors examining a patient for signs of c ancer; tests are typically done on patients who want to know if they are cured or if there is "recurrence." (In f act, r ecurrence is a misnomer; it simply means that the treatment did not k ill all the cancerous cells a nd that these undetected malignant cells have started to multiply out of control.) It is not feasible, in the present state of t echnology, t o examine every single one of the patient's cells t o see if all of them are nonmalignant, so the doctor takes a sample by scanning the body with as much precision as possible. Then she makes an assumption about what she did not see. I was once taken aback when a doctor told me after a r outine cancer checkup, "Stop worrying, we have evidence of cure." " Why?" I a sked. "There is evidence of no c ancer" was the reply. "How do you know?" I asked. He replied, "The scan is negative." Yet he went around calling himself doctor! An a cronym used in the medical literature is N E D , which stands for No Evidence of Disease. There is no such thing as END, Evidence of No D isease. Y et my experience discussing this matter with plenty of doctors, even those who publish p apers o n their results, is that many slip into the r ound-trip f allacy during c onversation. D octors in the midst of the scientific arrogance of the 1 960s l ooked d own a t mothers' milk as something primitive, as if it could be replicated by t heir laboratories—not realizing that mothers' milk might include use- CONFIRMATION SHMONFIRMATION! 55 fui c omponents that could have eluded their scientific u nderstanding—a simple confusion of absence of evidence o f the benefits of mothers' milk with evidence of absence o f the benefits (another case of Platonicity as "it did not make sense" to breast-feed when we could simply use bottles). M any people paid the price for this naïve inference: those who were not breast-fed as infants t urned o ut to be at an increased risk of a collection of health problems, including a higher likelihood of developing certain types o f c ancer—there had to be in mothers' milk some necessary nutrients that still elude us. Furthermore, benefits to mothers who breast-feed were also neglected, such as a reduction in the risk of breast cancer. Likewise w ith tonsils: the removal of tonsils may lead to a higher i ncidence of throat cancer, but for decades doctors never suspected that this " useless" tissue might actually have a use that escaped their detection. The same with the dietary fiber found in fruits and vegetables: doctors in the 1 960s found it useless because they saw no immediate evidence of its necessity, a nd so they created a malnourished generation. F iber, it t urns o ut, acts t o slow d own t he absorption of sugars in the blood and scrapes the intestinal tract of precancerous c ells. I ndeed medicine has caused plenty of damage throughout history, owing to this simple kind of inferential confusion. I a m not saying here that doctors should not have b eliefs, o nly that some kinds of definitive, closed beliefs need to be avoided—this is what Menodotus and his school seemed to be advocating with their brand of s keptical-empirical m edicine that avoided theorizing. Medicine has gotten better—but many kinds of knowledge have not. Evidence By a m ental mechanism I c all naïve empiricism, we have a natural tendency to look for instances that confirm our story and our vision of the world—these instances are always easy to find. Alas, with tools, and f ools, anything can be easy to find. You take past instances that corroborate your theories and you treat them as evidence. F or instance, a diplomat will show you his "accomplishments," not what he failed to do. Mathematicians will try to convince you that their s cience is useful to society by pointing out instances where it proved helpful, not those where it was a waste of time, or, worse, those numerous mathematical applications that inflicted a severe cost on society owing to the highly unempirical n ature o f elegant m athematical theories. 56 UMBERTO ECO'S ANTILIBRARY Even in testing a hypothesis, we tend to look for instances where the hypothesis proved true. O f course we can easily find confirmation; all we have to do is look, or have a researcher do it for us. I can find confirma­ tion for just about anything, the way a skilled London cabbie can find traffic t o increase the fare, even on a holiday. S ome p eople go further and give me examples of events that we have been a ble to foresee with some success—indeed there are a few, like land­ ing a man on the moon and the economic growth of the twenty-first cen­ tury. O ne can find plenty of "counterevidence" to the points in this book, the best being that newspapers are excellent at predicting movie and the­ ater schedules. Look, I predicted yesterday that the sun would rise today, and it did! N EGATIVE EMPIRICISM T he g ood news is that there is a way around this naive empiricism. I am saying that a series of corroborative facts is not necessarily evidence. See­ ing white swans does not confirm the nonexistence of black swans. There is a n exception, however: I know what statement is wrong, but not neces­ sarily w hat statement is correct. If I see a black swan I can certify that all swans are not whitel I f I see someone k ill, t hen I can be practically certain that he is a criminal. If I d on't see him k ill, I c annot be certain that he is in­ nocent. T he same applies to cancer detection: the finding of a single malig­ nant tumor proves that you have cancer, but the absence of such a finding cannot allow you to say with certainty that you are cancer-free. W e c an get closer to the t ruth by negative instances, not by verification! It is misleading to build a general rule from observed f acts. C ontrary to c onventional w isdom, our body of knowledge does not increase from a se­ ries o f confirmatory observations, like the turkey's. But there are some things I can remain skeptical about, and others I can safely consider cer­ tain. This makes the consequences of observations one-sided. It is not much more difficult t han t hat. T his a symmetry is immensely practical. It tells us that we do not have to be c omplete skeptics, just semiskeptics. The subtlety of real life over the b ooks is that, in your decision making, you need be interested only in one side of the story: if you seek certainty a bout whether the patient has can­ cer, n ot certainty a bout whether he is healthy, then you might be satisfied with negative inference, since it will supply you the certainty you seek. So CONFIRMATION SHMONFIRMATIONI 57 we can learn a lot from d ata—but n ot as much as we expect. Sometimes a l ot o f data can be meaningless; at other times one single piece of informa­ tion can be very meaningful. It is t rue t hat a thousand days cannot prove you right, but one day can prove you to be wrong. T he person who promoted this idea of one-sided semiskepticism is Sir D oktor P rofessor Karl Raimund Popper, who may be the only philosopher o f science who is actually read and discussed by actors in the real world (though not as enthusiastically by professional philosophers). As I am writing these lines, a black-and-white picture of him is hanging on the wall o f my study. It was a gift I got in Munich from the essayist Jochen Wegner, who, like me, considers Popper to be about all "we've got" among mod­ ern thinkers—well, almost. He writes to us, not to other philosophers. " We" are the empirical decision makers who hold that uncertainty is our discipline, and that u nderstanding h ow to act under c onditions of incom­ plete information is the highest and most urgent h uman p ursuit. P opper generated a large-scale theory around this asymmetry, based on a technique called "falsification" (to falsify is to prove wrong) meant to distinguish between science and nonscience, and people immediately started splitting hairs about its technicalities, even though it is not the most interesting, or the most original, of Popper's ideas. This idea about the asymmetry of knowledge is so liked by practitioners, because it is ob­ vious to them; it is the way they run their business. The philosopher maudit C harles Sanders Peirce, who, like an artist, got only posthumous re­ spect, also came up with a version of this B lack S wan solution when Pop­ per was wearing diapers—some people even called it the Peirce-Popper approach. Popper's far more powerful and original idea is the "open" so­ ciety, o ne that relies on skepticism as a m odus o perandi, refusing and re­ sisting definitive truths. He accused Plato of closing our minds, according to the arguments I described in the Prologue. But Popper's biggest idea was his insight concerning the fundamental, severe, and incurable u npre­ dictability o f the world, and that I will leave for the chapter on prediction.* O f c ourse, it is not so easy to "falsify," i.e., to state that something is wrong with full certainty. Imperfections in your testing method may yield a m istaken "no." The doctor discovering cancer cells m ight have faulty * Neither Peirce nor Popper was the first to come up with this asymmetry. The philosopher V ictof B rochard mentioned the i mportance o f negative empiricism in 1 878, as if it were a matter held by the empiricists to be the sound way to do business—ancients understood it implicitly. Out-of-print books deliver many sur­ prises. 58 UMBERTO ECO'S ANTILIBRARY e quipment causing optical illusions; or he could be a bell-curve-using e conomist disguised as a doctor. An eyewitness to a crime might be drunk. But it remains the case that you know what is wrong with a lot more con­ fidence than you know what is right. All pieces of information are not equal in importance. Popper introduced the mechanism of conjectures and refutations, which works as follows: you formulate a (bold) conjecture and you start looking for the observation that would prove you wrong. This is the alter­ native to our search for confirmatory instances. If you think the task is easy, y ou will be disappointed—few humans have a natural ability to do this. I confess that I am not one of them; it does not come naturally to me. Counting to Three C ognitive scientists have studied our natural tendency to look only for corroboration; they c all t his vulnerability to the corroboration error the confirmation bias. T here are some experiments showing that people focus only on the books read in Umberto E co's library. You can test a given rule either directly, by looking at instances where it works, or indirectly, by fo­ cusing on where it does not work. As we saw earlier, disconfirming in­ stances are far more powerful in establishing t ruth. Y et we tend to not be aware of this property. T he first experiment I know of concerning this phenomenon was done by t he psychologist P. C. Wason. He presented subjects with the threenumber sequence 2 , 4 , 6, and asked them to try to guess the rule generat­ ing it. Their method of guessing was to produce other three-number s equences, t o which the experimenter would respond "yes" or "no" de­ pending on whether the new sequences were consistent with the rule. O nce c onfident with their answers, the subjects would formulate the rule. (Note the similarity of this experiment to the discussion in Chapter 1 o f t he way history presents i tself t o us: assuming history is generated ac­ cording to some l ogic, w e see only the events, never the rules, but need to guess how it works.) The correct rule was "numbers in ascending order," nothing more. Very few subjects discovered it because in order to do so they had to offer a series in descending order (that the experimenter would say " n o " to). Wason noticed that the subjects had a rule in mind, but gave him examples aimed at confirming it instead of trying to supply series that were inconsistent with their hypothesis. S ubjects t enaciously kept trying to c onfirm t he rules that they h ad made up. C O N F I R M A T I O N S H M O N F I R M A T I O N ! 59 T his e xperiment inspired a collection of similar tests, of which another e xample: S ubjects were asked which questions to ask to find out whether a person was extroverted or not, p urportedly for another type of experi­ ment. It was established that subjects supplied mostly questions for which a " yes" answer would support t he hypothesis. B ut there are exceptions. Among them figure chess grand masters, who, it has been shown, actually do focus on where a speculative move might be weak; rookies, by comparison, look for confirmatory instances instead of falsifying ones. But d on't p lay chess to practice skepticism. S ci­ entists believe that it is the search for their own weaknesses that makes them good chess players, not the practice of chess that t urns t hem into s keptics. Similarly, the speculator George S oros, w hen making a financial bet, keeps looking for instances that would prove his initial theory wrong. T his, p erhaps, is t rue self-confidence: the ability to look at the world with­ out the need to find signs that stroke one's ego.* Sadly, t he notion of corroboration is rooted in our intellectual habits and discourse. Consider this comment by the writer and critic John Up­ dike: "When Julian Jaynes . . . speculates that until late in the second mil­ lennium B .C . men had no consciousness but were automatically obeying the voices of gods, we are astounded but compelled to follow this remark­ able thesis t hrough all the corroborative evidence." Jaynes's thesis may be right, but, Mr. Updike, the central problem of knowledge (and the point o f this chapter) is that there is no such animal as corroborative e vidence. Saw Another Red Mini! T he following point further illustrates the absurdity of confirmation. If you believe that witnessing an additional white swan will bring confirma­ tion that there are no black swans, then you should also accept the state­ ment, on purely logical grounds, that the sighting of a red Mini Cooper should confirm that there are no black swans. W hy? J ust consider that the statement "all swans are white" implies * This confirmation problem pervades our modern life, since most conflicts have at their r oot the following mental bias: when Arabs and Israelis watch news reports they see different stories in the same succession of events. Likewise, Democrats and Republicans look at different parts o f the same d ata and never converge to the same opinions. Once your mind is inhabited with a certain view of the world, you will tend to only consider instances proving you to be right. Paradoxically, the more information you have, the m ore justified you will feel in your views. 60 UMBERTO ECO'S ANTIUBRARY t hat all nonwhite objects are not swans. W hat confirms the latter statement should confirm the former. Therefore, the sighting of a nonwhite object t hat is not a swan should bring such confirmation. This argument, known as Hempel's raven paradox, was rediscovered by my friend the (thinking) mathematician Bruno Dupire during o ne of our intense meditating walks in London—one of those intense walk-discussions, intense to the point of our not noticing the rain. He pointed to a red Mini and shouted, " Look, N assim, look! N o B lack S wan!" Not Everything W e a re not naïve enough to believe that someone will be immortal because we have never seen him die, or that someone is innocent of murder b ecause we have never seen him k ill. T he problem of naïve generalization does not plague us everywhere. But such smart pockets of inductive skepticism t end to involve events that we have encountered in our natural environment, matters from which we have learned to avoid foolish generalization. F or i nstance, when children are presented with the picture of a single member of a g roup a nd are asked to guess the properties of other unseen members, they are capable of selecting which a ttributes to generalize. S how a c hild a photograph of someone overweight, tell her that he is a member of a tribe, and ask her to describe the rest of the population: she w ill ( most likely) n ot jump to the conclusion that all the members of the tribe are weight-challenged. But she would respond differently to generalizations involving skin color. If you show her people of dark complexion and ask her to describe their co-tribesmen, she will assume that they too have dark skin. S o it seems that we are endowed with specific and elaborate inductive instincts showing us the way. Contrary to the opinion held by the great David Hume, and that of the British empiricist tradition, that belief arises from custom, as they assumed that we learn generalizations solely from e xperience a nd empirical observations, it was shown from studies of infant behavior that we come equipped with mental machinery that causes us to selectively g eneralize from experiences ( i.e., t o selectively acquire inductive learning in some domains but remain skeptical in others). By doing so, we are not learning from a mere thousand days, but benefiting, thanks to evolution, from the learning of our ancestors—which found its way into our biology. C O N F I R M A T I O N S H M O N F I R M A T I O N ! 61 Back to Mediocristan And we may have learned things wrong from our ancestors. I speculate here that we probably inherited the instincts adequate for survival in the E ast African Great Lakes region where we presumably hail from, but these instincts are certainly not well a dapted t o the present, post-alphabet, in­ tensely i nformational, and statistically complex environment. Indeed our environment is a bit more complex t han w e (and our insti­ tutions) seem to realize. How? The modern world, being Extremistan, is dominated by rare—very rare—events. It can deliver a B lack S wan after t housands and t housands o f white ones, so we need to withhold judgment for l onger t han we are inclined to. As I said in Chapter 3, it is impossible— b iologically i mpossible—to run into a h uman several h undred miles tall, so our intuitions rule these events out. But the sales of a book or the mag­ nitude o f social events do not follow such strictures. It takes a lot more t han a t housand days to accept that a writer is ungifted, a market will not c rash, a w ar will not h appen, a p roject is hopeless, a country is "our ally," a c ompany will not go bust, a brokerage-house security analyst is not a charlatan, or a neighbor will not attack us. In the distant past, h umans c ould m ake inferences far more accurately and quickly. Furthermore, the sources of B lack S wans today have multiplied be­ yond measurability. * In the primitive environment they were limited to newly encountered wild animals, new enemies, and a brupt w eather c hanges. T hese events were repeatable enough for us to have built an in­ nate fear of them. This instinct to make inferences rather quickly, and to "tunnel" ( i.e., focus on a small number of sources of uncertainty, or causes o f k nown B lack S wans) remains rather ingrained in us. This instinct, in a word, is our predicament. * Clearly, weather-related and geodesic events (such as tornadoes and earthquakes) have not changed much over the past millennium, but what have changed are the socioeconomic consequences of such o ccurrences. Today, an earthquake o r hurri­ cane c ommands more and m ore severe economic consequences than it did in the past because of the interlocking relationships between economic entities and the intensification of the "network effects" t hat we will discuss in P art T hree. M atters that used to have mild effects now command a high i mpact. Tokyo's 1 9 2 3 e arth­ quake caused a drop o f about a third in J apan's GNP. E xtrapolating from the tragedy of Kobe in 1 994, we can easily infer t hat the consequences of a nother such earthquake in Tokyo would be far costlier than t hat o f its predecessor. C h a p t e r S ix THE NARRATIVE FALLACY The cause of the because—How to split a brain—Effective methods of point­ ing at the ceiling—Dopamine will help you win—I will stop riding motorcycles (but not today)—Both empirical and psychologist? Since when? O N THE CAUSES O F MY R EJECTION O F C AUSES D uring the fall o f 2 0 0 4 , 1 a ttended a conference on aesthetics and science in R ome, p erhaps the best possible location for such a meeting since aes­ thetics p ermeates everything there, down to one's personal behavior and tone of v oice. A t lunch, a prominent professor from a university in south­ ern Italy greeted me with extreme enthusiasm. I had listened earlier that morning to his impassioned presentation; he was so charismatic, so con-, v inced, a nd so convincing that, although I could not understand much of what he said, I found m yself fully agreeing with everything. I could only make out a sentence here and there, since my knowledge of Italian worked better in cocktail parties than in intellectual and scholarly venues. At some point during his speech, he turned all red with anger-—thus convincing me (and the audience) that he was definitely right. He assailed me during l unch to congratulate me for showing the effects o f t hose causal links that are more prevalent in the human mind than in reality. T he conversation got so animated that we stood together near the THE NARRATIVE FALLACY 6 3 buffet t able, blocking the other delegates from getting c lose t o the food. He was speaking accented French (with his hands), I was answering in primitive Italian (with my hands), and we were so vivacious that the other guests were afraid to i nterrupt a c onversation of such importance and an­ imation. He was emphatic about my previous book on randomness, a sort o f angry t rader's r eaction against blindness to luck in life a nd in the mar­ kets, w hich had been published there under t he musical title Giocati dal caso. I h ad been lucky to have a translator who knew almost more about the topic t han I did, and the book found a small following among Italian i ntellectuals. " I am a huge fan of your ideas, but I feel s lighted. These are truly mine too, and you wrote the book that I (almost) planned to write," he said. "You are a lucky man; you presented in such a comprehensive way the effect o f chance on society and the overestimation of cause and ef­ fect. You show how stupid we are to systematically try to explain s kills." H e stopped, then a dded, in a calmer tone: "But, mon cher ami, let me tell you quelque chose [uttered very slowly, with his t humb h itting his i ndex and middle fingers]: h ad you grown up in a Protestant society where people are told that efforts are linked to rewards and individual responsi­ bility is emphasized, you would never have seen the world in such a man­ ner. You were able to see luck and separate cause and effect because o f your Eastern Orthodox Mediterranean heritage." He was using the F rench à cause. A nd he was so convincing that, for a minute, I agreed with his interpretation. We like stories, we like to summarize, and we like to simplify, i.e., to re­ duce the dimension of matters. The first of the problems of h uman n ature t hat we examine in this section, the one just illustrated above, is what I c all t he narrative fallacy. (It is actually a fraud, but, to be more polite, I will call it a fallacy.) T he fallacy is associated with our vulnerability to overinterpretation and our predilection for compact stories over raw truths. It severely d istorts our mental representation of the world; it is particularly acute when it comes to the rare event. N otice h ow my thoughtful Italian fellow traveler shared my militancy against overinterpretation and against the overestimation of cause, yet was unable to see me and my work without a reason, a cause, tagged to both, as anything other t han p art o f a story. He had to invent a c ause. Fur­ thermore, he was not aware of his having fallen into the causation trap, nor was I immediately aware of it myself. T he n arrative fallacy addresses our limited ability to look at sequences 64 UMBERTO ECO'S ANTIUBRARY o f facts without weaving an explanation into them, or, equivalently, forc­ ing a logical link, an arrow of relationship, u pon t hem. Explanations bind f acts t ogether. They make them all the more easily remembered; they help them make more sense. W here this propensity can go wrong is when it in­ creases o ur impression o f understanding. T his c hapter will cover, just like the preceding one, a single problem, but s eemingly in different disciplines. The problem of narrativity, although ex­ tensively studied in one of its versions by psychologists, is not so "psycho­ logical": s omething about the way disciplines are designed masks the point that it is more generally a problem of information. W hile narrativity c omes from an ingrained biological need to reduce dimensionality, robots would be prone to the same process of reduction. Information wants t o be reduced. T o help the reader locate himself: in studying the problem of induction in the previous chapter, we examined what could be inferred about the un­ seen, w hat lies outside o ur information set. Here, we look at the seen, what lies within t he information set, and we examine the distortions in the a ct o f processing it. There is plenty to say on this topic, but the angle I take c oncerns n arrativity's simplification of the world around us and its effects on our perception o£ the B lack S wan and wild uncertainty. S PLITTING B RAINS F erreting o ut antilogies is an exhilarating activity. For a few months, you e xperience t he titillating sensation that you've just entered a new world. After t hat, the novelty fades, and your thinking r eturns t o business as usual. The world is dull a gain until you find another subject to be excited about (or manage to put another hotshot in a state of total rage). F or m e, one such antilogic came with the discovery—thanks to the lit­ erature on cognition—that, counter to what everyone believes, not theo­ rizing is an act—that theorizing can correspond to the absence of willed activity, t he "default" option. It takes considerable effort to see facts (and remember them) while withholding judgment and resisting explanations. And this theorizing disease is rarely under o ur control: it is largely a natomical, p art o f our biology, so fighting it requires fighting one's own self. S o the ancient skeptics' precepts to withhold judgment go against our nature. Talk is cheap, a problem with advice-giving philosophy we will see in Chapter 13. THE NARRATIVE FALLACY 6 5 Try t o be a t rue s keptic with respect to your interpretations and you will be worn out in no time. You will also be humiliated for resisting to theorize. (There are tricks to achieving t rue s kepticism; but you have to go t hrough t he back door rather t han e ngage in a frontal attack on yourself.) Even from an anatomical perspective, it is impossible for our brain to see anything in raw form without some interpretation. We may not even al­ ways be conscious of it. Post hoc rationalization. In an experiment, psychologists asked women to select from among twelve pairs of nylon stockings the ones they pre­ ferred. The researchers then asked the women their reasons for their c hoices. T exture, " feel," and c olor featured among the selected reasons. All the pairs of stockings were, in f act, i dentical. The women supplied backfit, post hoc e xplanations. Does this suggest that we are better at explaining than at understanding? Let us see. A series of famous experiments on split-brain patients gives us con­ vincing physical—that is, biological—evidence of the automatic aspect of the act of interpretation. There appears, to be a sense-making organ in us—though it may not be easy to zoom in on it with any precision. Let us see h ow it is detected. Split-brain patients have no connection between the left a nd the right sides of their brains, which prevents information from being shared between the two cerebral hemispheres. These patients are j ewels, r are and invalu­ able for researchers. You literally have two different persons, and you can communicate with each one of them separately; the differences between the two individuals give you some indication about the specialization of each o f the hemispheres. This splitting is usually the result of surgery to remedy more serious conditions like severe epilepsy; no, scientists in West­ ern countries (and most Eastern ones) are no longer allowed to cut h uman b rains in half, even if it is for the p ursuit o f knowledge and wisdom. Now, say that you induced such a person to perform an act—raise his finger, laugh, or grab a shovel—in order to ascertain how he ascribes a reason to his act (when in f act y ou know that there is no reason for it other t han your inducing it). If you ask the right hemisphere, here isolated from the left side, to perform the action, then ask the other hemisphere for an explanation, the patient will invariably offer s ome interpretation: "I was pointing at the ceiling in order to . . . , " "I saw something interesting on the wall," or, if you ask this author, I will offer m y usual "because I am originally from the Greek Orthodox village of Amioun, northern L ebanon," et cetera. 66 UMBERTO ECO'S ANTILIBRARY N ow, if you do the opposite, namely instruct the isolated left hemi­ sphere of a right-handed person to perform an act and ask the right hemi­ sphere for the reasons, you will be plainly told, "I don't know." Note that the left hemisphere is where language and deduction generally reside. I warn the reader hungry for " science" a gainst attempts to build a neural map: all I'm trying to show is the biological basis of this tendency toward c ausality, n ot its precise location. There are reasons for us to be suspicious o f t hese "right brain/left brain" distinctions and subsequent pop-science generalizations about personality. Indeed, the idea that the left brain con­ trols language may not be so accurate: the left brain seems more precisely to be where pattern recognition resides, and it may control language only i nsofar as language has a pattern-recognition attribute. Another difference between the hemispheres is that the right brain deals with novelty. It tends to see series of facts (the particular, or the trees) while the left one per­ ceives t he patterns, the gestalt (the general, or the forest). T o see an illustration of our biological dependence on a story, consider the following experiment. First, read this: A THE BIRD HAND IN T I NT IS H H E WORTH E BUSH TWO D o y ou see anything unusual? Try again.* T he S ydney-based brain scientist Alan Snyder (who has a Philadelphia a ccent) m ade the following discovery. If you inhibit the left hemisphere of a r ight-handed person (more technically, by directing low-frequency mag­ netic pulses into the left frontotemporal l obes), y ou lower his rate of error in reading the above caption. Our propensity to impose meaning and con­ cepts blocks our awareness of the details making up the concept. However, i f y ou zap people's left hemispheres, they become more realistic—they c an d raw b etter and with more verisimilitude. Their minds become bet­ ter at seeing the objects themselves, cleared of theories, narratives, and p rejudice. W hy is it hard to avoid interpretation? It is key that, as we saw with the vignette of the Italian scholar, brain functions often operate outside our awareness. You interpret pretty much as you perform other activities deemed automatic and outside your control, like breathing. * T he word the is written twice. THE NARRATIVE FALLACY 6 7 W hat m akes nontheorizing cost y ou so much more energy t han t heo­ rizing? F irst, there is the impenetrability of the activity. I said that much of it t akes place outside of our awareness: if you d on't k now that you are making the inference, how can you stop yourself unless you stay in a con­ tinuous state of alert? And if you need to be continuously on the watch, doesn't that cause fatigue? Try it for an afternoon and see. A Little More Dopamine In addition to the story of the left-brain interpreter, we have more physio­ logical evidence of our ingrained p attern seeking,* t hanks to our growing knowledge of the role of neurotransmitters, the chemicals that are as­ sumed to transport signals between different p arts o f the brain. It appears that p attern p erception increases along with the concentration in the brain o f the chemical dopamine. Dopamine also regulates moods and supplies an internal reward system in the brain (not surprisingly, it is found in slightly higher concentrations in the left side of the brains of right-handed persons t han on the right s ide). A h igher concentration of dopamine ap­ pears to lower skepticism and result in greater vulnerability to p attern de­ tection; an injection of L-dopa, a substance used to treat patients with Parkinson's disease, seems to increase such activity and lowers one's sus­ pension of belief. T he person becomes vulnerable to all manner of fads, such as astrology, superstitions, economics, and tarot-card reading. Actually, as I am writing this, there is news of a pending lawsuit by a patient going after his doctor for more t han $ 2 0 0 , 0 0 0 — a n a mount he al­ legedly l ost while gambling. The patient claims that the treatment of his Parkinson's disease caused him to go on wild betting sprees in casinos. It turns o ut that one of the side effects o f L-dopa is that a small but signifi­ cant m inority of patients become compulsive gamblers. S ince s uch gam­ bling is associated with their seeing what they believe to be clear patterns in random numbers, this illustrates the relation between knowledge and randomness. It also shows that some aspects of what we c all " knowledge" (and what I c all n arrative) are an ailment. O nce a gain, I w arn t he reader that I am not focusing on dopamine as the reason for our overinterpreting; rather, my point is that there is a physi­ cal and neural correlate to such operation and that our minds are largely victims o f our physical embodiment. Our minds are like inmates, captive to our biology, unless we manage a cunning escape. It is the l ack o f our c ontrol o f such inferences that I am stressing. Tomorrow, someone may 68 UMBERTO ECO'S ANTIUBRARY d iscover a nother chemical or organic basis for our perception of patterns, o r c ounter what I said about the left-brain interpreter by showing the role o f a m ore complex structure; but it would not negate the idea that percep­ tion of causation has a biological foundation. Andrey Nikolayevich's Rule T here is another, even deeper reason for our inclination to narrate, and it is n ot psychological. It has to do with the effect o f order on information storage and retrieval in any system, and it's worth explaining here because o f w hat I consider the central problems of probability and information theory. T he first problem is that information is costly to obtain. T he s econd problem is that information is also costly to store—like real estate in New Y ork. T he more orderly, less random, patterned, and narratized a series of w ords o r symbols, the easier it is to store that series in one's mind or jot it d own in a book so your grandchildren can read it someday. Finally, i nformation is costly to manipulate and retrieve. W ith s o many brain cells—one h undred b illion (and counting)—the attic is quite large, so the difficulties probably do not arise from storagecapacity l imitations, but may be just indexing problems. Your conscious, o r w orking, memory, the one you are using to read these lines and make sense of their meaning, is considerably smaller t han t he attic. Consider that your working memory has difficulty holding a mere phone number longer t han seven digits. Change metaphors slightly and imagine that your c onsciousness is a desk in the Library of Congress: no matter how many books the library holds, and makes available for retrieval, the size of your desk sets some processing limitations. Compression is vital to the perfor­ mance of conscious work. Consider a collection of w ords glued together to constitute a 500-page b ook. I f the w ords a re purely random, picked up from the dictionary in a totally unpredictable way, you will not be able to summarize, transfer, or reduce the dimensions of that book without losing something significant from it. You need 1 0 0 , 0 0 0 w ords t o carry the exact message of a random 1 0 0 , 0 0 0 w ords w ith you on your next t rip t o Siberia. Now consider the opposite: a book filled with the repetition of the following sentence: "The chairman of [insert here your company name] is a lucky fellow who hap­ pened to be in the right place at the right time and claims credit for the THE NARRATIVE FALLACY 6 9 c ompany's success, without making a single allowance for luck," r unning ten times per page for 5 0 0 pages. The entire book can be accurately com­ pressed, as I have just done, into 3 4 w ords ( out of 1 0 0 , 0 0 0 ) ; y ou could re­ produce it with total fidelity out of such a kernel. By finding the pattern, the logic of the series, you no longer need to memorize it all. You just store the pattern. And, as we can see here, a p attern is obviously more com­ pact t han r aw information. You looked into the book and found a rule. It is a long these lines that the great probabilist Andrey Nikolayevich Kolmogorov defined the degree of randomness; it is called "Kolmogorov com­ plexity." W e, m embers of the h uman v ariety of primates, have a hunger for rules because we need to reduce the dimension of matters so they can get into our heads. Or, rather, sadly, so we can squeeze t hem into our heads. The more random information is, the greater the dimensionality, and thus t he more difficult to summarize. The more you summarize, the more order you put in, the less randomness. Hence the same condition that makes us simplify pushes us to think that the world is less random than it actually is. And the B lack S wan is what we leave out of simplification. B oth t he artistic and scientific enterprises are the product of our need to reduce dimensions and inflict some order on things. Think of the world around you, laden with trillions of details. Try to describe it and you will find y ourself t empted to weave a thread into what you are saying. A novel, a story, a myth, or a tale, all have the same function: they spare us from the complexity of the world and shield us from its randomness. Myths im­ part order to the disorder of h uman p erception and the perceived "chaos o f h uman e xperience." * Indeed, many severe psychological disorders accompany the feeling of loss o f control of—being able to "make sense" of—one's environment. P latonicity affects us here once again. The very same desire for order, interestingly, applies to scientific pursuits—it is just that, unlike art, the (stated) purpose o f science is to get to the t ruth, n ot to give you a feeling of organization or make you feel better. We tend to use knowledge as therapy. * The Parisian novelist Georges Perec tried to break a way from n arrative and at­ tempted t o write a book as large as the world. He had to settle for an exhaustive a ccount o f what happened on the Place Saint-Sulpice between October 18 and Oc­ tober 2 0 , 1 9 7 4 . Even so, his a ccount w as not so exhaustive, and he ended up with a narrative. 70 UMBERTO ECO'S ANTILIBRARY A Better Way to Die T o v iew the potency of narrative, consider the following statement: "The king died and the queen died." Compare it to "The king died, and then the queen died of grief." This e xercise, presented by the novelist E. M . Forster, shows the distinction between mere succession of information and a plot. B ut n otice the hitch here: although we added i nformation to the second statement, we effectively r educed the dimension of the total. The second s entence i s, in a way, much lighter to carry and easier to remember; we now have one single piece of information in place of two. As we can re­ member it with less effort, we can also sell it to others, that is, market it better as a packaged idea. T his, in a nutshell, is the definition and function o f a narrative. T o see how the narrative can lead to a mistake in the assessment of the odds, do the following experiment. Give someone a well-written detective story—say, an Agatha Christie novel with a handful of characters who can all b e plausibly deemed guilty. Now question your subject about the prob­ abilities o f each character's being the murderer. Unless she writes down the percentages to keep an e xact t ally of them, they should add up to well over 1 00 p ercent (even well over 2 0 0 percent for a good novel). The better the d etective writer, the higher that number. R EMEMBRANCE O F T HINGS NOT QUITE P AST O ur tendency to perceive—to impose—narrativity a nd causality are symp­ toms of the same disease—dimension reduction. Moreover, like causality, narrativity has a chronological dimension and leads to the perception of the flow of time. Causality makes time flow in a single direction, and so does narrativity. B ut m emory and the arrow of time can get mixed up. Narrativity can v iciously affect t he remembrance of past events as follows: we will tend to more easily remember those facts from our past that fit a narrative, while we tend to neglect others that do not appear t o play a causal role in that narrative. Consider that we recall events in our memory all the while knowing the answer of what happened subsequently. It is literally impos­ sible t o ignore posterior information when solving a problem. This simple i nability t o remember not the t rue s equence of events but a reconstructed one will make history appear in hindsight to be far more explainable t han it a ctually was—or is. THE NARRATIVE FALLACY 7 1 C onventional wisdom holds that memory is like a serial recording de­ vice like a computer diskette. In reality, memory is dynamic—not static— like a p aper on which new texts (or new versions of the same text) will be continuously recorded, thanks to the power of posterior information. (In a r emarkable insight, the nineteenth-century Parisian poet Charles Baude­ laire c ompared our memory to a palimpsest, a type of parchment on which old texts can be erased and new ones written over them.) Memory is m ore of a self-serving dynamic revision machine: you remember the last time you remembered the event and, without realizing it, change the story at every subsequent remembrance. So we pull memories along causative lines, revising them involuntarily and unconsciously. We continuously renarrate past events in the light of what appears to make what we think of as logical sense after these events occur. By a p rocess called reverberation, a memory corresponds to the strengthening of connections from an increase of brain activity in a given s ector o f the brain—the more activity, the stronger the memory. While we believe t hat the memory is fixed, c onstant, and connected, all this is very far from t ruth. W hat makes sense according to information obtained subsequently will be remembered more vividly. We invent some of our m emories—a s ore point in courts of law since it has been shown that plenty of people have invented child-abuse stories by d int o f listening to t heories. The Madman's Narrative We h ave far too many possible ways to interpret past events for our own good. C onsider t he behavior of paranoid people. I have had the privilege to work with colleagues who have hidden p aranoid disorders that come to the surface on occasion. When the person is highly intelligent, he can astonish you with the most far-fetched, yet completely plausible inter­ pretations of the most innocuous remark. If I say to them, "I am afraid t h a t . . . ," in reference to an undesirable state of the world, they may in­ terpret it literally, that I am experiencing actual fright, and it triggers an episode of fear on the p art o f the paranoid person. Someone hit with such a disorder can muster the most insignificant of details and construct an e laborate a nd coherent theory of why there is a conspiracy against him. And if you gather, say, ten paranoid people, all in the same state of 72 UMBERTO ECO'S ANTIUBRARY e pisodic delusion, the ten of them will provide ten distinct, yet coherent, interpretations of events. W hen I w as about seven, my schoolteacher showed us a painting of an a ssembly o f impecunious Frenchmen in the Middle Ages at a banquet held by o ne of their benefactors, some benevolent king, as I recall. They were holding the soup bowls to their lips. The schoolteacher asked me why they had their noses in the bowls and I answered, "Because they were not taught manners." She replied, "Wrong. The reason is that they are hun­ gry." I felt stupid at not having thought of this, but I could not understand what made one explanation more likely than the other, or why we weren't both wrong (there was no, or little, silverware at the time, which seems the most likely explanation). B eyond o ur perceptional distortions, there is a problem with logic itself. How can someone have no clue yet be able to hold a set of perfectly sound and coherent viewpoints that match the observations and abide by every single possible rule of logic? C onsider that two people can hold incompati­ ble beliefs based on the exact same data. Does this mean that there are pos­ sible families of explanations and that each of these can be equally perfect and sound? Certainly not. One may have a million ways to explain things, but the true explanation is unique, whether or not it is within our reach. In a f amous argument, the logician W. V. Quine showed that there e xist families of logically consistent interpretations and theories that can match a given series of f acts. S uch insight should warn us that mere ab­ sence o f nonsense may not be sufficient to make something true. Quine's problem is related to his finding difficulty in translating state­ ments between languages, simply because one could interpret any sentence in an infinity of ways. (Note here that someone splitting hairs could find a s elf-canceling a spect to Quine's own writing. I wonder how he expects us to understand this very point in a noninfinity of ways). T his does not mean that we cannot talk about causes; there are ways to escape the narrative fallacy. How? By making conjectures and running experiments, or as we will see in Part Two ( alas), by making testable pre­ dictions.* T he psychology experiments I am discussing here do so: they se­ lect a p opulation and run a test. The results should hold in Tennessee, in C hina, even in France. * Such tests avoid both the narrative fallacy and much of the confirmation bias, since testers a re obliged to take into a ccount the failures as well as the successes of their experiments. THE NARRATIVE FALLACY 7 3 Narrative and Therapy I f n arrativity causes us to see past events as more predictable, more ex­ pected, and less random t han they actually were, then we should be able to make it work for us as therapy against some of the stings of random­ ness. Say some unpleasant event, such as a car accident for which you feel indirectly r esponsible, leaves you with a bad lingering aftertaste. You are tortured by the thought that you caused injuries to your passengers; you are continuously aware that you could have avoided the accident. Y our mind keeps playing alternative scenarios branching out of a main tree: if you did not wake up three minutes later t han u sual, you would have avoided the car accident. It was not your intension to injure your passen­ gers, yet your mind is inhabited with remorse and guilt. People in profes­ sions w ith high randomness (such as in the markets) can suffer more t han their share of the t oxic effect o f look-back stings: I should have sold my p ortfolio at the top; I could have bought that stock years ago for pennies and I would now be driving a pink convertible; et cetera. If you are a pro­ fessional, y ou can feel t hat you "made a mistake," or, worse, that "mis­ takes were made," when you failed to do the equivalent of buying the winning lottery ticket for your investors, and feel t he need to apologize for your "reckless" investment strategy (that is, what seems reckless in retro­ spect). H ow can you get rid of such a persistent throb? Don't try to willingly avoid thinking about it: this will almost surely backfire. A more a ppropri­ ate solution is to make the event appear more unavoidable. Hey, it was bound to take place and it seems futile to agonize over it. How can you do so? W ell, with a narrative. P atients who spend fifteen minutes every day writing an account of their daily troubles feel indeed better about what has befallen them. You feel less guilty for not having avoided certain events; you feel less responsible for it. Things appear as if they were bound to h appen. I f you work in a randomness-laden profession, as we see, you are likely to suffer b urnout effects from that constant second-guessing of your past a ctions in terms of what played out subsequently. Keeping a diary is the least you can do in these circumstances. 74 UMBERTO ECO'S ANTILIBRARY T O BE W R O N G W ITH INFINITE P RECISION W e h arbor a crippling dislike for the abstract. One day in December 2 0 0 3 , w hen Saddam Hussein was captured, B loomberg N ews flashed the following headline at 1 3:01: u .s. SURIES RISE; HUSSEIN CAPTURE MAY NOT CURB TERRORISM. TREA­ W henever there is a market move, the news media feel o bligated to give t he "reason." H alf a n hour later, they had to issue a new headline. As these U .S. T reasury bonds fell in price (they fluctuate all day long, so there was nothing special about that), Bloomberg News had a new reason for the fall: S addam's capture (the same Saddam). At 13:31 they issued the n ext b ulletin: u.s. LURE OF RISKY TREASURIES FALL; HUSSEIN CAPTURE BOOSTS AL­ ASSETS. S o it was the same capture (the cause) explaining one event and its e xact o pposite. Clearly, this can't be; these two facts cannot be linked. D o m edia journalists repair to the nurse's office every morning to get their daily dopamine injection so that they can narrate better? (Note the irony that the word dope, used to designate the illegal drugs athletes take to improve performance, has the same root as dopamine.) It h appens all the time: a cause is proposed to make you swallow the news and make matters more concrete. After a candidate's defeat in an e lection, y ou will be supplied with the "cause" of the voters' disgruntlement. Any conceivable cause can do. The media, however, go to great lengths to make the process "thorough" with their armies of fact-checkers. It is as if they wanted to be wrong with infinite precision (instead of ac­ cepting being approximately right, like a fable writer). Note that in the absence of any other information about a person you encounter, you tend to fall b ack on her nationality and background as a salient attribute (as the Italian scholar did with me). How do I know that this attribution to the background is bogus? I did my own empirical test by c hecking how many t raders w ith my background who experienced the same war became skeptical empiricists, and found none out of twenty-six. T his n ationality business helps you make a great story and satisfies your hunger for ascription of causes. It seems to be the dump site where all ex­ planations go until one can ferret out a more obvious one (such as, say, some evolutionary argument that "makes s ense"). I ndeed, people tend to f ool t hemselves with their self-narrative of "national identity," which, in a breakthrough paper in Science by sixty-five authors, was shown to be a t otal fiction. ("National traits" might be great for movies, they might THE NARRATIVE FALLACY 7 5 help a lot with war, but they are Platonic notions that carry no empirical validity—yet, for example, both the English and the non-English erro­ neously believe in an English "national temperament.") Empirically, sex, s ocial c lass, a nd profession seem to be better predictors of someone's be­ havior t han n ationality (a male from Sweden resembles a male from Togo more t han a female from Sweden; a philosopher from Peru resembles a philosopher from Scotland more t han a j anitor from Peru; and so on). T he p roblem of overcausation does not lie with the journalist, but with the public. Nobody would pay one dollar to buy a series of abstract statis­ tics r eminiscent of a boring c ollege l ecture. We want to be told stories, and there is nothing wrong with that—except that we should c heck m ore thor­ oughly whether the story provides consequential distortions of reality. Could it be that fiction reveals t ruth w hile nonfiction is a harbor for the liar? C ould it be that fables and stories are closer to the t ruth t han is the thoroughly fact-checked ABC News? Just consider that the newspapers try to get impeccable f acts, b ut weave them into a narrative in such a way as to convey the impression of causality (and knowledge). There are f actcheckers, n ot i ntellect-checkers. A las. B ut t here is no reason to single out journalists. Academics in narrative disciplines do the same thing, but dress it up in a formal language—we will c atch up to them in Chapter 10, on prediction. Besides n arrative and causality, journalists and public intellectuals of the sound-bite variety do not make the world simpler. Instead, they almost invariably make it look far more complicated t han it is. The next time you are asked to discuss world events, plead ignorance, and give the arguments I offered in this chapter casting d oubt o n the visibility of the immediate c ause. Y ou will be told that "you overanalyze," or that "you are too com­ plicated." All you will be saying is that you d on't k now! Dispassionate Science N ow, if you think that science is an abstract subject free of sensationalism and distortions, I have some sobering news. Empirical researchers have found evidence that scientists too are vulnerable to narratives, emphasiz­ ing titles and " sexy" a ttention-grabbing punch lines over more substantive matters. They too are h uman a nd get their attention from sensational mat­ ters. T he way to remedy this is t hrough m eta-analyses of scientific studies, in which an iiberresearcher peruses the entire literature, which includes the less-advertised articles, and produces a synthesis. 76 UMBERTO ECO'S ANTILIBRARY T HE S ENSATIONAL A ND T HE BLACK S WAN L et us see how narrativity affects our u nderstanding o f the B lack S wan. Narrative, as well as its associated mechanism of salience of the sensa­ tional fact, can mess up our projection of the odds. Take the following ex­ periment conducted by Kahneman and Tversky, the pair introduced in the previous chapter: the subjects were forecasting professionals who were asked to imagine the following scenarios and estimate their odds. a. A massive flood somewhere in America in which more t han a t hou­ sand people die. b . An earthquake in California, c ausing massive flooding, in which more t han a t housand people die. Respondents estimated the first event to be less likely t han t he second. An earthquake in California, however, is a readily imaginable cause, which greatly increases the mental availability—hence the assessed probability— o f t he flood scenario. L ikewise, i f I asked you how many cases of lung cancer are likely to take place in the country, you would supply some number, say h alf a mil­ lion. N ow, if instead I asked you many cases of lung cancer are likely to take place because o f smoking, odds a re that you would give me a much higher number (I would guess more t han t wice as high). Adding the be­ cause m akes these matters far more plausible, and far more likely. C ancer from smoking seems more likely t han c ancer without a cause attached to it—an unspecified cause means no cause at all. I r eturn t o the example of E . M . Forster's plot from earlier in this chap­ ter, but seen from the standpoint of probability. Which of these two state­ ments seems more likely? Joey seemed happily married. He killed his wife. Joey seemed happily married. He killed his wife to get her inheritance. C learly t he second statement seems more likely at first blush, which is a p ure m istake of l ogic, since the first, being broader, can accommodate more causes, such as he killed his wife because he went mad, because she cheated with both the postman and the ski instructor, because he entered a s tate of delusion and mistook her for a financial forecaster. All t his can lead to pathologies in our decision making. How? J ust i magine that, as shown by Paul S lovic a nd his collaborators, peo- THE NARRATIVE FALLACY 7 7 pie are more likely to pay for terrorism insurance t han f or plain insurance (which covers, among other things, terrorism). T he B lack S wans we imagine, discuss, and worry about do not resem­ ble t hose likely to be B lack S wans. We worry about the wrong "improba­ ble" events, as we will see next. Black Swan Blindness T he first question about the paradox of the perception of B lack S wans is as follows: How is it that some B lack S wans are overblown in our minds when the topic of this book is that we mainly neglect B lack S wans? T he a nswer is that there are two varieties of rare events: a) the narrated B lack S wans, those that are present in the current discourse and that you are likely to hear about on television, and b) those nobody talks about, since they escape models—those that you would feel a shamed discussing in public because they do not seem plausible. I can safely say that it is en­ tirely compatible with h uman n ature t hat the incidences of B lack S wans would be overestimated in the first c ase, b ut severely underestimated in the second one. Indeed, lottery buyers overestimate their chances of winning because they visualize such a potent payoff—in fact, they are so blind to the odds t hat they treat odds o f one in a thousand and one in a million almost in the same way. Much of the empirical research agrees with this p attern o f overestima­ tion and underestimation of B lack S wans. Kahneman and Tversky initially showed that people overreact to low-probability outcomes when you dis­ cuss the event with them, w hen you make them aware of it. If you ask s omeone, " What is the probability of death from a plane crash?" for in­ stance, they will raise it. However, S lovic a nd his colleagues found, in in­ surance patterns, neglect of these highly improbable events in people's insurance purchases. They c all it the "preference for insuring against probable small losses"—at the expense of the less probable but larger im­ pact ones. Finally, after years of searching for empirical tests of our scorn of the abstract, I found researchers in Israel that ran the experiments I had been waiting for. Greg Barron and Ido Erev provide experimental evidence that agents underweigh small probabilities when they engage in sequential ex­ periments in which they derive the probabilities themselves, w hen they are 78 UMBERTO ECO'S ANTILIBRARY n ot supplied with the odds. If you d raw from an urn with a very small number of red balls and a high number of black ones, and if you do not have a clue about the relative proportions, you are likely to underestimate the number of red balls. It is only when you are supplied with their frequency—say, by telling you that 3 percent of the balls are red—that you overestimate it in your betting decision. I've spent a lot of time wondering how we can be so myopic and shorttermist yet survive in an environment that is not entirely from Medioc­ ristan. One day, looking at the gray beard that makes me look ten years older t han I a m and thinking about the pleasure I derive from exhibiting it, I r ealized the following. Respect for elders in many societies might be a kind of compensation for our short-term memory. The word senate c omes f rom senatus, " aged" in Latin; sheikh in Arabic means both a member of the ruling elite and "elder." Elders are repositories of complicated induc­ tive l earning that includes information about rare events. Elders can scare us with stories—which is why we become overexcited when we think of a specific B lack S wan. I was- excited to find out that this also holds true in the animal kingdom: a paper in Science s howed that elephant matriarchs play the role of superadvisers on rare events. W e l earn from repetition—at the expense of events that have not hap­ pened before. Events that are nonrepeatable are ignored before their oc­ currence, a nd overestimated after (for a while). After a B lack S wan, such as September 1 1 , 2 0 0 1 , p eople expect it to recur when in fact the odds o f that happening have arguably been lowered. We like to think about spe­ cific a nd known B lack S wans when in fact the very n ature o f randomness lies in its abstraction. As I said in the Prologue, it is the wrong definition o f a g od. T he e conomist Hyman Minsky sees the cycles o f risk taking in the e conomy as following a pattern: stability and absence of crises encourage risk t aking, complacency, and lowered awareness of the possibility of problems. Then a crisis occurs, resulting in people being shell-shocked and s cared o f investing their resources. Strangely, both Minsky and his school, dubbed Post-Keynesian, and his opponents, the libertarian "Austrian" e conomists, h ave the same analysis, except that the first g roup r ecom­ mends governmental intervention to smooth out the c ycle, while the sec­ ond believes that civil s ervants should not be trusted to deal with such matters. While both schools of thought seem to fight each other, they both emphasize fundamental uncertainty and stand outside the mainstream e conomic d epartments (though they have large followings among busi- THE NARRATIVE FALLACY 7 9 nessmen and nonacademics). No d oubt t his emphasis on fundamental un­ certainty b others the Platonifiers. All the tests of probability I discussed in this section are important; they show how we are fooled by the rarity of B lack S wans but not by the r ole they play in the aggregate, their impact. In a preliminary study, t he p sychologist D an Goldstein and I subjected s tudents a t the London B usi­ ness S chool t o examples from two domains, Mediocristan and Extremis­ tan. We selected height, weight, and Internet hits per website. The subjects were good at guessing the role of rare events in Mediocristan-style envi­ ronments. But their intuitions failed when it came to variables outside M ediocristan, s howing that we are effectively not skilled at intuitively gauging the impact of the improbable, such as the contribution of a block­ buster to total book sales. In one experiment they underestimated by thirty-three times the effect o f a rare event. N ext, let us see how this lack of u nderstanding o f abstract matters af­ fects us. The Pull of the Sensational Indeed, abstract statistical information does not sway us as much as the anecdote—no matter how sophisticated the person. I will give a few in­ stances. The Italian Toddler. In the late 1 970s, a t oddler fell i nto a well in Italy. T he rescue team could not pull him out of the hole and the child stayed at the bottom of the well, helplessly crying. Understandably, the whole of Italy w as concerned with his fate; the entire country h ung o n the frequent news updates. The child's cries produced acute pains of guilt in the pow­ erless rescuers and reporters. His picture was prominently displayed on magazines and newspapers, and you could hardly walk in the center of M ilan w ithout being reminded of his plight. M eanwhile, t he civil w ar was raging in Lebanon, with an occasional hiatus in the conflict. While in the midst of their mess, the Lebanese were a lso a bsorbed in the fate of that child. The Italian c hild. Five miles away, people were dying from the war, citizens were threatened with car bombs, but the fate of the Italian child ranked high among the interests of the population in the Christian quarter of Beirut. "Look how cute that poor thing is," I was told. And the entire town expressed r elief u pon his even­ tual rescue. 80 UMBERTO ECO'S ANTILIBRARY As S talin, who knew something about the business of mortality, sup­ posedly said, "One death is a tragedy; a million is a statistic." Statistics stay silent in us. T errorism k ills, b ut the biggest killer remains the environment, respon­ sible f or close to 13 million deaths annually. But terrorism causes out­ rage, w hich makes us overestimate the likelihood of a potential terrorist attack—and react more violently to one when it happens. We feel t he sting o f m an-made damage far more t han t hat caused by nature. Central Park. Y ou are on a plane on your way to spend a long (bibulous) weekend in New Y ork City. You are sitting next to an insurance salesman who, being a salesman, cannot stop talking. For him, not talking is the ef­ fortful activity. He tells you that his cousin (with whom he will celebrate the holidays) worked in a law office w ith someone whose brother-in-law's business partner's twin brother was mugged and killed in Central Park. In­ deed, Central Park in glorious New Y ork City. That was in 1 9 8 9 , if he remembers it well (the year is now 2 0 0 7 ) . T he poor victim was only thirtyeight and had a wife and three children, one of whom had a birth defect and needed special care at Cornell Medical Center. Three children, one of whom needed special care, lost their father because of his foolish visit to Central Park. W ell, y ou are likely to avoid Central Park during y our stay. You know you can get crime statistics from the Web or from any brochure, rather t han a necdotal information from a verbally incontinent salesman. But you c an't help it. For a while, the name Central Park will conjure up the image o f t hat that poor, undeserving man lying on the polluted grass. It will take a l ot of statistical information to override your hesitation. Motorcycle Riding. L ikewise, t he death of a relative in a motorcycle a cci­ dent is far more likely to influence your a ttitude t oward motorcycles t han v olumes of statistical analyses. You can effortlessly look up accident sta­ tistics o n the Web, but they do not easily come to mind. Note that I ride my red Vespa around town, since no one in my immediate environment has recently suffered an accident—although I am aware of this problem in l ogic, I a m incapable of acting on it. Now, I do not disagree with those recommending the use of a narrative to get attention. Indeed, our consciousness may be linked to our ability to c oncoct s ome form of story about ourselves. It is just that narrative can be l ethal w hen used in the wrong places. THE NARRATIVE FALLACY 8 1 T HE S HORTCUTS N ext I will go beyond narrative to discuss the more general attributes of thinking and reasoning behind our crippling shallowness. These defects in reasoning have been cataloged and investigated by a powerful research tradition represented by a school called the S ociety o f Judgment and D eci­ sion Making (the only academic and professional society of which I am a member, and p roudly s o; its gatherings are the only ones where I do not have tension in my shoulders or anger fits). I t is associated with the school o f research started by Daniel Kahneman, Amos Tversky, and their friends, such as Robyn Dawes and Paul S lovic. I t is mostly composed of empirical psychologists and cognitive scientists whose methodology hews strictly to running very precise, controlled experiments (physics-style) on humans and making catalogs of how people react, with minimal theorizing. They l ook for regularities. Note that empirical psychologists use the bell curve to gauge errors in their testing methods, but as we will see more techni­ cally in Chapter 15, this is one of the rare adequate applications of the bell curve in social s cience, o wing to the n ature o f the experiments. We have seen such types of experiments earlier in this chapter with the flood in Cal­ ifornia, and with the identification of the confirmation bias in Chapter 5. T hese r esearchers have mapped our activities into (roughly) a dual m ode o f t hinking, which they separate as "System 1" and "System 2 , " or the ex­ periential a nd the cogitative. T he distinction is straightforward. System 1, t he experiential one, is effortless, automatic, fast, opaque (we do not know that we are using it), parallel-processed, and can lend i tself t o errors. It is what we c all " intuition," and performs these quick acts of prowess that became popular u nder t he name blink, after the title of Mal­ colm Gladwell's bestselling book. System 1 is highly emotional, precisely because it is quick. It produces shortcuts, called "heuristics," that allow us to function rapidly and effectively. Dan Goldstein calls these heuristics "fast a nd frugal." Others prefer to c all t hem "quick and dirty." Now, these shortcuts are certainly virtuous, since they are rapid, but, at times, they can lead us into some severe mistakes. This main idea generated an entire school of research called the heuristics and biases a pproach (heuris­ tics c orresponds to the study o f shortcuts, biases stand for mistakes). System 2, t he cogitative one, is what we normally c all thinking. I t is what you use in a classroom, as it is effortful (even for Frenchmen), reasoned, 82 UMBERTO ECO'S ANTILIBRARY slow, l ogical, serial, progressive, and self-aware (you can follow the steps in your reasoning). It makes fewer mistakes t han t he experiential system, and, since you know how you derived your result, you can retrace your steps and correct them in an adaptive manner. M ost o f our mistakes in reasoning come from using System 1 when we are in fact thinking that we are using System 2 . How? Since we react with­ out thinking and introspection, the main property of System 1 is our lack o f a wareness of using it! R ecall t he r ound-trip error, our tendency to confuse "no evidence of B lack S wans" with "evidence of no B lack S wans"; it shows System 1 at work. You have to make an effort (System 2) to override your first reac­ tion. Clearly Mother Nature makes you usé the fast System 1 to get out of trouble, so that you do not sit d own a nd cogitate whether there is truly a tiger attacking you or if it is an optical illusion. You run immediately, be­ fore y ou become "conscious" of the presence of the tiger. E motions a re assumed to be the weapon System 1 uses to direct us and f orce us to act quickly. It mediates risk avoidance far more effectively t han o ur cognitive system. Indeed, neurobiologists who have studied the emo­ tional system show how it often reacts to the presence of danger long be­ fore w e are consciously aware of it—we experience fear and start reacting a few milliseconds before we realize that we are facing a snake. Much of the trouble with h uman n ature resides in our inability to use much of System 2 , or to use it in a prolonged way without having to take a l ong beach vacation. In addition, we often just forget to use it. Beware the Brain N ote that neurobiologists make, roughly, a similar distinction to that be­ tween System 1 and System 2 , except that they operate along anatomical l ines. T heir distinction differentiates between p arts o f the brain, the corti­ cal p art, w hich we are supposed to use for thinking, and which distin­ guishes us from other animals, and the fast-reacting limbic b rain, which is the center of emotions, and which we share with other mammals. As a s keptical empiricist, I do not want to be the turkey, so I do not want to focus solely on specific organs in the brain, since we do not ob­ serve brain functions very well. Some people try to identify what are called the neural correlates of, say, decision making, or more aggressively the neural "substrates" of, say, memory. The brain might be more compli­ cated machinery t han w e think; its anatomy has fooled us repeatedly in THE NARRATIVE FALLACY 8 3 the past. We can, however, assess regularities by running precise and thor­ ough experiments on how people react under c ertain conditions, and keep a tally of what we see. F or an example that justifies skepticism about unconditional reliance on neurobiology, and vindicates the ideas of the empirical school of medi­ cine t o which Sextus belonged, let's consider the intelligence of birds. I kept reading in various texts that the cortex is where animals do their "thinking," and that the creatures with the largest cortex have the highest intelligence—we h umans have the largest cortex, followed by bank execu­ tives, d olphins, and our cousins the apes. W ell, it t urns o ut that some birds, such as parrots, have a high level of intelligence, equivalent to that o f d olphins, but that the intelligence of birds correlates with the size of an­ other p art o f the brain, called the hyperstriatum. So neurobiology with its attribute of "hard s cience" c an sometimes (though not always) f ool y ou into a Platonified, reductive statement. I am amazed that the "empirics," skeptical about links between anatomy and function, had such insight— no wonder their school played a very small p art in intellectual history. As a s keptical empiricist I prefer the experiments of empirical psychology to the theories-based M R I scans of neurobiologists, even if the former appear less " scientific" t o the public. How to Avert the Narrative Faliacy I'll c onclude by saying that our misunderstanding of the B lack S wan can be largely attributed to our using System 1 , i .e., narratives, and the sensational—as well as the emotional—which imposes on us a wrong map o f the likelihood of events. On a day-to-day basis, we are not introspective enough to realize that we understand what is going on a little less than warranted from a dispassionate observation of our experiences. We also tend to forget about the notion of B lack S wans immediately after one o ccurs—since they are too abstract for us—focusing, rather, on the precise and vivid events that easily come to our minds. We do worry about B lack S wans, j ust the wrong ones. Let me bring Mediocristan into this. In Mediocristan, narratives seem to work—the past is likely to yield to our inquisition. But not in Extrem­ istan, where you do not have repetition, and where you need to remain suspicious of the sneaky past and avoid the easy and obvious narrative. Given t hat I have lived largely deprived of information, I've often felt t hat I inhabit a different planet than my peers, which can sometimes be ex- 84 UMBERTO ECO'S ANTIUBRARY t remely painful. It's like they have a virus controlling their brains that pre­ vents them from seeing things going forward—the B lack S wan around the corner. T he w ay to avoid the ills of the narrative fallacy is to favor experimen­ tation over storytelling, experience over history, and clinical knowledge over theories. Certainly the newspaper cannot perform an experiment, but it c an choose one report over another—there is plenty of empirical re­ search to present and interpret from—as I am doing in this book. Being e mpirical does not mean r unning a l aboratory in one's basement: it is just a m ind-set that favors a certain class of knowledge over others. I do not forbid m yself from using the word cause, b ut the causes I discuss are either bold speculations (presented as such) or the result of experiments, not sto­ ries. A nother approach is to predict and keep a tally of the predictions. Finally, t here may be a way to use a narrative—but for a good purpose. Only a diamond can cut a diamond; we can use our ability to convince with a story that conveys the right message—what storytellers seem to do. S o far we have discussed two internal mechanisms behind our blindness to B lack S wans, the confirmation bias and the narrative fallacy. The next chapters will look into an external mechanism: a defect in the way we re­ ceive a nd interpret recorded events, and a defect in the way we act on them. Chapter Seven LIVING IN T HE A NTECHAMBER OF HOPE How to avoid watercoolers—Select your brother-in-law—Yevgenia's favorite book—What deserts can and cannot deliver—On the avoidance of hope— El desierto de los târtaros—The virtues of slow motion Assume t hat, like Yevgenia, your activities depend o n a B lack S wan surprise—i.e., you are a reverse turkey. Intellectual, scientific, and artistic activities b elong to the province of Extremistan, where there is a severe concentration of success, with a very small number of winners claiming a large share of the pot. This seems to apply to all professional activities I find nondull and "interesting" (I am still looking for a single counter­ example, a n ondull activity that belongs to Mediocristan). Acknowledging the role of this concentration of success, and acting accordingly, causes us to be punished twice: we live in a society where the reward mechanism is based on the illusion of the regular; our hormonal reward system also needs tangible and steady results. It too thinks that the world is steady and well behaved—it falls for the confirmation error. The world has changed too fast for our genetic makeup. We are alienated from our environment. 86 UMBERTO ECO'S ANTILIBRARY P EER C RUELTY Every m orning you leave your cramped apartment in Manhattan's East V illage t o go to your laboratory at the R ockefeller University in the East S ixties. Y ou r eturn in the late evening, and people in your social network ask y ou if you had a good day, just to be polite. At the laboratory, people are more tactful. O f course you did not have a good day; you found noth­ ing. Y ou are not a watch repairman. Your finding nothing is very valuable, s ince it is p art o f the process of discovery—hey, you know where not t o l ook. O ther researchers, knowing your results, would avoid trying your special e xperiment, provided a journal is thoughtful enough to consider your "found nothing" as information and publish it. M eanwhile y our brother-in-law is a salesman for a Wall Street firm, and keeps getting large commissions—large and steady commissions. "He is d oing very well," you hear, particularly from your father-in-law, with a s mall pensive nanosecond of silence after the utterance—which makes you r ealize t hat he just made a comparison. It was involuntary, but he made o ne. H olidays can be terrible. You run into your brother-in-law at family re­ unions and, invariably, detect unmistakable signs of frustration on the p art o f your wife, who, briefly, fears that she married a loser, before re­ membering the logic of your profession. But she has to fight her first im­ pulse. Her sister will not stop talking about their renovations, their new wallpaper. Your wife will be a little more silent t han usual on the drive h ome. T his sulking will be made slightly worse because the car you are driving is rented, since you cannot afford to garage a car in Manhattan. W hat s hould you do? Move to Australia and thereby make family re­ unions less frequent, or switch brothers-in-laws by marrying someone with a less "successful" brother? O r s hould you dress like a hippie and become defiant? That may work for a n artist, but not so easily for a scientist or a businessman. You are t rapped. Y ou w ork on a project that does not deliver immediate or steady re­ sults; all the while, people around you work on projects that do. You are in trouble. Such is the lot of scientists, artists, and researchers lost in s oci­ ety r ather t han living in an insulated community or an artist colony. P ositive lumpy outcomes, for which we either c ollect big or get nothing, prevail in numerous occupations, those invested with a sense of mission, L I V I N G IN T H E A N T E C H A M B E R O F H O P E 8 7 such as doggedly pursuing (in a smelly laboratory) the elusive cure for can­ cer, w riting a book that will change the way people view the world (while living h and t o mouth), making music, or painting miniature icons on sub­ way trains and considering it a higher form of art despite the diatribes of the antiquated "scholar" Harold B loom. I f you are a researcher, you will have to publish inconsequential arti­ cles in "prestigious" publications so that others say hello to you once in a while when you run into them at conferences. I f y ou run a public-corporation, things were great for you before you had shareholders, when you and your p artners w ere the sole owners, along with savvy venture capitalists who understood uneven results and the lumpy n ature o f economic life. B ut now you have a slow-thinking thirty-year-old security analyst at a d owntown M anhattan firm who " judges" y our results and reads too much into them. He likes routine re­ wards, and the last thing you can deliver are routine rewards. M any p eople labor in life under t he impression that they are doing something right, yet they may not show solid results for a long time. They need a capacity for continuously adjourned gratification to survive a steady diet of peer cruelty without becoming demoralized. They look like idiots to their cousins, they look like idiots to their peers, they need courage to continue. No confirmation comes to them, no validation, no fawning students, no Nobel, no Shnobel. "How was your year?" brings them a small but containable spasm of pain deep inside, since almost all of their years will seem wasted to someone looking at their life from the out­ side. T hen bang, the lumpy event comes that brings the grand vindication. O r it may never come. Believe m e, it is tough to deal with the social consequences of the ap­ pearance of continuous failure. We are social animals; hell is other people. Where the Relevant Is the Sensational O ur intuitions are not cut out for nonlinearities. Consider our life in a primitive environment where process and result are c losely c onnected. Y ou are thirsty; drinking brings you adequate satisfaction. Or even in a not-so-primitive environment, when you engage in building, say, a bridge or a s tone house, more work will lead to more a pparent r esults, so your mood is p ropped up by visible continuous feedback. In a primitive environment, the relevant is t he sensational. This applies to our knowledge. When we try to c ollect i nformation about the world 88 UMBERTO ECO'S ANTIUBRARY a round us, we tend to be guided by our biology, and our attention flows effortlessly t oward the sensational—not the relevant so much as the sensa­ tional. S omehow the guidance system has gone wrong in the process of our coevolution with our habitat—it was transplanted into a world in which the relevant is often boring, nonsensational. Furthermore, we think that if, say, two variables are causally linked, then a steady i nput in one variable should always yield a result in the other o ne. O ur emotional a pparatus is designed for linear causality. For in­ stance, i f you study every day, you expect to learn something in propor­ tion to your studies. If you feel t hat you are not going anywhere, your emotions will cause you to become demoralized. But modern reality rarely gives us the privilege of a satisfying, linear, positive progression: you may think about a problem for a year and learn nothing; then, unless you are disheartened by the emptiness of the results and give up, something will c ome t o you in a flash. R esearchers spent some time dealing with this notion of gratification; neurology has been enlightening us about the tension between the notions o f i mmediate rewards and delayed ones. Would you like a massage today, o r t wo next week? W ell, t he news is that the logical p art o f our mind, that "higher" one, which distinguishes us from animals, can override our ani­ mal instinct, which asks for immediate rewards. So we are a little better t han a nimals, after all—but p erhaps n ot by much. And not all of the time. Nonlinearities T he s ituation can get a little more tragic—the world is more nonlinear t han w e think, and t han s cientists would like to think. W ith l inearities, relationships between variables are clear, crisp, and constant, therefore Platonically easy to grasp in a single sentence, such as " A 1 0 percent increase in money in the bank corresponds to a 10 percent i ncrease in interest income and a 5 percent increase in obsequiousness on the p art o f the personal banker." If you have more money in the bank, you get m ore interest. Nonlinear relationships can vary; p erhaps the best way to describe them is to say that they cannot be expressed verbally in a way that does justice to them. Take the relationship between pleasure and drinking water. If you are in a state of painful thirst, then a bottle of water i ncreases y our well-being significantly. More water means more pleasure. B ut w hat if I gave you a cistern of water? Clearly your well-being becomes L I V I N G IN T H E A N T E C H A M B E R O F H O P E 8 9 rapidly insensitive to further quantities. As a matter of fact, if I gave you the choice between a bottle or a cistern you would prefer the bottle—so your enjoyment declines w ith additional quantities. T hese n onlinear relationships are ubiquitous in life. L inear relation­ ships are truly the exception; we only focus on them in classrooms and t extbooks b ecause they are easier to u nderstand. Y esterday afternoon I tried to take a fresh look around me to catalog what I could see during my day that was linear. I could not find anything, no more t han s omeone hunting for squares or triangles could find them in the rain forest—or, as we will see in Part Three, any more t han s omeone looking for bell-shape randomness finding it in socioeconomic phenomena. Y ou play tennis every day with no improvement, then suddenly you start beating the pro. Y our c hild does not seem to have a learning impediment, but he does not seem to want to speak. The schoolmaster pressures you to start con­ sidering "other options," namely therapy. You argue with her to no avail (she is supposed to be the "expert"). Then, suddenly, the child starts com­ posing elaborate sentences, p erhaps a b it too elaborate for his age group. I will repeat that linear progression, a Platonic idea, is not the norm. Process over Results We favor the sensational and the extremely v isible. T his affects the way we judge heroes. There is little room in our consciousness for heroes who do not deliver visible results—or those heroes who focus on process rather t han results. However, those who claim that they value process over result are not telling the whole t ruth, assuming of course that they are members of the human species. We often hear the semi-lie that writers do not write for glory, that artists create for the sake of art, because the activity is "its own reward." True, these activities can generate a steady flow of autosatisfac­ tion. But this does not mean that artists do not crave some form of atten­ tion, or that they would not be better off if they got some publicity; it does not mean that writers do not wake up early Saturday morning to check if The New York Times Book Review h as featured their work, even if it is a very long shot, or that they do not keep checking their mailbox for that long-awaited reply from The New Yorker. E ven a philosopher the caliber o f H ume spent a few weeks sick in bed after the trashing of his master- 90 UMBERTO ECO'S ANTILIBRARY p iece ( what later became known as his version of the B lack S wan problem) by s ome dim-thinking reviewer—whom he knew to be wrong and to have missed his whole point. W here it gets painful is when you see one of your peers, whom you de­ spise, h eading to Stockholm for his Nobel reception. M ost p eople engaged in the pursuits t hat I c all " concentrated" spend most of their time waiting for the big day that (usually) never comes. T rue, this takes your mind away from the pettiness of life—the cappuc­ cino t hat is too warm or too cold, the waiter too slow or too intrusive, the f ood t oo spicy or not enough, the overpriced hotel room that does not quite resemble the advertised picture—all these considerations disappear b ecause y ou have your mind on much bigger and better things. But this does not mean that the person insulated from materialistic pursuits b e­ comes i mpervious to other pains, those issuing from disrespect. Often these B lack S wan hunters feel s hame, or are made to feel s hame, at not contributing. "You betrayed those who had high hopes for you," they are told, increasing their feeling of guilt. The problem of lumpy payoffs is not so m uch in the l ack o f income they entail, but the pecking order, the loss o f dignity, the subtle humiliations near the watercooler. It is my great hope someday to see science a nd decision makers redis­ cover w hat the ancients have always known, namely that our highest cur­ rency is respect. Even e conomically, the individual B lack S wan hunters are not the ones who make the bucks. The researcher Thomas Astebro has shown that re­ turns o n independent inventions (you take the cemetery into account) are far l ower than those on venture capital. S ome blindness to the odds o r an o bsession w ith their own positive B lack S wan is necessary for entrepre­ neurs to function. The venture capitalist is the one who gets the shekels. T he e conomist William Baumol c alls this "a touch of madness." This may indeed apply to all concentrated businesses: when you look at the empiri­ cal r ecord, you not only see that venture capitalists do better than entre­ preneurs, but publishers do better than writers, dealers do better than artists, and s cience does better than scientists (about 5 0 percent of scien­ tific a nd scholarly papers, costing months, sometimes years, of effort, are never truly read). The person involved in such gambles is paid in a cur­ rency o ther than material success: hope. L I V I N G IN T H E A N T E C H A M B E R O F H O P E 9 1 Human Nature, Happiness, and Lumpy Rewards Let me distill the main idea behind what researchers c all h edonic happi­ ness. M aking $ 1 million in one year, but nothing in the preceding nine, does not bring the same pleasure as having the total evenly distributed over the same period, that is, $ 1 0 0 , 0 0 0 every year for ten years in a row. The same applies to the inverse order—making a bundle the first year, then nothing for the remaining period. Somehow, your pleasure system will be satu­ rated rather quickly, and it will not carry forward the hedonic balance like a sum on a tax r eturn. As a matter of f act, y our happiness depends far more on the number of instances of positive feelings, what psychologists call "positive a ffect," t han o n their intensity when they hit. In other words, g ood news is good news first; how g ood matters rather little. So to have a pleasant life y ou should spread these small " affects" a cross time as evenly as possible. Plenty of mildly good news is preferable to one single l ump o f great news. Sadly, it may be even worse for you to make $ 1 0 million, then lose b ack n ine, t han t o making nothing at all! True, you may end up with a million (as compared to nothing), but it may be better had you got zilch. (This assumes, of course, that you care about financial rewards.) So from a narrowly defined accounting point of view, which I may call here "hedonic calculus," it does not pay to shoot for one large win. M other N ature destined us to derive enjoyment from a steady flow of pleasant small, but frequent, rewards. As I said, the rewards do not have to be large, just frequent—a little bit here, a little bit there. Consider that our major satisfaction for thousands of years came in the form of food and water (and something else more private), and that while we need these steadily, we quickly reach saturation. T he p roblem, of course, is that we do not live in an environment where results are delivered in a steady manner—Black Swans dominate much of h uman history. It is unfortunate that the right strategy for our current en­ vironment may not offer internal r ewards and positive feedback. T he same property in reverse applies to our unhappiness. It is better to lump all your pain into a b rief p eriod rather t han have it spread out over a longer one. But s ome people find it possible to transcend the asymmetry of pains and j oys, escape the hedonic deficit, set themselves outside that game— and live with hope. There is some good news, as we see next. 92 UMBERTO ECO'S ANTIUBRARY The Antechamber of Hope F or Y evgenia Krasnova, a person could love one book, at most a few— beyond this was a form of promiscuity. Those who talk about books as commodities are inauthentic, just as those who c ollect a cquaintances can be superficial in their friendships. A novel you like resembles a friend. You read it and reread it, getting to know it better. L ike a friend, you accept it the way it is; you do not judge it. Montaigne was asked "why" he and the writer Etienne de la B oétie w ere friends—the kind of question people ask you at a cocktail party as if you knew the answer, or as if there were an an­ swer to know. It was typical of Montaigne to reply, "Parce que c'était lui, parce que c'était moi" (because it was him and because it was me). L ike­ wise, Y evgenia claims that she likes that one b ook "because it is it and be­ cause I am me." Yevgenia once even walked out on a schoolteacher b ecause he analyzed that book and t hus v iolated her rule. One does not sit idle listening as people wax analytical about your friends. A very stubborn s choolchild she was. T his b ook she has as a friend is J / deserto dei tartari, by Dino Buzzati, a n ovel that was well known in Italy and France during her childhood, but that, strangely, nobody she knows in America had heard of. Its English t itle is mistranslated as The Tartar Steppe i nstead of The Desert of the Tar­ tars. Y evgenia e ncountered // deserto w hen she was thirteen, in her parents' weekend country house in a small village two h undred k ilometers outside P aris, w here their Russian and French books multiplied without the con­ straints of the overfed Parisian apartment. She was so bored in the coun­ try that she could not even read. Then, one afternoon, she opened the b ook a nd was sucked into it. Inebriated by Hope G iovanni Drogo is a man of promise. He has just g raduated from the mil­ itary academy with the rank of junior officer, a nd active life is just start­ ing. But things do not t urn o ut as planned: his initial four-year assignment is a r emote outpost, the Bastiani fortress, protecting the nation from the Tartars likely to invade from the border desert—not too desirable a posi­ tion. The fortress is located a few days by horseback from the town; there is n othing but bareness around it—none of the social buzz that a man of his age could look forward to. Drogo thinks that his assignment in the L I V I N G IN T H E A N T E C H A M B E R O F H O P E 9 3 o utpost is temporary, a way for him to pay his dues b efore more appealing positions present themselves. Later, back in town, in his impeccably ironed uniform and with his athletic figure, few ladies will be able to resist him. What is Drogo to do in this hole? He discovers a loophole, a way to be transferred after only four months. He decides to use the loophole. At the very last minute, however, Drogo takes a glance at the desert from the window of the medical office a nd decides to extend his stay. Something in the walls of the fort and the silent landscape ensnares him. T he appeal of the fort and waiting for the attackers, the big battle with the ferocious T artars, gradually become his only reason to exist. The entire atmosphere of the fort is one of anticipation. The other men spend their time looking at the horizon and awaiting the big event of the enemy attack. T hey are so focused that, on rare occasions, they can detect the most insignificant s tray animal that appears at the edge of the desert and mistake it for an enemy attack. Sure e nough, Drogo spends the rest of his life e xtending his stay, delaying the beginning of his life in the city—thirty-five years of pure h ope, spent in the grip of the idea that one day, from the remote hills that no human has ever crossed, the attackers will eventually emerge and help him rise t o the occasion. At t he end of the novel we see Drogo dying in a roadside inn as the event for which he has waited all his life t akes place. He has missed it. The Sweet Trap of Anticipation Yevgenia r ead // deserto n umerous times; she even learned Italian (and perhaps m arried an Italian) so she could read it in the original. Yet she never had the heart to reread the painful ending. I presented the B lack S wan as the outlier, the important event that is not expected to h appen. B ut consider the opposite: the unexpected event that you very badly want to happen. D rogo is obsessed and blinded by the possibility o f an unlikely event; that rare occurrence is his raison d'être. At thirteen, when she encountered the book, little did Y evgenia k now that she would spend an entire life playing Giovanni Drogo in the antechamber o f hope, waiting for the big event, sacrificing for it, and refusing intermediate steps, the consolation prizes. She did not mind the sweet t rap o f anticipation: to her it was a life w orth living; it was worth living in the cathartic simplicity of a single pur- 94 UMBERTO ECO'S ANTILIBRARY p ose. I ndeed, "be careful what you wish for": she may have been happier b efore t he B lack S wan of her success t han after. O ne o f the attributes of a B lack S wan is an asymmetry in c onsequences—either p ositive or negative. For Drogo the consequences were thirty-five years spent waiting in the antechamber of hope for just a few r andomly distributed h ours o f glory—which he ended up missing. When You Need the Bastiani Fortress N ote that there was no brother-in-law a round in Drogo's social network. He was lucky to have companions in his mission. He was a member of a community at the gate of the desert intently looking together at the hori­ zon. Drogo had the advantage of an association with peers and the avoid­ ance o f social contact with others outside the community. We are l ocal a nimals, i nterested in our immediate neighborhood—even if people far away consider us total idiots. Those homo sapiens are abstract and remote and we do not care about them because we do not run into them in eleva­ tors or make eye contact with them. Our shallowness can sometimes work for u s. I t m ay be a banality that we need others for many things, but we need them far more t han w e realize, particularly for dignity and respect. Indeed, we have very few historical records of people who have achieved anything extraordinary without such peer validation—but we have the freedom to c hoose o ur peers. If we look at the history of ideas, we see schools of thought occasionally forming, producing unusual w ork u npopular out­ side the school. You hear about the S toics, t he Academic S keptics, the C ynics, t he Pyrrhonian S keptics, t he Essenes, the Surrealists, the Dadaists, the anarchists, the hippies, the fundamentalists. A school allows someone with u nusual ideas with the remote possibility of a p ayoff t o find company and create a microcosm insulated from others. The members of the group c an b e ostracized together—which is better t han being ostracized alone. I f y ou engage in a B lack S wan-dependent activity, it is better to be p art o f a g roup. E L D ESIERTO D E LOS T ÂRTAROS Y evgenia m et Nero Tulip in the lobby of the Hotel Danieli in V enice. H e was a trader who lived between London and New Y ork. At the time, L I V I N G IN T H E A N T E C H A M B E R O F H O P E 9 5 traders from London went to V enice o n Friday noon during t he low sea­ son, just to talk to other t raders (from London). As Yevgenia and Nero stood engaged in an effortless conversation, she noticed that her husband was looking uncomfortably at them from the bar where he sat, trying to stay focused on the pontifications of one of his childhood friends. Yevgenia realized that she was going to see a bit more o f N ero. T hey m et again in New Y ork, first in a clandestine way. Her husband, being a philosophy professor, had too much time on his hands, so he started paying close attention to her schedule and became clingy. The dingier he got, the more stifled Yevgenia felt, which made him even dingier. She dumped h im, called her lawyer who was by then expecting to hear from her, and saw more of Nero openly. Nero had a stiff g ait since he was recovering from a helicopter crash— he gets a little too arrogant after episodes of success and starts taking uncalculated physical risks, though he remains financially hyperconservative, even paranoid. He had spent months immobile in a London hospital, hardly able to read or write, trying to resist having to watch televi­ sion, teasing the nurses, and waiting for his bones to heal. He can d raw the ceiling with its fourteen cracks from memory, as well as the shabby white building across the street with its sixty-three windowpanes, all in need of professional cleaning. Nero claimed that he was comfortable in Italian when he d rank, so Yevgenia gave him a copy of II deserto. N ero did not read novels— "Novels are fun to write, not read," he claimed. So he left the book by his bedside for a while. Nero and Yevgenia were, in a sense, like night and day. Yevgenia went to bed at d awn, w orking on her manuscripts at night. Nero rose at d awn, like m ost traders, even on weekends. He then worked for an hour on his opus, Treatise on Probability, a nd never touched it again after that. He had been writing it for a decade and felt rushed to finish it only when his life w as threatened. Yevgenia smoked; Nero was mindful of his health, spending at least an hour a day at the gym or in the pool. Yevgenia h ung a round intellectuals and bohemians; Nero often felt comfortable with street-smart t raders a nd businessmen who had never been to college and spoke with cripplingly severe Brooklyn accents. Yevgenia never under­ stood how a classicist and a polyglot like Nero could socialize with people like t hat. What was worse, she had this French Fifth Republic overt dis- 96 UMBERTO ECO'S ANTIUBRARY dain for money, unless disguised by an intellectual or cultural façade, and she could hardly bear these Brooklyn fellows with thick hairy fingers and g igantic b ank accounts. Nero's post-Brooklyn friends, in t urn, found her snotty. (One of the effects of prosperity has been a steady migration of streetwise people from Brooklyn to Staten Island and New Jersey.) N ero was also elitist, unbearably so, but in a different way. He sepa­ rated those who could connect the dots, B rooklyn-born or not, from those who could not, regardless of their levels of sophistication and learning. A few months later, after he was done with Yevgenia (with inordinate relief) he opened IV deserto a nd was sucked into it. Yevgenia had the pre­ science t hat, like her, Nero would identify with Giovanni Drogo, the main c haracter o f 17 deserto. H e did. N ero, in t urn, b ought cases of the English (bad) translation of the book and h anded c opies to anyone who said a polite hello to him, including his New Y ork d oorman who could hardly speak English, let alone read it. Nero was so enthusiastic while explaining the story that the doorman got interested and Nero had to order the Spanish translation for him, El desierto de los tartaros. Bleed or Blowup L et us separate the world into two categories. Some people are like the turkey, exposed to a major blowup without being aware of it, while oth­ ers play reverse turkey, prepared for big events that might surprise others. In s ome strategies and life s ituations, you gamble dollars to win a succes­ sion o f pennies while appearing to be winning all the time. In others, you r isk a s uccession of pennies to win dollars. In other words, you bet either that the B lack S wan will h appen o r that it will never h appen, t wo strate­ gies t hat require completely different mind-sets. W e have seen that we (humans) have a marked preference for making a little bit of income at a time. R ecall from Chapter 4 that in the summer o f 1 9 8 2 , large American banks lost close to everything they had ever earned, and more. S o s ome matters that belong to Extremistan are extremely dangerous but do not appear to be so beforehand, since they hide and delay their r isks—so s uckers think they are " safe." It is indeed a property of Extrem­ istan to look less risky, in the short run, t han it really is. Nero called the businesses exposed to such blowups dubious busi­ nesses, p articularly since he distrusted whatever method was being used to L I V I N G IN T H E A N T E C H A M B E R O F H O P E 9 7 c ompute the odds o f a blowup. R ecall f rom Chapter 4 that the accounting period upon w hich companies' performances are evaluated is too short to reveal w hether or not they are doing a great job. And, owing to the shal­ lowness of our intuitions, we formulate our risk assessments too quickly. I will rapidly present Nero's idea. His premise was the following triv­ ial p oint: some business bets in which one wins big but infrequently, yet loses small but frequently, are worth making if others are suckers for them and if you have the personal and intellectual stamina. B ut you need such stamina. You also need to deal with people in your entourage heaping all manner of insult on you, much of it blatant. People often accept that a fi­ nancial strategy with a small chance of success is not necessarily a bad one as long as the success is large enough to justify it. For a spate of psycho­ logical r easons, however, people have difficulty carrying out such a strat­ egy, simply because it requires a combination of belief, a c apacity for delayed gratification, and the willingness to be spat u pon by clients with­ out blinking. And those who lose money for any reason start looking like guilty dogs, eliciting more scorn on the p art o f their entourage. Against t hat background of potential blowup disguised as s kills, N ero engaged in a strategy that he called "bleed." You lose steadily, daily, for a long time, except when some event takes place for which you get paid dis­ proportionately well. No single event can make you blow up, on the other hand—some changes in the world can produce extraordinarily large prof­ its t hat pay back such bleed for years, sometimes decades, sometimes even c enturies. O f all the people he knew, Nero was the least genetically designed for such a strategy. His brain disagreed so heavily with his body that he found himself in a state of continuous warfare. It was his body that was his prob­ lem, w hich accumulated physical fatigue from the neurobiological effect o f e xposure to the small continuous losses, Chinese-water-torture-style, throughout the day. Nero discovered that the losses went to his emotional brain, bypassing his higher cortical structures and slowly affecting his hip­ pocampus and weakening his memory. The hippocampus is the structure where memory is supposedly controlled. It is the most plastic p art o f the brain; it is also the p art t hat is assumed to absorb all the damage from re­ peated insults like the chronic stress we experience daily from small doses o f negative feelings—as opposed to the invigorating "good stress" of the tiger p opping up occasionally in your living room. You can rationalize all you want; the hippocampus takes the insult of chronic stress seriously, in­ curring irreversible atrophy. Contrary to popular belief, t hese small, seem- 98 UMBERTO ECO'S ANTIUBRARY ingly h armless stressors do not strengthen you; they can amputate p art o f your self. I t w as the exposure to a high level of information that poisoned Nero's life. H e could sustain the pain if he saw only weekly performance num­ bers, i nstead of u pdates every minute. He did better emotionally with his own portfolio than with those of clients, since he was not obligated to monitor it continuously. I f his neurobiological system was a victim of the confirmation bias, re­ acting t o the short term and the visible, he could trick his brain to escape its v icious effect by focusing only on the longer haul. He refused to look at any printout of his track record that was shorter than ten years. Nero c ame o f age, intellectually speaking, with the stock market crash of 1987, in which he derived monstrous returns on what small equity he controlled. T his e pisode would forever make his track record valuable, taken as a w hole. In c lose t o twenty years of trading, Nero had only four good years. F or h im, one was more than enough. All he needed was one good year per century. Investors were no problem for him—they needed his trading as insur­ ance a nd paid him well. He just had to exhibit a mild degree of contempt toward those he wanted to shed, which did not take much effort on his p art. T his effort was not contrived: Nero did not think much of them and let his body language express it freely, all the while maintaining an unfashionably high level of courtesy. He made sure, after a long string of losses, that they did not think he was apologetic—indeed, paradoxically, they be­ came m ore supportive that way. Humans will believe anything you say provided you do not exhibit the smallest shadow of diffidence; like ani­ mals, t hey can detect the smallest crack in your confidence before you ex­ press it. The trick is to be as smooth as possible in personal manners. It is much easier to signal self-confidence if you are exceedingly polite and friendly; you can control people without having to offend their sensitivity. T he p roblem with business people, Nero realized, is that if you act like a l oser t hey will treat you as a loser—you set the yardstick yourself. There is n o absolute measure of good or bad. It is not what you are telling peo­ ple, it is how you are saying it. B ut y ou need to remain understated and maintain an Olympian calm in front of others. W hen he worked as a trader for an investment bank, Nero had to face t he typical employee-evaluation form. The form was supposed to keep t rack o f "performance," supposedly as a c heck a gainst employees slacking L I V I N G IN T H E A N T E C H A M B E R O F H O P E 9 9 off. N ero found the evaluation absurd because it did not so much judge the quality of a t rader's p erformance as encourage him to game the system by w orking for short-term profits at the expense of possible blowups— like b anks that give foolish loans that have a small probability of blowing up, because the loan officer is shooting for his next quarterly evaluation. So o ne day early in his career, Nero sat d own a nd listened very calmly to the evaluation of his "supervisor." When Nero was h anded t he evaluation form he tore it into small pieces in front of him. He did this very slowly, accentuating the contrast between the n ature o f the act and the tranquillity with which he tore the paper. T he boss watched him blank with fear, eyes p opping o ut of his head. Nero focused on his undramatic, slow-motion a ct, elated by both the feeling of standing up for his beliefs and the aesthet­ ics o f its execution. The combination of elegance and dignity was exhila­ rating. He knew that he would either be fired or left a lone. He was left a lone. Chapter Eight G IACOMO CASANOVA'S UNFAILING L UCK: THE PROBLEM OF SILENT EVIDENCE The Diagoras problem—How Black Swans make their way out of history books—Methods to help you avoid drowning—The drowned do not usually vote—We should all be stockbrokers—Do silent witnesses count?— Casanova's étoile—New York is "so invincible" A nother f allacy in the way we understand events is that of silent evidence. History hides both B lack S wans and its B lack S wan-generating ability from us. T HE S TORY O F T HE D ROWNED W ORSHIPPERS M ore t han two thousand years ago, the Roman orator, belletrist, thinker, S toic, m anipulator-politician, and (usually) virtuous gentleman, Marcus Tullius C icero, p resented the following story. One Diagoras, a nonbeliever in the gods, was shown painted tablets bearing the portraits of some wor­ shippers who prayed, then survived a subsequent shipwreck. The implica­ tion was that praying protects you from drowning. Diagoras asked, "Where were the pictures of those who prayed, then drowned?" T he d rowned worshippers, being dead, would have a lot of trouble ad­ vertising their experiences from the bottom of the sea. This can fool the casual observer into believing in miracles. GIACOMO CASANOVA'S UNFAILING LUCK 101 We c all this the problem of silent evidence. The idea is simple, yet po­ tent and universal. While most thinkers try to put to shame those who c ame before t hem, Cicero puts t o shame almost all empirical thinkers who c ame after h im, until very recently. L ater o n, both my hero of heroes, the essayist Michel de Montaigne and the empirical Francis B acon, m entioned the point in their works, ap­ plying it to the formation of false beliefs. " And such is the way of all su­ perstition, whether in astrology, dreams, omens, divine judgments, or the l ike," w rote B acon in his Novum Organum. T he problem, of course, is that unless they are drilled into us systematically, or integrated into our way of thinking, these great observations are rapidly forgotten. Silent evidence pervades everything connected to the notion of history. By history, I d on't j ust mean those learned-but-dull books in the history section (with Renaissance paintings on their cover to attract buyers). His­ tory, I will repeat, is any succession of events seen with the effect o f poste­ riority. T his bias extends to the ascription of factors in the success of ideas and r eligions, t o the illusion of skill in many professions, to success in artistic o ccupations, t o the n ature versus n urture d ebate, to mistakes in using evidence in the court of law, to illusions about the " logic" o f history— and of course, most severely, in our perception of the n ature o f extreme events. You a re in a classroom listening to someone self-important, dignified, and ponderous (but dull), wearing a tweed j acket ( white shirt, polka-dot t ie), pontificating for two hours on the theories of history. You are too p ar­ alyzed by boredom to u nderstand w hat on earth he is talking about, but you hear the names of big guns: Hegel, F ichte, M arx, Proudhon, Plato, Herodotus, Ibn Khaldoun, Toynbee, Spengler, Michelet, Carr, B loch, F ukuyama, Schmukuyama, Trukuyama. He seems deep and knowledge­ able, m aking sure that no attention lapse will make you forget that his ap­ proach is "post-Marxist," "postdialectical," or post-something, whatever that means. Then you realize that a large p art o f what he is saying reposes on a simple optical illusion! But this will not make a difference: he is so in­ vested in it that if you questioned his method he would react by throwing even more names at you. It is so easy to avoid looking at the cemetery while concocting histori­ cal t heories. But this is not just a problem with history. It is a problem with the way we construct samples and gather evidence in every domain. W e shall c all this distortion a bias, i.e., the difference between what you see 102 UMBERTO ECO'S ANTIUBRARY a nd what is there. By bias I m ean a systematic error consistently showing a m ore positive, or negative, effect from the phenomenon, like a scale that unfailingly shows you a few p ounds h eavier or lighter t han your true w eight, or a video camera that adds a few sizes to your waistline. This bias has been rediscovered here and there throughout the past century across disciplines, often to be rapidly forgotten (like Cicero's insight). As drowned worshippers do not write histories of their experiences (it is better to be alive for that), so it is with the losers in history, whether people or ideas. R emarkably, h istorians and other scholars in the humanities who need to u nderstand silent evidence the most do not seem to have a name for it (and I l ooked hard). As for journalists, fuhgedaboudit! They are industrial pro­ ducers of the distortion. T he t erm bias a lso indicates the condition's potentially quantifiable na­ ture: you may be able to calculate the distortion, and to correct for it by taking into account both the dead and the living, instead of only the liv­ ing. S ilent evidence is what events use to conceal their own randomness, particularly the B lack S wan type of randomness. Sir F rancis B acon is an interesting and endearing fellow in many re­ spects. H e harbored a deep-seated, skeptical, nonacademic, antidogmatic, and o bsessively e mpirical nature, which, to someone skeptical, nonacademic, antidogmatic, and obsessively empirical, like this author, is a quality al­ most impossible to find in the thinking business. (Anyone can be skeptical; any scientist can be overly empirical—it is the rigor coming from the com­ bination of skepticism and empiricism that's h ard t o come by.) The prob­ lem is that his empiricism wanted us to confirm, not disconfirm; thus he introduced the problem of confirmation, that beastly corroboration that generates the B lack S wan. T HE C EMETERY O F L ETTERS T he P hoenicians, we are often reminded, produced no literature, although they allegedly invented the alphabet. Commentators discuss their philistinism from the basis of this absence of a written legacy, asserting that by r ace o r culture, they were more interested in commerce t han in the arts. A ccordingly, t he Phoenician invention of the alphabet served the lower p urpose o f commercial record keeping rather t han the more noble purpose GIACOMO CASANOVA'S UNFAILING LUCK 1 0 3 o f literary production. (I remember finding on the shelves of a country house I once rented a mildewed history book by W ill a nd Ariel Durant de­ scribing t he Phoenicians as the "merchant race." I was tempted to throw it in the fireplace.) W ell, it now seems that the Phoenicians wrote quite a b it, but using a perishable brand of p apyrus t hat did not stand the biodegradative assaults of time. Manuscripts had a high rate of extinction before c opyists and authors switched to parchment in the second or third century. Those not copied during t hat period simply disappeared. T he neglect of silent evidence is endemic to the way we study c ompara­ tive t alent, particularly in activities that are plagued with winner-take-all attributes. We may enjoy what we see, but there is no point reading too much into success stories because we do not see the full picture. R ecall t he winner-take-all effect from Chapter 3: notice the large num­ ber o f people who c all themselves writers but are (only "temporarily") op­ erating the shiny cappuccino machines at Starbucks. The inequity in this field is larger than, say, medicine, since we rarely see medical doctors serv­ ing hamburgers. I can thus infer that I can largely gauge the performance o f the latter profession's entire population from what sample is visible to m e. L ikewise with plumbers, taxi drivers, prostitutes, and those in profes­ sions devoid of superstar effects. L et us go beyond the discussion on E xtremistan a nd Mediocristan in Chapter 3. The consequence of the superstar dynamic is that what we c all " literary heritage" or "literary trea­ sures" is a minute proportion of what has been produced cumulatively. T his is the first point. How it invalidates the identification of talent can be derived immediately from it: say you attribute the success of the nineteenth-century novelist Honoré de B alzac t o his superior "realism," " insights," "sensitivity," "treatment of characters," "ability to keep the reader riveted," and so on. These may be deemed "superior" qualities that lead t o superior performance //, and only if, t hose who l ack w hat we c all t alent also l ack these qualities. But what if there are dozens of comparable literary masterpieces that happened to perish? And, following my l ogic, i f there are indeed many perished manuscripts with similar attributes, then, I regret to say, your idol B alzac w as just the beneficiary of disproportion­ ate luck compared to his peers. Furthermore, you may be committing an injustice t o others by favoring him. M y p oint, I will repeat, is not that B alzac is untalented, but that he is less uniquely t alented t han w e think. Just consider the thousands of writ­ ers now completely vanished from consciousness: their record does not 104 UMBERTO ECO'S ANTIUBRARY e nter into analyses. We do not see the tons of rejected manuscripts because these writers have never been published. The New Yorker a lone rejects c lose t o a h undred m anuscripts a day, so imagine the number of geniuses that we will never hear about. In a country like France, where more people write books while, sadly, fewer people read them, respectable literary publishers accept one in ten thousand manuscripts they receive from firsttime authors. Consider the number of actors who have never passed an audition but would have done very well had they had that lucky break in life. T he n ext time you visit a Frenchman of comfortable means, you will l ikely s pot the stern books from the collection Bibliothèque de la Pléiade, w hich their owner will never, almost never, read, mostly on account of their uncomfortable size and weight. Membership in the Pléiade m eans membership in the literary canon. The tomes are expensive; they have the distinctive smell of ultrathin India paper, compressing the equivalent of fifteen h undred pages into the size of a drugstore paperback. They are supposed to help you maximize the number of masterpieces per Parisian square foot. The publisher Gallimard has been extremely selective in electing writers into the Pléiade c ollection-only a few authors, such as the aesthete and adventurer André Malraux, have made it in while still alive. D ickens, D ostoyevsky, Hugo, and Stendhal are in, along with Mallarmé, S artre, C amus, and . . . B alzac. Y et if you follow B alzac's o wn ideas, which I will examine next, you would accept that there is no ultimate justification for such an official c orpus. B alzac o utlined the entire business of silent evidence in his novel Lost Illusions. L ucien de Rubempré (alias of Lucien Chardon), the penurious provincial genius, "goes up" to Paris to start a literary career. We are told that he is talented—actually he is told that he is talented by the semiaristocratic set in Angoulême. But it is difficult to figure out whether this is due to his good looks or to the literary quality of his works—or even whether literary quality is visible, or, as B alzac seems to wonder, if it has much to do with anything. Success is presented cynically, as the product of w ile a nd promotion or the lucky surge of interest for reasons completely external to the works themselves. Lucien discovers the existence of the immense cemetery inhabited by what B alzac c alls "nightingales." Lucien was told that this designation "nightingale" was given by bookstores to those works residing on the shelves in the solitary depths o f their shops. GIACOMO CASANOVA'S UNFAILING LUCK 1 0 5 B alzac presents to us the sorry state of contemporary literature when Lucien's m anuscript is rejected by a publisher who has never read it; later on, when Lucien's reputation has developed, the very same manuscript is a ccepted by another publisher who did not read it either! The work i tself w as a secondary consideration. In a nother example of silent evidence, the book's characters keep be­ moaning that things are no longer as they were before, i mplying that liter­ ary fairness prevailed in more ancient times—as if there was no cemetery b efore. T hey fail t o take into account the nightingales among the ancients' work! Notice that c lose t o two centuries ago people had an idealized opin­ ion of their own past, just as we have an idealized opinion of today's past. I m entioned earlier that to u nderstand successes and analyze what caused t hem, we need to study t he traits present in failures. It is to a more general version of this point that I t urn n ext. How to Become a Millionaire in Ten Steps N umerous studies of millionaires aimed at figuring out the skills required for h otshotness follow the following methodology. They take a popula­ tion of hotshots, those with big titles and big j obs, a nd study t heir attrib­ utes. They look at what those big guns have in common: courage, risk taking, optimism, and so on, and infer that these traits, most notably risk taking, help you to become successful. You would also probably get the same impression if you read C EOs' g hostwritten autobiographies or at­ tended their presentations to fawning M B A students. Now take a look at the cemetery. It is quite difficult to do so because people who fail do not seem to write memoirs, and, if they did, those busi­ ness publishers I know would not even consider giving them the courtesy o f a r eturned phone c all (as to returned e-mail, fuhgedit). Readers would not pay $ 2 6 . 9 5 for a story of failure, even if you convinced them that it h ad more useful tricks than a story of success.* The entire notion of biography is grounded in the arbitrary ascription of a causal relation be­ tween specified traits and subsequent events. Now consider the cemetery. T he g raveyard of failed persons will be full of people who shared the f ollowing t raits: courage, risk taking, optimism, et cetera. Just like the population of millionaires. There may be some differences in s kills, b ut * The best noncharlatanic finance book I know is called What I Learned Losing a Mil­ lion Dollars, by D. Paul and B . Moynihan. The authors had t o self-publish the book. 106 UMBERTO ECO'S ANTIUBRARY w hat truly separates the two is for the most p art a single factor: luck. Plain l uck. Y ou d o not need a lot of empiricism to figure this out: a simple thought experiment suffices. The fund-management industry claims that some peo­ ple are extremely skilled, since year after year they have outperformed the market. They will identify these "geniuses" and convince you of their abil­ ities. M y approach has been to manufacture cohorts of purely random investors and, by simple computer simulation, show how it would be im­ possible to not have these geniuses produced just by luck. Every year you fire the losers, leaving only the winners, and thus end up with long-term steady winners. S ince y ou do not observe the cemetery of failed investors, you will think that it is a good business, and that some operators are con­ siderably better t han o thers. O f course an explanation will be readily pro­ vided for the success of the lucky survivors: "He eats tofu," "She works l ate; j ust the other day I called her office a t eight P . M . . . . " Or of course, " She is naturally lazy. People with that type of laziness can see things c learly." B y the mechanism of retrospective determinism we will find the "cause"—actually, we need to see the cause. I c all these simulations of hy­ pothetical cohorts, often done by computer, an engine of computational epistemology. Your thought experiments can be run on a computer. You j ust s imulate an alternative world, plain random, and verify that it looks s imilar t o the one in which we live. Not getting lucky billionaires in these experiments would be the exception.* R ecall t he distinction between Mediocristan and Extremistan in Chap­ ter 3 . 1 said that taking a "scalable" profession is not a good idea, simply b ecause t here are far too few winners in these professions. W ell, these pro­ fessions p roduce a large cemetery: the pool of starving actors is larger t han t he one of starving accountants, even if you assume that, on average, they earn the same income. * D octors are rightfully and vigorously skeptical of anecdotal results, and require t hat studies of drug efficacy probe into the cemetery of silent evidence. However, the same doctors fall for the bias elsewhere! W here? In their personal lives, or in their investment activities. At the cost of being repetitive, I have to once again state my a mazement at the aspect of human nature t hat allows us to mix the most rig­ orous skepticism and the most a cute gullibility. GIACOMO CASANOVA'S UNFAILING LUCK 107 A H EALTH CLUB FOR RATS T he s econd, and more vicious, variety of the problem of silent evidence is as follows. When I was in my early twenties and still read the newspaper, and thought that steadily reading the newspapers was something useful to m e, I c ame across an article discussing the mounting threat of the Russian M afia in the United States and its displacement of the traditional Louie and Tony in some neighborhoods of B rooklyn. T he article explained their toughness and brutality as a result of their being hardened by their Gulag e xperiences. T he Gulag was a network of labor camps in Siberia where criminals and dissidents were routinely deported. Sending people to Siberia was one of the purification methods initially used by the czarist regimes and later continued and perfected by the Soviets. Many deportees did not survive these labor camps. Hardened by the Gulag? T he sentence jumped out at me as both pro­ foundly flawed (and a reasonable inference). It took me a while to figure out the nonsense in it since it was protected by cosmetic wrapping; the fol­ lowing thought experiment will give the intuition. Assume that you're able to find a large, assorted population of rats: fat, thin, sickly, strong, wellproportioned, et cetera. (You can easily get them from the kitchens of fancy N ew Y ork r estaurants.) With these thousands of rats, you build a heterogeneous cohort, one that is well representative of the general New Y ork r at population. You bring them to my laboratory on East Fifty-ninth Street in New Y ork C ity and we put the entire collection in a large vat. We subject the rats to increasingly higher levels of radiation (since this is sup­ posed to be a thought experiment, I am told that there is no cruelty in the p rocess). At every level of radiation, those that are naturally stronger (and this is the key) will survive; the dead will d rop o ut of your sample. We will progressively have a stronger and stronger collection of rats. Note the f ol­ lowing central fact: every single rat, including the strong ones, will be weaker after the radiation t han b efore. An o bserver endowed with analytical abilities, who probably got ex­ cellent grades in c ollege, w ould be led to believe that treatment in my lab­ oratory is an excellent health-club replacement, and one that could be generalized to all mammals (think of the potential commercial s uccess). H is logic would run as follows: Hey, these rats are stronger t han t he rest o f the rat population. What do they seem to have in common? They all c ame from that B lack S wan guy Taleb's workshop. Not many people will have the temptation to go look at the dead rats. 108 UMBERTO ECO'S ANTILIBRARY N ext we pull the following trick on The New York Times: we let these surviving rats loose in New Y ork C ity and inform the c hief r odent corre­ spondent of the newsworthy disruption in the pecking order in the New Y ork r at population. He will write a lengthy (and analytical) article on the s ocial d ynamics of New Y ork r ats that includes the following passage: " Those r ats are now bullies in the rat population. They literally run the show. Strengthened by their experience in the laboratory of the reclusive (but friendly) statistician/philosopher/trader Dr. T aleb, they . . . " Vicious Bias T here is a vicious attribute to the bias: it can hide best when its impact is largest. Owing to the invisibility of the dead rats, the more lethal the risks, the less visible they will be, since the severely victimized are likely to be eliminated from the evidence. The more injurious the treatment, the larger the difference between the surviving rats and the rest, and the more fooled you will be about the strengthening effect. O ne of the two following ingre­ dients is necessary for this difference between the true effect (weakening) and the observed one (strengthening): a) a degree of inequality in strength, o r diversity, in the base cohort, or b) unevenness, or diversity, somewhere in the treatment. Diversity here has to do with the degree of uncertainty inherent in the process. More Hidden Applications We c an keep going with this argument; it has such universality that once we get the bug it is h ard t o look at reality with the same eyes again. Clearly it r obs our observations of their realistic power. I will enumerate a few more cases to illustrate the weaknesses of our inferential machinery. The stability of species. T ake the number of species that we now con­ sider extinct. For a long time scientists took the number of such species as that implied from an analysis of the extant fossils. B ut this number ignores the silent cemetery of species that came and left without leaving traces in the form of fossils; t he fossils that we have managed to find correspond to a s maller proportion of all species that came and disappeared. This implies that our biodiversity was far greater t han i t seemed at first examination. A more worrisome consequence is that the rate of extinction of species may be far greater t han w e think—close to 9 9 . 5 percent of species that t ran­ sited t hrough e arth are now extinct, a number of scientists have kept rais- GIACOMO CASANOVA'S UNFAILING LUCK 1 0 9 ing t hrough t ime. Life is a great deal more fragile t han w e have allowed for. B ut this does not mean we (humans) should feel guilty for extinctions around us; nor does it mean that we should act to stop themspecies were c oming and going before we started messing up the environment. There is no need to feel m oral responsibility for every endangered species. Does crime pay? N ewspapers report on the criminals who get caught. T here is no section in The New York Times r ecording the stories of those who committed crimes but have not been caught. So it is with cases of t ax e vasion, government bribes, prostitution rings, poisoning of wealthy spouses (with substances that do not have a name and cannot be detected), and drug trafficking. In a ddition, our representation of the s tandard c riminal might be based on the properties of those less intelligent ones who were caught. O nce w e seep ourselves into the notion of silent evidence, so many things around us that were previously hidden s tart manifesting them­ selves. H aving spent a couple of decades in this mind-set, I am convinced (but cannot prove) that training and education can help us avoid its pit­ falls. The Evolution of the Swimmer's Body W hat do the popular expressions "a swimmer's body" and "beginner's l uck" have in common? What do they seem to share with the concept of h istory? T here is a b elief a mong gamblers that beginners are almost always lucky. " It gets worse later, but gamblers are always lucky when they start out," you hear. This statement is actually empirically true: researchers confirm t hat gamblers have lucky beginnings (the same applies to stock market speculators). Does this mean that each one of us should become a g ambler for a while, take advantage of lady luck's friendliness to begin­ ners, then stop? T he a nswer is no. The same optical illusion prevails: those who start gambling will be either lucky or unlucky (given that the casino has the ad­ vantage, a slightly greater number will be unlucky). The lucky ones, with the feeling of having been selected by destiny, will continue gambling; the others, discouraged, will stop and will not show up in the sample. They will p robably take up, depending on their temperaments, bird-watching, S crabble, piracy, or other pastimes. Those who continue gambling will re­ member having been lucky as beginners. The dropouts, by definition, will 110 UMBERTO ECO'S ANTIUBRARY n o longer be p art o f the surviving gamblers' community. This explains be­ ginner's luck. T here is an analogy with what is called in common parlance a "swim­ mer's body," which led to a mistake I shamefully made a few years ago (in spite of my specialty in this bias, I did not notice that I was being fooled). W hen a sking around about the comparative physical elegance of athletes, I w as often told that r unners l ooked anorexic, cyclists bottom-heavy, and weight lifters insecure and a little primitive. I inferred that I should spend s ome t ime inhaling c hlorine, in the New Y ork University pool to get those "elongated muscles." Now suspend the causality. Assume that a person's g enetic v ariance allows for a certain type of body shape. Those born with a n atural tendency to develop a swimmer's body become better swimmers. T hese a re the ones you see in your sample splashing up and down a t the p ools. B ut they would have looked pretty much the same if they lifted weights. It is a fact that a given muscle grows exactly the same way whether you take steroids or climb walls at the local gym. W HAT YOU SEE A ND W HAT YOU D ON'T S EE K atrina, t he devastating hurricane that hit New Orleans in 2 0 0 5 , got plenty of politicizing politicians on television. These legislators, moved by the images of devastation and the pictures of angry victims made home­ less, m ade promises of "rebuilding." It was so noble on their p art t o do something humanitarian, to rise above our a bject selfishness. D id t hey promise to do so with their own money? No. It was with pub­ lic m oney. Consider that such funds will be taken away from somewhere e lse, as in the saying "You take from Peter to give to Paul." That some­ where else w ill be less mediatized. It may be privately funded cancer re­ search, o r the next efforts to curb diabetes. Few seem to pay attention to the victims of cancer lying lonely in a state of untelevised depression. Not o nly d o these cancer patients not vote (they will be dead by the next bal­ lot), b ut they do not manifest themselves to our emotional system. More o f t hem die every day t han w ere killed by Hurricane Katrina; they are the ones who need us the most—not just our financial help, but our attention and kindness. And they may be the ones from whom the money will be taken—indirectly, p erhaps even directly. Money (public or private) taken away from research might be responsible for killing them—in a crime that may remain silent. A r amification of the idea concerns our decision making under a cloud GIACOMO CASANOVA'S UNFAILING LUCK 1 1 1 o f p ossibilities. W e see the obvious and visible consequences, not the invis­ ible and less obvious ones. Yet those unseen consequences can be—nay, generally a re—more meaningful. F rédéric B astiat was a nineteenth-century humanist of a strange vari­ ety, o ne of those rare independent thinkers—independent to the point of being u nknown in his own country, France, since his ideas ran counter to F rench p olitical orthodoxy (he joins another of my favorite thinkers, Pierre B ayle, in being u nknown a t home and in his own language). But he has a large number of followers in America. In his essay "What We See and What We Don't See," Bastiat offered the following idea: we can see what governments do, and therefore sing their praises—but we do not see the alternative. But there is an alternative; it is less obvious and remains unseen. R ecall t he confirmation fallacy: governments are great at telling you what they did, but not what they did not do. In fact, they engage in what c ould be labeled as phony "philanthropy," the activity of helping people in a visible and sensational way without taking into account the unseen c emetery o f invisible consequences. Bastiat inspired libertarians by attack­ ing the usual arguments that showed the benefits of governments. But his ideas can be generalized to apply to both the Right and the L eft. B astiat g oes a bit deeper. If both the positive and the negative conse­ quences of an action fell o n its author, our learning would be fast. But often an action's positive consequences benefit only its author, since they are visible, while the negative consequences, being invisible, apply to oth­ ers, w ith a net cost to society. Consider job-protection measures: you no­ tice t hose whose j obs a re made safe and ascribe social benefits to such p rotections. Y ou do not notice the effect o n those who cannot find a job as a result, since the measure will reduce job openings. In some cases, as with the cancer patients who may be punished by Katrina, the positive c onsequences o f an action will immediately benefit the politicians and phony humanitarians, while the negative ones take a long time to appear— they may never become noticeable. One can even blame the press for di­ recting charitable contributions toward those who may need them the least. L et us apply this reasoning to September 1 1 , 2 0 0 1 . A round twenty-five hundred people were directly killed by bin Laden's g roup in the Twin T owers o f the World Trade Center. Their families benefited from the sup­ port o f all manner of agencies and charities, as they should. But, accord­ ing to researchers, during t he remaining three months of the year, close to 112 UMBERTO ECO'S ANTILIBRARY o ne thousand people died as silent victims of the terrorists. How? Those who were afraid of flying and switched to driving ran an increased risk of death. There was evidence of an increase of casualties on the road during t hat period; the road is considerably more lethal t han t he skies. These families g ot no support—they did not even know that their loved ones were also the victims of bin Laden. In a ddition to Bastiat, I have a weakness for Ralph Nader (the activist and consumer advocate, certainly not the politician and political thinker). He may be the American citizen who saved the highest number of lives by exposing the safety record of car companies. But, in his political campaign a few years ago, even he forgot to t rumpet t he tens of t housands o f lives saved by his seat belt laws. It is much easier to sell "Look what I did for you" t han " Look what I avoided for you." R ecall f rom the Prologue the story of the hypothetical legislator whose actions might have avoided the attack of September 1 1 . How many such people are walking the street without the u pright g ait of the phony hero? Have the guts t o consider the silent consequences when standing in front of the next snake-oil humanitarian. Doctors O ur neglect of silent evidence kills people daily. Assume that a drug saves many people from a potentially dangerous ailment, but runs the risk of k illing a few, with a net benefit to society. Would a doctor prescribe it? He has no incentive to do so. The lawyers of the person h urt by the side ef­ fects will go after the doctor like attack dogs, while the lives saved by the drug m ight not be accounted for anywhere. A life saved is a statistic; a person h urt is an anecdote. Statistics are in­ visible; a necdotes are salient. Likewise, the risk of a B lack Swan is invisible. T HE T EFLON-STYLE P ROTECTION O F GIACOMO C ASANOVA T his b rings us to gravest of all manifestations of silent evidence, the illu­ sion of stability. The bias lowers our perception of the risks we incurred in the past, particularly for those of us who were lucky to have survived them. Your life c ame under a serious threat but, having survived it, you retrospectively underestimate how risky the situation actually was. T he a dventurer Giacomo Casanova, later self-styled Jacques, Cheva­ lier de Seingalt, the wannabe intellectual and legendary seducer of women, GIACOMO CASANOVA'S UNFAILING LUCK 113 Giacomo Casanova a.k.a. Jacques, Chevalier de Seingalt. Some readers might be surprised that the leg­ endary seducer did not look quite like James Bond. seems to have had a Teflon-style trait that would cause envy on the p art o f the most resilient of Mafia dons: misfortune did not stick to him. Casanova, while known for his seductions, viewed h imself as some sort of a scholar. He aimed at literary fame with his twelve-volume History of My Life, written in bad (charmingly bad) French. In addition to the extremely useful lessons on how to become a seducer, the History provides an en­ grossing account of a succession of reversals of fortune. Casanova felt that every time he got into difficulties, his lucky star, his étoile, w ould pull him out of trouble. After things got bad for him, they somehow recovered by some invisible hand, and he was led to believe that it was his intrinsic property to recover from hardships by r unning every time into a new op­ portunity. He would somehow meet someone in extremis who offered him a financial transaction, a new patron that he had not betrayed in the past, or s omeone generous enough and with a weak enough memory to forget past betrayals. Could Casanova have been selected by destiny to bounce b ack from all hardships? Not necessarily. Consider the following: of all the colorful adventurers who have lived on our planet, many were occasionally crushed, and a few did bounce back repeatedly. It is those who survive who will tend to be- 114 UMBERTO ECO'S ANTIUBRARY lieve t hat they are indestructible; they will have a long and interesting enough experience to write books about it. Until, of course . . . A ctually, a dventurers who feel singled out by destiny abound, simply b ecause t here are plenty of adventurers, and we do not hear the stories of those d own o n their luck. As I started writing this chapter, I recalled a con­ versation with a woman about her flamboyant fiancé, the son of a civil s ervant, who managed t hrough a few financial transactions to catapult h imself i nto the life o f a character in a novel, with h andmade s hoes, Cuban cigars, c ollectible c ars, and so on. The French have a word for this, flambeur, w hich means a mixture of extravagant bon vivant, wild specula­ tor, and risk taker, all the while bearing considerable personal charm; a word that does not seem to be available in Anglo-Saxon cultures. The fi­ ancé w as spending his money very quickly, and as we were having the con­ versation about his fate (she was going to marry him, after all), she e xplained t o me that he was undergoing slightly difficult times, but that there was no need to worry since he always came back with a vengeance. T hat w as a few years ago. Out of curiosity, I have just tracked him down (trying to do so tactfully): he has not recovered (yet) from his latest blow o f f ortune. He also d ropped o ut of the scene and is no longer to be found among other flambeurs. H ow does this relate to the dynamics of history? Consider what is gen­ erally c alled the resilience of New Y ork City. For seemingly transcenden­ tal reasons, every time it gets close to the brink of disaster, the city manages to pull back and recover. Some people truly believe that this is an internal property of New Y ork City. The following quote is from a New York Times a rticle: W hich is why New York still needs Samuel M. E. An economist who turns 7 7 today, Mr. E. studied New York City through half a century o f booms and busts. . . . "We have a record of going through tough times and coming back stronger than ever," he said. Now run the idea in reverse: think of cities as little Giacomo Casanovas, o r as rats in my laboratory. As we put the thousands of rats t hrough a very dangerous process, let's put a collection of cities in a simu­ lator o f history: Rome, Athens, Carthage, Byzantium, Tyre, Catal Hyuk ( located in modern-day Turkey, it is one of the first known h uman settle­ ments), J ericho, P eoria, and, of course, New Y ork City. Some cities will survive the harsh conditions of the simulator. As to others, we know that G I A C O M O C A S A N O V A ' S U N F A I L I N G L U'CK 1 1 5 h istory might not be too kind. I am sure that Carthage, T yre, a nd J ericho had their l ocal, n o less eloquent, Samuel M . E., saying, "Our enemies have tried to destroy us many times; but we always came back more resilient t han b efore. We are now invincible." T his bias causes the survivor to be an unqualified witness of the p rocess. U nsettling? The fact t hat you survived is a condition that may weaken your interpretation of the properties of the survival, including the shallow notion of "cause." Y ou c an do a lot with the above statement. Replace the retired econo­ mist Samuel E. with a CEO discussing his corporation's ability to recover from p ast problems. How about the t aunted " resilience of the financial s ystem"? H ow about a general who has had a good run? T he r eader can now see why I use Casanova's unfailing luck as a gen­ eralized f ramework for the analysis of history, all histories. I generate arti­ ficial histories featuring, say, millions of Giacomo Casanovas, and observe the difference between the attributes of the successful Casanovas (because you generate them, you know their exact properties) and those an ob­ server of the result would obtain. From that perspective, it is not a good idea to be a Casanova. "/ Am a Risk Taker" C onsider the restaurant business in a competitive place like New Y ork City. O ne has indeed to be foolish to open one, owing to the enormous risks involved and the harrying quantity of work to get anywhere in the business, n ot counting the finicky fashion-minded clients. The cemetery of failed r estaurants is very silent: walk a round M idtown Manhattan and you will see these warm patron-filled restaurants with limos waiting out­ side for the diners to come out with their second, trophy, spouses. The owner is overworked but h appy t o have all these important people pa­ tronize his eatery. Does this mean that it makes sense to open a restaurant in such a competitive neighborhood? Certainly not, yet people do it out of the foolish risk-taking trait that pushes us to jump into such adventures blinded by the outcome. C learly t here is an element of the surviving Casanovas in us, that of the risk-taking genes, which encourages us to take blind risks, unaware of the variability in the possible outcomes. We inherited the taste for uncalculated risk taking. Should we encourage such behavior? In fact, e conomic growth comes from such risk taking. But some f ool 116 UMBERTO ECO'S ANTILIBRARY m ight argue the following: if someone followed reasoning such as mine, we would not have had the spectacular growth we experienced in the past. T his is exactly like someone playing Russian roulette and finding it a good idea because he survived and pocketed the money. W e a re often told that we humans have an optimistic bent, and that it is supposed to be good for us. T his argument appears to justify general risk t aking as a positive enterprise, and one that is glorified in the common culture. Hey, look, our ancestors took the challenges—while you, NNT, are encouraging us to do nothing (I am not). W e h ave enough evidence to confirm that, indeed, we humans are an e xtremely l ucky species, and that we got the genes of the risk takers. The f oolish r isk takers, that is. In fact, the Casanovas who survived. O nce a gain, I am not dismissing the idea of risk taking, having been in­ volved in it myself. I am only critical of the encouragement of uninformed r isk t aking. The uberpsychologist Danny Kahneman has given us evidence that we generally take risks not out of bravado but out of ignorance and blindness to probability! The next few chapters will show in more depth h ow we tend to dismiss outliers and adverse outcomes when projecting the future. But I insist on the following: that we got here by accident does not mean that we should continue to take the same risks. W e are mature enough a race to realize this point, enjoy our blessings, and try to preserve, by b ecoming more conservative, what we got by luck. We have been play­ ing Russian roulette; now let's stop and get a real job. I h ave two further points to make on this subject. First, justification of overoptimism on g rounds t hat "it brought us here" arises from a far more serious mistake about h uman n ature: the b elief t hat we are built to under­ stand n ature a nd our own n ature a nd that our decisions are, and have been, the result of our own choices. I beg to disagree. So many instincts drive us. S econd, a little more worrisome t han t he first point: evolutionary fit­ ness is something that is continuously touted and aggrandized by the crowd who takes it as gospel. The more unfamiliar someone is with the wild B lack S wan-generating randomness, the more he or she believes in the optimal working of evolution. Silent evidence is not present in their theories. Evolution is a series of flukes, some good, many bad. You only see t he good. But, in the short term, it is not obvious which traits are re­ ally g ood for you, particularly if you are in the B lack S wan-generating en- GIACOMO CASANOVA'S UNFAILING LUCK 1 1 7 v ironment of Extremistan. This is like looking at rich gamblers coming out of the casino and claiming that a taste for gambling is good for the species b ecause gambling makes you rich! R isk t aking made many species head for extinction! T his idea that we are here, that this is the best of all possible worlds, and that evolution did a great job seems rather bogus in the light of the silent-evidence effect. T he f ools, t he Casanovas, and the blind risk takers are often the ones who win in the short term. Worse, in a B lack S wan en­ vironment, where one single but rare event can come shake up a species after a very long run of "fitness," the foolish risk takers can also win in the long term! I will revisit this idea in Part Three, where I show how Extrem­ istan worsens the silent-evidence effect. B ut there is another manifestation that merits a mention. I A M A B LACK SWAN: THE A NTHROPIC B IAS I w ant to stay closer to earth and avoid bringing higher-up metaphysical or c osmological arguments into this discussion—there are so many signifi­ cant dangers to worry about d own here on planet earth and it would be a good idea to postpone the metaphysical philosophizing for later. But it would be useful to take a peek (not more) at what is called the anthropic c osmological a rgument, as it points out the gravity of our misunderstand­ ing of historical stability. A r ecent wave of philosophers and physicists (and people combining the two categories) has been examining the self-sampling e xistence. C onsider our own fates. Some people reason that the odds o f any of us being in existence are so low that our being here cannot be attributed to an accident of fate. Think of the odds o f the parameters being exactly where they need to be to induce our existence (any deviation from the op­ timal calibration would have made our world explode, collapse, or simply not come into e xistence). I t is often said that the world seems to have been built to the specifications that would make our existence possible. Accord­ ing to such an argument, it could not come from luck. However, our presence in the sample c ompletely vitiates the computa­ tion of the odds. Again, the story of Casanova can make the point quite simple—much simpler t han in its usual formulation. Think again of all the assumption, w hich is a generalization of the principle of the Casanova bias to our own 118 UMBERTO ECO'S ANTIUBRARY p ossible worlds as little Casanovas following their own fates. The one who is still kicking (by accident) will feel t hat, given that he cannot be so lucky, there had to be some transcendental force guiding him and super­ vising his destiny: "Hey, otherwise the odds w ould be too low to get here just by luck." For someone who observes all a dventurers, the odds o f find­ ing a Casanova are not low at all: there so many adventurers, and some­ one is bound to win the lottery ticket. T he p roblem here with the universe and the h uman r ace is that we are the surviving Casanovas. W hen you start with many adventurous C asanovas, there is bound to be a survivor, and guess what: if you are here talking about it, you are likely to be that particular one (notice the "con­ dition": you survived to talk about it). So we can no longer naively com­ pute odds w ithout considering that the condition that we are in existence imposes restrictions on the process that led us here. Assume that history delivers either "bleak" ( i.e., u nfavorable) or "rosy" ( i.e., f avorable) scenarios. The bleak scenarios lead to extinction. C learly, i f I am now writing these lines, it is certainly because history de­ livered a "rosy" scenario, one that allowed me to be here, a historical route in which my forebears avoided massacre by the many invaders who roamed the Levant. Add to that beneficial scenarios free of meteorite c ol­ lisions, n uclear war, and other large-scale terminal epidemics. But I do not have to look at humanity as a whole. Whenever I probe into my own bi­ ography I am alarmed at how tenuous my life has been so far. Once when I r eturned to Lebanon during t he war, at the age of eighteen, I felt episodes o f e xtraordinary fatigue and cold chills in spite of the summer heat. It was typhoid fever. Had it not been for the discovery of antibiotics, only a few decades earlier, I would not be here today. I was also later "cured" of an­ other severe disease that would have left me for dead, thanks to a treat­ ment that depends o n another recent medical technology. As a human being alive here in the age of the Internet, capable of writing and reaching an audience, I have also benefited from society's luck and the remarkable absence of recent large-scale war. In addition, I am the result of the rise of the h uman r ace, i tself a n accidental event. M y b eing here is a consequential low-probability occurrence, and I tend to forget it. L et us r eturn t o the touted recipes for becoming a millionaire in ten steps. A successful person will try to convince you that his achievements could not possibly be accidental, just as a gambler who wins at roulette GIACOMO CASANOVA'S UNFAILING LUCK 1 1 9 seven times in a row will explain to you that the odds a gainst such a streak are one in several million, so you either have to believe some transcenden­ tal intervention is in play or accept his skills and insight in picking the winning numbers. But if you take into account the quantity of gamblers out there, and the number of gambling sessions (several million episodes in total), then it becomes obvious that such strokes of luck are bound to happen. And if you are talking about them, they have happened to you. T he reference point argument is as follows: do not compute odds f rom the vantage point of the winning gambler (or the lucky Casanova, or the endlessly b ouncing back New Y ork City, or the invincible Carthage), but from all those who started in the cohort. Consider once again the example o f the gambler. If you look at the population of beginning gamblers taken as a whole, you can be c lose t o certain that one of them (but you do not know in advance which one) will show stellar results just by luck. So, from the reference point o f the beginning cohort, this is not a big deal. B ut from the reference point of the winner (and, who does not, and this is key, t ake the losers into account), a long string of wins will appear to be too extraordinary an occurrence to be explained by luck. Note that a "his­ tory" is just a series of numbers t hrough t ime. The numbers can represent degrees of wealth, fitness, weight, anything. The Cosmetic Because T his in itself g reatly weakens the notion of "because" that is often pro­ pounded by scientists, and almost always misused by historians. We have to accept the fuzziness of the familiar "because" no matter how queasy it makes us feel (and it does makes us queasy to remove the analgesic illusion o f c ausality). I r epeat that we are explanation-seeking animals who tend to think that everything has an identifiable cause and grab the most a pparent o ne as the e xplanation. Yet there may not be a visible because; t o the con­ trary, frequently there is nothing, not even a spectrum of possible explana­ tions. B ut silent evidence masks this f act. W henever our survival is in play, the very notion of because is severely weakened. The condition of survival drowns all possible explanations. The Aristotelian "because" is not there to account for a solid link between two items, but rather, as we saw in Chapter 6, to cater to our hidden w eakness for imparting explanations. Apply this reasoning to the following question: Why didn't t he bubonic plague kill m ore people? People will supply quantities of cosmetic expia- 120 UMBERTO ECO'S ANTIUBRARY n ations involving theories about the intensity of the plague and "scientific m odels" o f epidemics. Now, try the weakened causality argument that I have just emphasized in this chapter: had the bubonic plague killed more people, the observers (us) would not be here to observe. So it may not nec­ essarily be the property of diseases to spare us humans. Whenever your survival is in play, d on't i mmediately look for causes and effects. T he main identifiable reason for our survival of such diseases might simply be i naccessible t o us: we are here s ince, C asanova-style, the "rosy" scenario played out, and if it seems too h ard t o u nderstand it is because we are too brainwashed by notions of causality and we think that it is smarter to say because t han t o accept randomness. M y biggest problem with the educational system lies precisely in that it f orces s tudents t o squeeze explanations out of subject matters and shames t hem for withholding judgment, for uttering the "I d on't k now." Why did the Cold War end? Why did the Persians lose the battle of S alamis? W hy did Hannibal get his behind kicked? Why did Casanova bounce back from hardship? In each of these examples, we are taking a condition, survival, and looking for the explanations, instead of flipping the argument on its head and stating that conditional on such survival, o ne cannot read that m uch into the process, and should learn instead to invoke some measure o f r andomness (randomness is what we d on't k now; to invoke random­ ness is to plead ignorance). It is not just your c ollege p rofessor who gives you bad habits. I showed in Chapter 6 how newspapers need to stuff their t exts w ith causal links to make you enjoy the narratives. But have the in­ tegrity to deliver your "because" very sparingly; try to limit it to situations where the "because" is derived from experiments, not backward-looking history. Note here that I am not saying causes do not exist; do not use this ar­ gument to avoid trying to learn from history. All I am saying is that it is not so simple; be suspicious of the "because" and handle it with care— particularly in situations where you suspect silent evidence. W e have seen several varieties of the silent evidence that cause defor­ mations in our perception of empirical reality, making it appear more e xplainable (and more stable) t han it actually is. In addition to the confir­ mation error and the narrative fallacy, t he manifestations of silent evi­ dence further distort the role and importance of B lack S wans. In fact, they c ause a g ross overestimation at times (say, with literary s uccess), and un- GIACOMO CASANOVA'S UNFAILING LUCK 121 d erestimation at others (the stability of history; the stability of our h uman species). I said earlier that our perceptual system may not react to what does not lie in front of our eyes, or what does not arouse our emotional attention. We are made to be superficial, to heed what we see and not heed what does not vividly come to mind. We wage a double war against silent evi­ dence. T he unconscious p art o f our inferential mechanism (and there is one) will ignore the cemetery, even if we are intellectually aware of the need to take it into account. Out of sight, out of mind: we harbor a nat­ ural, even physical, scorn of the abstract. T his will be further illustrated in the next chapter. Chapter Nine THE L UDIC FALLACY, OR T HE U NCERTAINTY OF THE NERD Lunch at Lake Como (west)—The military as philosophers—Plato's random­ ness FAT T ONY " Fat T ony" is one of Nero's friends who irritates Yevgenia Krasnova be­ yond measure. We should perhaps more thoughtfully style him "Horizon­ tally-challenged T ony," since he is not as objectively overweight as his nickname indicates; it is just that his body shape makes whatever he wears seem ill-fitted. He wears only tailored suits, many of them cut for him in R ome, b ut they look as if he bought them from a Web catalog. He has t hick h ands, hairy fingers, wears a gold wrist chain, and reeks of licorice candies that he devours in industrial quantities as a substitute for an old smoking habit. He doesn't usually mind people calling him Fat Tony, but he much prefers to be called just Tony. Nero calls him, more politely, " Brooklyn T ony," because of his accent and his Brooklyn way of thinking, though Tony is one of the prosperous Brooklyn people who moved to New Jersey twenty years ago. T ony is a successful nonnerd with a happy disposition. He leads a gre­ garious existence. His sole visible problem seems to be his weight and the corresponding nagging by his family, remote cousins, and friends, who THE LUDIC FALLACY, OR T H E UNCERTAINTY OF THE NERD 1 2 3 keep warning him about that premature heart attack. Nothing seems to work; Tony often goes to a fat farm in Arizona to not e at, lose a few pounds, then gain almost all of them back in his first-class seat on the flight b ack. It is remarkable how his self-control and personal discipline, otherwise admirable, fail to apply to his waistline. He started as a clerk in the back office o f a New Y ork b ank in the early 1 980s, in the letter-of-credit department. He pushed papers and did some grunt w ork. Later he grew into giving small business loans and figured out the game of how you can get financing from the monster banks, how their bureaucracies operate, and what they like to see on paper. All the while an e mployee, he started acquiring property in bankruptcy proceedings, buy­ ing it from financial institutions. His big insight is that bank employees who sell you a house that's not theirs just don't care as much as the own­ ers; T ony knew very rapidly how to talk to them and maneuver. Later, he a lso learned to buy and sell gas stations with money borrowed from small neighborhood bankers. T ony h as this remarkable habit of trying to make a buck effortlessly, j ust for entertainment, without straining, without office w ork, without meeting, just by melding his deals into his private life. T ony's motto is "Finding who the sucker is." Obviously, they are often the banks: "The c lerks d on't care about nothing." Finding these suckers is second nature to him. If you took walks around the block with Tony you would feel c on­ siderably more informed about the texture of the world just "tawking" to him. T ony is remarkably gifted at getting unlisted phone numbers, first-class seats on airlines for no additional money, or your car in a garage that is of­ ficially full, e ither through connections or his forceful charm. Non-Brooklyn John I found the perfect non-Brooklyn in someone I will c all Dr. John. He is a former engineer currently working as an actuary for an insurance com­ pany. He is thin, wiry, and wears glasses and a dark suit. He lives in New J ersey n ot far from Fat Tony but certainly they rarely run into each other. T ony never takes the train, and, actually, never commutes (he drives a C adillac, and sometimes his wife's Italian convertible, and jokes that he is more visible than the rest of the car). Dr. John is a master of the schedule; he is as predictable as a c lock. H e quietly and efficiently reads the newspa­ per on the train to Manhattan, then neatly folds it for the lunchtime con- 124 UMBERTO ECO'S ANTIUBRARY t inuation. While Tony makes restaurant owners rich (they beam when they see him coming and exchange noisy hugs with him), John meticu­ lously p acks his sandwich every morning, fruit salad in a plastic container. As f or his clothing, he also wears a suit that looks like it came from a Web c atalog, e xcept that it is quite likely that it actually did. Dr. J ohn is a painstaking, reasoned, and gentle fellow. He takes his work seriously, so seriously that, unlike Tony, you can see a line in the sand between his working time and his leisure activities. He has a PhD in e lectrical e ngineering from the University of Texas at Austin. Since he knows both computers and statistics, he was hired by an insurance com­ pany to do computer simulations; he enjoys the business. Much of what he does consists of running computer programs for "risk management." I k now that it is rare for Fat Tony and Dr. John to breathe the same air, let a lone find themselves at the same bar, so consider this a pure t hought e xercise. I will ask each of them a question and compare their answers. N N T (that is, me): Assume that a coin is fair, i.e., has an equal probability o f c oming up heads or tails when flipped. I flip it ninety-nine times and get heads each time. What are the odds o f my getting tails on my next throw? Dr. J ohn: Trivial question. One half, of course, since you are assuming 5 0 p ercent o dds f or each and independence between draws. N NT: W hat do you say, Tony? F at T ony: I'd say no more than 1 percent, of course. N NT: W hy so? I gave you the initial assumption of a fair coin, mean­ ing that it was 5 0 percent either way. F at T ony: You are either full of crap or a pure s ucker to buy that " 5 0 p ehcent" business. The coin gotta be loaded. It can't be a fair game. ( Translation: It is far more likely that your assumptions about the fair­ ness are wrong than the coin delivering ninety-nine heads in ninety-nine throws.) N NT: B ut Dr. John said 5 0 percent. F at T ony (whispering in my ear): I know these guys with the nerd ex­ amples from the bank days. They think way too slow. And they are too commoditized. You can take them for a ride. Now, of the two of them, which would you favor for the position of mayor of New Y ork C ity (or Ulan Bator, Mongolia)? Dr. John thinks en­ tirely w ithin the box, the box that was given to him; Fat Tony, almost en­ tirely o utside the box. THE LUDIC FALLACY, OR THE UNCERTAINTY OF THE NERD 1 2 5 T o set the terminology straight, what I c all " a nerd" here doesn't have to look sloppy, unaesthetic, and sallow, and wear glasses and a portable computer on his belt as if it were an ostensible weapon. A nerd is simply s omeone w ho thinks exceedingly inside the box. Have you ever wondered why so many of these straight-A s tudents end up going nowhere in life w hile someone who lagged behind is now getting the shekels, buying the diamonds, and getting his phone calls returned? Or even getting the Nobel Prize in a real discipline (say, medicine)? Some of this may have something to do with luck in outcomes, but there is this sterile and obscurantist quality that is often associated with classroom knowledge that may get in the way of u nderstanding w hat's going on in real life. In an IQ test, as well as in any academic setting (including sports), Dr. J ohn would vastly outperform Fat Tony. But Fat Tony would outper­ form Dr. John in any other possible ecological, real-life situation. In fact, Tony, in spite of his lack of culture, has an enormous curiosity about the texture of reality, and his own erudition—to me, he is more scientific in the literal, though not in the social, sense t han D r. John. We will get deep, very deep, into the difference between the answers of F at T ony and Dr. John; this is probably the most vexing problem I know about the connections between two varieties of knowledge, what we dub P latonic and a-Platonic. Simply, people like Dr. John can cause B lack Swans outside Mediocristan—their minds are closed. While the problem is very general, one of its nastiest illusions is what I c all t he ludic fallacy— the attributes of the uncertainty we face in real life h ave little connection to the sterilized ones we encounter in exams and games. So I c lose Part One with the following story. L UNCH A T L AKE C OMO O ne spring day a few years ago, I was surprised to receive an invitation from a t hink tank sponsored by the United States Defense Department to a b rainstorming session on risk that was to take place in Las Vegas the f ol­ lowing fall. T he person who invited me announced on the phone, "We'll have lunch on a terrace overlooking Lake Como," which put me in a state o f severe distress. Las Vegas (along with its sibling the emirate of Dubai) is p erhaps o ne place I'd never wish to visit before I die. Lunch at "fake C omo" w ould be torture. But I'm glad I went. T he t hink tank had gathered a nonpolitical collection of people they called doers and scholars (and practitioners like me who do not accept the 126 UMBERTO ECO'S ANTIUBRARY d istinction) i nvolved in uncertainty in a variety of disciplines. And they s ymbolically p icked a major casino as a venue. T he s ymposium was a closed-doors, synod-style assembly of peo­ ple who would never have mixed otherwise. My first surprise was to dis­ cover t hat the military people there thought, behaved, and acted like philosophers—far more so than the philosophers we will see splitting hairs in their weekly colloquium in Part Three. They thought out of the b ox, l ike traders, except much better and without fear of introspection. An assistant secretary of defense was among us, but had I not known his p rofession I w ould have thought he was a practitioner of skeptical empiri­ cism. Even an engineering investigator who had examined the cause of a s pace s huttle explosion was thoughtful and open-minded. I came out of the meeting realizing that only military people deal with randomness with genuine, introspective intellectual honesty—unlike academics and corpo­ rate executives using other people's money. This does not show in war m ovies, w here they are usually portrayed as war-hungry autocrats. The people in front of me were not the people who initiate wars. Indeed, for many, the successful defense policy is the one that manages to eliminate potential dangers without war, such as the strategy of bankrupting the R ussians t hrough the escalation in defense spending. When I expressed my amazement to Laurence, another finance person who was sitting next to m e, he told me that the military collected more genuine intellects and risk thinkers than most if not all other professions. Defense people wanted to understand the epistemology of risk. In t he group was a gentleman who ran a group of professional gam­ blers a nd who was banned from most casinos. He had come to share his wisdom with us. He sat not far from a stuffy professor of political s cience, dry like a bone and, as is characteristic of "big names," careful about his reputation, who said nothing out of the box, and who did not smile once. During the sessions, I tried to imagine the hotshot with a rat dropped d own his back, p utting h im in a state of wriggling panic. He was perhaps good at writing Platonic models of something called game theory, but when Laurence and I went after him on his improper use of financial metaphors, he lost all his arrogance. Now, when you think of the major risks casinos f ace, g ambling situa­ tions come to mind. In a casino, one would think, the risks include lucky gamblers blowing up the house with a series of large wins and cheaters taking away money through devious methods. It is not just the general public that would believe so, but the casino management as well. Conse- THE LUDIC FALLACY, OR THE UNCERTAINTY OF THE NERD 1 2 7 quently, the casino had a high-tech surveillance system tracking cheaters, card counters, and other people who try to derive an advantage over them. E ach o f the participants gave his presentation and listened to those of the others. I came to discuss B lack S wans, and I intended to tell them that the only thing I know is that we know precious little about them, but that it was their property to sneak up on us, and that attempts at Platonifying them led to additional misunderstandings. Military people can u nderstand such things, and the idea became recently prevalent in military c ircles w ith the expression unknown unknown (as opposed to the known unknown). But I had prepared my talk (on five restaurant napkins, some stained) and was ready to discuss a new phrase I coined for the occasion: the ludic fal­ lacy. I intended to tell them that I should not be speaking at a casino be­ cause it had nothing to do with uncertainty. The Uncertainty of the Nerd W hat is the ludic fallacy? Ludic c omes from ludus, L atin for games. I was hoping that the representatives of the casino would speak before me so I could start harassing them by showing (politely) that a casino was precisely the venue not t o pick for such a discussion, since the class of risks c asinos e ncounter are very insignificant outside o f the building, and their study n ot readily transferable. My idea is that gambling was sterilized a nd domesticated uncertainty. In the casino you know the rules, you can c al­ culate the odds, and the type of uncertainty we encounter there, we will see later, is mild, b elonging to Mediocristan. My prepared statement was t his: " The casino is the only h uman v enture I know where the probabili­ ties are known, Gaussian ( i.e., b ell-curve), and almost computable." You cannot expect the casino to pay out a million times your bet, or to change the rules abruptly on you during t he game—there are never days in which " 36 b lack" is designed to pop up 95 percent of the time.* In real life you do not know the odds; you need to discover them, and the sources of uncertainty are not defined. Economists, who do not con- * M y colleague M ark Spitznagel found a martial version of the ludic fallacy: o rga­ nized competitive fighting trains the athlete to focus on the game and, in order n ot t o dissipate his c oncentration, t o ignore the possibility of what is not specifically al­ lowed by the rules, such as kicks to the groin, a surprise knife, et c etera. So those who win the gold medal might be precisely those who will be most vulnerable in real life. Likewise, you see people with huge muscles (in black T-shirts) who can impress you in the artificial environment of the gym but are unable to lift a stone. 128 UMBERTO ECO'S ANTIUBRARY sider what was discovered by noneconomists worthwhile, d raw an artifi­ cial d istinction between Knightian risks (which you can compute) and K nightian u ncertainty (which you cannot compute), after one Frank K night, w ho rediscovered the notion of unkown uncertainty and did a lot o f t hinking but p erhaps never took risks, or p erhaps lived in the vicinity of a c asino. Had he taken economic or financial risks he would have realized that these "computable" risks are largely absent from real life! T hey are laboratory contraptions! Yet w e automatically, spontaneously associate chance with these Platonified g ames. I find it infuriating to listen to people who, upon being in­ formed that I specialize in problems of chance, immediately shower me with references to dice. Two illustrators for a paperback edition of one of my books spontaneously and independently added a die to the cover and b elow every chapter, throwing me into a state of rage. The editor, familiar with my thinking, warned them to "avoid the ludic fallacy," as if it were a well-known intellectual violation. Amusingly, they both reacted with an " Ah, sorry, we d idn't k now." T hose w ho spend too much time with their noses glued to maps will tend to mistake the map for the territory. Go buy a recent history of prob­ ability a nd probabilistic thinking; you will be showered with names of al­ leged " probability thinkers" who all base their ideas on these sterilized c onstructs. I r ecently looked at what college students are t aught under the s ubject o f chance and came out horrified; they were brainwashed with this ludic fallacy and the outlandish bell curve. The same is true o f people doing PhD's in the field of probability theory. I'm reminded of a recent b ook by a thoughtful mathematician, Amir A czel, c alled Chance. E xcel­ lent book perhaps, but like all other modern books it is grounded in the ludic fallacy. Furthermore, assuming chance has anything to do with m athematics, w hat little mathematization we can do in the real world does not assume the mild randomness represented by the bell curve, but rather scalable wild randomness. What can be mathematized is usually not Gaussian, but Mandelbrotian. Now, go read any of the classical thinkers who had something practi­ cal t o say about the subject of chance, such as Cicero, and you find some­ thing different: a notion of probability that remains fuzzy t hroughout, as it needs to be, since such fuzziness is the very n ature o f uncertainty. Prob­ ability is a liberal art; it is a child of skepticism, not a tool for people with c alculators o n their belts to satisfy their desire to produce fancy calcula­ tions and certainties. B efore W estern thinking drowned in its "scientific" THE LUDIC FALLACY, OR THE UNCERTAINTY OF THE NERD 1 2 9 mentality, what is arrogantly called the Enlightenment, people prompted their brain to think—not compute. In a beautiful treatise now vanished from our consciousness, Dissertation on the Search for Truth, p ublished in 1 673, the polemist Simon Foucher exposed our psychological predilection for c ertainties. He teaches us the art of doubting, how to position our­ selves b etween doubting and believing. He writes: "One needs to exit d oubt in order to produce science—but few people heed the importance of not exiting from it prematurely.... It is a fact that one usually exits d oubt w ithout realizing it." He warns us further: "We are dogma-prone from our mother's wombs." By the confirmation error discussed in Chapter 5, we use the example o f g ames, which probability theory was successful at tracking, and claim that this is a general c ase. F urthermore, just as we tend to underestimate the role of luck in life in general, we tend to overestimate it in games of c hance. " This building is inside the Platonic fold; life s tands outside of it," I wanted to shout. Gambling with the Wrong Dice I w as in for quite a surprise when I learned that the building too was out­ side the Platonic fold. T he c asino's risk management, aside from setting its gambling policies, was geared toward reducing the losses resulting from cheaters. One does not need heavy training in probability theory to u nderstand t hat the c asino w as sufficiently diversified across the different tables to not have to worry about taking a hit from an extremely lucky gambler (the diversifi­ cation a rgument that leads to the bell curve, as we will see in Chapter 15). All they had to do was control the "whales," the high rollers flown in at the casino's expense from Manila or Hong Kong; whales can swing several million d ollars in a gambling bout. Absent cheating, the performance of most individual gamblers would be the equivalent of a d rop in the bucket, making the aggregate very stable. I p romised not to discuss any of the details of the casino's sophisticated surveillance system; all I am allowed to say is that I felt transported into a J ames B ond movie—I wondered if the casino was an imitation of the movies or if it was the other way a round. Y et, in spite of such sophistica­ tion, their risks had nothing to do with what can be anticipated knowing that the business is a casino. For it t urned o ut that the four largest losses 130 UMBERTO ECO'S ANTILIBRARY i ncurred or narrowly avoided by the casino fell c ompletely outside their sophisticated models. F irst, t hey lost around $ 1 0 0 million when an irreplaceable performer in their main show was maimed by a tiger (the show, Siegfried and Roy, h ad been a major Las Vegas attraction). The tiger had been reared by the performer and even slept in his bedroom; until then, nobody suspected that the powerful animal would t urn a gainst its master. In scenario analy­ ses, t he casino had even conceived of the animal jumping into the crowd, but nobody came near to the idea of insuring against what happened. S econd, a disgruntled contractor was h urt during t he construction of a hotel annex. He was so offended by the settlement offered him that he made an attempt to dynamite the casino. His plan was to put explosives around the pillars in the basement. The attempt was, of course, thwarted ( otherwise, t o use the arguments in Chapter 8, we would not have been t here), b ut I shivered at the thought of possibly sitting above a pile of dynamite. T hird, c asinos must file a s pecial form with the Internal Revenue Ser­ vice d ocumenting a gambler's profit if it exceeds a given amount. The em­ ployee w ho was supposed to mail the forms hid them, instead, for c ompletely u nexplainable reasons, in boxes under his desk. This went on for y ears without anyone noticing that something was wrong. The em­ ployee's refraining from sending the documents was truly impossible to predict. Tax violations (and negligence) being serious offences, t he casino f aced t he near loss of a gambling license or the onerous financial costs of a s uspension. Clearly they ended up paying a monstrous fine (an undis­ closed a mount), which was the luckiest way out of the problem. Fourth, there was a spate of other dangerous scenes, such as the kidnapping of the casino owner's daughter, w hich caused him, in order to s ecure c ash for the ransom, to violate gambling laws by dipping i nto the c asino c offers. Conclusion: A b ack-of-the-envelope calculation shows that the dollar value of these B lack S wans, the off-model hits and potential hits I've just outlined, swamp the on-model risks by a factor of c lose t o 1,000 to 1. The c asino spent h undreds o f millions of dollars on gambling theory and high­ tech s urveillance while the bulk of their risks came from outside their m odels. All t his, and yet the rest of the world still learns about uncertainty and probability from gambling examples. THE LUDIC FALLACY, OR THE UNCERTAINTY OF THE NERD 1 3 1 W RAPPING U P PART O NE The Cosmetic Rises to the Surface All o f the topics in Part One are actually only one. You can think about a s ubject for a long time, to the point of being possessed by it. Somehow you have a lot of ideas, but they do not seem explicitly connected; the logic linking them remains concealed from you. Yet you know deep d own t hat all these are the same i dea. Meanwhile, what Nietzsche calls bildungsphilisters, * o r learned philistines, blue collars of the thinking business, tell you that you are spread out between fields; you reply that these disciplines are artificial and arbitrary, to no avail. Then you tell them that you are a limousine driver, and they leave you alone—you feel b etter because you do not identify with them, and t hus y ou no longer need to be amputated to fit into the Procrustean bed of the disciplines. Finally, a little push a nd you see t hat it was all one single problem. O ne evening I found myself a t a cocktail party in Munich at the a part­ ment of a former art historian who had more art books in its library t han I t hought existed. I stood drinking excellent Riesling in the spontaneously formed English-speaking corner of the apartment, in the hope of getting to a state where I would be able to start speaking my brand of fake German. O ne o f the most insightful thinkers I know, the computer entrepreneur Yossi V ardi, prompted me to summarize "my idea" while standing on one leg. It was not too convenient to stand on one leg after a few glasses of per­ fumed Riesling, so I failed in my improvisation. The next day I experi­ enced s taircase wit. I jumped out of bed with the following idea: the cosmetic and the Platonic rise naturally to the surface. T his is a simple ex­ tension of the problem of knowledge. It is simply that one side of E co's l i­ brary, the one we never see, has the property of being ignored. This is also the problem of silent evidence. It is why we do not see B lack S wans: we worry about those that happened, not those that may h appen b ut did not. It is why we Platonify, liking known schémas and well-organized knowledge—to the point of blindness to reality. It is why we fall for the problem of induction, why we confirm. I t is why those who " study" a nd fare well in school have a tendency to be suckers for the ludic fallacy. * W hat Nietzsche means by this term a re the dogma-prone newspaper readers and opera lovers who have cosmetic exposure to culture and shallow depth. I extend the term here to the philistine hiding in academia who lacks in erudition out of lack o f curiosity and is closely centered on his ideas. 132 UMBERTO ECO'S ANTIUBRARY A nd it is why we have B lack S wans and never learn from their occur­ rence, b ecause the ones that did not h appen w ere too abstract. Thanks to V ardi, I n ow belonged to the club of single-idea people. W e love the tangible, the confirmation, the palpable, the real, the v isible, t he concrete, the known, the seen, the vivid, th'e visual, the s ocial, t he embedded, the emotionally laden, the salient, the stereotypical, the moving, the theatrical, the romanced, the cosmetic, the official, the scholarly-sounding verbiage ( b******t), t he pompous Gaussian econo­ mist, the mathematicized crap, the pomp, the Académie Française, Har.vard Business S chool, t he Nobel Prize, dark business suits with white shirts and Ferragamo ties, the moving discourse, and the lurid. Most of all we favor the narrated. A las, we are not manufactured, in our current edition of the human r ace, t o u nderstand a bstract matters—we need context. Randomness and uncertainty are abstractions. We respect what has happened, ignoring what could have h appened. In other words, we are naturally shallow and superficial—and we do not know it. This is not a psychological problem; it c omes from the main property of information. The dark side of the moon is harder to see; beaming light on it costs energy. In the same way, beaming light on the unseen is costly in both computational and mental ef­ fort. Distance from Primates T here h ave been in history many distinctions between higher and lower forms of humans. For the Greeks, there were the Greeks and the barbar­ ians, t hose people of the north who uttered amorphous sentences similar, to the Attic ear, to an animal's shrieks. For the English, a higher form of life w as the gentleman's—contrary to today's definition, a gentleman's life w as practiced t hrough idleness and a code of behavior that included, along with a set of manners, the avoidance of work beyond the necessities o f c omfortable subsistence. For New Y orkers, t here are those with a Man­ hattan zip code and those with such a thing as a Brooklyn or, worse, Queens address. For the earlier Nietzsche, there was the Apollonian com­ pared to the Dionysian; for the better-known Nietzsche, there was the Ubermensch, something his readers interpret however it suits them. For a modern stoic, a higher individual subscribes to a dignified system of virtue that determines elegance in one's behavior and the ability to separate re­ sults from efforts. All of these distinctions aim at lengthening the distance THE LUDIC FALLACY, OR THE UNCERTAINTY OF THE NERD 1 3 3 between us and our relatives among other primates. (I keep insisting that, when it comes to decision making, the distance between us and these hairy c ousins is far shorter t han we think.) I p ropose that if you want a simple step to a higher form of life, as dis­ tant from the animal as you can get, then you may have to denarrate, that is, shut down t he television set, minimize time spent reading newspapers, ignore the blogs. Train your reasoning abilities to control your decisions; nudge System 1 (the heuristic or experiential system) out of the important o nes. T rain yourself to spot the difference between the sensational and the empirical. T his insulation from the toxicity of the world will have an ad­ ditional benefit: it will improve your well-being. Also, bear in mind how s hallow we are with probability, the mother of all abstract notions. You do not have to do much more in order to gain a deeper u nderstanding o f things around you. Above all, learn to avoid "tunneling." A bridge here to what is to come. The Platonic blindness I illustrated with the casino story has another manifestation: focusing. To be able to focus is a g reat virtue if you are a watch repairman, a brain surgeon, or a chess player. But the last thing you need to do when you deal with uncertainty is t o "focus" (you should tell uncertainty to focus, not us). This "focus" makes you a sucker; it translates into prediction problems, as we will see in the next section. Prediction, not narration, is the real test of our u nder­ standing of the world. hen I ask people to name three recently implemented technolo­ gies t hat most impact our world today, they usually propose the computer, the Internet, and the laser. All three were unplanned, unpredicted, and unappreciated u pon t heir discovery, and remained unap­ preciated well after their initial use. They were consequential. They were B lack S wans. O f course, we have this retrospective illusion of their partak­ ing in some master plan. You can create your own lists with similar re­ sults, whether you use political events, wars, or intellectual epidemics. Y ou w ould expect our record of prediction to be horrible: the world is far, far more complicated than we think, which is not a problem, except when most of us don't know it. We tend to "tunnel" while looking into the future, making it business as usual, B lack S wan-free, when in f act there is nothing usual about the future. It is not a Platonic category! W e h ave seen how good we are at narrating backward, at inventing stories t hat convince us that we understand the past. For many people, knowledge has the remarkable power of producing confidence instead of measurable aptitude. Another problem: the focus on the (inconsequential) regular, the Platonification that makes the forecasting "inside the box." I find it scandalous that in spite of the empirical record we continue to p roject i nto the future as if we were good at it, using tools and methods that exclude rare events. Prediction is firmly institutionalized in our world. We are suckers for those who help us navigate uncertainty, whether the 136 W E JUST CAN'T PREDICT f ortune-teller or the "well-published" (dull) academics or civil servants using phony mathematics. From Yogi Berra to Henri Poincaré T he g reat baseball coach Y ogi B erra has a saying, "It is tough to make pre­ dictions, e specially about the future." While he did not produce the writ­ ings that would allow him to be considered a philosopher, in spite of his wisdom and intellectual abilities, Berra can claim to know something about randomness. He was a practitioner of uncertainty, and, as a base­ ball p layer and coach, regularly faced random outcomes, and had to face t heir results deep into his bones. In f act, Y ogi B erra is not the only thinker who thought about how much of the future lies beyond our abilities. Many less popular, less pithy, but not less competent thinkers t han he have examined our inherent limi­ tations in this regard, from the philosophers Jacques H adamard and Henri Poincaré (commonly described as mathematicians), to the philoso­ pher Friedrich von Hayek (commonly described, alas, as an e conomist), t o the philosopher Karl Popper (commonly known as a philosopher). We can safely c all t his the Berra-Hadamard-Poincaré-Hayek-Popper conjecture, which puts s tructural, built-in limits to the enterprise of predicting. " The future ain't what it used to be," Berra later said.* He seems to have been right: the gains in our ability to model (and predict) the world may be dwarfed by the increases in its complexity—implying a greater and greater role for the unpredicted. The larger the role of the B lack S wan, the harder it will be for us to predict. Sorry. B efore g oing into the limits of prediction, we will discuss our track record in forecasting and the relation between gains in knowledge and the offsetting g ains in confidence. * N ote t hat these sayings attributed t o Yogi Berra might be apocryphal—it was the physicist Niels Bohr w ho c ame up with the first one, and plenty of others came up with the second. These sayings remain, however, quintessential Berraisms. C h a p t e r T en THE SCANDAL OF PREDICTION Welcome to Sydney—How many lovers did she have?—How to be an econo­ mist, wear a nice suit, and make friends—Not right, just "almost" Shallow rivers can have deep spots right- O ne M arch evening, a few men and women were standing on the es­ planade overlooking the bay outside the Sydney Opera House. It was close to the end of the summer in Sydney, but the men were wearing jackets de­ spite the warm weather. The women were more thermally comfortable t han the men, but they had to suffer the impaired mobility of high heels. T hey all had come to pay the price of sophistication. Soon they would listen for several h ours t o a collection of oversize men and women singing endlessly in Russian. Many of the opera-bound people looked like they worked for the local office o f J . R M organ, or some other financial insti­ tution where employees experience differential wealth from the rest of the l ocal p opulation, with concomitant pressures on them to live by a sophis­ ticated script (wine and opera). But I was not there to take a peek at the n eosophisticates. I h ad come to look at the Sydney Opera House, a build­ ing that a dorns every Australian tourist brochure. Indeed, it is striking, though it looks like the sort of building architects create in order to im­ press other architects. T hat evening walk in the very pleasant p art o f Sydney called the R ocks 138 WE JUST CAN'T PREDICT w as a pilgrimage. While Australians were under t he illusion that they had built a monument to distinguish their skyline, what they had really done was to construct a monument to our failure to predict, to plan, and to c ome t o grips with our unknowledge o f the future—our systematic underestimation of what the future has in store. T he A ustralians had actually built a symbol of the epistemic arrogance o f t he h uman r ace. The story is as follows. The Sydney Opera House was supposed to open in early 1 9 6 3 at a cost of AU$ 7 million. It finally opened its doors more t han ten years later, and, although it was a less ambitious version t han i nitially envisioned, it ended up costing around AU$ 1 04 m illion. While there are far worse cases of planning failures (namely the Soviet Union), or failures to forecast (all important historical events), the Sydney Opera House provides an aesthetic (at least in principle) illustration of the difficulties. This opera-house story is the mildest of all the distortions we will discuss in this section (it was only money, and it did not cause the spilling of innocent blood). But it is nevertheless emblematic. T his c hapter has two topics. First, we are demonstrably arrogant about what we think we know. We certainly know a lot, but we have a built-in tendency to think that we know a little bit more t han we actually do, enough of that little bit t o occasionally get into serious trouble. We shall see h ow you can verify, even measure, such arrogance in your own living room. S econd, w e will look at the implications of this arrogance for all the activities involving prediction. W hy o n earth do we predict so much? Worse, even, and more interesting: Why d on't w e talk about our record in predicting? Why d on't we see how we (almost) always miss the big events? I c all this the scandal of prediction. O N T HE VAGUENESS O F C ATHERINE'S LOVER C OUNT L et us examine what I c all epistemic arrogance, literally, our hubris concerning the limits of our knowledge. Epistëmê is a Greek word that refers to knowledge; giving a Greek name to an abstract concept makes it sound important. True, our knowledge does grow, but it is threatened by greater i ncreases in confidence, which make our increase in knowledge at the same time an increase in confusion, ignorance, and conceit. T ake a r oom full of people. Randomly pick a number. The number could correspond to anything: the proportion of psychopathic stockbro- THE SCANDAL OF PREDICTION 1 3 9 kers in western Ukraine, the sales of this book during t he months with r in them, the average IQ of business-book editors (or business writers), the number of lovers of Catherine II of Russia, et cetera. Ask each person in the room to independently estimate a range of possible values for that number set in such a way that they believe that they have a 98 percent c hance o f being right, and less t han 2 p ercent chance of being wrong. In other words, whatever they are guessing has about a 2 percent chance to fall outside their range. For example: " I a m 98 percent confident that the population of Rajastan is between 1 5 and 23 million." " I a m 98 percent confident that Catherine II of Russia had between 3 4 and 63 lovers." Y ou c an make inferences about h uman n ature by counting how many people in your sample guessed wrong; it is not expected to be too much higher t han t wo out of a h undred p articipants. Note that the subjects (your victims) are free to set their range as wide as they want: you are not trying to gauge their knowledge but rather their evaluation of their own knowledge. N ow, the results. L ike m any things in life, t he discovery was un­ planned, serendipitous, surprising, and took a while to digest. Legend has it t hat Albert and R aiffa, t he researchers who noticed it, were actually l ooking for something quite different, and more boring: how humans fig­ ure out probabilities in their decision making when uncertainty is involved (what the learned c all calibrating). T he researchers came out befuddled. T he 2 p ercent error rate t urned o ut to be c lose t o 4 5 percent in the p opu­ lation being tested! It is quite telling that the first sample consisted of Har­ vard Business S chool s tudents, a breed not particularly renowned for their humility or introspective orientation. M B As a re particularly nasty in this regard, which might explain their business success. Later studies docu­ ment more humility, or rather a smaller degree of arrogance, in other populations. Janitors and cabdrivers are rather humble. Politicians and corporate executives, alas . . . I'll leave them for later. Are we twenty-two times too comfortable with what we know? It seems s o. T his e xperiment has been replicated dozens of times, across popula­ tions, p rofessions, and cultures, and just about every empirical psycholo­ gist and decision theorist has tried it on his class to show his s tudents t he big p roblem of humankind: we are simply not wise enough to be trusted with knowledge. The intended 2 percent error rate usually t urns o ut to be 140 WE JUST CAN'T PREDICT b etween 15 percent and SO percent, depending o n the population and the s ubject m atter. I h ave tested m yself a nd, sure enough, failed, even while consciously trying to be humble by carefully setting a wide range—and yet such under­ estimation h appens t o be, as we will see, the core of my professional a ctivities. T his bias seems present in all cultures, even those that favor humility—there may be no consequential difference between d owntown K uala L umpur and the ancient settlement of Amioun, (currently) Lebanon. Y esterday a fternoon, I gave a workshop in London, and had been men­ tally w riting on my way to the venue because the cabdriver had an aboveaverage ability to "find t raffic." I decided to make a quick experiment during m y talk. I a sked the participants to take a stab at a range for the number of b ooks in Umberto E co's l ibrary, which, as we know from the introduction to Part One, contains 3 0 , 0 0 0 v olumes. O f the sixty attendees, not a single one made the range wide enough to include the actual number (the 2 per­ cent e rror rate became 1 0 0 percent). This case may be an aberration, but the distortion is exacerbated with quantities that are out of the ordinary. I nterestingly, t he crowd erred on the very high and the very low sides: s ome set their ranges at 2 , 0 0 0 t o 4 , 0 0 0 ; o thers at 3 0 0 , 0 0 0 t o 6 0 0 , 0 0 0 . T rue, s omeone warned about the n ature o f the test can play it safe and set the range between zero and infinity; but this would no longer be "calibrating"—that person would not be conveying any information, and c ould n ot produce an informed decision in such a manner. In this case it is more honorable to just say, "I d on't w ant to play the game; I have no c lue." I t is not uncommon to find counterexamples, people who overshoot in the opposite direction and actually overestimate their error rate: you may have a cousin particularly careful in what he says, or you may remember that c ollege b iology professor who exhibited pathological humility; the tendency that I am discussing here applies to the average of the popula­ tion, not to every single individual. There are sufficient variations a round t he average to w arrant o ccasional counterexamples. Such people are in the minority—and, sadly, since they do not easily achieve prominence, they do not seem to play too influential a role in society. E pistemic a rrogance bears a double effect: we overestimate what we know, and underestimate uncertainty, by compressing the range of possi­ ble u ncertain states ( i.e., by reducing the space of the unknown). T he a pplications of this distortion extend beyond the mere pursuit o f THE SCANDAL OF PREDICTION 141 k nowledge: just look into the lives of the people around you. Literally any decision p ertaining to the future is likely to be infected by it. Our h uman r ace is affected by a chronic underestimation of the possibility of the fu­ ture straying from the course initially envisioned (in addition to other biases t hat sometimes exert a compounding e ffect). T o take an obvious ex­ ample, think about how many people divorce. Almost all of them are ac­ quainted with the statistic that between one-third and one-half of all marriages fail, s omething the parties involved did not forecast while tying the knot. Of course, "not us," because "we get along so well" (as if others tying the knot got along poorly). I remind the reader that I am not testing how much people know, but assessing the difference between what people actually know and how much they think they know. I a m reminded of a measure my mother con­ cocted, as a j oke, w hen I decided to become a businessman. B eing i ronic about my (perceived) confidence, though not necessarily unconvinced of my abilities, she found a way for me to make a killing. How? Someone who could figure out how to buy me at the price I am truly worth and sell me at what I think I am worth would be able to pocket a huge difference. Though I keep trying to convince her of my internal humility and insecu­ rity concealed under a confident exterior; though I keep telling her that I am an introspector—she remains skeptical. Introspector shmintrospector, she still j okes a t the time of this writing that I am a little ahead of myself. B LACK S WAN B LINDNESS R EDUX T he simple test above suggests the presence of an ingrained tendency in humans to underestimate outliers—or B lack S wans. Left t o our own de­ vices, we tend to think that what h appens every decade in f act o nly hap­ pens once every century, and, furthermore, that we know what's going on. T his m iscalculation problem is a little more subtle. In t ruth, o utliers are not as sensitive to underestimation since they are fragile to estimation errors, which can go in both directions. As we saw in Chapter 6, there are conditions under w hich people overestimate the u nusual o r some specific unusual event (say when sensational images come to their minds)—which, we have seen, is how insurance companies thrive. So my general point is that these events are very fragile to miscalculation, w ith a general severe underestimation mixed with an occasional severe overestimation. T he e rrors get worse with the degree of remoteness to the event. So far, we have only considered a 2 percent error rate in the game we saw earlier, 142 WE JUST CAN'T PREDICT b ut if you look at, say, situations where the odds are one in a hundred, one in a thousand, or one in a million, then the errors become monstrous. The l onger t he odds, the larger the epistemic arrogance. Note here one particularity of our intuitive judgment: even if we lived in Mediocristan, in which large events are rare, we would still underesti­ mate extremes—we would think that they are even rarer. We underesti­ mate our error rate even with Gaussian variables. Our intuitions are s ub-Mediocristani. B ut we do not live in Mediocristan. The numbers we are likely to estimate on a daily basis belong largely in Extremistan, i.e., they are run by concentration and subjected to B lack S wans. Guessing and Predicting T here is no effective difference between my guessing a variable that is not random, but for which my information is partial or deficient, such as the number of lovers who transited t hrough t he bed of Catherine II of Russia, and predicting a random one, like tomorrow's unemployment rate or next year's stock market. In this sense, guessing (what I d on't k now, but what s omeone else may know) and predicting (what has not taken place yet) are the same thing. T o further appreciate the connection between guessing and predicting, assume that instead of trying to gauge the number of lovers of Catherine o f R ussia, you are estimating the less interesting but, for some, more im­ portant q uestion of the population growth for the next century, the stockmarket returns, the social-security déficit, the price of oil, the results of your great-uncle's estate s ale, o r the environmental conditions of Brazil t wo decades from now. Or, if you are the publisher of Yevgenia K rasnova's b ook, y ou may need to produce an estimate of the possible future sales. W e a re now getting into dangerous waters: just consider that most profes­ sionals w ho make forecasts are also afflicted with the mental impediment discussed above. Furthermore, people who make forecasts professionally are often more affected by such impediments t han t hose who d on't. I NFORMATION I S B AD FOR K NOWLEDGE Y ou m ay wonder how learning, education, and experience affect epistemic arrogance—how educated people might score on the above test, as com­ pared with the rest of the population (using Mikhail the cabdriver as a b enchmark). Y ou will be surprised by the answer: it depends o n the pro- THE SCANDAL OF PREDICTION 1 4 3 fession. I will first look at the advantages of the "informed" over the rest o f us in the humbling business of prediction. I r ecall visiting a friend at a New Y ork i nvestment bank and seeing a frenetic h otshot "master of the universe" type walking a round w ith a set o f wireless headphones w rapped a round his ears and a microphone jutting out of the right side that prevented me from focusing on his lips during m y twenty-second conversation with him. I asked my friend the p urpose o f that contraption. "He likes to keep in touch with London," I was told. W hen y ou are employed, hence d ependent o n other people's judgment, l ooking busy can help you claim responsibility for the results in a random environment. The appearance of busyness reinforces the perception of causality, o f the link between results and one's role in them. This of course applies even more to the C EOs o f large companies who need to t rumpet a link between their "presence" and "leadership" and the results of the company. I am not aware of any studies that probe the usefulness of their time being invested in conversations and the absorption of small-time information—nor have too many writers had the guts t o question how large the C EO's r ole is in a corporation's success. Let us discuss one main effect o f information: impediment to knowl­ edge. A ristotle O nassis, p erhaps t he first mediatized tycoon, was principally famous for being rich—and for exhibiting it. An ethnic Greek refugee from s outhern Turkey, he went to Argentina, made a l ump o f cash by im­ porting Turkish tobacco, then became a shipping magnate. He was reviled when he married Jacqueline Kennedy, the widow of the American presi­ dent J ohn F. Kennedy, which drove the heartbroken opera singer Maria C allas t o immure h erself in a Paris apartment to await death. I f you study O nassis's life, w hich I spent p art o f my early adulthood doing, you would notice an interesting regularity: "work," in the conven­ tional sense, was not his thing. He did not even bother to have a desk, let a lone a n office. H e was not just a dealmaker, which does not necessitate having an office, b ut he also ran a shipping empire, which requires day-to­ day monitoring. Yet his main tool was a notebook, which contained all the information he needed. Onassis spent his life t rying to socialize with the rich and famous, and to pursue ( and c ollect) w omen. He generally woke up at noon. If he needed legal advice, he would summon his lawyers to some nightclub in Paris at two A . M . H e was said to have an irresistible charm, which helped him take advantage of people. Let us go beyond the anecdote. There may be a "fooled by random- 144 W E JUST CAN'T PREDICT n ess" effect h ere, of making a causal link between Onassis's success and his m odus o perandi. I may never know if Onassis was skilled or lucky, though I am convinced that his charm opened doors for him, but I can s ubject his m odus t o a rigorous examination by looking at empirical re­ search o n the link between information and understanding. So this state­ ment, additional knowledge of the minutiae of daily business can be useless, even actually toxic, is indirectly but quite effectively t estable. S how t wo groups of people a blurry image of a fire h ydrant, blurry enough for them not to recognize what it is. For one group, increase the resolution slowly, in ten steps. For the second, do it faster, in five steps. S top a t a point where both groups have been presented an identical image and ask each of them to identify what they see. The members of the group t hat saw fewer intermediate steps are likely to recognize the h ydrant m uch faster. M oral? The more information you give someone, the more hy­ potheses they will formulate along the way, and the worse off they will be. T hey see more random noise and mistake it for information. T he p roblem is that our ideas are sticky: once we produce a theory, we are not likely to change our minds—so those who delay developing their theories are better off. When you develop your opinions on the basis of weak evidence, you will have difficulty interpreting subsequent informa­ tion that contradicts these opinions, even if this new information is obvi­ ously m ore accurate. Two mechanisms are at play here: the confirmation b ias t hat we saw in Chapter 5, and b elief p erseverance, the tendency not to reverse opinions you already have. Remember that we treat ideas like p ossessions, a nd it will be h ard for us to p art w ith them. T he fire h ydrant e xperiment was first done in the s ixties, a nd replicated several t imes s ince. I h ave also studied this effect using the mathematics of information: the more detailed knowledge one gets of empirical reality, the more one will see the noise ( i.e., t he anecdote) and mistake it for actual information. Remember that we are swayed by the sensational. Listening to the news on the radio every hour is far worse for you t han reading a w eekly m agazine, because the longer interval allows information to be fil­ tered a bit. I n 1 9 6 5 , S tuart Oskamp supplied c linical p sychologists with successive files, e ach c ontaining an increasing amount of information about patients; the psychologists' diagnostic abilities did not grow with the additional supply of information. They just got more confident in their original diag­ nosis. G ranted, one may not expect too much of psychologists of the 1965 variety, but these findings seem to hold across disciplines. THE SCANDAL OF PREDICTION 1 4 5 Finally, in another telling experiment, the psychologist Paul S lovic asked bookmakers to select from eighty-eight variables in past horse races those that they found useful in computing the odds. These variables in­ cluded all manner of statistical information about past performances. The bookmakers were given the ten most useful variables, then asked to pre­ dict the outcome of races. Then they were given ten more and asked to predict again. The increase in the information set did not lead to an in­ crease in their accuracy; their confidence in their c hoices, o n the other h and, w ent up markedly. Information proved to be t oxic. I 've struggled much of my life w ith the common middlebrow b elief t hat "more is better"—more is sometimes, but not always, better. This toxicity of knowl­ edge will show in our investigation of the so-called expert. T HE EXPERT P ROBLEM, O R T HE T RAGEDY O F T HE E MPTY S UIT So far we have not questioned the authority of the professionals involved but rather their ability to gauge the boundaries of their own knowledge. E pistemic a rrogance does not preclude s kills. A p lumber will almost al­ ways know more about plumbing t han a s tubborn essayist and mathemati­ cal trader. A hernia surgeon will rarely know less about hernias t han a belly dancer. But their probabilities, on the other h and, w ill be off—and, this is the disturbing point, you may know much more on that score t han the expert. No matter what anyone tells you, it is a good idea to ques­ tion the error rate o f an expert's procedure. Do not question his proce­ dure, o nly his confidence. (As someone who was burned by the medical establishment, I learned to be cautious, and I urge everyone to be: if you walk into a doctor's office w ith a symptom, do not listen to his o dds o f its not being cancer.) I will separate the two cases as follows. The mild c ase: arrogance in the presence of (some) competence, a nd the severe c ase: arrogance mixed with incompetence (the empty suit). T here are some professions in which you know more t han t he experts, who are, alas, people for whose opinions you are paying—instead of them paying you to listen to them. Which ones? What Moves and What Does Not Move T here is a very rich literature on the so-called expert problem, r unning e m­ pirical testing on experts to verify their record. But it seems to be confus- 146 W E JUST CAN'T PREDICT ing at first. On one h and, w e are shown by a class of expert-busting researchers s uch as Paul Meehl and Robyn Dawes that the "expert" is the c losest t hing to a fraud, performing no better t han a c omputer using a single m etric, their intuition getting in the way and blinding them. (As an example of a computer using a single metric, the ratio of liquid assets to debt fares b etter t han t he majority of credit analysts.) On the other h and, there is a bundant l iterature showing that many people can beat computers thanks to their intuition. Which one is correct? T here m ust be some disciplines with t rue e xperts. Let us ask the following questions: Would you rather have your upcoming brain surgery performed by a newspaper's science reporter or by a certified brain surgeon? O n the other h and, w ould you prefer to listen to an economic forecast by someone with a PhD in finance from some "prominent" institution such as the Wharton S chool, o r by a newspaper's business writer? While the answer to the first question is empirically obvious, the answer to the s econd o ne isn't at all. We can already see the difference between "knowhow" and "know-what." The Greeks made a distinction between technë a nd epistèmê. T he empirical school of medicine of Menodotus of Nicomedia and Heraclites of Tarentum wanted its practitioners to stay closest to technë ( i.e., " craft"), a nd away from epistèmê ( i.e., " knowledge," " science"). T he p sychologist James Shanteau undertook the task of finding out which disciplines have experts and which have none. Note the confirmation problem here: if you want to prove that there are no experts, then you w ill be able to find a p rofession in which experts are useless. And you can prove the opposite just as well. But there is a regularity: there are professions w here experts play a role, and others where there is no evidence of s kills. W hich are which? Experts who tend to be experts: l ivestock judges, astronomers, test pilots, soil judges, chess masters, physicists, mathematicians (when they deal with mathematical problems, not empirical ones), accountants, grain i nspectors, p hoto interpreters, insurance analysts (dealing with bell curvestyle s tatistics). Experts who tend to be . .. not experts: s tockbrokers, clinical psychologists, p sychiatrists, college admissions officers, c ourt judges, councilors, personnel selectors, intelligence analysts (the CIA's record, in spite of its c osts, is pitiful). I would add these results from my own examination of the literature: economists, financial forecasters, finance professors, political s cientists, "risk experts," B ank f or International Settlements staff, THE SCANDAL OF PREDICTION 147 august members of the International Association of Financial Engineers, and personal financial advisers. Simply, things that move, a nd therefore require knowledge, do not usually have experts, while things that d on't m ove seem to have some ex­ perts. In other words, professions that deal with the future and base their studies on the nonrepeatable past have an expert problem (with the e xcep­ tion of the weather and businesses involving short-term physical processes, not s ocioeconomic o nes). I a m not saying that no one who deals with the future provides any valuable information (as I pointed out earlier, news­ papers c an predict theater opening hours rather w ell), b ut rather that those who provide no tangible added value are generally dealing with the future. Another way to see it is that things that move are often B lack S wan-prone. Experts are narrowly focused persons who need to " tun­ nel." In situations where tunneling is safe, b ecause B lack S wans are not c onsequential, t he expert will do well. R obert T rivers, an evolutionary psychologist and a man of super­ normal insights, has another answer (he became one of the most influen­ tial e volutionary thinkers since Darwin with ideas he developed while trying to go to law s chool). H e links it to self-deception. In fields where we have ancestral traditions, such as pillaging, we are very good at predicting outcomes by gauging the balance of power. Humans and chimps can im­ mediately sense which side has the upper h and, a nd make a cost-benefit analysis a bout whether to attack and take the goods and the mates. Once you start raiding, you put yourself into a delusional mind-set that makes you ignore additional information—it is best to avoid wavering during b attle. O n the other h and, u nlike raids, large-scale wars are not something present in h uman h eritage—we are new to them—so we tend to misesti­ mate their d uration a nd overestimate our relative power. R ecall t he u nder­ estimation of the d uration o f the Lebanese war. Those who fought in the G reat W ar thought it would be a mere cakewalk. So it was with the V iet­ nam c onflict, so it is with the Iraq war, and just about every modern con­ flict. Y ou c annot ignore self-delusion. The problem with experts is that they do not know what they do not know. L ack o f knowledge and delusion about the quality of your knowledge come together—the same process that makes you know less also makes you satisfied with your knowledge. N ext, instead of the range of forecasts, we will concern ourselves with the accuracy of forecasts, i.e., the ability to predict the number itself. 148 W E JUST CAN'T PREDICT How to Have the Last Laugh W e c an also learn about prediction errors from t rading a ctivities. We q uants h ave ample data about economic and financial forecasts—from general data about large economic variables to the forecasts and market c alls o f the television "experts" or "authorities." The abundance of such data and the ability to process it on a computer make the subject invalu­ able f or an empiricist. If I had been a journalist, or, God forbid, a histo­ rian, I would have had a far more difficult time testing the predictive effectiveness o f these verbal discussions. You cannot process verbal com­ mentaries with a computer—at least not so easily. Furthermore, many economists naively make the mistake of producing a lot of forecasts con­ cerning many variables, giving us a database of economists and variables, which enables us to see whether some economists are better t han o thers (there is no consequential difference) or if there are certain variables for which they are more competent ( alas, n one that are meaningful). I w as in a seat to observe from very c lose o ur ability to predict. In my full-time trader days, a couple of times a week, at 8:30 A . M . , my screen would flash some economic number released by the Department of Com­ merce, o r Treasury, or Trade, or some such honorable institution. I never had a clue about what these numbers meant and never saw any need to in­ vest energy in finding out. So I would not have cared the least about them e xcept t hat people got all excited and talked quite a bit about what these figures were going to mean, p ouring v erbal sauce a round the forecasts. Among such numbers you have the Consumer Price Index ( CPI), N onfarm Payrolls (changes in the number of employed individuals), the Index of Leading Economic Indicators, Sales o f Durable Goods (dubbed "doable g irls" by traders), the Gross Domestic Product (the most important one), and many more that generate different levels of excitement depending o n their presence in the discourse. T he d ata vendors allow you to take a peek at forecasts by "leading e conomists," p eople (in suits) who work for the venerable institutions, such as J . P. Morgan Chase or Morgan Stanley. You can watch these econ­ omists talk, theorizing eloquently and convincingly. Most of them earn seven figures and they rank as stars, with teams of researchers crunching numbers and projections. But the stars are foolish enough to publish their p rojected n umbers, right there, for posterity to observe and assess their de­ gree of competence. W orse y et, many financial institutions produce booklets every year-end THE SCANDAL OF PREDICTION 1 4 9 called " Outlook for 2 0 0 X , " r eading into the following year. O f course they do not c heck h ow their previous forecasts fared after t hey were for­ mulated. The public might have been even more foolish in buying the ar­ guments without requiring the following simple tests—easy though they are, very few of them have been done. One elementary empirical test is to compare these star economists to a hypothetical cabdriver (the equivalent o f M ikhail from Chapter 1): you create a synthetic agent, someone who takes the most recent number as the best predictor of the next, while as­ suming that he does not know anything. Then all you have to do is com­ pare the error rates of the hotshot economists and your synthetic agent. T he p roblem is that when you are swayed by stories you forget about the necessity o f such testing. Events Are Outlandish T he p roblem with prediction is a little more subtle. It comes mainly from the fact t hat we are living in Extremistan, not Mediocristan. Our predic­ tors may be good at predicting the ordinary, but not the irregular, and this is where they ultimately fail. All you need to do is miss one interest-rates m ove, from 6 percent to 1 percent in a longer-term projection (what hap­ pened between 2 0 0 0 a nd 2 001) t o have all your subsequent forecasts ren­ dered completely ineffectual in correcting your cumulative track record. W hat m atters is not how often you are right, but how large your cumula­ tive e rrors are. And these cumulative errors depend largely on the big surprises, the big o pportunities. Not only do economic, financial, and political predic­ tors miss them, but they are quite ashamed to say anything outlandish to their clients—and yet events, it turns out, are almost always outlandish. F urthermore, as we will see in the next section, economic forecasters tend to fall c loser t o one another t han t o the resulting outcome. Nobody wants to be off the wall. Since my testing has been informal, for commercial and entertainment purposes, for my own consumption and not formatted for publishing, I will use the more formal results of other researchers who did the dog work o f dealing with the tedium of the publishing process. I am surprised that so little introspection has been done to c heck o n the usefulness of these p rofessions. T here are a few—but not many—formal tests in three do­ mains: security analysis, political s cience, a nd economics. We will no d oubt have more in a few years. Or p erhaps n ot—the authors of such pa- 150 WE JUST CAN'T PREDICT pers might become stigmatized by his colleagues. Out of c lose t o a million p apers p ublished in politics, finance, and economics, there have been only a s mall number of checks on the predictive quality of such knowledge. Herding Like Cattle A few researchers have examined the work and a ttitude o f security ana­ lysts, w ith amazing results, particularly when one considers the epistemic arrogance of these operators. In a study c omparing them with weather f orecasters, T adeusz Tyszka and Piotr Zielonka document that the ana­ lysts are worse at predicting, while having a greater faith in their own s kills. S omehow, the analysts' self-evaluation did not decrease their error margin after their failures to forecast. L ast J une I bemoaned the d earth o f such published studies to J eanPhilippe Bouchaud, whom I was visiting in Paris. He is a boyish man who l ooks h alf m y age though he is only slightly younger t han I , a matter that I h alf j okingly attribute to the beauty of physics. Actually he is not exactly a p hysicist but one of those quantitative scientists who apply methods o f s tatistical physics to economic variables, a field that was started b y B enoît M andelbrot in the late 1 950s. T his community does not use Mediocristan mathematics, so they seem to care about the t ruth. T hey are c ompletely o utside the economics and business-school finance establish­ ment, and survive in physics and mathematics departments or, very often, in t rading h ouses (traders rarely hire economists for their own consump­ tion, but rather to provide stories for their less sophisticated c lients). S ome o f t hem also operate in sociology with the same hostility on the p art o f the "natives." Unlike economists who wear suits and spin theories, they use empirical methods to observe the data and do not use the bell curve. He surprised me with a research paper that a summer intern had just finished u nder his supervision and that had just been accepted for publica­ tion; it scrutinized two thousand predictions by security analysts. What it showed was that these brokerage-house analysts predicted nothing—a naive forecast made by someone who takes the figures from one period as predictors of the next would not do markedly worse. Yet analysts are in­ formed about companies' orders, forthcoming contracts, and planned ex­ penditures, so this advanced knowledge should help them do considerably better t han a n aive forecaster looking at the past data without further in­ formation. Worse yet, the forecasters' errors were significantly larger t han t he average difference between individual forecasts, which indicates herd- THE SCANDAL OF PREDICTION 1 5 1 ing. N ormally, forecasts should be as far from one another as they are from the predicted number. But to u nderstand h ow they manage to stay in business, a nd why they d on't develop severe nervous breakdowns (with weight loss, erratic behavior, or acute alcoholism), we must look at the work of the psychologist Philip Tetlock. / Was "Almost" Right T etlock studied the business of political and economic "experts." He asked various specialists to judge the likelihood of a number of political, e conomic, a nd military events occurring within a specified time frame (about five years ahead). The outcomes represented a total number of around twenty-seven thousand predictions, involving close to three hun­ dred s pecialists. Economists represented about a quarter of his sample. T he study revealed that experts' error rates were clearly many times what they had estimated. His study e xposed an expert problem: there was no difference in results whether one had a PhD or an u ndergraduate d egree. Well-published p rofessors had no advantage over journalists. The only regularity Tetlock found was the negative effect o f reputation on predic­ tion: those who had a big reputation were worse predictors t han t hose who had none. But T etlock's focus was not so much to show the real competence of experts (although the study w as quite convincing with respect to that) as to investigate why the experts did not realize that they were not so good at their own business, in other words, how they spun t heir stories. There seemed t o be a logic to such incompetence, mostly in the form of b elief de­ fense, o r the protection of self-esteem. He therefore dug further into the mechanisms by which his subjects generated ex post explanations. I will leave aside how one's ideological commitments influence one's perception and address the more general aspects of this blind spot toward one's own predictions. You tell yourself that you were playing a different game. L et's say you failed t o predict the weakening and precipitous fall of the Soviet Union (which n o social scientist saw c oming). I t is easy to claim that you were ex­ cellent a t u nderstanding t he political workings of the Soviet Union, but that these Russians, being exceedingly Russian, were skilled at hiding from y ou crucial economic elements. Had you been in possession of such e conomic i ntelligence, you would certainly have been able to predict the demise of the Soviet regime. It is not your skills that are to blame. The 152 W E JUST CAN'T PREDICT s ame might apply to you if you had forecast the landslide victory for Al G ore o ver George W. Bush. You were not aware that the economy was in such dire straits; indeed, this fact seemed to be concealed from everyone. Hey, y ou are not an economist, and the game t urned o ut to be about e co­ nomics. You invoke the outlier. S omething happened that was outside the sys­ tem, o utside the scope of your s cience. G iven that it was not predictable, you are not to blame. It was a B lack S wan and you are not supposed to predict B lack S wans. B lack S wans, N N T tells us, are fundamentally unpredictable (but then I think that N N T would ask you, Why rely on p redictions?). S uch events are "exogenous," coming from outside your s cience. O r maybe it was an event of very, very low probability, a thousandyear f lood, and we were unlucky to be exposed to it. But next time, it will not h appen. T his focus on the narrow game and linking one's performance to a given script is how the nerds e xplain the failures of mathematical methods in society. The model was right, it worked well, but the game t urned o ut to be a different one t han a nticipated. The "almost right" defense. R etrospectively, with the benefit of a revi­ sion o f values and an informational framework, it is easy to feel t hat it was a c lose c all. T etlock writes, "Observers of the former Soviet Union who, in 1 9 8 8 , t hought the Communist Party could not be driven from power by 1 993 o r 1 9 9 8 were especially likely to believe that Kremlin hardliners al­ most overthrew Gorbachev in the 1 9 9 1 coup attempt, and they would have if the conspirators had been more resolute and less inebriated, or if k ey m ilitary officers had obeyed orders to kill civilians challenging martial law or if Y eltsin h ad not acted so bravely." I will go now into more general defects uncovered by this example. T hese " experts" were lopsided: on the occasions when they were right, they attributed it to their own depth o f u nderstanding and expertise; when wrong, it was either the situation that was to blame, since it was unusual, or, w orse, they did not recognize that they were wrong and spun stories around it. They found it difficult to accept that their grasp was a little short. But this attribute is universal to all our activities: there is something in us designed to protect our self-esteem. W e h umans are the victims of an asymmetry in the perception of ran­ dom events. We attribute our successes to our skills, and our failures to e xternal events outside our control, namely to randomness. We feel re­ sponsible for the good stuff, but not for the bad. This causes us to think that we are better t han o thers at whatever we do for a living. Ninety-four THE SCANDAL OF PREDICTION 1 5 3 p ercent of Swedes believe that their driving skills put them in the top 5 0 p ercent of Swedish drivers; 84 percent of Frenchmen feel t hat their lovemaking abilities put them in the top h alf o f French lovers. T he o ther effect o f this asymmetry is that we feel a l ittle unique, unlike others, for whom we do not perceive such an asymmetry. I have men­ tioned the unrealistic expectations about the future on the p art o f people in the process of tying the knot. Also consider the number of families who tunnel on their future, locking themselves into hard-to-flip real estate thinking they are going to live there permanently, not realizing that the general track record for sedentary living is dire. Don't they see those welldressed real-estate agents driving around in fancy two-door German cars? We are very nomadic, far more t han we plan to be, and forcibly so. Con­ sider how many people who have abruptly lost their job deemed it likely to occur, even a few days before. Or consider how many drug a ddicts en­ tered the game willing to stay in it so long. T here is another lesson from Tetlock's experiment. He found what I mentioned earlier, that many university stars, or "contributors to top jour­ nals," are no better t han t he average New York Times r eader or journalist in detecting changes in the world around them. These sometimes overspecialized e xperts failed tests in their own specialties. The hedgehog and the fox. T etlock distinguishes between two types of predictors, the hedgehog and the fox, according to a distinction promoted by the essayist Isaiah B erlin. As in Aesop's f able, t he hedgehog knows one thing, the fox knows many things—these are the adaptable types you need in daily life. M any of the prediction failures come from hedgehogs who are mentally married to a single big B lack S wan event, a big bet that is not likely t o play out. The hedgehog is someone focusing on a single, improb­ able, a nd consequential event, falling for the narrative f allacy t hat makes us so blinded by one single outcome that we cannot imagine others. Hedgehogs, because of the narrative fallacy, a re easier for us to understand—their ideas work in sound bites. Their category is overrepresented among famous people; ergo famous people are on average worse at forecasting t han t he rest of the predictors. I have avoided the press for a long time because whenever journalists hear my B lack S wan story, they ask me to give them a list of future impact­ ing events. They want me to be predictive o f these B lack S wans. Strangely, my book Fooled by Randomness, p ublished a week before September 1 1 , 2 0 0 1 , h ad a discussion of the possibility of a plane crashing into my office building. So I was naturally asked to show "how I predicted the event." I 154 WE JUST CAN'T PREDICT d idn't p redict it—it was a chance occurrence. I am not playing oracle! I even recently got an e-mail asking me to list the next ten B lack S wans. M ost fail to get my point about the error of specificity, the narrative fallacy, a nd the idea of prediction. Contrary to what people might expect, I am not recommending that anyone become a hedgehog—rather, be a fox with an open mind. I know that history is going to be dominated by an improbable event, I just d on't k now what that event will be. Reality? What For? I found no formal, Tetlock-like comprehensive study in economics journals. B ut, suspiciously, I found no paper trumpeting economists' ability to produce reliable projections. So I reviewed what articles and working papers in economics I could find. They collectively show no convincing evidence that economists as a community have an ability to predict, and, if they have some ability, their predictions are at best just slightly b etter t han r andom ones—not good enough to help with serious decisions. T he m ost interesting test of how academic methods fare in the real world was run by Spyros Makridakis, who spent p art o f his career managing competitions between forecasters who practice a "scientific method" called econometrics—an approach that combines economic theory with statistical measurements. Simply put, he made people forecast in real life a nd then he judged their accuracy. This led to the series of " M-Competitions" he ran, with assistance from Michèle Hibon, of which M 3 w as the third and most recent one, completed in 1 9 9 9 . Makridakis and Hibon reached the sad conclusion that "statistically sophisticated or c omplex m ethods do not necessarily provide more accurate forecasts t han s impler ones." I h ad an identical experience in my q uant days—the foreign scientist with the throaty accent spending his nights on a computer doing complicated m athematics rarely fares better t han a c abdriver using the simplest methods within his reach. The problem is that we focus on the rare o ccasion w hen these methods work and almost never on their far more numerous failures. I kept begging anyone who would listen to me: "Hey, I am an uncomplicated, no-nonsense fellow from Amioun, Lebanon, and have trouble u nderstanding w hy something is considered valuable if it requires r unning c omputers overnight but does not enable me to predict better t han a ny other guy from Amioun." The only reactions I got from these THE SCANDAL OF PREDICTION 1 5 5 colleagues w ere related to the geography and history of Amioun rather t han a n o-nonsense explanation of their business. Here again, you see the narrative fallacy at work, except that in place of journalistic stories you have the more dire situation of the "scientists" with a Russian accent looking in the rearview mirror, narrating with equations, and refusing to l ook a head because he may get too dizzy. The econometrician Robert E ngel, an otherwise charming gentleman, invented a very complicated sta­ tistical m ethod called G A R C H and got a Nobel for it. No one tested it to see i f it has any validity in real life. Simpler, less sexy methods fare exceed­ ingly better, but they do not take you to Stockholm. You have an expert problem in Stockholm, and I will discuss it in Chapter 17. T his unfitness of complicated methods seems to apply to all methods. Another study effectively tested practitioners of something called game theory, in which the most notorious player is John Nash, the schizo­ phrenic mathematician made famous by the film A Beautiful Mind. Sadly, for all the intellectual appeal of these methods and all the media attention, its practitioners are no better at predicting t han university students. T here is another problem, and it is a little more worrisome. Makridakis and Hibon were to find out that the strong empirical evidence of their studies has been ignored by theoretical statisticians. Furthermore, they encountered shocking hostility toward their empirical verifications. "Instead [statisticians] have concentrated their efforts in building more so­ phisticated models without regard to the ability of such models to more accurately predict real-life data," Makridakis and Hibon write. S omeone m ay counter with the following argument: Perhaps econo­ mists' f orecasts create feedback that cancels their effect (this is called the L ucas c ritique, after the economist Robert L ucas). L et's say economists predict inflation; in response to these expectations the Federal Reserve acts and lowers inflation. So you cannot judge the forecast accuracy in e co­ nomics as you would with other events. I agree with this point, but I do not believe that it is the cause of the economists' failure to predict. The world is far too complicated for their discipline. When an economist fails to predict outliers he often invokes the issue o f e arthquakes or revolutions, claiming that he is not into geodesies, at­ mospheric sciences, or political s cience, i nstead of incorporating these fields into his studies and accepting that his field does not exist in isola­ tion. Economics is the most insular of fields; it is the one that quotes least from outside itself! Economics is p erhaps t he subject that currently has the 156 W E JUST CAN'T PREDICT h ighest number of philistine scholars—scholarship without erudition and natural curiosity can close your mind and lead to the fragmentation of d isciplines. " OTHER T HAN T HAT," I T WAS OKAY W e h ave used the story of the Sydney Opera House as a springboard for our discussion of prediction. We will now address another constant in h uman n ature: a systematic error made by project planners, coming from a m ixture of h uman n ature, the complexity of the world, or the structure o f o rganizations. In order to survive, institutions may need to give them­ selves a nd others the appearance of having a "vision." Plans fail because of what we have called tunneling, the neglect of s ources o f uncertainty outside the plan itself. T he t ypical scenario is as follows. J o e , a nonfiction writer, gets a book c ontract w ith a set final date for delivery two years from now. The topic is r elatively e asy: the authorized biography of the writer Salman Rushdie, for w hich J o e has compiled ample data. He has even tracked down R ushdie's former girlfriends and is thrilled at the prospect of pleasant in­ terviews. T wo years later, minus, say, three months, he calls to explain to the publisher that he will be a little d elayed. The publisher has seen this c oming; he is used to authors being late. The publishing house now has cold feet because the subject has unexpectedly faded from public attention—the firm projected that interest in Rushdie would remain high, but attention has faded, seemingly because the Iranians, for some reason, l ost i nterest in killing him. L et's l ook at the source of the biographer's underestimation of the time for c ompletion. He projected his own schedule, but he tunneled, as he did not forecast that some "external" events would emerge to slow him d own. A mong these external events were the disasters on September 1 1 , 2 0 0 1 , which set him back several months; trips to Minnesota to assist his ailing mother (who eventually r ecovered); a nd many more, like a broken engage­ ment (though not with Rushdie's ex-girlfriend). "Other t han t hat," it was all w ithin his plan; his own work did not stray the least from schedule. He does not feel r esponsible for his failure.* The unexpected has a one-sided effect with projects. C onsider the * T he book you have in your hands is approximately and "unexpectedly" fifteen m onths late. THE SCANDAL OF PREDICTION 1 5 7 t rack r ecords of builders, paper writers, and contractors. The unexpected a lmost always pushes in a single direction: higher costs and a longer time to completion. On very rare occasions, as with the Empire State Building, you get the opposite: shorter completion and lower costs—these occasions are truly exceptional. We c an run experiments and test for repeatability to verify if such er­ rors in projection are p art o f h uman n ature. Researchers have tested how students e stimate the time needed to complete their projects. In one repre­ sentative test, they broke a g roup i nto two varieties, optimistic and pes­ simistic. O ptimistic students p romised twenty-six days; the pessimistic ones forty-seven days. The average actual time to completion t urned o ut to be fifty-six days. T he e xample of J oe t he writer is not acute. I selected it because it con­ cerns a r epeatable, routine task—for such tasks our planning errors are milder. With projects of great novelty, such as a military invasion, an allout war, or something entirely new, errors explode u pward. In f act, t he more routine the task, the better you learn to forecast. But there is always something nonroutine in our modern environment. T here m ay be incentives for people to promise shorter completion dates—in order to win the book contract or in order for the builder to get your d own p ayment and use it for his upcoming t rip t o Antigua. But the planning problem exists even where there is no incentive to underestimate the d uration ( or the c osts) o f the task. As I said earlier, we are too narrowminded a species to consider the possibility of events straying from our mental projections, but furthermore, we are too focused on matters inter­ nal to the project to take into account external uncertainty, the "unknown unknown," so to speak, the contents of the unread books. T here is also the nerd effect, w hich stems from the mental elimination o f off-model risks, or focusing o n what you know. You view the world from within a m odel. Consider that most delays and cost overruns arise from u nexpected elements that did not enter into the plan—that is, they lay outside the model at hand—such as strikes, electricity shortages, a cci­ dents, bad weather, or rumors of Martian invasions. These small B lack Swans t hat threaten to hamper our projects do not seem to be taken into a ccount. T hey are too abstract—we d on't k now how they look and can­ not talk about them intelligently. We c annot truly plan, because we do not u nderstand t he future—but this is not necessarily bad news. We could plan while bearing in mind such limitations. It just takes guts. 158 W E JUST CAN'T PREDICT The Beauty of Technology: Excel Spreadsheets I n t he not too distant past, say the precomputer days, projections re­ mained vague and qualitative, one had to make a mental effort to keep t rack o f them, and it was a strain to push s cenarios into the future. It took p encils, e rasers, reams of paper, and huge wastebaskets to engage in the activity. A dd to that an accountant's love for tedious, slow work. The ac­ tivity o f projecting, in short, was effortful, undesirable, and marred with self-doubt. B ut t hings changed with the intrusion of the spreadsheet. When you put an E xcel s preadsheet into computer-literate h ands y ou get a "sales p rojection" effortlessly extending ad infinitum! Once on a page or on a computer screen, or, worse, in a PowerPoint presentation, the projection takes on a life o f its own, losing its vagueness and abstraction and becom­ ing what philosophers c all reified, invested with concreteness; it takes on a n ew life as a tangible o bject. M y friend Brian Hinchcliffe suggested the following idea when we were both sweating at the local gym. Perhaps the ease with which one can p roject i nto the future by dragging cells in these spreadsheet programs is responsible for the armies of forecasters confidently producing longerterm forecasts (all the while tunneling on their assumptions). We have be­ come w orse planners t han t he Soviet Russians thanks to these potent computer programs given to those who are incapable of handling their knowledge. L ike m ost commodity traders, Brian is a man of incisive and s ometimes b rutally painful realism. A c lassical mental mechanism, called anchoring, seems to be at work h ere. Y ou lower your anxiety about uncertainty by producing a number, then you "anchor" on it, like an o bject t o hold on to in the middle of a vacuum. This anchoring mechanism was discovered by the fathers of the p sychology o f uncertainty, Danny Kahneman and Amos Tversky, early in their heuristics and biases project. It operates as follows. Kahneman and T versky h ad their subjects spin a wheel of fortune. The subjects first l ooked a t the number on the wheel, which they knew was random, then they were asked to estimate the number of African countries in the United Nations. Those who had a low number on the wheel estimated a low num­ ber o f African nations; those with a high number produced a higher esti­ mate. Similarly, a sk someone to provide you with the last four digits of his s ocial s ecurity number. Then ask him to estimate the number of dentists in THE SCANDAL OF PREDICTION 1 5 9 M anhattan. Y ou will find that by m aking h im a ware o f the four-digit number, y ou elicit an e stimate that is c orrelated with i t. We use reference points in our h eads, s ay sales projections, a nd s tart building beliefs around them because less mental effort is needed t o c om­ pare an idea t o a reference point t han t o e valuate it in the a bsolute {Sys­ tem 1 a t w ork!). We cannot work without a p oint o f r eference. S o t he i ntroduction o f a reference point in the f orecaster's mind will work wonders. This is no different from a s tarting point in a b argaining episode: you open with high number ( "I w ant a m illion f or t his house"); the bidder will answer "only eight-fifty"—the discussion will be deter­ mined by t hat initial level. The Character of Prediction Errors L ike m any biological variables, life e xpectancy is f rom Mediocristan, that is, it is s ubjected t o m ild randomness. I t is not s calable, since t he o lder w e get, t he less likely w e are to live. In a developed country a n ewborn female is e xpected t o die at a round 7 9 , according t o i nsurance tables. When, she r eaches h er 7 9th birthday, h er life e xpectancy, assuming that she is in t yp­ ical h ealth, is a nother 10 years. A t the age of 9 0 , she s hould have another 4 .7 years t o go. At the age of 1 0 0 , 2 .5 y ears. A t the age of 1 1 9 , i f she m iraculously lives that long, she s hould have about nine months left. A s she lives beyond t he e xpected date o f d eath, t he n umber o f a dditional years t o go d ecreases. This illustrates t he m ajor property o f r andom vari­ ables r elated t o the bell curve. T he c onditional expectation o f a dditional life drops as a p erson gets older. W ith h uman p rojects a nd ventures w e h ave another story. These a re often s calable, as I said in C hapter 3 . W ith scalable variables, t he o nes from E xtremistan, y ou will witness t he e xact opposite effect. L et's s ay a p roject is e xpected t o t erminate in 7 9 d ays, t he s ame expectation in days as t he n ewborn female h as in y ears. O n the 7 9th day, if the p roject is not finished, it will be e xpected t o t ake another 2 5 days t o c omplete. B ut on the 90th day, if the p roject is still n ot c ompleted, it s hould have about 5 8 days t o go. On the 1 00th, it s hould have 8 9 days t o go. On the 1 19th, it should have an e xtra 1 4 9 days. O n day 6 0 0 , i f the project is not d one, y ou will be e xpected t o need a n e xtra 1,590 days. As you s ee, the longer you wait, the longer you will be expected to wait. Let's say you are a refugee waiting for the r eturn t o y our homeland. E ach day t hat passes y ou are g etting farther from, n ot c loser to, t he day o f 160 W E JUST CAN'T PREDICT t riumphal r eturn. T he same applies to the completion date of your next opera house. If it was expected to take two years, and three years later you are asking questions, do not expect the project to be completed any time soon. If wars last on average six months, and your conflict has been going on for two years, expect another few years of problems. The Arab-Israeli c onflict is sixty years old, and counting—yet it was considered "a simple problem" sixty years ago. (Always remember that, in a modern environ­ ment, wars last longer and kill m ore people t han is typically planned.) An­ other example: Say that you send your favorite author a letter, knowing that he is busy and has a two-week t urnaround. I f three weeks later your m ailbox is still empty, do not expect the letter to come tomorrow—it will take on average another three weeks. If three months later you still have nothing, you will have to expect to wait another year. E ach day will bring you c loser t o your death but further from the receipt of the letter. T his s ubtle but extremely consequential property of scalable random­ ness is unusually counterintuitive. We misunderstand the logic of large de­ viations from the norm. I will get deeper into these properties of scalable randomness in Part T hree. B ut let us say for now that they are central to our misunderstand­ ing of the business of prediction. D ON'T C ROSS A R IVER I F IT IS (ON A VERAGE) F OUR F EET D EEP C orporate and government projections have an additional easy-to-spot flaw: t hey do not attach a possible error rate t o their scenarios. Even in the a bsence o f B lack S wans this omission would be a mistake. I o nce gave a talk to policy wonks at the Woodrow Wilson Center in Washington, D.C., challenging them to be aware of our weaknesses in see­ ing ahead. T he a ttendees were tame and silent. What I was telling them was against everything they believed and stood for; I had gotten carried away with my aggressive message, but they looked thoughtful, compared to the testosterone-charged characters one encounters in business. I felt guilty for my aggressive stance. Few asked questions. The person who organized the talk and invited me must have been pulling a j oke o n his colleagues. I was like a n aggressive atheist making his case in front of a synod of cardinals, while dispensing with the usual formulaic euphemisms. Y et s ome members of the audience were sympathetic to the message. One anonymous person (he is employed by a governmental agency) ex- THE SCANDAL OF PREDICTION 1 6 1 plained to me privately after the talk that in January 2 0 0 4 his department was forecasting the price of oil for twenty-five years later at $ 2 7 a barrel, slightly higher t han w hat it was at the time. Six months later, around June 2 0 0 4 , after oil doubled in, price, they had to revise their estimate to $ 5 4 (the price of oil is currently, as I am writing these lines, close to $ 7 9 a b arrel). It did not d awn o n them that it was ludicrous to forecast a s ec­ ond time given that their forecast was off so early and so markedly, that this business of forecasting had to be somehow questioned. And they were looking twenty-five years a head! Nor did it hit them that there was something called an error rate to take into account.* F orecasting w ithout incorporating an error rate uncovers three falla­ cies, all arising from the same misconception about the n ature o f uncer­ tainty. T he first fallacy: variability matters. T he first error lies in taking a p rojection t oo seriously, without heeding its accuracy. Yet, for planning purposes, the accuracy in your forecast matters far more the forecast itself. I will explain it as follows. Don't cross a river if it is four feet deep on average. Y ou would take a different set of clothes on your t rip t o some remote destination if I told you that the temperature was expected to be seventy degrees Fahrenheit, with an expected error rate of forty degrees t han i f I told you that my mar­ gin of error was only five degrees. The policies we need to make decisions on should depend far more on the range of possible outcomes t han o n the e xpected final number. I have seen, while working for a bank, how people p roject c ash flows for companies without w rapping t hem in the thinnest layer o f uncertainty. Go to the stockbroker and check on what method they use to forecast sales ten years ahead to "calibrate" their valuation m odels. G o find out how analysts forecast government deficits. Go to a bank or security-analysis training program and see how they teach * While forecast errors have always been entertaining, c ommodity prices have been a great t rap for suckers. Consider this 1 970 forecast by U.S. officials (signed by the U.S. Secretaries o f the Treasury, State, Interior, and Defense): "the standard price o f foreign crude oil by 1980 may well decline and will in any event not experience a substantial increase." Oil prices went up tenfold by 1 980. I just wonder if c ur­ rent forecasters lack in intellectual curiosity or if they are intentionally ignoring forecast e rrors. Also note this additional aberration: since high oil prices are marking up their inventories, oil companies are making r ecord bucks and oil executives are getting huge bonuses because "they did a good job"—as if they brought profits by causing the rise of oil prices. 162 WE JUST CAN'T PREDICT t rainees to make assumptions; they do not teach you to build an error rate a round t hose assumptions—but their error rate is so large that it is far more significant t han t he projection itself! T he s econd f allacy lies in failing to take into account forecast degrada­ tion as the projected period lengthens. We do not realize the full extent of the difference between near and far futures. Yet the degradation in such f orecasting t hrough t ime becomes evident t hrough simple introspective examination—without even recourse to scientific papers, which on this topic are suspiciously rare. Consider forecasts, whether economic or tech­ nological, m ade in 1 9 0 5 for the following quarter of a century. How c lose t o the projections did 1 9 2 5 t urn o ut to be? For a convincing experience, g o r ead George Orwell's 1984. O r look at more recent forecasts made in 1 975 a bout the prospects for the new millennium. Many events have taken place and new technologies have appeared that lay outside the fore­ casters' i maginations; many more that were expected to take place or ap­ pear did not do so. Our forecast errors have traditionally been enormous, and there may be no reasons for us to believe that we are suddenly in a more privileged position to see into the future compared to our blind pre­ decessors. F orecasting by bureaucrats tends t o be used for anxiety relief r ather t han for adequate policy making. T he t hird fallacy, a nd p erhaps t he gravest, concerns a misunderstand­ ing of the random character of the variables being forecast. Owing to the B lack S wan, these variables can accommodate far more optimistic—or far more pessimistic—scenarios t han a re currently expected. R ecall from my experiment with Dan Goldstein testing the domain-specificity of our intu­ itions, h ow we tend to make no mistakes in Mediocristan, but make large ones in Extremistan as we do not realize the consequences of the rare event. W hat is the implication here? Even if you agree with a given forecast, you have to worry about the real possibility of significant divergence from i t. T hese divergences may be welcomed by a speculator who does not de­ pend o n steady income; a retiree, however, with set risk attributes cannot afford s uch gyrations. I would go even further and, using the argument about the depth o f the river, state that it is the lower bound of estimates ( i.e., t he worst c ase) t hat matters when engaging in a policy—the worst c ase is far more consequential t han t he forecast itself. This is particularly t rue i f the bad scenario is not acceptable. Yet the current phraseology makes no allowance for t hat. N one. THE SCANDAL OF PREDICTION 1 6 3 It is often said that "is wise he who can see things coming." Perhaps the wise one is the one who knows that he cannot see things far away. Get Another Job T he t wo typical replies I face w hen I question forecasters' business are: " What should he do? Do you have a better way for us to predict?" and " I f you're so smart, show me your own prediction." In fact, the latter ques­ tion, usually boastfully presented, aims to show the superiority of the practitioner and "doer" over the philosopher, and mostly comes from peo­ ple who do not know that I was a trader. If there is one advantage of hav­ ing been in the daily practice of uncertainty, it is that one does not have to take any crap from bureaucrats. O ne o f my clients asked for my predictions. When I told him I had n one, he was offended and decided to dispense with my services. There is in fact a routine, unintrospective habit of making businesses answer ques­ tionnaires and fill o ut p aragraphs s howing their "outlooks." I have never had an outlook and have never made professional predictions—but at least I know that I cannot forecast a nd a small number of people (those I c are a bout) take that as an asset. T here a re those people who produce forecasts uncritically. When asked why they forecast, they answer, " Well, t hat's what we're paid to do here." M y suggestion: get another job. T his suggestion is not too demanding: unless you are a slave, I assume you have some amount of control over your job selection. Otherwise this b ecomes a p roblem of ethics, and a grave one at that. People who are trapped in their j obs w ho forecast simply because "that's my j ob," k now­ ing pretty well that their forecast is ineffectual, are not what I would c all e thical. W hat they do is no different from repeating lies simply because " it's my j o b . " Anyone who causes harm by forecasting should be treated as either a fool o r a liar. Some forecasters cause more damage to society t han c rimi­ nals. P lease, d on't drive a school bus blindfolded. At JFK At N ew York's J F K airport you can find gigantic newsstands with walls full o f magazines. They are usually manned by a very polite family from 164 W E JUST CAN'T PREDICT Caravaggio's The Forfune-Teller. We have always been suckers for those who tell us about the future. In this pic­ ture the fortune-teller is stealing the victim's ring. t he Indian subcontinent (just the parents; the children are in medical s chool). T hese walls present you with the entire corpus of what an "in­ formed" person needs in order "to know what's going on." I wonder how long it would take to read every single one of these magazines, ex­ cluding the fishing and motorcycle periodicals (but including the gossip magazines—you might as well have some fun). H alf a lifetime? An entire lifetime? Sadly, all this knowledge would not help the reader to forecast what is to happen tomorrow. Actually, it might decrease his ability to forecast. T here is another aspect to the problem of prediction: its inherent limita­ tions, t hose that have little to do with human nature, but instead arise from t he very nature of information itself. I have said that the B lack Swan has three attributes: unpredictability, consequences, and retrospective explainability. L et us examine this unpredictability business.* * I o we the reader an answer concerning Catherine's lover count. She had only twelve. Chapter Eleven HOW TO LOOK FOR B IRD P OOP Popper's prediction about the predictors—Poincaré plays with billiard balls— Von Hayek is allowed to be irreverent—Anticipation machines—Paul Samuelson wants you to be rational—Beware the philosopher—Demand certainties. some W e've seen that a) we tend to both tunnel and think "narrowly" (epis­ temic a rrogance), and b) our prediction record is highly overestimated— many people who think they can predict actually can't. We will now go deeper into the unadvertised structural limitations on our ability to predict. These limitations may arise not from us but from the n ature o f the activity itself—too complicated, not just for us, but for any t ools we haye or can conceivably obtain. Some B lack S wans will remain elusive, enough to kill our forecasts. H OW T O LOOK FOR B IRD P OOP In the summer of 1 9 9 8 I worked at a European-owned financial institu­ tion. It wanted to distinguish i tself by being rigorous and farsighted. The unit involved in t rading h ad five managers, all serious-looking (always in dark blue suits, even on dress-down Fridays), who had to meet t hrough­ out the summer in order "to formulate the five-year plan." This was sup- 166 W E JUST CAN'T PREDICT p osed to be a meaty document, a sort of user's manual for the firm. A fiveyear p lan? To a fellow deeply skeptical of the central planner, the notion was ludicrous; growth within the firm had been organic and unpre­ dictable, b ottom-up not t op-down. I t was well known that the firm's most lucrative department was the product of a chance c all from a customer asking for a specific b ut strange financial transaction. The firm acciden­ tally r ealized that they could build a unit just to handle these transactions, s ince t hey were profitable, and it rapidly grew to dominate their activities. T he m anagers flew across the world in order to meet: B arcelona, H ong K ong, et cetera. A lot of miles for a lot of verbiage. Needless to say they were usually sleep-deprived. B eing a n executive does not require very de­ veloped frontal lobes, but rather a combination of charisma, a capacity to sustain boredom, and the ability to shallowly perform on harrying sched­ ules. Add to these tasks the " duty" o f attending opera performances. T he m anagers sat d own t o brainstorm during these meetings, about, of c ourse, t he medium-term future—they wanted to have "vision." But then an event occurred that was not in the previous five-year plan: the B lack S wan o f the Russian financial default of 1 998 a nd the accompanying melt­ down o f the values of Latin American debt markets. It had such an effect o n the firm that, although the institution had a sticky employment policy o f r etaining managers, none of the five was still employed there a month after t he sketch of the 1 9 9 8 five-year plan. Y et I a m confident that today their replacements are still meeting to work on the next "five-year plan." We never learn. Inadvertent Discoveries T he d iscovery of h uman e pistemic arrogance, as we saw in the previous chapter, was allegedly inadvertent. But so were many other discoveries as w ell. M any more t han w e think. T he c lassical m odel of discovery is as follows: you search for what you know (say, a new way to reach India) and find something you didn't k now was there ( America). I f y ou think that the inventions we see around us came from someone sitting in a cubicle and concocting them according to a timetable, think again: almost everything of the moment is the product of serendipity. The term serendipity w as coined in a letter by the writer H ugh W alpole, who derived it from a fairy tale, "The Three Princes of Serendip." These HOW T O LOOK FOR BIRD POOP 1 6 7 princes "were always making discoveries by accident or sagacity, of things which they were not in quest of." In o ther words, you find something you are not looking for and it changes the world, while wondering after its discovery why it "took so long" to arrive at something so obvious. N o journalist was present when the wheel was invented, but I am ready to bet that people did not just em­ bark on the project of inventing the wheel (that main engine of growth) and then complete it according to a timetable. Likewise with most inven­ tions. Sir F rancis B acon c ommented that the most important advances are the least predictable ones, those "lying out of the p ath o f the imagina­ tion." B acon w as not the last intellectual to point this out. The idea keeps popping up, yet then rapidly dying out. Almost h alf a c entury ago, the bestselling novelist Arthur Koestler wrote an entire book about it, aptly called The Sleepwalkers. It describes discoverers as sleepwalkers stum­ bling upon results and not realizing what they have in their hands. We think that the import of Copernicus's discoveries concerning planetary motions was obvious to him and to others in his day; he had been dead seventy-five years before the authorities started getting offended. Likewise we think that Galileo was a victim in the name of s cience; in f act, t he church didn't t ake him too seriously. It seems, rather, that Galileo caused the u proar h imself by ruffling a few feathers. At the end of the year in which Darwin and W allace p resented their p apers o n evolution by natural selection t hat changed the way we view the world, the president of the Linnean society, where the p apers w ere presented, announced that the so­ ciety s aw "no striking discovery," nothing in particular that could revolu­ tionize s cience. We forget about unpredictability when it is our t urn t o predict. This is why people can read this chapter and similar accounts, agree entirely with them, yet fail t o heed their arguments when thinking about the future. T ake this dramatic example of a serendipitous discovery. Alexander Fleming w as cleaning up his laboratory when he found that pénicillium mold had contaminated one of his old experiments. He t hus h appened upon t he antibacterial properties of penicillin, the reason many of us are alive t oday (including, as I said in Chapter 8, myself, for typhoid fever is often fatal when untreated). True, Fleming was looking for "something," but the actual discovery was simply serendipitous. Furthermore, while in hindsight the discovery appears momentous, it took a very long time for 168 W E JUST CAN'T PREDICT h ealth officiais t o realize the importance of what they had on their hands. E ven F leming lost faith in the idea before it was subsequently revived. In 1 9 6 5 two radio astronomists at B ell L abs in New J ersey w ho were mounting a large antenna were bothered by a background noise, a hiss, l ike t he static that you hear when you have bad reception. The noise could not be eradicated—even after they cleaned the bird excrement out of the dish, since they were convinced that bird poop was behind the noise. It t ook a w hile for them to figure out that what they were hearing was the t race o f the birth of the universe, the cosmic background microwave radia­ tion. This discovery revived the big bang theory, a languishing idea that was posited by earlier researchers. I found the following comments on Bell L abs' w ebsite commenting on how this "discovery" was one of the cen­ tury's g reatest advances: Dan Stanzione, then Bell Labs president and Lucent's chief operating officer when Penzias [one of the radio astronomers involved in the dis­ covery] retired, said Penzias "embodies the creativity and technical excellence that are the hallmarks of Bell L abs." He called him a Re­ naissance figure who "extended our fragile understanding o f creation, and advanced the frontiers of science in many important areas." R enaissance s hmenaissance. The two fellows were looking for bird poop! Not only were they not looking for anything remotely like the evi­ dence of the big bang but, as usual in these c ases, t hey did not immediately see t he importance of their find. Sadly, the physicist Ralph Alpher, the per­ son who initially conceived of the idea, in a paper coauthored with heavy­ weights George Gamow and Hans B ethe, w as surprised to read about the d iscovery in The New York Times. In f act, in the languishing papers posit­ ing the birth of the universe, scientists were doubtful whether such radia­ tion could ever be measured. As h appens s o often in discovery, those l ooking f or evidence did not find it; those not looking for it found it and were hailed as discoverers. W e h ave a paradox. Not only have forecasters generally failed dismally to foresee the drastic changes brought about by unpredictable discoveries, but incremental change has t urned o ut to be generally slower t han fore­ casters e xpected. When a new technology emerges, we either grossly un­ derestimate or severely overestimate its importance. Thomas Watson, the founder of I B M , o nce predicted that there would be no need for more t han j ust a handful of computers. HOW TO LOOK F O R BIRD POOP 1 6 9 T hat t he reader of this book is probably reading these lines not on a screen b ut in the pages of that anachronistic device, the book, would seem quite an aberration to certain p undits o f the "digital revolution." That you are reading them in archaic, messy, and inconsistent English, French, o r S wahili, instead of in Esperanto, defies the predictions of h alf a c entury ago that the world would soon be communicating in a l ogical, u nambigu­ ous, and Platonically designed lingua franca. Likewise, we are not spend­ ing long weekends in space stations as was universally predicted three decades ago. In an example of corporate arrogance, after the first moon landing the now-defunct airline Pan Am took advance bookings for round-trips b etween earth and the moon. Nice prediction, except that the company failed to forsee that it would be out of business not long after. A Solution Waiting for a Problem Engineers tend to develop tools for the pleasure of developing tools, not to induce n ature t o yield its secrets. It so h appens t hat some o f these tools bring us more knowledge; because of the silent evidence effect, w e forget to consider tools that accomplished nothing but keeping engineers off the streets. T ools lead to unexpected discoveries, which themselves lead to other unexpected discoveries. But rarely do our tools seem to work as in­ tended; it is only the engineer's gusto and love for the building of toys and machines that contribute to the augmentation of our knowledge. Knowl­ edge does not progress from tools designed to verify or help theories, but rather the opposite. The computer was not built to allow us to develop new, visual, geometric mathematics, but for some other purpose. It hap­ pened to allow us to discover mathematical o bjects t hat few cared to look for. N or was the computer invented to let you chat with your friends in S iberia, b ut it has caused some long-distance relationships to bloom. As an essayist, I c an attest that the Internet has helped me to spread my ideas by bypassing journalists. But this was not the stated p urpose o f its military designer. T he l aser is a prime illustration of a tool made for a given p urpose ( ac­ tually no real purpose) that then found applications that were not even dreamed of at the time. It was a typical "solution looking for a problem." Among the early applications was the surgical stitching of detached reti­ nas. H alf a c entury later, The Economist a sked Charles Townes, the al­ leged i nventor of the laser, if he had had retinas on his mind. He had not. He was satisfying his desire to split light beams, and that was that. In f act, 170 W E JUST CAN'T PREDICT T ownes's c olleagues teased him quite a bit about the irrelevance of his dis­ covery. Y et just consider the effects of the laser in the world around you: compact disks, eyesight corrections, microsurgery, data storage and r etrieval—all u nforeseen applications of the technology.* W e build toys. Some of those toys change the world. Keep Searching In t he summer of 2 0 0 5 I w as the guest of a biotech company in California that had found inordinate success. I was greeted with T-shirts and pins showing a bell-curve buster and the announcement of the formation of the F at T ails Club ("fat tails" is a technical term for B lack S wans). This was my first encounter with a firm that lived off B lack S wans of the positive kind. I was told that a scientist managed the company and that he had the i nstinct, as a scientist, to just let scientists look wherever their instinct took them. Commercialization came later. M y hosts, scientists at heart, under­ stood that research involves a large element of serendipity, which can pay o ff big as long as one knows how serendipitous the business can be and structures it around that fact. Viagra, which changed the mental outlook and social mores of retired men, was meant to be a hypertension drug. An­ other hypertension drug led to a hair-growth medication. My friend Bruce G oldberg, w ho u nderstands r andomness, calls these unintended side ap­ plications " corners." While many worry about unintended consequences, t echnology a dventurers thrive on them. T he b iotech company seemed to follow implicitly, though not explic­ itly, L ouis Pasteur's adage about creating luck by sheer exposure. "Luck favors t he prepared," Pasteur said, and, like all great discoverers, he knew something about accidental discoveries. The best way to get maximal ex­ posure is to keep researching. Collect opportunities—on that, later. To predict the spread of a technology implies predicting a large ele­ ment of fads and social contagion, w hich lie outside the objective utility of the technology i tself ( assuming there is such an animal as objective utility). How many wonderfully useful ideas have ended up in the cemetery, such as the Segway, an electric scooter that, it was prophesized, would change * M ost of the debate between creationists and evolutionary theorists (of which I do n ot p artake) lies in the following: creationists believe t hat the world comes from some form of design while evolutionary theorists see the world as a result of ran­ dom changes by an aimless process. But it is h ard t o look at a computer or a car and consider them the result of aimless process. Yet they a re. HOW TO LOOK F O R BIRD POOP 1 7 1 the morphology of c ities, a nd many others. As I was mentally writing these lines I saw a Time m agazine cover at an airport stand announcing the "meaningful inventions" of the year. These inventions seemed to be meaningful as of the issue date, or p erhaps for a couple of weeks after. Journalists can teach us how to not l earn. H OW TO PREDICT YOUR PREDICTIONS! T his brings us to Sir Doktor Professor Karl Raimund Popper's attack on h istoricism. As I said in Chapter 5, this was his most significant insight, but it remains his least known. People who do not really know his work tend to focus on Popperian falsification, which addresses the verification or n onverification of c laims. T his focus obscures his central idea: he made skepticism a method, he made of a skeptic someone constructive. J ust as Karl M a r x wrote, in great irritation, a diatribe called The Mis­ ery of Philosophy in response to Proudhon's The Philosophy of Misery, Popper, irritated by some of the philosophers of his time who believed in the scientific u nderstanding o f history, wrote, as a pun, The Misery of His­ toricism (which has been translated as The Poverty of Historicism).* Popper's insight concerns the limitations in forecasting historical events and the need to downgrade "soft" areas such as history and social science t o a level slightly above aesthetics and entertainment, like butter­ fly o r coin collecting. (Popper, having received a classical Viennese educa­ tion, didn't g o quite that far; I do. I am from Amioun.) What we c all h ere soft h istorical sciences are narrative d ependent s tudies. Popper's central argument is that in order to predict historical events you need to predict technological innovation, i tself f undamentally u npre­ dictable. " Fundamentally" unpredictable? I will explain what he means using a modern framework. Consider the following property of knowledge: If you e xpect t hat you will know tomorrow w ith certainty that your boyfriend has been cheating on you all this time, then you know today w ith certainty that your boyfriend is cheating on you and will take action today, say, by grabbing a pair of scissors and angrily cutting all his Ferragamo ties in half. Y ou won't tell yourself, This is what I will figure out tomorrow, but * Recall from Chapter 4 how Algazel and Averroës traded insults through book ti­ tles. Perhaps one day I will be lucky enough to r ead an a ttack on this book in a diatribe called The White Swan. 172 WE JUST CAN'T PREDICT t oday is different so I will ignore the information and have a pleasant din­ ner. This point can be generalized to all forms of knowledge. There is ac­ tually a law in statistics called the law of iterated expectations, w hich I outline here in its strong form: if I expect to expect something at some date in the future, then I already expect that something at present. C onsider t he wheel again. If you are a Stone Age historical thinker c alled o n to predict the future in a comprehensive report for your c hief t ribal planner, you must project the invention of the wheel or you will miss pretty much all of the action. Now, if you can prophesy the invention of the wheel, you already know what a wheel looks l ike, a nd thus you al­ ready know how t o build a wheel, so you are already on your way. The B lack S wan needs to be predicted! B ut t here is a weaker form of this law of iterated knowledge. It can be phrased as follows: to understand the future to the point of being able to predict it, you need to incorporate elements from this future itself. I f you know about the discovery you are about to make in the future, then you have almost made it. Assume that you are a special scholar in Medieval U niversity's F orecasting Department specializing in the projection of fu­ ture h istory (for our purposes, the remote twentieth century). You would need to hit u pon t he inventions of the steam machine, electricity, the a tomic b omb, and the Internet, as well as the institution of the airplane onboard massage and that strange activity called the business meeting, in which well-fed, but sedentary, men voluntarily restrict their blood circula­ tion with an expensive device called a necktie. T his i ncapacity is not trivial. The mere knowledge that something has been invented often leads to a series of inventions of a similar nature, even though not a single detail of this invention has been disseminated— there is no need to find the spies and hang them publicly. In mathemat­ ics, o nce a proof of an arcane theorem has been announced, we frequently witness the proliferation of similar proofs coming out of nowhere, with o ccasional a ccusations of leakage and plagiarism. There may be no pla­ giarism: t he information that the solution exists is i tself a big piece of the solution. B y t he same l ogic, w e are not easily able to conceive of future inven­ tions (if we were, they would have already been invented). On the day when we are able to foresee inventions we will be living in a state where everything conceivable has been invented. Our own condition brings to mind the apocryphal story from 1 8 9 9 w hen the head of the U .S. p atent of- HOW T O LOOK F O R BIRD P O O P 1 7 3 fice resigned because he deemed that there was nothing left to discover— e xcept t hat on that day the resignation would be justified.* Popper was not the first to go after the limits to our knowledge. In Ger­ many, in the late nineteenth century, Emil du Bois-Reymond claimed that ignoramus et ignorabimus—we are ignorant and will remain so. S ome­ how his ideas went into oblivion. But not before causing a réaction: the mathematician David Hilbert set to defy him by d rawing a list of problems that mathematicians would need to solve over the next century. Even du Bois-Reymond was wrong. We are not even good at u nder­ standing the unknowable. Consider the statements we make about things that we will never come to knowwe confidently underestimate what knowledge we may acquire in the future. Auguste Comte, the founder of the school of positivism, which is (unfairly) accused of aiming at the scientization of everything in sight, declared that mankind would forever re­ main ignorant of the chemical composition of the fixed stars. But, as C harles Sanders Peirce reported, "The ink was scarcely dry u pon t he printed page before the spectroscope was discovered and that which he had deemed absolutely unknowable was well on the way of getting ascertained." Ironically, Comte's other projections, concerning what we would come to learn about the workings of society, were grossly—and dangerously—overstated. He assumed that society was like a c lock t hat would yield its secrets to us. I 'll summarize my argument here: Prediction requires knowing about t echnologies t hat will be discovered in the future. But that very knowledge would almost automatically allow us to start developing those technolo­ gies right away. Ergo, we do not know what we will know. S ome m ight say that the argument, as phrased, seems obvious, that we always think that we have reached definitive knowledge but d on't n otice that those past societies we laugh at also thought the same way. M y argu­ ment is trivial, so why d on't w e take it into account? The answer lies in a pathology of h uman n ature. Remember the psychological discussions on asymmetries in the perception of skills in the previous chapter? We see flaws in others and not in ourselves. Once again we seem to be wonderful at self-deceit machines. * Such claims are not uncommon. F or instance the physicist Albert Michelson imag­ ined, t oward the end of the nineteenth century, t hat w hat was left for us to discover in the sciences of nature was no m ore than fine-tuning our precisions by a few dec­ imal places. 174 W E JUST CAN'T PREDICT Monsieur le professeur Henri Poincaré. Somehow they stopped making this kind of thinker. Courtesy of Université Nancy-2. T HE N TH B ILLIARD B ALL H enri Poincaré, in spite of his fame, is regularly considered to be an un­ dervalued scientific thinker, given that it took close to a century for some o f his ideas to be appreciated. He was p erhaps the last great thinking mathematician (or possibly the reverse, a mathematical thinker). Every time I see a T-shirt bearing the picture of the modern icon Albert Einstein, I c annot help thinking of Poincaré—Einstein is worthy of our reverence, but he has displaced many others. There is so little room in our conscious­ ness; it is winner-take-all up there. Third Republic-Style Decorum A gain, P oincaré is in a class by himself. I recall my father recommending P oincaré's e ssays, not just for their scientific content, but for the quality of his French prose. The grand master wrote these wonders as serialized ar­ ticles a nd composed them like extemporaneous speeches. As in every mas­ terpiece, y ou see a mixture of repetitions, digressions, everything a "me t oo" e ditor with a prepackaged mind would condemn—but these make his text even more readable owing to an iron consistency of thought. P oincaré b ecame a prolific essayist in his thirties. He seemed in a hurry a nd died prematurely, at fifty-eight; he was in such a rush t hat he did not bother correcting typos and grammatical errors in his text, even after spot­ ting them, since he found doing so a gross misuse of his time. They no HOW T O LOOK FOR BIRD P O O P 1 7 5 longer make geniuses like that—or they no longer let them write in their own way. P oincaré's r eputation as a thinker waned rapidly after his death. His idea that concerns us took almost a century to resurface, but in another f orm. It was indeed a great mistake that I did not carefully read his essays as a child, for in his magisterial La science et l'hypothèse, I d iscovered later, he angrily disparages the use of the bell curve. I will repeat that Poincaré was the t rue k ind of philosopher of s cience: his philosophizing came from his witnessing the limits of the subject itself, which is what true p hilosophy is all about. I love to tick off French literary intellectuals by naming Poincaré as my favorite French philosopher. "Him a philosophe? What do you mean, monsieur?" I t is always frustrating to explain to people that the thinkers they put on the pedestals, such as Henri Bergson or Jean-Paul Sartre, are largely the result of fashion production and can't come close to Poincaré in terms of sheer influence that will c ontinue for centuries to come. In fact, there is a scandal of prediction going on here, since it is the French Ministry of National Education that decides who is a philosopher and which philosophers need to be studied. I a m looking at Poincaré's picture. He was a bearded, portly and imposing, well-educated patrician gentleman of the French Third Republic, a m an who lived and breathed general s cience, l ooked deep into his subject, and had an astonishing breadth of knowledge. He was p art o f the class o f mandarins that gained respectability in the late nineteenth century: upper middle c lass, p owerful, but not exceedingly rich. His father was a doctor and professor of medicine, his uncle was a prominent scientist and administrator, and his cousin Raymond became a president of the republic of France. These were the days when the grandchildren of businessmen and wealthy landowners headed for the intellectual professions. However, I can hardly imagine him on a T-shirt, or sticking out his tongue like in that famous picture of Einstein. There is something nonplayful about him, a Third Republic style of dignity. In his day, Poincaré was thought to be the king of mathematics and s cience, e xcept of course by a few narrow-minded mathematicians like Charles Hermite who considered him too intuitive, too intellectual, or too "hand-waving." When mathematicians say "hand-waving," disparagingly, a bout someone's work, it means that the person has: a) insight, b) r ealism, c) something to say, and it means that d) he is right because that's what critics say when they can't find anything more negative. A nod from Poincaré made or broke a career. Many claim that Poincaré figured 176 WE JUST CAN'T PREDICT o ut relativity before Einstein—and that Einstein got the idea from him— but that he did not make a big deal out of it. These claims are naturally made by the French, but there seems to be some validation from Einstein's friend and biographer Abraham Pais. Poincaré was too aristocratic in both background and demeanor to complain about the ownership of a result. P oincaré is central to this chapter because he lived in an age when we had made extremely rapid intellectual progress in the fields of prediction— think of c elestial m echanics. The scientific revolution made us feel t hat we were in possession of tools that would allow us to grasp the future. Uncer­ tainty was gone. The universe was like a c lock a nd, by studying the move­ ments of the pieces, we could project into the future. It was only a matter o f w riting down the right models and having the engineers do the calcula­ tions. T he future was a mere extension of our technological certainties. The Three Body Problem P oincaré w as the first known big-gun mathematician to understand and e xplain t hat there are fundamental limits to our equations. He introduced n onlinearities, s mall effects that can lead to severe consequences, an idea that later became popular, perhaps a bit too popular, as chaos theory. What's so poisonous about this popularity? Because Poincaré's entire point is about the limits that nonlinearities put on forecasting; they are not an invitation to use mathematical techniques to make extended forecasts. M athematics c an show us its own limits rather clearly. T here is (as usual) an element of the unexpected in this story. Poincaré i nitially r esponded to a competition organized by the mathematician G ôsta M ittag-Leffer to celebrate the sixtieth birthday of King Oscar of S weden. P oincaré's memoir, which was about the stability of the solar sys­ tem, won the prize that was then the highest scientific honor (as these were the happy days before the Nobel Prize). A problem arose, however, when a m athematical editor checking the memoir before publication realized that there was a calculation error, and that, after consideration, it led to the opposite conclusion—unpredictability, or, more technically, nonintegrability. T he memoir was discreetly pulled and reissued about a year later. P oincaré's r easoning was simple: as you project into the future you may need an increasing amount of precision about the dynamics of the p rocess t hat you are modeling, since your error rate grows very rapidly. T he p roblem is that near precision is not possible since the degradation of your forecast compounds abruptly—you would eventually need to figure HOW T O LOOK F O R BIRD P O O P 1 7 7 FIGURE 2: P RECISION A ND F ORECASTING One of the readers of a draft of this book, David Cowan, gracefully drew this picture of scattering, which shows how, at the second bounce, variations in the initial conditions can lead to extremely divergent results. As the initial imprecision in the angle is multiplied, every additional bounce will be further magnified. This causes a severe multiplicative effect where the error grows out disproportionately. o ut the past with infinite precision. Poincaré showed this in a very simple c ase, famously known as the "three body problem." If you have only two planets in a solar-style system, with nothing else affecting their course, then you may be able to indefinitely predict the behavior of these planets, no sweat. But add a third body, say a comet, ever so small, between the planets. Initially the third body will cause no drift, no impact; later, with t ime, its effects on the two other bodies may become explosive. Small differences in where this tiny body is located will eventually dictate the future o f the behemoth planets. E xplosive f orecasting difficulty comes from complicating the mechanics, ever so slightly. Our world, unfortunately, is far more complicated t han t he three body problem; it contains far more t han t hree o bjects. W e are dealing with what is now called a dynamical system—and the world, we will see, is a little too much of a dynamical system. T hink o f the difficulty in forecasting in terms of branches growing out o f a t ree; at every fork we have a multiplication of new branches. To see how our intuitions about these nonlinear multiplicative effects are rather weak, consider this story about the chessboard. The inventor of the chessboard requested the following compensation: one grain of ricè for the first 178 W E JUST CAN'T PREDICT s quare, two for the second, four for the third, eight, then sixteen, and so on, doubling every time, sixty-four times. The king granted this request, think­ ing that the inventor was asking for a pittance—but he soon realized that he was outsmarted. The amount of rice exceeded all possible grain reserves! T his m ultiplicative difficulty leading to the need for greater and greater p recision in assumptions can be illustrated with the following simple exer­ cise c oncerning the prediction of the movements of billiard balls on a t able. I use the example as computed by the mathematician Michael Berry. I f y ou know a set of basic parameters concerning the ball at rest, can com­ pute t he resistance of the table (quite elementary), and can gauge the strength of the impact, then it is rather easy to predict what would happen a t the first hit. The second impact becomes more complicated, but possi­ ble; y ou need to be more careful about your knowledge of the initial s tates, a nd more precision is called for. The problem is that to correctly compute the ninth impact, you need to take into account the gravitational pull of someone standing next to the table (modestly, Berry's computa­ tions use a weight of less t han 1 5 0 pounds). And to compute the fifty-sixth impact, every single elementary particle of the universe needs to be present in your assumptions! An electron at the edge of the universe, separated f rom us by 10 billion light-years, must figure in the calculations, since it e xerts a meaningful effect o n the outcome. Now, consider the additional b urden o f having to incorporate predictions about where these variables will be in the future. F orecasting the motion of a billiard ball on a pool t able r equires knowledge of the dynamics of the entire universe, down t o every single atom! We can easily predict the movements of large objects l ike p lanets (though not too far into the future), but the smaller entities c an b e difficult to figure out—and there are so many more of them. Note that this billiard-ball story assumes a plain and simple world; it does not even take into account these crazy social matters possibly en­ dowed with free will. Billiard balls do not have a mind of their own. Nor does our example take into account relativity and q uantum effects. N or did we use the notion (often invoked by phonies) called the "uncer­ tainty principle." We are not concerned with the limitations of the preci­ sion in measurements done at the subatomic level. We are just dealing with billiard balls! I n a d ynamical system, where you are considering more t han a ball on its o wn, where trajectories in a way depend on one another, the ability to p roject i nto the future is not just reduced, but is subjected to a fundamen­ tal limitation. Poincaré proposed that we can only work with qualitative HOW T O LOOK FOR BIRD POOP 1 7 9 m atters—some property of systems can be discussed, b ut not computed. Y ou c an think rigorously, but you cannot use numbers. Poincaré even in­ vented a field for this, analysis in situ, now p art o f topology. Prediction and forecasting are a more complicated business t han is commonly ac­ cepted, but it takes someone who knows mathematics to u nderstand t hat. T o a ccept it takes both u nderstanding a nd courage. In the 1 960s t he M I T meteorologist Edward Lorenz rediscovered Poincaré's results on his own—once again, by accident. He was producing a computer model of weather dynamics, and he ran a simulation that pro­ jected a w eather system a few days ahead. Later he tried to repeat the same simulation with the exact same model and what he thought were the same input p arameters, but he got wildly different results. He initially at­ tributed these differences to a computer bug or a calculation error. Com­ puters then were heavier and slower machines that bore no resemblance to what we have today, so users were severely constrained by time. Lorenz subsequently realized that the consequential divergence in his results arose not from error, but from a small r ounding in the i nput p arameters. This b ecame k nown as the butterfly effect, since a butterfly moving its wings in India could cause a hurricane in New Y ork, t wo years later. Lorenz's find­ ings generated interest in the field of chaos theory. Naturally researchers found predecessors to Lorenz's discovery, not only in the work of Poincaré, but also in that of the insightful and intuitive J acques H adamard, who thought of the same point around 1 8 9 8 , and then went on to live for almost seven more decades—he died at the age o f ninety-eight.* They Still Ignore Hayek Popper and Poincaré's findings limit our ability to see into the future, mak­ ing it a very complicated reflection of the past—if it is a reflection of the past at all. A potent application in the social world comes from a friend of Sir K arl, the intuitive economist Friedrich Hayek. Hayek is one of the rare c elebrated m embers of his "profession" (along with J . M . Keynes and G .L.S. S hackle) t o focus on t rue u ncertainty, on the limitations of knowl­ edge, on the unread books in E co's library. In 1 9 7 4 he received the B ank o f Sweden Prize in Economic S ciences in * There are more limits I haven't even attempted to discuss here. I a m not even bring­ ing up the class of incomputability people call NP completeness. 180 W E JUST CAN'T PREDICT M emory o f Alfred Nobel, but if you read his acceptance speech you will be in for a bit of a surprise. It was eloquently called "The Pretense of K nowledge," a nd he mostly railed about other economists and about the idea of the planner. He argued against the use of the tools of h ard science in the social ones, and depressingly, right before the big boom for these methods in economics. Subsequently, the prevalent use of complicated equations made the environment for t rue e mpirical thinkers worse t han it was before Hayek wrote his speech. Every year a paper or a book appears, bemoaning the fate of economics and complaining about its attempts to ape physics. The latest I've seen is about how economists should shoot for the role of lowly philosophers rather t han t hat of high priests. Yet, in one e ar a nd out the other. F or H ayek, a t rue f orecast is done organically by a system, not by fiat. O ne single institution, say, the central planner, cannot aggregate k nowl­ edge; m any important pieces of information will be missing. But society as a w hole will be able to integrate into its functioning these multiple pieces o f i nformation. S ociety as a whole thinks outside the box. Hayek attacked s ocialism a nd managed economies as a product of what I have called nerd knowledge, or Platonicity—owing to the growth of scientific knowledge, we overestimate our ability to u nderstand t he subtle changes that consti­ tute t he world, and what weight needs to be imparted to each such change. He aptly called this "scientism." T his disease is severely ingrained in our institutions. It is why I fear gov­ ernments and large corporations—it is h ard t o distinguish between them. Governments make forecasts; companies produce projections; every year various forecasters project the level of mortgage rates and the stock mar­ ket a t the end of the following year. Corporations survive not because they have made good forecasts, but because, like the CEOs visiting Wharton I mentioned earlier, they may have been the lucky ones. And, like a restau­ rant o wner, they may be h urting t hemselves, not us—perhaps helping us and subsidizing our consumption by giving us goods in the process, like cheap telephone calls to the rest of the world funded by the overinvestment d uring t he dotcom era. We consumers can let them forecast all they want i f t hat's what is necessary for them to get into business. Let them go hang themselves if they wish. As a m atter of fact, as I mentioned in Chapter 8, we New Yorkers are all benefiting from the quixotic overconfidence of corporations and restaurant entrepreneurs. This is the benefit of capitalism that people dis­ cuss t he least. HOW T O LOOK F O R BIRD POOP 1 8 1 But c orporations can go bust as often as they l ike, t hus subsidizing us consumers by transferring their wealth into our pockets—the more bank­ ruptcies, the better it is for us. Government is a more serious business and we need to make sure we do not pay the price for its folly. As individuals we should love free markets because operators in them can be as incompe­ tent as they wish. T he only criticism one might have of Hayek is that he makes a hard and qualitative distinction between social sciences and physics. He shows that the methods of physics do not translate to its social science siblings, and he blames the engineering-oriented mentality for this. But he was writing at a time when physics, the queen of s cience, seemed to zoom in our world. It turns o ut that even the natural sciences are far more complicated than that. He was right about the social s ciences, he is certainly right in trusting hard scientists m ore than social theorizers, but what he said about the weak­ nesses o f social knowledge applies to all knowledge. All knowledge. W hy? B ecause of the confirmation problem, one can argue that we know very little about our natural world; we advertise the read books and forget a bout the unread ones. Physics has been successful, but it is a nar­ row field of hard science in which we have been successful, and people tend to generalize that success to all s cience. It would be preferable if we were better at understanding cancer or the (highly nonlinear) weather than the origin of the universe. How Not to Bo a Nerd Let us dig deeper into the problem of knowledge and continue the com­ parison of Fat Tony and Dr. John in Chapter 9. Do nerds tunnel, meaning, do they focus on crisp categories and miss sources of uncertainty? Remem­ ber from the Prologue my presentation of Platonification as a top-down focus o n a world composed of these crisp c ategories. * T hink o f a bookworm picking up a new language. He will learn, say, S erbo-Croatian o r !Kung by reading a grammar book cover to cover, and memorizing the rules. He will have the impression that some higher gram­ matical a uthority set the linguistic regulations so that nonlearned ordinary people could subsequently speak the language. In reality, languages grow * This idea pops up here and there in history, under different names. Alfred North Whitehead called it the "fallacy of misplaced concreteness," e.g., the mistake of confusing a model with the physical entity t hat it means to describe. 182 W E JUST CAN'T PREDICT o rganically; g rammar is something people without anything more exciting to do in their lives codify into a book. While the scholastic-minded will memorize declensions, the a-Platonic nonnerd will acquire, say, S erboCroatian by picking up potential girlfriends in bars on the outskirts of S arajevo, o r talking to cabdrivers, then fitting (if needed) grammatical rules to the knowledge he already possesses. C onsider a gain the central planner. As with language, there is no gram­ matical a uthority codifying s ocial a nd economic events; but try to con­ vince a b ureaucrat or s ocial s cientist that the world might not want to f ollow his " scientific" e quations. In f act, t hinkers of the Austrian school, to which Hayek belonged, used the designations tacit o r implicit precisely for t hat p art o f knowledge that cannot be written d own, but that we should avoid repressing. They made the distinction we saw earlier be­ tween "know-how" and "know-what"—the latter being more elusive and more prone to nerdification. T o clarify, P latonic is t op-down, f ormulaic, closed-minded, self-serving, and commoditized; a-Platonic is bottom-up, open-minded, skeptical, and e mpirical. T he r eason for my singling out the great Plato becomes a pparent w ith the following example of the master's thinking: Plato believed that we should use both h ands w ith equal dexterity. It would not "make sense" otherwise. He considered favoring one limb over the other a deformation caused by the " folly o f mothers and nurses." Asymmetry bothered him, and he projected his ideas of elegance onto reality. We had to wait until L ouis P asteur to figure out that chemical molecules were either left- o r right-handed and that this mattered considerably. O ne c an find similar ideas among several disconnected branches o f t hinking. The earliest were (as usual) the empirics, whose bottom-up, theory-free, " evidence-based" medical approach was mostly associated with Philnus of Cos, Serapion of Alexandria, and Glaucias of Tarentum, l ater m ade skeptical by Menodotus of Nicomedia, and currently wellknown by its vocal practitioner, our friend the great skeptical philosopher S extus E mpiricus. Sextus who, we saw earlier, was p erhaps t he first to dis­ cuss t he B lack S wan. The empirics practiced the "medical art" without re­ lying o n reasoning; they wanted to benefit from chance observations by making guesses, and experimented and tinkered until they found some­ thing that worked. They did minimal theorizing. T heir m ethods are being revived today as evidence-based medicine, after t wo millennia of persuasion. Consider that before we knew of bacte- HOW TO LOOK F O R BIRD P O O P 1 8 3 r ia, and their role in diseases, doctors rejected the practice of hand washing because it made no sense t o them, despite the evidence of a meaningful de­ crease in hospital deaths. Ignaz Semmelweis, the mid-nineteenth-century doctor who promoted the idea of hand washing, wasn't vindicated until decades after his death. Similarly it may not "make sense" that acupunc­ ture w orks, but if pushing a needle in someone's toe systematically pro­ duces relief from pain (in properly conducted empirical t ests), t hen it c ould be that there are functions too complicated for us to u nderstand, so let's go with it for now while keeping our minds open. Academic Libertarianism T o b orrow from Warren Buffett, d on't a sk the barber if you need a haircut—and d on't a sk an academic if what he does is relevant. So I'll end this discussion of Hayek's libertarianism with the following observation. As I've said, the problem with organized knowledge is that there is an oc­ casional divergence of interests between academic guilds and knowledge itself. S o I cannot for the life o f me u nderstand w hy today's libertarians do not go after tenured faculty (except p erhaps b ecause many libertarians are a cademics). W e saw that companies can go bust, while governments re­ main. But while governments remain, civil s ervants can be demoted and c ongressmen a nd senators can be eventually voted out of office. I n academia a tenured faculty is permanent—the business of knowledge has per­ manent "owners." Simply, the charlatan is more the product of control t han t he result of freedom and l ack o f structure. Prediction and Free Will I f you know all possible conditions of a physical system you can, in theory (though not, as we saw, in practice), project its behavior into the future. B ut this only concerns inanimate o bjects. W e hit a stumbling b lock w hen s ocial m atters are involved. It is another matter to project a future when humans are involved, if you consider them living beings and endowed with free will. I f I c an predict all of your actions, u nder given circumstances, then you may not be as free as you think you are. You are an automaton respond­ ing to environmental stimuli. You are a slave of destiny. And the illusion o f free will could be reduced to an equation that describes the result of in­ teractions among molecules. It would be like studying the mechanics of a 184 WE JUST CAN'T PREDICT c lock: a genius with extensive knowledge of the initial conditions and the causal chains would be able to extend his knowledge to the future of your a ctions. W ouldn't that be stifling? However, if you believe in free will you can't truly believe in social sci­ ence a nd economic projection. You cannot predict how people will act. E xcept, o f course, if there is a trick, and that trick is the cord on which n eoclassical e conomics is suspended. You simply assume that individuals will b e rational in the future and t hus a ct predictably. There is a strong l ink b etween rationality, predictability, and mathematical tractability. A rational individual will perform a unique set of actions in specified circum­ stances. T here is one and only one answer to the question of how "ratio­ nal" people satisfying their best interests would act. Rational actors must be c oherent: they cannot prefer apples to oranges, oranges to pears, then pears to apples. If they did, then it would be difficult to generalize their be­ havior. It would also be difficult to project their behavior in time. In o rthodox economics, rationality became a straitjacket. Platonified e conomists i gnored the fact that people might prefer to do something other t han m aximize their economic interests. This led to mathematical techniques such as "maximization," or "optimization," on which Paul S amuelson b uilt much of his work. Optimization consists in finding the mathematically optimal policy that an economic agent could pursue. F or i nstance, w hat is the "optimal" quantity you should allocate to stocks? It involves complicated mathematics and thus raises a barrier to entry by nonmathematically trained scholars. I would not be the first to say that this optimization set back social science by reducing it from the intellectual and reflective discipline that it was becoming to an attempt at an "exact s cience." B y "exact s cience," I m ean a second-rate engineering problem f or t hose who want to pretend that they are in the physics department— s o-called p hysics envy. In other words, an intellectual fraud. Optimization is a case of sterile modeling that we will discuss further in Chapter 17. It had no practical (or even theoretical) use, and so it be­ came p rincipally a competition for academic positions, a way to make people compete with mathematical muscle. It kept Platonified economists out of the bars, solving equations at night. The tragedy is that Paul S amuelson, a q uick mind, is said to be one of the most intelligent scholars o f his generation. This was clearly a case of very badly invested intelli­ gence. C haracteristically, Samuelson intimidated those who questioned his techniques with the statement "Those who can, do s cience, o thers do methodology." If you knew math, you could "do s cience." T his is reminis- HOW TO LOOK FOR BIRD P O O P 1 8 5 c ent o f psychoanalysts who silence their critics by accusing them of having trouble with their fathers. Alas, it t urns o ut that it was Samuelson and most of his followers who did not know m uch math, or did not know how to use what math they knew, how to apply it to reality. They only knew enough math to be blinded by it. T ragically, before the proliferation of empirically blind idiot savants, interesting work had been begun by t rue t hinkers, the likes of J . M . K eynes, F riedrich Hayek, and the great Benoît Mandelbrot, all of whom were displaced because they moved economics away from the precision of second-rate physics. Very sad. One great underestimated thinker is G .L.S. S hackle, n ow almost completely obscure, who introduced the notion of "unknowledge," that is, the unread books in Umberto E co's l ibrary. It is unusual t o see Shackle's work mentioned at all, and I had to buy his books from s econdhand dealers in London. L egions o f empirical psychologists of the heuristics and biases school have shown that the model of rational behavior under u ncertainty is not j ust grossly inaccurate but plain wrong as a description of reality. Their re­ sults also bother Platonified economists because they reveal that there are several ways to be irrational. Tolstoy said that h appy families were all alike,, while each unhappy o ne is unhappy in its own way. People have been shown to make errors equivalent to preferring apples to oranges, oranges to pears, and pears to apples, depending on how the relevant questions are presented to them. The sequence matters! Also, as we have seen with the anchoring example, subjects' estimates of the number of dentists in Man­ hattan are influenced by which random number they have just been pre­ sented with—the anchor. Given the randomness of the anchor, we will have randomness in the estimates. So if people make inconsistent choices and decisions, the central core of economic optimization fails. Y ou can no longer p roduce a "general theory," and without one you cannot predict. Y ou have to learn to live without a general theory, for Pluto's sake! T HE G RUENESS O F E MERALD R ecall the turkey problem. You look at the past and derive some rule about the future. W ell, t he problems in projecting from the past can be even worse t han w hat we have already learned, because the same past data c an confirm a theory and also its exact opposite! If you survive until to­ morrow, it could mean that either a) you are more likely to be immortal or b) t hat you are closer to death. Both conclusions rely on the exact same 186 WE JUST C A N ' T PREDICT F IGURE 3 2 .4 O < Q- ; - i * • • • j 2 .2 2 • • O 1.8 : 1.6 ; • • 1.4 5 10 YEARS 15 20 A series of a seemingly growing bacterial population (or of sales records, or of any variable observed through time—such as the total feeding of the turkey in Chapter 4 ). F IGURE 4 10 20 30 YEARS 40 50 60 Easy t o fit the trend—there is one and only one linear model that fits the data. You can project a continuation into the future HOW TO LOOK FOR BIRD P O O P 187 FIGURE 5 YEARS We look at a broader scale. Hey, other models also fit it rather well. FIGURE 6 2 .5 z O < = a. 2!• O Q. • ... • 1.5 ; 50 100 YEARS 150 200 And the real "generating process" is extremely simple but it had nothing to do with a linear model! Some parts of it appear t o be linear and we are fooled by extrapo­ lating in a direct line.* T hese g raphs also illustrate a statistical version o f the narrative fallacy—you find a m odel t hat fits t he past. "Linear r egression" o r "R-square" can ultimately fool you b eyond m easure, to the point where it is no longer funny. You can fit the linear part of the curve and c laim a h igh R-square, meaning that your m odel f its t he d ata v ery well and has high predictive powers. All that off hot air: you only fit the linear segment of the s eries. A lways remember that "R-square" is u nfit f or E xtremis­ tan; it is only g ood f or a cademic p romotion. 188 W E JUST CAN'T PREDICT d ata. If you are a turkey being fed for a long period of time, you can either n aively a ssume that feeding confirms your safety o r be shrewd and con­ sider that it confirms the danger o f being t urned i nto supper. An acquain­ tance's u nctuous past behavior may indicate his genuine affection for me and his concern for my welfare; it may also confirm his mercenary and c al­ culating desire to get my business one day. S o n ot only can the past be misleading, but there are also many degrees o f freedom in our interpretation of past events. F or t he technical version of this idea, consider a series of dots on a page representing a number t hrough t ime—the g raph w ould resemble Fig­ ure 1 showing the first thousand days in Chapter 4 . Let's say your high s chool t eacher asks you to extend the series of dots. With a linear model, that is, using a ruler, you can run only a straight line, a single s traight line f rom t he past to the future. The linear model is unique. There is one and o nly o ne straight line that can project from a series of points. But it can get t rickier. I f you do not limit yourself to a straight line, you find that there is a huge family of curves that can do the job of connecting the dots. If you p roject f rom the past in a linear way, you continue a trend. But possible future deviations from the course of the past are infinite. T his is what the philosopher Nelson Goodman called the riddle of in­ duction: We project a straight line only because we have a linear model in our head—the f act t hat a number has risen for 1,000 days straight should make you more confident that it will rise in the future. But if you have a nonlinear model in your head, it might confirm that the number should d ecline o n day 1 ,001. L et's say that you observe an emerald. It was green yesterday and the day before yesterday. It is green again today. Normally this would confirm the "green" property: we can assume that the emerald will be green to­ morrow. But to Goodman, the emerald's c olor h istory could equally con­ firm the "grue" property. What is this grue property? The emerald's grue property is to be green until some specified date, say, December 3 1 , 2 0 0 6 , a nd then blue thereafter. T he riddle of induction is another version of the narrative fallacy—you f ace a n infinity of "stories" that explain what you have seen. The severity o f G oodman's riddle of induction is as follows: if there is no longer even a single u nique way to "generalize" from what you see, to make an inference about the unknown, then how should you operate? The answer, clearly, w ill b e that you should employ "common sense," but your common sense may not be so well developed with respect to some Extremistan variables. HOW TO LOOK F O R BIRD POOP 1 8 9 T HAT G REAT A NTICIPATION M ACHINE T he reader is entitled to wonder, So, NNT, why on earth do we plan? S ome people do it for monetary gain, others because it's "their j o b . " But we also do it without such intentions—spontaneously. W hy? T he answer has to do with h uman n ature. Planning may come with the package of what makes us h uman, namely, our consciousness. T here is supposed to be an evolutionary dimension to our need to pro­ ject m atters into the future, which I will rapidly summarize here, since it c an be an excellent candidate explanation, an excellent conjecture, though, since it is linked to evolution, I would be cautious. T he i dea, as promoted by the philosopher Daniel Dennett, is as fol­ lows: W hat is the most potent use of our brain? It is precisely the ability to project conjectures into the future and play the counterfactual game— " If I punch him in the nose, then he will punch me back right away, or, w orse, c all his lawyer in New Y ork." O ne of the advantages of doing so is that we can let our conjectures die in our stead. Used correctly and in place o f m ore visceral reactions, the ability to project effectively frees us from immediate, first-order n atural s election—as opposed to more primitive or­ ganisms that were vulnerable to d eath a nd only grew by the improvement in the gene pool t hrough t he selection of the best. In a way, projecting al­ lows us to cheat evolution: it now takes place in our head, as a series of p rojections a nd c ounterfa ctual scenarios. T his a bility to mentally play with conjectures, even if it frees us from the laws of evolution, is i tself supposed to be the p roduct o f evolution—it is as if evolution has put us on a long leash whereas other animals live on the very short leash of immediate dependence on their environment. For Dennett, our brains are "anticipation machines"; for him the h uman m ind and consciousness are emerging properties, those properties necessary for our accelerated development. W hy d o we listen to experts and their forecasts? A candidate explana­ tion is that society reposes on specialization, effectively the division of knowledge. You do not go to medical school the minute you encounter a big health problem; it is less taxing (and certainly safer) for you to consult s omeone w ho has already done so. Doctors listen to car mechanics (not for health matters, just when it comes to problems with their c ars); c ar me­ chanics listen to doctors. We have a n atural t endency to listen to the ex­ pert, even in fields where there may be no experts. Chapter Twelve EPISTEMOCRACY, A DREAM This is only an essay—Children and philosophers vs. adults and nonphilosophers—Science as an autistic enterprise—The past too has a past—Mispredict and live a long, happy life (if you survive) S omeone w ith a low degree of epistemic arrogance is not too visible, like a shy person at a cocktail party. We are not predisposed to respect humble people, those who try to suspend judgment. Now contemplate epistemic humility. T hink of someone heavily introspective, tortured by the aware­ ness of his own ignorance. He lacks the courage of the idiot, yet has the rare guts to say "I d on't k now." He does not mind looking like a fool or, worse, an ignoramus. He hesitates, he will not commit, and he agonizes over the consequences of being wrong. He introspects, introspects, and in­ trospects until he reaches physical and nervous exhaustion. T his does not necessarily mean that he lacks confidence, only that he holds his own knowledge to be suspect. I will c all such a person an epistemocrat; t he province where the laws are structured with this kind of h uman f allibility in mind I will c all an epistemocracy. T he m ajor modern epistemocrat is Montaigne. EPISTEMOCRACY, A DREAM 191 Monsieur de Montaigne, Epistemocrat A t the age of thirty-eight, Michel Eyquem de Montaigne retired to his es­ tate, in the countryside of southwestern France. Montaigne, which means mountain in Old French, was the name of the estate. The area is known today for the Bordeaux wines, but in Montaigne's time not many people invested their mental energy and sophistication in wine. Montaigne had s toic tendencies and would not have been strongly d rawn t o such p ursuits anyway. His idea was to write a modest collection of "attempts," that is, essays. T he very word essay c onveys the tentative, the speculative, and the nondefinitive. Montaigne was well grounded in the classics and wanted to meditate on life, d eath, education, knowledge, and some not uninteresting b iological aspects of h uman n ature (he wondered, for example, whether cripples had more vigorous libidos owing to the richer circulation of b lood in their sexual organs). T he t ower that became his study w as inscribed with Greek and Latin sayings, a lmost all referring to the vulnerability of h uman k nowledge. Its windows offered a wide vista of the s urrounding h ills. M ontaigne's s ubject, officially, w as himself, but this was mostly as a means to facilitate the discussion; he was not like those corporate execu­ tives w ho write biographies to make a boastful display of their honors and a ccomplishments. H e was mainly interested in discovering t hings about himself, m aking us discover things about himself, and presenting matters that could be generalized—generalized to the entire h uman r ace. Among the inscriptions in his study w as a remark by the Latin poet Terence: Homo sum, humani a me nil alienum puto—I am a man, and nothing h uman is foreign to me. M ontaigne is quite refreshing to read after the strains of a modern edu­ cation since he fully accepted h uman w eaknesses and understood that no philosophy could be effective unless it took into account our deeply in­ grained imperfections, the limitations of our rationality, the flaws that make us h uman. It is not that he was ahead of his time; it would be better said t hat later scholars (advocating rationality) were backward. He was a thinking, ruminating fellow, and his ideas did not spring up in his tranquil study, b ut while on horseback. He went on long rides and c ame b ack with ideas. Montaigne was neither one of the academics of the S orbonne n or a professional man of letters, and he was not t hese things on two. p lanes. F irst, he was a doer; he had been a magistrate, a businessman, 192 WE JUST CAN'T PREDICT a nd the mayor of Bordeaux before he retired to mull over his life a nd, mostly, his own knowledge. Second, he was an antidogmatist: he was a s keptic with charm, a fallible, noncommittal, personal, introspective writer, and, primarily, someone who, in the great classical tradition, wanted to be a man. Had he been in a different period, he would have been an empirical skeptic—he had skeptical tendencies of the Pyrrhonian variety, the antidogmatic kind like Sextus Empiricus, particularly in his awareness of the need to suspend judgment. Epistemocracy E veryone has an idea o f Utopia. F or m any it means equality, universal j us­ tice, freedom from oppression, freedom from w ork (for some it m ay be the more modest, though n o m ore a ttainable, s ociety with c ommuter trains free o f lawyers o n cell p hones). To me Utopia is an epistemocracy, a soci­ ety in which anyone o f rank is an e pistemocrat, and where epistemocrats m anage to be elected. It would be a s ociety governed from the basis o f the awareness o f i gnorance, n ot knowledge. A las, o ne cannot assert authority by accepting one's own fallibility. Simply, p eople need to be blinded by knowledge—we are made to follow leaders who can gather people together because the advantages of being in groups t rump t he disadvantages of being alone. It has been more prof­ itable for us to bind together in the wrong direction t han t o be alone in the right one. Those who have followed the assertive idiot rather t han the in­ trospective wise person have passed us some of their genes. This is appar­ ent from a social pathology: psychopaths rally followers. O ncejn a while you encounter members o f the human species with so m uch intellectual s uperiority t hat they can change their minds effortlessly. N ote here the following B lack S wan asymmetry. I believe that you c an be dead certain about some t hings, and ought to be so. You can be more confident about disconfirmation t han c onfirmation. Karl Popper was accused of promoting self-doubt while writing in an aggressive and confident tone (an accusation that is occasionally addressed to this au­ thor by people who d on't f ollow my logic of skeptical empiricism). Fortu­ nately, we have learned a lot since Montaigne about how to carry on the skeptical-empirical enterprise. The B lack S wan asymmetry allows you to b e c onfident about what is wrong, n ot about what you believe is right. K arl P opper was once asked whether one "could falsify falsification" (in other words, if one could be skeptical about skepticism). His answer was EPISTEMOCRACY, A DREAM 193 t hat he threw students out of his lectures for asking far more intelligent questions than that one. Quite tough, Sir Karl was. T HE P AST'S PAST, A ND T HE P AST'S FUTURE S ome truths o nly hit children—adults and nonphilosophers get sucked into the minutiae of practical life a nd need to worry about "serious mat­ ters," so they abandon these insights for seemingly more relevant ques­ tions. O ne of these t ruths c oncerns the larger difference in texture and quality between the past and the future. Thanks to my studying this dis­ tinction all my life, I u nderstand it better than I did during my childhood, but I no longer envision it as vividly. T he o nly way you can imagine a future "similar" to the past is by as­ suming that it will be an exact p rojection of it, hence predictable. Just as you know with some precision when you were born, you would then know with equal precision when you will die. The notion of future mixed with chance, n ot a deterministic extension of your perception of the past, is a m ental operation that our mind cannot perform. Chance is too fuzzy for us to be a category by itself. There is an asymmetry between past and future, and it is too subtle for us to understand naturally. T he first consequence of this asymmetry is that, in people's minds, the relationship between the past and the future does not learn from the rela­ tionship between the past and the past previous to it. There is a blind spot: when we think of tomorrow we do not frame it in terms of what we thought about yesterday or the day before yesterday. B ecause o f this intro­ spective defect we fail t o learn about the difference between our past pre­ dictions and the subsequent outcomes. When we think of tomorrow, we j ust p roject it as another yesterday. T his small blind spot has other manifestations. Go to the primate s ec­ tion of the B ronx Z oo where you can see our c lose r elatives in the happy primate family leading their own busy s ocial lives. Y ou can also see masses o f t ourists laughing at the caricature of humans that the lower primates represent. Now imagine being a member of a higher-level species (say a " real" philosopher, a truly wise person), far more sophisticated than the human primates. You would certainly laugh at the people laughing at the nonhuman primates. Clearly, to those people amused by the apes, the idea o f a being who would look down on them the way they look down on the apes cannot immediately come to their minds—if it did, it would e licit selfpity. They would stop laughing. 194 WE JUST CAN'T PREDICT A ccordingly, a n element in the mechanics of how the human mind learns from the past makes us believe in definitive solutions—yet not con­ sider that those who preceded us thought that they too had definitive so­ lutions. We laugh at others and we don't realize that someone will be just as justified in laughing at us on some not too remote day. Such a realiza­ tion would entail the recursive, or second-order, thinking that I mentioned in the Prologue; we are not good at it. T his m ental block about the future has not yet been investigated and l abeled by psychologists, but it appears to resemble autism. Some autistic s ubjects c an possess high levels of mathematical or technical intelligence. T heir s ocial skills are defective, but that is not the root of their problem. A utistic p eople cannot put themselves in the shoes of others, cannot view the world from their standpoint. They see others as inanimate o bjects, like m achines, m oved by explicit rules. They cannot perform such simple men­ tal operations as "he knows that I don't know that I know," and it is this i nability t hat impedes their social skills. (Interestingly, autistic subjects, re­ gardless of their "intelligence," also exhibit an inability to comprehend uncertainty.) J ust as autism is called "mind blindness," this inability to think dy­ namically, t o position o neself w ith respect to a future observer, we should c all "future blindness." Prediction, Misprediction, and Happiness I s earched the literature of cognitive science for any research on "future blindness" and found nothing. But in the literature on happiness I did find an examination of our chronic errors in prediction that will make us happy. T his p rediction error works as follows. You are about to buy a new car. I t is going to change your life, e levate your status, and make your commute a vacation. It is so quiet that you can hardly tell if the engine is on, so you can listen to Rachmaninoff's nocturnes on the highway. This new car will bring you to a permanently elevated plateau of contentment. P eople w ill think, Hey, he has a great car, every time they see you. Yet you f orget t hat the last time you bought a car, you also had the same expecta­ tions. Y ou do not anticipate that the effect o f the new car will eventually wane and that you will revert to the initial condition, as you did last time. A few weeks after you drive your new car out of the showroom, it will EPISTEMOCRACY, A DREAM 1 9 5 b ecome dull. If you had expected this, you probably would not have bought it. Y ou are about to commit a prediction error that you have already made. Yet it would cost so little to introspect! P sychologists have studied this kind of misprediction with respect to both pleasant and unpleasant events. We overestimate the effects o f both kinds of future events on our lives. W e seem to be in a psychological predicament that makes us do so. This predicament is called "anticipated utility" by Danny Kahneman and "affective forecasting" by Dan Gilbert. T he p oint is not so much that we tend to mispredict our future happiness, but rather that we do not learn recursively from past e xperiences. W e have evidence o f a mental b lock a nd distortions in the way we fail t o learn from our past errors in projecting the future of our affective states. We grossly overestimate the length of the effect o f misfortune on our lives. Y ou think that the loss of your fortune or current position will be devastating, but you are probably wrong. More likely, you will a dapt t o anything, as you probably did after past misfortunes. You may feel a s ting, but it will not be as bad as you expect. This kind of misprediction may have a purpose: to motivate us to perform important a cts (like b uying new c ars o r getting rich) and to prevent us from taking certain unnecessary r isks. And it is p art o f a more general problem: we humans are supposed to fool ourselves a little bit here and there. According to Trivers's theory o f self-deception, this is supposed to orient us favorably toward the future. But self-deception is not a desirable feature outside of its natural domain. It prevents us from taking some unnecessary risks—but we saw in Chap­ ter 6 how it does not as readily cover a spate of modern risks that we do not fear because they are not vivid, such as investment risks, environmen­ tal dangers, or long-term security. Helenus and the Reverse Prophecies I f y ou are in the business of being a seer, describing the future to other lessprivileged mortals, you are judged on the merits of your predictions. Helenus, in The Iliad, w as a different kind of seer. The son of Priam and Hecuba, he was the cleverest man in the Trojan army. It was he who, under t orture, told the Achaeans how they would capture Troy (appar­ ently he didn't p redict that he h imself w ould be captured). But this is not what distinguished him. Helenus, unlike other seers, was able to predict 196 WE JUST CAN'T PREDICT the past w ith great precision—without having been given any details of it. He predicted backward. Our problem is not just that we do not know the future, we do not know much of the past either. We badly need someone like Helenus if we are to know history. Let us see how. The Melting Ice Cube C onsider the following thought experiment borrowed from my friends Aaron Brown and Paul Wilmott: Operation 1 (the melting ice cube): I magine an ice cube and consider how it may melt over the next two hours while you play a few r ounds o f poker with your friends. Try to envision the shape of the resulting puddle. Operation 2 (where did the water come from?): C onsider a puddle o f water on the floor. Now try to reconstruct in your mind's eye the shape of the ice cube it may once have been. Note that the puddle m ay not have n ecessarily o riginated from an ice cube. T he s econd operation is harder. Helenus indeed had to have skills. T he difference between these two processes resides in the following. If you have the right models (and some time on your hands, and nothing bet­ ter to do) you can predict with great precision how the ice cube will melt— this is a specific e ngineering problem devoid of complexity, easier t han the one involving billiard balls. However, from the pool of water you can build infinite possible ice cubes, if there was in f act a n ice cube there at all. T he first direction, from the ice cube to the puddle, is called the forward process. T he second direction, the backward process, is much, much more complicated. The forward process is generally used in physics and engi­ neering; the backward process in nonrepeatable, nonexperimental histori­ cal a pproaches. In a way, the limitations that prevent us from unfrying an egg also prevent us from reverse engineering history. Now, let me increase the complexity of the forward-backward prob­ lem j ust a bit by assuming nonlinearity. Take what is generally called the "butterfly in India" paradigm from the discussion of Lorenz's discovery in the previous chapter. As we have seen, a small input in a complex system c an l ead to nonrandom large results, depending on very special condi­ tions. A single butterfly flapping its wings in New Delhi may be the certain cause o f a hurricane in North Carolina, though the hurricane may take EPISTEMOCRACY, A DREAM 197 place a c ouple of years later. However, given the observation of a hurri­ cane in North Carolina, it is dubious that you could figure out the causes with any precision: there are billions of billions of such small things as wing-flapping butterflies in Timbuktu or sneezing wild dogs in Australia that could have caused it. The process from the butterfly to the hurricane is greatly simpler t han t he reverse process from t he hurricane to t he poten­ tial butterfly. Confusion b etween the two is disastrously widespread in common cul­ ture. This "butterfly in India" metaphor has fooled at least one filmmaker. F or i nstance, Happenstance ( a.k.a. The Beating of a Butterfly's Wings), a F rench-language film by one Laurent Firode, meant to encourage people to focus on small things that can change the course of their lives. Hey, since a small event (a petal falling on the ground and getting your atten­ tion) c an lead to your choosing one person over another as a mate for life, you should focus on these very small details. Neither the filmmaker nor the critics realized that they were dealing with the backward process; there are trillions of such small things in the course of a simple day, and exam­ ining all of them lies outside of our reach. Once Again, Incomplete Information T ake a p ersonal computer. You can use a spreadsheet program to generate a r andom sequence, a succession of points we can c all a h istory. How? The computer program responds to a very complicated equation of a nonlin­ ear n ature t hat produces numbers that seem random. The equation is very simple: if you know it, you can predict the sequence. It is almost impossi­ ble, however, for a h uman being to reverse engineer the equation and pre­ dict further sequences. I am talking about a simple one-line computer program (called the "tent map") generating a handful of data points, not about the billions of simultaneous events that constitute the real history of the world. In other words, even if history were a nonrandom series gener­ ated by some "equation of the world," as long as reverse engineering such an equation does not seem within h uman possibility, it should be deemed random and not bear the name "deterministic chaos." Historians should stay away from chaos theory and the difficulties of reverse engineering ex­ cept t o discuss general properties of the world and learn the limits of what they can't know. T his brings me to a greater problem with the historian's craft. I will 198 W E JUST CAN'T PREDICT s tate the fundamental problem of practice as follows: while in theory ran­ domness is an intrinsic property, in practice, randomness is incomplete in­ formation, w hat I called opacity in Chapter 1. Nonpractitioners of randomness do not u nderstand the subtlety. O ften, in conferences when they hear me talk about uncertainty and ran­ domness, philosophers, and sometimes mathematicians, bug me about the l east r elevant point, namely whether the randomness I address is " true r andomness" or "deterministic chaos" that masquerades as randomness. A t rue r andom system is in f act r andom and does not have predictable properties. A chaotic system has entirely predictable properties, but they are h ard t o know. So my answer to them is dual. a) T here is no functional difference in practice between the two since we will never get to make the distinction—the difference is mathematical, not practical. If I see a pregnant woman, the sex of her child is a purely random matter to me (a 5 0 percent chance for either sex)—but not to her doctor, who might have done an ultrasound. In practice, randomness is fundamentally incomplete information. b) T he mere f act t hat a person is talking about the difference implies that he has never made a meaningful decision under u ncertainty—which is why he does not realize that they are indistinguishable in practice. R andomness, in the end, is just unknowledge. The world is opaque and appearances f ool us. What They Call Knowledge O ne final word on history. History is like a museum where one can go to see the repository of the past, and taste the charm of olden days. It is a wonderful mirror in which we can see our own narratives. You can even track the past using DNA a nalyses. I a m fond of literary history. Ancient history satisfies my desire to build my own self-narrative, my identity, to connect with my (compli­ cated) E astern Mediterranean roots. I even prefer the accounts of older, patently less accurate books to modern ones. Among the authors I've reread (the ultimate test of whether you like an author is if you've reread h im) t he following come to mind: Plutarch, Livy, S uetonius, Diodorus Siculus, G ibbon, Carlyle, Renan, and M ichelet. T hese accounts are patently substandard, compared to today's works; they are largely anecdotal, and full o f myths. But I know this. History is useful for the thrill of knowing the past, and for the narra- EPISTEMOCRACY, A DREAM 199 tive (indeed), provided it remains a harmless narrative. One should learn under severe caution. History is certainly not a place to theorize or derive general knowledge, nor is it meant to help in the future, without some caution. We can get negative confirmation from history, which is invaluable, but we get plenty of illusions of knowledge along with it. T his brings me back once again to Menodotus and the treatment of the turkey problem and how to not be a sucker for the past. The empirical doctor's approach to the problem of induction was to know h istory without theorizing from it. Learn to read history, get all the knowledge you c an, do not frown on the anecdote, but do not d raw a ny causal links, do not try to reverse engineer too much—but if you do, do not make big s cientific c laims. Remember that the empirical skeptics had respect for custom: they used it as a default, a basis for action, but not for more t han t hat. This clean approach to the past they called epilogism.* But m ost historians have another opinion. Consider the representative introspection What Is History? by Edward Hallett Carr. You will catch him explicitly pursuing c ausation as a central aspect of his job. You can even go higher up: Herodotus, deemed to be the father of the subject, defined his purpose in the opening of his work: T o p reserve a m emory of the deeds of the Greeks and b arbarians, " and in p articular, b eyond everything else, t o g ive a cause [ emphasis mine] to t heir fighting one another." Y ou see the same with all theoreticians of history, whether Ibn Khaldoun, M arx, or Hegel. The more we try to t urn h istory into anything other than an enumeration of accounts to be enjoyed with minimal theorizing, the more we get into trouble. Are we so plagued with the narrative f allacy?! * Yogi Berra might have a theory of epilogism with his saying, "You can observe a lot by just watching." f While looking at the past it would be a good idea to resist naïve analogies. Many people have c ompared the United States today to Ancient Rome, both from a military standpoint (the destruction of C arthage w as often invoked as an incentive for the destruction of enemy regimes) and from a social one (the endless platitudinous warnings o f the upcoming decline and fall). Alas, we need to be extremely careful in transposing knowledge from a simple environment t hat is closer to type 1, like the one we had in antiquity, to today's type 2, complex system, with its intricate webs of casual links. Another e rror is to draw casual conclusions from the absence of nuclear war, since, invoking the Casanova argument of Chapter 8 ,1 would repeat that we would not be here had a nuclear war taken place, and it is not a good idea for us to derive a "cause" when our survival is conditioned on t hat c ause. 200 W E JUST CAN'T PREDICT W e m ay have to wait for a generation of skeptical-empiricist historians c apable o f u nderstanding t he difference between a forward process and a reverse one. J ust a s Popper attacked the historicists in their making claims about the future, I have just presented the weakness of the historical approach in knowing the past itself. After t his discussion about future (and past) blindness, let us see what to do about it. Remarkably, there are extremely practical measures we can t ake. W e will explore this next. Chapter Thirteen A PPELLES THE PAINTER, O R WHAT D O YOU DO IF YOU CANNOT P REDICT?* You should charge people for advice—My two cents here—Nobody knows anything, but, at least, he knows it—Go to parties A DVICE I S C HEAP, V ERY C HEAP It is not a good habit to stuff o ne's text with quotations from prominent thinkers, except to make fun of them or provide a historical reference. T hey " make sense," but well-sounding maxims force themselves on our gullibility a nd do not always stand up to empirical tests. So I chose the ioU lowing statement by the ùberphilosopher Bertrand Russell precisely because I disagree with it. T he demand for certainty is one which is natural t o man, but is nevertheless an intellectual vice. If you take your children for a picnic on a doubtful day, they will demand a dogmatic answer as to whether it will be fine or wet, and be disappointed in you when you cannot be sure. . . . * This chapter provides a general conclusion for those who by now say, "Taleb, I get the point, but what should I d o?" M y answer is t hat if you got the point, you are pretty much there. But here is a nudge. 202 W E JUST CAN'T PREDICT But so long as men are not trained [emphasis mine] to withhold judgment in the absence of evidence, they will be led astray by cock­ sure prophets . . . For the learning of every virtue there is an appropri­ ate discipline, and for the learning of suspended judgment the best discipline is philosophy. T he r eader may be surprised that I disagree. It is hard to disagree that the demand for certainty is an intellectual v ice. I t is hard to disagree that we can be led astray by some cocksure prophet. Where I beg to differ with the great man is that I do not believe in the track record of advicegiving "philosophy" in helping us deal with the problem; nor do I believe that virtues can be easily t aught; nor do I urge people to strain in order to avoid making a judgment. Why? Because we have to deal with humans as humans. We cannot teach p eople to withhold judgment; judgments are embedded in the way we view o bjects. I d o not see a "tree"; I see a pleas­ ant or an ugly tree. It is not possible without great, paralyzing effort to strip these small values we attach to matters. Likewise, it is not possible to hold a situation in one's head without some element of bias. Something in our dear human nature makes us want to believe; so what? Philosophers since Aristotle have taught us that we are deep-thinking a nimals, a nd that we can learn by reasoning. It took a while to discover that we do effectively think, but that we more readily narrate backward in order to give ourselves the illusion of understanding, and give a cover to our past actions. The minute we forgot about this point, the "Enlighten­ ment" came to drill it into our heads for a second time. I'd rather degrade us humans to a level certainly above other known animals but not quite on a par with the ideal Olympian man who can ab­ sorb philosophical statements and act accordingly. Indeed, if philosophy were that effective, t he self-help section of the local bookstore would be of s ome use in consoling souls experiencing pain—but it isn't. We forget to philosophize when under strain. I 'll end this section on prediction with the following two lessons, one very b rief (for the small matters), one rather lengthy (for the large, impor­ tant decisions). APPELLES THE PAINTER, OR WHAT DO YOU DO IF Y O U C A N N O T PREDICT? 203 Being a Fool in the Right Places T he lesson for the small is: be human! A ccept that being h uman involves some a mount of epistemic arrogance in r unning y our affairs. Do not be ashamed of that. Do not try to always withhold judgment—opinions are the stuff o f life. D o not try to avoid predicting—yes, after this diatribe about prediction I am not urging you to stop being a f ool. J ust be a fool in the right places.* W hat y ou should avoid is unnecessary dependence on large-scale harmful predictions—those and only those. Avoid the big subjects that may h urt y our future: be fooled in small matters, not in the large. Do not listen t o economic forecasters or to predictors in social science (they are mere entertainers), but do make your own forecast for the picnic. By all m eans, demand certainty for the next picnic; but avoid government socialsecurity f orecasts for the year 2 0 4 0 . K now h ow to rank beliefs not according to their plausibility but by the harm they may cause. Be Prepared T he reader might feel q ueasy reading about these general failures to see the future and wonder what to do. But if you shed the idea of full pre­ dictability, t here are plenty of things to do provided you remain conscious o f their limits. Knowing that you cannot predict does not mean that you cannot benefit from unpredictability. T he b ottom line: be prepared! Narrow-minded prediction has an anal­ gesic o r therapeutic effect. B e aware of the numbing effect o f magic numbers. Be prepared for all relevant eventualities. T HE I DEA O F P OSITIVE A CCIDENT R ecall the empirics, those members of the Greek school of empirical med­ icine. T hey considered that you should be open-minded in your medical diagnoses to let luck play a role. By luck, a patient might be cured, say, by * Dan Gilbert showed in a famous paper, " How Mental Systems Believe," t hat we are not natural skeptics and t hat n ot believing required an expenditure of mental effort. 204 WE JUST CAN'T PREDICT e ating some food that accidentally t urns o ut to be the cure for his disease, so t hat the treatment can then be used on subsequent patients. The posi­ tive a ccident (like hypertension medicine producing side benefits that led to Viagra) was the empirics' central method of medical discovery. T his s ame point can be generalized to life: m aximize the serendipity around you. S extus E mpiricus retold the story of Apelles the Painter, who, while doing a portrait of a horse, was attempting to depict the foam from the horse's mouth. After trying very h ard a nd making a mess, he gave up and, in irritation, took the sponge he used for cleaning his brush and threw it at the picture. Where the sponge hit, it left a perfect representation of the f oam. T rial a nd error means trying a lot. In The Blind Watchmaker, R ichard Dawkins brilliantly illustrates this notion of the world without grand de­ sign, moving by small incremental random changes. Note a slight dis­ agreement on my p art t hat does not change the story by much: the world, rather, moves by large i ncremental random changes. Indeed, we have psychological and intellectual difficulties with trial and error, and with accepting that series of small failures are necessary in life. M y c olleague Mark Spitznagel understood that we humans have a men­ tal h ang-up a bout failures: "You need to love to lose" was his motto. In f act, t he reason I felt immediately at home in America is precisely because American culture encourages the process of failure, unlike the cultures of Europe and Asia where failure is met with stigma and embarrassment. A merica's s pecialty is to take these small risks for the rest of the world, which explains this country's disproportionate share in innovations. Once established, an idea or a product is later "perfected" over there. Volatility and Risk of Black Swan P eople are often ashamed of losses, so they engage in strategies that pro­ duce very little volatility but contain the risk of a large loss—like c ol­ lecting n ickels in front of steamrollers. In Japanese culture, which is ill-adapted to randomness and badly equipped to u nderstand t hat bad performance can come from bad luck, losses can severely tarnish some­ one's reputation. People hate volatility, t hus engage in strategies exposed to blowups, leading to occasional suicides after a big loss. Furthermore, this trade-off between volatility and risk can show up in A P P E L L E S T H E P A I N T E R , O R W H A T D O Y O U D O IF Y O U C A N N O T P R E D I C T ? 2 0 5 c areers that give the appearance of being stable, like jobs at I B M until the 1 990s. W hen laid off, the employee faces a total void: he is no longer fit for anything else. The same holds for those in protected industries. On the other h and, c onsultants can have volatile earnings as their clients' earnings go up and d own, b ut face a lower risk of starvation, since their skills match demand—fluctuât nec mergitur (fluctuates but doesn't sink). L ike­ wise, d ictatorships that do not appear volatile, like, say, Syria or Saudi A rabia, face a larger risk of chaos than, say, Italy, as the latter has been in a state of continual political turmoil since the second war. I learned about this problem from the finance industry, in which we see "conservative" bankers sitting on a pile of dynamite but fooling themselves because their operations seem dull a nd lacking in volatility. Barbell Strategy I am trying here to generalize to real life t he notion of the "barbell" strat­ egy I used as a trader, which is as follows. If you know that you are vul­ nerable to prediction errors, and if you accept that most "risk measures" are flawed, because of the B lack S wan, then your strategy is to be as hyperconservative and hyperaggressive as you can be instead of being mildly aggressive or conservative. Instead of p utting y our money in "medium risk" investments (how do you know it is medium risk? by listening to tenure-seeking "experts"?), you need to put a portion, say 85 to 9 0 per­ cent, in extremely safe instruments, like Treasury bills—as safe a class of instruments as you can manage to find on this planet. The remaining 10 to 1 5 p ercent you put in extremely speculative bets, as leveraged as possible (like o ptions), preferably venture capital-style portfolios.* That way you do not depend on errors of risk management; no B lack S wan can h urt y ou at all, beyond your "floor," the nest egg that you have in maximally safe investments. Or, equivalently, you can have a speculative portfolio and in­ sure it (if possible) against losses of more than, say, 15 percent. You are "clipping" your incomputable risk , the one that is harmful to you. Instead * M ake sure t hat you have plenty of these small bets; avoid being blinded by the vividness of one single Black Swan. Have as many of these small bets as you can conceivably have. Even venture capital firms fall for the narrative fallacy with a few stories t hat "make sense" to them; they do not have as many bets as they should. If venture capital firms are profitable, it is not because of the stories they have in their heads, but because they are exposed to unplanned r are events. 206 W E JUST CAN'T PREDICT o f h aving medium risk, you have high risk on one side and no risk on the other. The average will be medium risk but constitutes a positive exposure to the B lack S wan. More technically, this can be called a "convex" combi­ nation. Let us see how this can be implemented in all aspects of life. "Nobody Knows Anything" T he l egendary screenwriter William Goldman was said to have shouted "Nobody knows anything!" in relation to the prediction of movie sales. Now, the reader may wonder how someone as successful as Goldman can figure out what to do without making predictions. The answer stands per­ ceived business logic on its head. He knew that he could not predict indi­ vidual events, but he was well aware that the unpredictable, namely a m ovie t urning i nto a blockbuster, would benefit him immensely. S o t he second lesson is more aggressive: you can actually take advan­ tage of the problem of prediction and epistemic arrogance! As a matter o f f act, I suspect that the most successful businesses are precisely those that know how to work around inherent unpredictability and even ex­ ploit it. R ecall my discussion of the biotech company whose managers under­ stood that the essence of research is in the unknown unknowns. Also, n otice h ow they seized on the "corners," those free lottery tickets in the world. Here are the (modest) tricks. But note that the more modest they are, the more effective they will be. a. First, make a distinction between positive contingencies and nega­ tive o nes. Learn to distinguish between those h uman undertakings in which the lack of predictability can be (or has been) extremely beneficial a nd those where the failure to u nderstand the future caused harm. There are both positive and negative B lack S wans. W illiam G oldman was involved in the movies, a positive-Black S wan b usiness. Uncertainty did occasionally pay off there. A n egative-Black Swan business is one where the unexpected c an h it h ard a nd h urt severely. If you are in the military, in catastro­ phe insurance, or in homeland security, you face o nly downside. L ikewise, as we saw in Chapter 7, if you are in banking and lend­ ing, surprise outcomes are likely to be negative for you. You lend, A P P E L L E S T H E P A I N T E R , O R W H A T D O Y O U D O IF Y O U C A N N O T P R E D I C T ? 2 0 7 and in the best of circumstances you get your loan back—but you may lose all of your money if the borrower defaults. In the event that the borrower enjoys great financial success, he is not likely to offer y ou an additional dividend. Aside from the movies, examples of positive-Black Swan busi­ nesses are: some segments of publishing, scientific research, and venture capital. In these businesses, you lose small to make big. Y ou have little to lose per book and, for completely unexpected reasons, any given book might take off. The downside is small and easily c ontrolled. The problem with publishers, of course, is that they regularly pay up for books, t hus m aking their upside r ather limited and their downside monstrous. (If you pay $ 1 0 million for a b ook, your B lack S wan is it not being a bestseller.) Likewise, while technology can carry a great payoff, paying for the hyped-up story, as people did with the dot-com bubble, can make any upside limited and any downside huge. It is the venture capitalist who in­ vested in a speculative company and sold his stake to unimagina­ tive investors who is the beneficiary of the B lack S wan, not the " me, t oo" investors. In these businesses you are lucky if you d on't k now anything— particularly if others d on't k now anything either, but aren't aware o f i t. And you fare best if you know where your ignorance l ies, i f you are the only one looking at the u nread b ooks, so to speak. This dovetails into the "barbell" strategy of taking maximum exposure to the positive B lack S wans while remaining paranoid about the negative ones. For your exposure to the positive B lack S wan, you do not need to have any precise u nderstanding o f the structure of uncertainty. I find it h ard t o explain that when you have a very lim­ ited loss you need to get as aggressive, as speculative, and some­ times as "unreasonable" as you can be. Middlebrow thinkers sometimes make the analogy of such strategy with that of collecting "lottery tickets." It is plain wrong. F irst, l ottery tickets do not have a scalable payoff; there is a known upper limit to what they can deliver. The ludic f allacy applies here—the scalability of real-life payoffs compared to lottery ones makes the p ayoff u nlimited or of u nknown l imit. Secondly, the lot­ tery tickets have known rules and laboratory-style well-presented p ossibilities; here we do not know the rules and can benefit from 208 W E JUST CAN'T PREDICT t his additional uncertainty, since it cannot h urt y ou and can only benefit y ou.* b . Don't look for the p recise and the l ocal. Simply, do not be narrowminded. The great discoverer Pasteur, who came up with the notion that chance favors the prepared, understood that you do not l ook f or something particular every morning but work h ard t o let c ontingency e nter your working life. As Y ogi B erra, another great thinker, said, "You got to be very careful if you d on't k now where you're going, because you might not get there." L ikewise, d o not try to predict precise B lack S wans—it tends to make you more vulnerable to the ones you did not predict. My friends Andy Marshall and Andrew Mays at the Department of D efense face t he same problem. The impulse on the p art o f the military is to devote resources to predicting the next problems. These thinkers advocate the opposite: invest in preparedness, not in prediction. R emember t hat infinite vigilance is just not possible. c . Seize any opportunity, or anything that looks like opportunity. T hey a re rare, much rarer t han y ou think. Remember that positive B lack S wans have a necessary first step: you need to be exposed to them. Many people do not realize that they are getting a lucky b reak in life w hen they get it. If a big publisher (or a big art dealer o r a m ovie executive or a hotshot banker or a big thinker) suggests * There is a finer epistemological point. Remember t hat in a virtuous Black Swan business, what the past did not reveal is almost certainly going to be good for you. W hen you look at past biotech revenues, you do not see the superblockbuster in t hem, and owing to the potential for a cure for c ancer (or headaches, or baldness, o r bad sense of humor, e tc.), there is a small probability t hat the sales in that industry may turn o ut to be m onstrous, far larger than might be expected. On the other h and, consider negative Black Swan businesses. The t rack r ecord you see is likely t o overestimate the properties. Recall the 1 9 8 2 blowup of banks: they appeared t o the naïve observer to be m ore profitable than they seemed. Insurance companies are o f two kinds: the regular diversifiable kind t hat belongs to Mediocristan (say, life insurance) and the m ore critical and explosive Black S wan-prone risks that are usually sold to reinsurers. A ccording t o the d ata, reinsurers have lost money on underwriting over the past couple of decades, but, unlike bankers, they are introspective enough to know t hat it actually could have been far worse, because the past twenty years did not have a big c atastrophe, and all you need is one of those per century t o kiss the business good-bye. Many finance academics doing "valuation" on insurance seem to have missed the point. APPELLES THE PAINTER, OR WHAT DO YOU DO IF Y O U C A N N O T PREDICT? 209 an appointment, cancel anything you have planned: you may never see such a window open up again. I am sometimes shocked at how little p eople realize that these opportunities do not grow on trees. C ollect as many free nonlottery tickets (those with open-ended payoffs) as you can, and, once they start paying off, do not discard them. Work h ard, n ot in g runt w ork, but in chasing such oppor­ tunities and maximizing exposure to them. This makes living in big cities invaluable because you increase the o dds o f serendipi­ tous encounters—you gain exposure to the envelope of serendipity. T he idea of settling in a r ural a rea on g rounds t hat one has good communications "in the age of the Internet" tunnels out of such s ources o f positive uncertainty. Diplomats u nderstand t hat very well: c asual chance discussions at cocktail parties usually lead to big b reakthroughs—not dry correspondence or telephone conver­ sations. G o to parties! If you're a scientist, you will chance u pon a r emark that might spark new research. And if you are autistic, send your associates to these events. d. Beware of precise plans by governments. As discussed in Chapter 1 0, let governments predict (it makes officials feel b etter about themselves and justifies their existence) but do not set much store by w hat they say. Remember that the interest of these civil s ervants is t o survive and self-perpetuate—not to get to the t ruth. I t does not mean that governments are useless, only that you need to keep a vigilant eye on their side effects. F or instance, regulators in the banking business are prone to a severe expert problem and they tend to condone reckless but (hidden) risk taking. Andy Marshall and Andy Mays asked me if the private sector could do better in predicting. Alas, no. Once again, recall the story of banks hiding e xplosive r isks in their portfolios. It is not a good idea to t rust c or­ porations with matters such as rare events because the performance o f these executives is not observable on a short-term basis, and they will game the system by showing good performance so they c an get their yearly bonus. The A chilles' heel of capitalism is that if you make corporations compete, it is sometimes the one that is most exposed to the negative B lack S wan that will appear to be the most fit for survival. Also recall from the footnote on Ferguson's discovery in Chapter 1 that markets are not good predictors of wars. No one in particular is a good predictor of anything. Sorry. 210 WE JUST CAN'T PREDICT e. " There are some people who, if they d on't a lready know, you can't tell ' em," as the great philosopher of uncertainty Y ogi B erra once said. Do not waste your time trying to fight forecasters, stock analysts, economists, and social scientists, except to play pranks on them. T hey are considerably easy to make fun of, and many get angry quite readily. It is ineffective to moan about unpredictability: people will continue to predict foolishly, especially if they are paid f or i t, and you cannot put an end to institutionalized frauds. If you ever d o have to heed a forecast, keep in mind that its accuracy degrades rapidly as you extend it t hrough t ime. I f y ou hear a "prominent" economist using the word equilibrium, o r normal distribution, d o not argue with him; just ignore him, or try to put a rat d own his shirt. The Great Asymmetry All t hese recommendations have one point in common: asymmetry. Put y ourself in situations where favorable consequences are much larger t han u nfavorable ones. Indeed, the notion of asymmetric outcomes as the central idea of this b ook: I w ill never get to know the unknown since, by definition, it is unknown. However, I can always guess how it might affect m e, and I should b ase m y decisions around that. T his idea is often erroneously called Pascal's wager, after the philosopher and (thinking) mathematician B laise P ascal. He presented it something like this: I do not know whether God exists, but I know that I have nothing to gain from being an atheist if he does not exist, whereas I have plenty to lose if he does. Hence, this justifies my belief in God. P ascal's a rgument is severely flawed theologically: one has to be naïve enough to believe that God would not penalize us for false belief. Unless, o f c ourse, one is taking the quite restrictive view of a naive God. (Bertrand R ussell w as reported to have claimed that God would need to have created f ools f or Pascal's argument to work.) B ut t he idea behind Pascal's wager has fundamental applications outside of theology. It stands the entire notion of knowledge on its head. It e liminates t he need for us to u nderstand t he probabilities of a rare event (there are fundamental limits to our knowledge of these); rather, we can focus o n the payoff and benefits of an event if it takes place. The probabilities o f very rare events are not computable; the effect o f an event on us is APPELLES THE PAINTER, OR WHAT DO YOU DO IF Y O U C A N N O T PREDICT? 211 c onsiderably easier to ascertain (the rarer the event, the fuzzier the odds). We c an have a clear idea of the consequences of an event, even if we do not know how likely it is to occur. I d on't k now the odds o f an earthquake, but I can imagine how San Francisco might be affected by one. This idea that in order to make a decision you need to focus on the consequences (which you can know) rather t han t he probability (which you can't know) is the central idea of uncertainty. M uch of my life is based on it. Y ou c an build an overall theory of decision making on this idea. All you have to do is mitigate the consequences. As I said, if my portfolio is exposed to a market crash, the odds o f which I can't compute, all I have to do is buy insurance, or get out and invest the amounts I am not willing to ever lose in less risky securities. Effectively, i f free markets have been successful, it is precisely because they allow the trial-and-error process I c all " stochastic tinkering" on the p art o f competing individual operators who fall for the narrative fallacy— but are effectively collectively partaking of a grand project. We are increasingly l earning to practice stochastic tinkering without knowing it— thanks to overconfident entrepreneurs, naïve investors, greedy investment bankers, and aggressive venture capitalists brought together by the freemarket system. The next chapter shows why I am optimistic that the academy is losing its power and ability to put knowledge in straitjackets and that more out-of-the-box knowledge will be generated Wiki-style. In the end we are being driven by history, all the while thinking that we are doing the driving. I'll sum up this long section on prediction by stating that we can easily narrow d own t he reasons we can't figure out what's going on. There are: a) epistemic arrogance and our corresponding future blindness; b) the Platonic notion of categories, or how people are fooled by reductions, particularly if they have an academic degree in an expert-free discipline; and, finally c) flawed tools of inference, particularly the B lack S wan-free tools from Mediocristan. In t he next section we will go deeper, much deeper, into these tools from Mediocristan, into the "plumbing," so to speak. Some readers may see it as an appendix; others may consider it the heart of the book. OfBCîWMISTAN THOSE ©RAY SWANS t's time to deal in some depth w ith four final items that bear on our B lack S wan. Primo, I have said earlier that the world is moving deeper into Ex­ tremistan, that it is less and less governed by Mediocristan—in f act, t his idea is more subtle t han t hat. I will show how and present the various ideas we have about the formation of inequality. Secondo, I h ave been de­ scribing t he Gaussian bell curve as a contagious and severe delusion, and it is time to get into that point in some d epth. Terso, I will present what I call M andelbrotian, or fractal, randomness. Remember that for an event to be a B lack S wan, it does not just have to be rare, or just wild; it has to be u nexpected, has to lie outside our tunnel of p ossibilities. Y ou must be a sucker for it. As it happens, many rare events can yield their structure to us: it is not easy to compute their probability, but it is easy to get a general idea about the possibility of their occurrence. We can t urn t hese B lack Swans i nto Gray Swans, so to speak, reducing their surprise effect. A p er­ son aware of the possibility of such events can come to belong to the nonsucker variety. Finally, I will present the ideas of those philosophers who focus on phony uncertainty. I organized this book in such a way that the more tech­ nical (though nonessential) sections are here; these can be skipped without any loss to the thoughtful reader, particularly Chapters 15, 17, and the sec­ ond h alf o f Chapter 1 6.1 will alert the reader with footnotes. The reader less interested in the mechanics of deviations can then directly proceed to Part 4 . Chapter Fourteen F ROM MEDIOCRISTAN TO E XTREMISTAN, AND BACK / prefer Horowitz—How to fall from favor—The long tail—Get ready for some surprises—It's not just money Let us see how an increasingly man-made planet can evolve away from mild into wild randomness. First, I describe how we get to Extremistan. T hen, I will take a look at its evolution. The World Is Unfair Is t he world that unfair? I have spent my entire life studying randomness, practicing randomness, hating randomness. The more that time passes, the worse things seem to me, the more scared I get, the more disgusted I am with Mother Nature. The more I think about my subject, the more I see evidence that the world we have in our minds is different from the one playing outside. Every morning the world appears to me more random than it did the day before, and humans seem to be even more fooled by it t han they were the previous day. It is becoming unbearable. I find writ­ ing these lines painful; I find the world revolting. T wo " soft" scientists propose intuitive models for the development of this inequity: one is a mainstream economist, the other a sociologist. B oth simplify a little too much. I will present their ideas because they are easy '216 THOSE GRAY SWANS OF EXTREMISTAN t o understand, not because of the scientific quality of their insights or any consequences in their discoveries; then I will show the story as seen from the vantage point of the natural scientists. L et m e start with the economist Sherwin Rosen. In the early eighties, he wrote papers about "the economics of superstars." In one of the papers he conveyed his sense of outrage that a basketball player could earn $1.2 m illion a year, or a television celebrity could make $2 million. To get an idea of how this concentration is increasing—i.e., of how we are moving away from Mediocristan—consider that television celebrities and sports stars (even in Europe) get contracts today, only two decades later, worth in the h undreds o f millions of dollars! The extreme is about (so far) twenty times higher than it was two decades ago! According to Rosen, this inequality comes from a tournament effect: s omeone who is marginally "better" can easily win the entire pot, leaving the others with nothing. Using an argument from Chapter 3, people pre­ fer t o pay $ 1 0 . 9 9 f or a recording featuring Horowitz to $ 9.99 for a strug­ gling pianist. Would you rather read Kundera for $ 1 3 . 9 9 o r some unknown author for $1? So it looks like a tournament, where the winner grabs the whole thing—and he does not have to win by much. B ut t he role of luck is missing in Rosen's beautiful argument. The prob­ lem h ere is the notion of "better," this focus on skills as leading to success. Random outcomes, or an arbitrary situation, can also explain success, and provide the initial push t hat leads to a winner-take-all result. A person can get slightly ahead for entirely random reasons; because we like to imitate one another, we will flock t o him. The world of contagion is so underesti­ mated! As I a m writing these lines I am using a Macintosh, by Apple, after years of using Microsoft-based products. The Apple technology is vastly better, yet the inferior software won the day. How? Luck. The Matthew Effect M ore t han a decade before Rosen, the sociologist of science Robert K. Merton presented his idea of the Matthew effect, by which people take from the poor to give to the rich. * H e looked at the performance of scien* These scalable laws were already discussed in the scriptures: " For onto everyone t hat hath shall be given, and he shall have abundance; but from him that hath not shall be taken away even t hat which he h ath." M atthew (Matthew 2 5:29, King J ames Version). FROM MEDIOCRISTAN TO EXTREMISTAN, AND BACK 217 tists and showed how an initial advantage follows someone t hrough life. C onsider the following process. Let's say someone writes an academic paper quoting fifty people who have worked on the subject and provided background materials for his study; a ssume, for the sake of simplicity, that all fifty are of equal merit. Another researcher working on the exact same subject will randomly cite three of those fifty in his bibliography. Merton showed that many acade­ mics c ite references without having read the original work; rather, they'll read a paper and d raw t heir own citations from among its sources. So a third researcher reading the second article selects three of the previously referenced a uthors for his c itations. These three authors will receive cumu­ latively m ore and more attention as their names become associated more tightly with the subject at h and. T he difference between the winning three and the other members of the original cohort is mostly luck: they were ini­ tially c hosen not for their greater skill, but simply for the way their names appeared in the prior bibliography. Thanks to their reputations, these suc­ cessful a cademics will go on writing p apers a nd their work will be easily a ccepted for publication. Academic success is partly (but significantly) a lottery.* It is easy to test the effect o f reputation. One way would be to find pa­ pers that were written by famous scientists, had their authors' identities changed by mistake, and got rejected. You could verify how many of these r ejections were subsequently overturned after the t rue i dentities of the au­ thors were established. Note that scholars are judged mostly on how many times their work is referenced in other people's work, and t hus c liques of people who quote one another are formed (it's an "I quote you, you quote m e" type of business). Eventually, a uthors who are not often cited will d rop o ut of the game by, say, going to work for the government (if they are of a gentle nature), o r for the Mafia, or for a Wall Street firm (if they have a high level of hor­ mones). T hose who got a good push in the beginning of their scholarly ca­ reers will keep getting persistent cumulative advantages t hroughout life. It is easier for the rich to get richer, for the famous to become more famous. In s ociology, Matthew effects bear the less literary name "cumulative * M uch of the perception of the i mportance o f precocity in the career o f researchers can be owed to the misunderstanding of the perverse role o f this effect, especially when reinforced by bias. Enough c ounterexamples, even in fields like m athematics meant t o be purely a "young man's g ame," illustrate the age fallacy: simply, it is necessary t o be successful early, and even very early a t t hat. 218 THOSE GRAY SWANS OF EXTREMISTAN a dvantage." This theory can easily apply to companies, businessmen, ac­ tors, writers, and anyone else who benefits from past success. If you get published in The New Yorker b ecause the color of your letterhead at­ tracted the attention of the editor, who was daydreaming of daisies, the resultant reward can follow you for life. M ore significantly, it will fol­ low others for life. F ailure is also cumulative; losers are likely to also lose in the future, even if we d on't t ake into account the mechanism of demoralization that might exacerbate it and cause additional failure. Note that art, because of its dependence on word of mouth, is ex­ tremely prone to these cumulative-advantage effects. I m entioned cluster­ ing in Chapter 1, and how journalism helps perpetuate these clusters. Our opinions about artistic merit are the result of arbitrary contagion even more t han o ur political ideas are. One person writes a book review; an­ other person reads it and writes a commentary that uses the same argu­ ments. Soon you have several h undred reviews that actually sum up in their contents to no more t han t wo or three because there is so much over­ lap. For an anecdotal example read Fire the Bastards!, w hose author, J ack G reen, g oes systematically t hrough t he reviews of William Gaddis's novel The Recognitions. G reen shows clearly how book reviewers anchor on other reviews and reveals powerful m utual influence, even in their word­ ing. This phenomenon is reminiscent of the herding of financial analysts I discussed in Chapter 10. T he a dvent of the modern media has accelerated these cumulative ad­ vantages. The sociologist Pierre Bourdieu noted a link between the in­ creased c oncentration of success and the globalization of culture and e conomic life. B ut I am not trying to play sociologist here, only show that unpredictable elements can play a role in social outcomes. Merton's cumulative-advantage idea has a more general precursor, "preferential attachment," which, reversing the chronology (though not the l ogic), I w ill present next. Merton was interested in the social aspect of knowledge, not in the dynamics of social randomness, so his studies were derived separately from research on the dynamics of randomness in more mathematical sciences. Lingua Franca T he t heory of preferential attachment is ubiquitous in its applications: it c an e xplain why city size is from Extremistan, why vocabulary is concen- FROM MEDIOCRISTAN TO EXTREMISTAN, AND BACK 2 1 9 t rated among a small number of words, or why bacteria populations can vary hugely in size. T he scientists J . C. Willis and G. U. Y ule p ublished a landmark paper in Nature in 1 9 2 2 called "Some Statistics of Evolution and Geographical Distribution in Plants and Animals, and Their S ignificance." W illis and Yule n oted the presence in biology of the so-called power laws, atractable versions of the scalable randomness that I discussed in Chapter 3. These power laws (on which more technical information in the following chap­ ters) had been noticed earlier by Vilfredo Pareto, who found that they ap­ plied to the distribution of income. Later, Y ule p resented a simple model showing how power laws can be generated. His point was as follows: Let's say species split in two at some constant rate, so that new species arise. T he r icher in species a genus is, the richer it will tend to get, with the same logic as the Mathew effect. N ote the following caveat: in Y ule's m odel the species never die out. During the 1 940s, a H arvard linguist, George Zipf, examined the properties of language and came up with an empirical regularity now known as Zipf's law, which, of course, is not a law (and if it were, it would not be Zipf's). It is just another way to think about the process of inequal­ ity. T he mechanisms he described were as follows: the more you use a word, the less effortful you will find it to use that word again, so you bor­ row w ords from your private dictionary in proportion to their past use. T his e xplains why out of the sixty thousand main w ords in English, only a few hundred c onstitute the bulk of what is used in writings, and even fewer a ppear regularly in conversation. Likewise, the more people aggre­ gate in a particular city, the more likely a stranger will be to pick that city as his destination. The big get bigger and the small stay small, or get rela­ tively smaller. A g reat illustration of preferential attachment can be seen in the mush­ rooming use of English as a lingua franca—though not for its intrinsic q ualities, but because people need to use one single language, or stick to one as much as possible, when they are having a conversation. So what­ ever language appears to have the upper h and will suddenly d raw p eople in droves; its usage will spread like an epidemic, and other languages will be rapidly dislodged. I am often amazed to listen to conversations between people from two neighboring countries, say, between a Turk and an Iran­ ian, or a Lebanese and a Cypriot, communicating in bad English, moving their hands for emphasis, searching for these w ords t hat come out of their 220 THOSE GRAY SWANS OF EXTREMISTAN t hroats at the cost of great physical effort. Even members of the Swiss Army use English (not French) as a lingua franca (it would be fun to listen). C onsider that a very small minority of Americans of northern European descent is from England; traditionally the p reponderant e thnic groups are of German, Irish, Dutch, French, and other northern European e xtraction. Y et because all these groups now use English as their main tongue, they have to study t he roots of their adoptive tongue and develop a c ultural association with p arts o f a particular wet island, along with its history, its traditions, and its customs! Ideas and Contagions T he s ame model can be used for the contagions and concentration of i deas. B ut there are some restrictions on the n ature o f epidemics I must discuss here. Ideas do not spread without some form of structure. R ecall t he discussion in Chapter 4 about how we come prepared to make inferences. J ust as we tend to generalize some matters but not others, so there seem t o be "basins of attraction" directing us to certain beliefs. S ome ideas w ill p rove contagious, but not others; some forms of superstitions will spread, but not others; some types of religious beliefs will dominate, but not others. The anthropologist, cognitive scientist, and philosopher Dan S perber h as proposed the following idea on the epidemiology of representations. What people c all " mêmes," ideas that spread and that compete with one another using people as carriers, are not truly like genes. Ideas spread because, alas, they have for carriers self-serving agents who are interested in them, and interested in distorting them in the replication p rocess. Y ou do not make a cake for the sake of merely replicating a r ecipe—you t ry to make your o wn c ake, using ideas from others to improve it. We humans are not photocopiers. So contagious mental c ategories m ust be those in which we are prepared to believe, perhaps even programmed to believe. To be contagious, a mental category must agree with our nature. N OBODY I S SAFE I N E XTREMISTAN T here is something extremely naïve about all these models of the dynamics o f concentration I've presented so far, particularly the socioeconomic o nes. F or instance, although Merton's idea includes luck, it misses an additional layer of randomness. In all these models the winner stays a win- FROM MEDIOCRISTAN TO EXTREMISTAN. AND BACK 2 2 1 ner. Now, a loser might always remain a loser, but a winner could be un­ seated by someone new p opping up out of nowhere. Nobody is safe. P referential-attachment theories are intuitively appealing, but they do not account for the possibility of being supplanted by newcomers—what every s choolchild knows as the decline of c ivilizations. C onsider the logic o f c ities: H ow did Rome, with a population of 1.2 million in the first cen­ tury A . D . , end up with a population of twelve thousand in the third? How did Baltimore, once a principal American city, become a r elic? A nd how did Philadelphia come to be overshadowed by New Y ork? A Brooklyn Frenchman W hen I s tarted t rading foreign exchange, I befriended a fellow named V in­ cent w ho exactly resembled a Brooklyn trader, d own t o the mannerisms of F at Tony, e xcept that he spoke the French version of B rooklynese. V incent t aught me a few tricks. Among his sayings were "Trading may have p rinces, but nobody stays a king" and "The people you meet on the way up, you will meet again on the way d own." T here were theories when I was a child about class warfare and strug­ gles by innocent individuals against powerful monster-corporations capa­ ble o f swallowing the world. Anyone with intellectual hunger was fed these theories, which were inherited from the Marxist b elief t hat the tools o f e xploitation were self-feeding, that the powerful would grow more and more powerful, furthering the unfairness of the system. But one had only to look a round t o see that these large corporate monsters d ropped l ike flies. T ake a cross section of the dominant corporations at any particular t ime; m any of them will be out of business a few decades later, while firms nobody ever heard of will have p opped o nto the scene from some garage in California or from some college dorm. Consider the following sobering statistic. O f the five h undred l argest U .S. c ompanies in 1 9 5 7 , only seventy-four were still p art o f that select group, the Standard and Poor's 5 0 0 , forty years later. Only a few had dis­ appeared in mergers; the rest either shrank or went bust. Interestingly, a lmost all these large corporations were located in the most capitalist country on earth, the United States. The more socialist a country's orientation, the easier it was for the large corporate monsters to stick a round. W hy did capitalism (and not socialism) destroy these ogres? In o ther words, if you leave companies alone, they tend to get eaten up. T hose in favor of economic freedom claim that beastly and greedy corpo- 222 THOSE GRAY SWANS OF EXTREMISTAN r ations pose no threat because competition keeps them in check. What I saw at the Wharton S chool c onvinced me that the real reason includes a large share of something else: c hance. B ut w hen people discuss chance (which they rarely do), they usually only look at their own luck. The luck of others c ounts greatly. Another corporation may luck out thanks to a blockbuster product and displace the current winners. Capitalism is, among other things, the revitalization o f t he world thanks to the opportunity to be lucky. Luck is the grand equalizer, because almost everyone can benefit from it. The socialist gov­ ernments protected their monsters and, by doing so, killed potential new­ comers in the womb. Everything is transitory. Luck both made and u nmade C arthage; it both made and u nmade R ome. I said earlier that randomness is bad, but it is not always so. Luck is far more egalitarian t han even intelligence. If people were rewarded strictly according to their abilities, things would still be unfair—people d on't c hoose t heir abilities. Randomness has the beneficial effect o f reshuffling s ociety's c ards, knocking d own t he big guy. In t he arts, fads do the same job. A newcomer may benefit from a fad, as followers multiply thanks to a preferential attachment-style epidemic. T hen, guess what? He too becomes history. It is quite interesting to look at the acclaimed authors of a particular era and see how many have d ropped o ut of consciousness. It even h appens in countries such as France where the government s upports e stablished reputations, just as it supports a iling large companies. When I visit Beirut, I often spot in relatives' homes the remnants of a series o f distinctively white-leather-bound "Nobel books." Some hyper­ active s alesman once managed to populate private libraries with these beautifully made volumes; many people buy books for decorative pur­ poses and want a simple selection criterion. The criterion this series of­ fered w as one book by a Nobel winner in literature every year—a simple way to build the ultimate library. The series was supposed to be updated every year, but I presume the company went out of business in the eigh­ ties. I feel a p ang every time I look at these volumes: Do you hear much today about Sully Prudhomme (the first recipient), Pearl B uck (an Ameri­ can w oman), Romain Rolland, Anatole France (the last two were the most famous French authors of their generations), St. John Perse, Roger Martin du Gard, or Frédéric Mistral? FROM MEDIOCRISTAN TO EXTREMISTAN, AND BACK 2 2 3 The Long Tail I have said that nobody is safe in Extremistan. This has a converse: no­ body is threatened with complete extinction either. Our current environ­ ment allows the little guy to bide his time in the antechamber of success—as l ong as there is life, t here is hope. T his idea was recently revived by Chris Anderson, one of a very few who get the point that the dynamics of fractal concentration has another layer o f randomness. He packaged it with his idea of the "long tail," about which in a moment. Anderson is lucky not to be a professional sta­ tistician (people who have had the misfortune of going t hrough c onven­ tional statistical training think we live in Mediocristan). He was able to take a fresh look at the dynamics of the world. T rue, the Web produces acute concentration. A large number of users visit j ust a few sites, such as Google, which, at the time of this writing, has total market dominance. At no time in history has a company grown so dominant so q uickly—Google c an service people from Nicaragua to south­ western Mongolia to the American West Coast, without having to worry about phone operators, shipping, delivery, and manufacturing. This is the ultimate winner-take-all case study. People forget, though, that before Google, Alta Vista dominated the search-engine m arket. I am prepared to revise the Google metaphor by re­ placing it with a new name for future editions of this book. W hat A nderson saw is that the Web causes something in addition t o c oncentration. T he Web enables the formation of a reservoir of protoGoogles w aiting in the background. It also promotes the inverse Google, t hat is, it allows people with a technical specialty to find a small, stable au­ dience. R ecall the role of the Web in Yevgenia Krasnova's success. Thanks to the Internet, she was able to bypass conventional publishers. Her pub­ lisher w ith the pink glasses would not even have been in business had it not been for the Web. Let's assume that Amazon.com does not exist, and that you have written a sophisticated book. O dds a re that a very small b ookstore t hat carries only 5 ,000 v olumes will not be interested in letting your "beautifully crafted prose" occupy premium s helf s pace. And the m egabookstore, such as the average American Barnes & Noble, might s tock 1 30,000 v olumes, which is still not sufficient to accommodate mar­ ginal t itles. So your work is stillborn. Not so with Web vendors. A Web bookstore can carry a near-infinite 224 THOSE GRAY SWANS OF EXTREMISTAN n umber of books since it need not have them physically in inventory. Ac­ tually, nobody needs to have them physically in inventory since they can remain in digital form until they are needed in p rint, an emerging business c alled p rint-on-demand. S o as the author of this little book, you can sit there, bide your time, be available in search engines, and p erhaps benefit from an occasional epi­ demic. In fact, the quality of readership has improved markedly over the past few years thanks to the availability of these more sophisticated b ooks. T his is a fertile environment for diversity.* Plenty of people have called me to discuss the idea of the long tail, which seems to be the exact opposite of the concentration implied by scal­ ability. T he long tail implies that the small guys, collectively, should con­ trol a large segment of culture and commerce, thanks to the niches and subspecialties that can now survive thanks to the Internet. But, strangely, it c an also imply a large measure of inequality: a large base of small guys and a very small number of supergiants, together representing a share of the world's culture—with some of the small guys, on occasion, rising to k nock o ut the winners. (This is the "double tail": a large tail of the small guys, a small tail of the big guys.) T he r ole of the long tail is fundamental in changing the dynamics of s uccess, d estabilizing the well-seated winner, and bringing about another winner. In a snapshot this will always be Extremistan, always ruled by the concentration of type-2 randomness; but it will be an ever-changing Ex­ tremistan. T he l ong tail's contribution is not yet numerical; it is still confined to the Web and its small-scale online commerce. But consider how the long tail could affect the future of culture, information, and political life. It could free us from the dominant political parties, from the academic sys­ tem, from the clusters of the press—anything that is currently in the hands o f ossified, conceited, and self-serving authority. The long tail will help f oster c ognitive diversity. One highlight of the year 2 0 0 6 w as to find in my * T he Web's bottom-up feature is also making book reviewers more accountable. While writers were helpless and vulnerable to the arbitrariness o f book reviews, which can distort their messages and, thanks to the confirmation bias, expose small irrelevant weak points in their t ext, they now have a much stronger hand. In place o f the moaning letter to the editor, they can simply post their review of a re­ view on the Web. If a ttacked ad hominem, they can reply ad hominem and go di­ rectly after the credibility of the reviewer, making sure t hat their statement shows rapidly in an Internet search o r on Wikipedia, the bottom-up encyclopedia. FROM MEDIOCRISTAN TO EXTREMISTAN, AND BACK 225 m ailbox a draft manuscript of a book called Cognitive Diversity: Our Individual Differences How Produce Collective Benefits, by Scott Page. Page e xamines the effects of cognitive diversity on problem solving and shows how variability in views and methods acts like an engine for tinkering. It works like evolution. By subverting the big structures we also get rid of the Platonified one way o f doing things—in the end, the bottom-up theory-free empiricist should prevail. In sum, the long tail is a by-product of Extremistan that makes it somewhat less unfair: the world is made no less unfair for the little guy, but it now becomes extremely unfair for the big man. Nobody is truly established. The little guy is very subversive. Naïve Globalization We are gliding into disorder, but not necessarily bad disorder. This implies that we will see more periods of calm and stability, with most problems concentrated into a small number of B lack S wans. Consider the n ature o f past wars. The twentieth century was not the deadliest (in percentage of the total population), but it brought something new: the beginning of the Extremistan warfare—a small probability of a conflict degenerating into total decimation of the h uman r ace, a conflict from which nobody is safe anywhere. A similar effect is taking place in economic life. I s poke about globalization in Chapter 3; it is here, but it is not all for the good: it creates interlocking fragility, while reducing volatility and giving the appearance of stability. In other w ords it creates devastating B lack S wans. We have never lived before under t he threat of a global collapse. Financial institutions have been merging into a smaller number of very large banks. Almost all banks are now interrelated. So the financial ecology is swelling into gigantic, i ncestuous, bureaucratic banks (often Gaussianized in their risk measurement)—when one falls, they all f all.* T he increased concentration * As if we did not have enough problems, banks are now more vulnerable to the Black Swan and the ludic fallacy than ever before with "scientists" among their staff taking c are o f exposures. The giant firm J . P. Morgan put the entire world at risk by introducing in the nineties RiskMetrics, a phony method aiming at managing people's risks, causing the generalized use of the ludic fallacy, and bringing Dr. Johns into power in place of the skeptical Fat Tonys. (A related method called "Value-at-Risk," which relies on the quantitative measurement of risk, has been spreading.) Likewise, the government-sponsored institution Fanny Mae, when I look at their risks, seems to be sitting on a barrel o f dynamite, vulnerable to the 226 THOSE GRAY SWANS OF EXTREMISTAN a mong banks seems to have the effect o f making financial crisis less likely, but when they happen they are more global in scale and hit us very hard. W e h ave moved from a diversified ecology of small banks, with varied lending policies, to a more homogeneous framework of firms that all re­ semble o ne another. True, we now have fewer failures, but when they o ccur . . . I shiver at the thought. I rephrase here: we will have fewer but more severe crises. The rarer the event, the less we know about its odds. It mean that we know less and less about the possibility of a crisis. And we have some idea how such a crisis would happen. A network is an assemblage of elements called nodes that are somehow connected to one another by a link; the world's airports constitute a network, as does the World Wide Web, as do social connections and electricity grids. There is a b ranch of research called "network theory" that studies the organiza­ tion of such networks and the links between their nodes, with such re­ searchers as Duncan Watts, Steven Strogatz, Albert-Laszlo Barabasi, and many more. They all understand Extremistan mathematics and the inade­ quacy of the Gaussian bell curve. They have uncovered the following property of networks: there is a concentration among a few nodes that serve as central connections. Networks have a natural tendency to orga­ nize themselves around an extremely concentrated architecture: a few nodes are extremely connected; others barely so. The distribution of these c onnections h as a scalable structure of the kind we will discuss in Chap­ ters 15 and 16. Concentration of this kind is not limited to the Internet; it appears in social life (a small number of people are connected to others), in electricity grids, in communications networks. This seems to make net­ works more robust: random insults to most parts of the network will not be c onsequential since they are likely to hit a poorly connected spot. But it a lso m akes networks more vulnerable to B lack S wans. Just consider what would happen if there is a problem with a major node. The electricity b lackout e xperienced in the northeastern United States during August 2 0 0 3 , w ith its consequential mayhem, is a perfect example of what could take place if one of the big banks went under today. B ut b anks are in a far worse situation than the Internet. The financial industry has no significant long tail! We would be far better off if there were a different ecology, in which financial institutions went bust on o cca­ sion a nd were rapidly replaced by new ones, thus m irroring the diversity slightest hiccup. But not to w orry: their large staff o f scientists deemed these events "unlikely." FROM MEDIOCRISTAN TO EXTREMISTAN, AND BACK 227 o f I nternet businesses and the resilience of the Internet economy. Or if there were a long tail of government officiais a nd civil s ervants coming to reinvigorate bureaucracies. R EVERSALS AWAY FROM E XTREMISTAN T here i s, inevitably, a mounting tension between our society, full of con­ centration, and our classical idea of aurea mediocritas, the golden mean, so it is conceivable that efforts may be made to reverse such concentration. We live in a society of one person, one vote, where progressive taxes have been enacted precisely to weaken the winners. Indeed, the rules of society c an be easily rewritten by those at the bottom of the pyramid to prevent concentration from h urting t hem. But it does not require voting to do so— religion could soften the problem. Consider that before Christianity, in many societies the powerful had many wives, t hus p reventing those at the bottom from accessing wombs, a condition that is not too different from the reproductive exclusivity of alpha males in many species. But Christian­ ity reversed this, thanks to the one man-one woman rule. Later, Islam c ame t o limit the number of wives to four. Judaism, which had been poly­ genic, b ecame monogamous in the Middle Ages. One can say that such a strategy has been successful—the institution of tightly monogamous mar­ riage (with no official c oncubine, as in the Greco-Roman days), even when practiced the "French way," provides social stability since there is no pool o f angry, sexually deprived men at the bottom fomenting a revolution just so they can have the chance to mate. But I find the emphasis on economic inequality, at the expense of other types of inequality, extremely bothersome. Fairness is not exclusively an e conomic m atter; it becomes less and less so when we are satisfying our basic m aterial needs. It is pecking order that matters! The superstars will always be there. The Soviets may have flattened the economic structure, but they encouraged their own brand of iibermensch. What is poorly un­ derstood, or denied (owing to its unsettling implications), is the absence of a r ole for the average in intellectual production. The disproportionate share of the very few in intellectual influence is even more unsettling t han the unequal distribution of wealth—unsettling because, unlike the income gap, no social policy can eliminate it. Communism could conceal or com­ press income discrepancies, but it could not eliminate the superstar system in intellectual life. It has even been shown, by Michael Marmot of the Whitehall Studies, 228 THOSE GRAY SWANS OF EXTREMISTAN t hat those at the top of the pecking order live longer, even when adjusting for d isease. Marmot's impressive project shows how social rank alone can affect longevity. It was calculated that actors who win an Oscar tend to live o n average about five years longer t han t heir peers who d on't. People live l onger in societies that have flatter social gradients. Winners kill their peers as those in a steep social gradient live shorter lives, regardless of their economic condition. I d o not know how to remedy this (except t hrough religious beliefs). Is insurance against your peers' demoralizing success possible? Should the Nobel Prize be banned? Granted the Nobel medal in economics has not been good for society or knowledge, but even those rewarded for real c ontributions in medicine and physics too rapidly displace others from our consciousness, and steal longevity away from them. Extremistan is here to stay, so we have to live with it, and find the tricks that make it more palatable. Chapter Fifteen THE B ELL C URVE, THAT GREAT I NTELLECTUAL F RAUD* Not worth a pastis—Quételet's error—The average man is a monster—Let's deify it—Yes or no—Not so literary an experiment F orget everything you heard in college statistics or probability theory. If you never took such a c lass, even better. Let us start from the very begin­ ning. T HE G AUSSIAN A ND T HE MANDELBROTIAN I was transiting t hrough the Frankfurt airport in December 2 0 0 1 , o n my way from Oslo to Zurich. I had time to kill at the airport and it was a great opportunity for me to buy dark European chocolate, especially since I have managed to suc­ cessfully c onvince m yself t hat airport calories d on't c ount. The cashier handed m e, among other things, a ten deutschmark b ill, a n (illegal) s can o f w hich can be seen on the next page. The deutschmark banknotes were going to be put out of circulation in a matter of days, since Europe was * The nontechnical (or intuitive) reader c an skip this chapter, as it goes into some de­ tails a bout the bell curve. Also, you can skip it if you belong to the c ategory o f for­ tunate people who do not know about the bell curve. 2 30 THOSE GRAY SWANS OF EXTREMISTAN The last ten deutschmark bill, representing Gauss and, to his right, the bell curve of Mediocristan. s witching to the euro. I k ept it as a valedictory. B efore the arrival of the euro, Europe had plenty of national currencies, which was good for print­ ers, m oney changers, and of course currency traders like this (more or less) h umble author. As I w as eating my dark European chocolate and wistfully looking at the b ill, I a lmost choked. I suddenly noticed, for the first time, that there was something curious about it. The bill bore the portrait of C arl F riedrich Gauss and a picture of his Gaussian bell curve. T he s triking irony here is that the last possible o bject t hat can be linked to the German currency is precisely such a curve: the reichsmark (as the currency was previously called) went from four per dollar to four trillion per dollar in the space of a few years during the 1 920s, an outcome that tells y ou that the bell curve is meaningless as a description of the random­ ness in currency fluctuations. All you need to r eject the bell curve is for such a movement to occur once, and only once—just consider the conse­ quences. Yet there was the bell curve, and next to it Herr Professor Doktor Gauss, unprepossessing, a little stern, certainly not someone I 'd want to spend time with lounging on a terrace, drinking pastis, and holding a conversation without a subject. S hockingly, t he bell curve is used as a risk-measurement tool by those regulators and central bankers who wear dark suits and talk in a boring way about currencies. THE BELL CURVE, THAT GREAT INTELLECTUAL FRAUD 2 3 1 The Increase In the Decrease T he m ain point of the Gaussian, as I've said, is that most observations hover around the mediocre, the average; the odds o f a deviation decline faster and faster (exponentially) as you move away from the average. If you must have only one single piece of information, this is the one: the dramatic increase in the speed of decline in the odds as you move away from the center, or the average. Look at the list below for an illustration o f t his. I am taking an example of a Gaussian quantity, such as height, and simplifying it a bit to make it more illustrative. Assume that the average height (men and women) is 1.67 meters, or 5 feet 7 inches. Consider what I c all a unit of deviation here as 10 centimeters. Let us look at increments above 1.67 meters and consider the odds o f someone being that tall.* 1 0 centimeters taller than the average (i.e., taller than 1.77 m, or 5 feet 1 0): 1 in 6.3 2 0 centimeters taller than the average (i.e., taller than 1.87 m, or 6 feet 2 ): 1 in 44 3 0 centimeters taller than the average (i.e., taller than 1.97 m, or 6 feet 6 ): 1 in 740 4 0 centimeters taller than the average (i.e., taller than 2 .07 m, or 6 feet 9 ): 1 in 3 2,000 50 centimeters taller than the average (i.e., taller than 2 .17 m, or 7 feet 1): l i n 3 ,500,000 60 centimeters taller than the average (i.e., taller than 2 .27 m, or 7 feet 5 ): 1 in 1 ,000,000,000 70 centimeters taller than the average (i.e., taller than 2 .37 m, or 7 feet 9 ): 1 in 7 80,000,000,000 80 centimeters taller than the average (i.e., taller than 2 .47 m, or 8 feet 1): 1 in 1 ,600,000,000,000,000 90 centimeters taller than the average (i.e., taller than 2 .57 m, or 8 feet 5 ): 1 in 8 ,900,000,000,000,000,000 100 centimeters taller than the average (i.e., taller than 2 .67 m, or 8 feet 9 ): 1 in 1 30,000,000,000,000,000,000,000 . . . a nd, * I have fudged the numbers a bit for simplicity's sake. 232 THOSE GRAY SWANS OF EXTREMISTAN 1 10 centimeters t aller t han t he a verage ( i.e., t aller t han 2 .77 m , or 9 feet 1): 1 in 3 6,000,000,000,000,000,000,000,000,000,000,000, 0 00,000,000,000,000,000,000,000,000,000,000,000,000,000,000, 0 00,000,000. N ote t hat s oon after, I believe, 2 2 deviations, or 2 2 0 centimeters taller t han t he average, the odds r each a googol, which is 1 with 100 zeroes be­ hind it. T he p oint of this list is to illustrate the acceleration. Look at the differ­ ence in o dds b etween 6 0 and 7 0 centimeters taller t han a verage: for a mere increase of four inches, we go from one in 1 billion people to one in 7 8 0 b illion! As for the jump between 7 0 and 80 centimeters: an additional 4 i nches above the average, we go from one in 7 8 0 billion to one in 1.6 mil­ lion billion!* T his p recipitous decline in the odds o f encountering something is w hat a llows you to ignore outliers. Only one curve can deliver this decline, and it is the bell curve (and its nonscalable siblings). The Mandelbrotian B y c omparison, look at the odds o f being rich in Europe. Assume t hat w ealth there is scalable, i.e., Mandelbrotian. (This is not an accurate de­ scription of wealth in Europe; it is simplified to emphasize the logic of s calable d istribution.)! Scalable Wealth Distribution P eople w ith a net w orth h igher t han € 1 m illion: 1 in 6 2.5 H igher t han € 2 m illion: 1 in 2 5 0 H igher t han € 4 million: 1 in 1 ,000 * O ne of the m ost misunderstood aspects o f a Gaussian is its fragility and vulnera­ bility in the estimation o f tail events. The odds of a 4 sigma move are twice that of a 4 .15 sigma. The odds of a 2 0 sigma are a trillion times higher than those of a 2 1 sigma! It means t hat a small measurement e rror o f the sigma will lead to a massive under­ estimation o f the probability. We can be a trillion times wrong a bout some events. f M y main point, which I repeat in some form o r another throughout Part Three, is as follows. Everything is made easy, conceptually, when you consider t hat there are two, and only two, possible paradigms: nonscalable (like the Gaussian) and other (such as M andebrotian r andomness). T he rejection o f the application o f the nonscalable is sufficient, as we will see later, to eliminate a certain vision of the world. This is like negative empiricism: I k now a lot by determining w hat is wrong. THE BELL CURVE, THAT GREAT INTELLECTUAL FRAUD 233 Higher than €8 million: 1 in 4 ,000 Higher than €16 million: 1 in 1 6,000 Higher than €32 million: 1 in 6 4,000 Higher than € 320 million: 1 in 6 ,400,000 The speed of the decrease here remains constant (or does not decline)! W hen you double the amount of money you cut the incidence by a factor o f four, no matter the level, whether you are at € 8 million or € 1 6 million. T his, in a nutshell, illustrates the difference between Mediocristan and Ex­ tremistan. R ecall the comparison between the scalable and the nonscalable in Chapter 3. Scalability means that there is no headwind to slow you down. O f c ourse, Mandelbrotian Extremistan can take many shapes. Con­ sider wealth in an extremely concentrated version of Extremistan; there, if you double the wealth, you halve the incidence. The result is quantita­ tively different from the above example, but it obeys the same l ogic. Fractal Wealth Distribution with Large Inequalities People with a net worth higher than €1 million: 1 in 63 Higher than €2 million: 1 in 125 Higher than €4 million: 1 in 250 Higher than €8 million: 1 in 500 Higher than €16 million: 1 in 1,000 Higher than €32 million: 1 in 2 ,000 Higher than € 320 million: 1 in 2 0,000 Higher than € 640 million: 1 in 4 0,000 I f w ealth were Gaussian, we would observe the following divergence away from € 1 million. Wealth Distribution Assuming a Gaussian Law People with a net worth higher than €1 million: 1 in 63 Higher than €2 million: 1 in 1 27,000 Higher than €3 million: 1 in 1 4,000,000,000 Higher than €4 million: 1 in 8 86,000,000,000,000,000 Higher than €8 million: 1 in 1 6,000,000,000,000,000,000,000,000,000,000,000 Higher than €16 million: 1 in . . . none of my computers is capable of handling the computation. 234 THOSE GRAY SWANS OF EXTREMISTAN W hat I want to show with these lists is the qualitative difference in the paradigms. As I have said, the second paradigm is scalable; it has no head­ wind. Note that another term for the scalable is power laws. J ust k nowing that we are in a power-law environment does not tell us much. Why? Because we have to measure the coefficients in real life, w hich is much harder t han w ith a Gaussian framework. Only the Gauss­ ian yields its properties rather rapidly. The method I propose is a general way of viewing the world rather t han a p recise solution. What to Remember R emember t his: the Gaussian-bell curve variations face a headwind that makes probabilities d rop a t a faster and faster rate as you move away from the mean, while "scalables," or Mandelbrotian variations, do not have such a restriction. That's pretty much most of what you need to know. * Inequality L et us look more closely at the n ature o f inequality. In the Gaussian frame­ work, inequality decreases as the deviations get larger—caused by the in­ crease in the rate of decrease. Not so with the scalable: inequality stays the same t hroughout. T he inequality among the superrich is the same as the inequality among the simply rich—it does not slow down.f * N ote t hat variables may not be infinitely scalable; there could be a very, very re­ mote upper limit—but we do not know where it is so we t reat a given situation as if it were infinitely scalable. Technically, you cannot sell m ore o f one book than there a re denizens of the planet—but t hat upper limit is large enough to be treated as if it didn't exist. F urthermore, w ho knows, by repackaging the book, you might be able to sell it to a person twice, or get t hat person to watch the same movie sev­ eral times. f As I was revising this draft, in August 2 0 0 6 , 1 stayed at a hotel in Dedham, Mass­ achusetts, near one of my children's summer c amps. T here, I was a little intrigued by the abundance o f weight-challenged people walking a round the lobby and caus­ ing problems with elevator backups. It turned out t hat the annual convention of N AFA, the National Association for F at A cceptance, was being held there. As most o f the members were extremely overweight, I was not able to figure out which dele­ gate w as the heaviest: some form of equality prevailed among the very heavy (someone m uch heavier than the persons I saw would have been dead). I am sure t hat a t the NARA convention, the National Association for Rich A cceptance, one person would d warf the o thers, a nd, even among the superrich, a very small per­ centage would represent a large section of the t otal wealth. THE BELL CURVE, THAT GREAT INTELLECTUAL FRAUD 235 C onsider this effect. T ake a random sample of any two people from the U.S. population who jointly earn $1 million per annum. What is the most likely breakdown of their respective incomes? In Mediocristan, the most likely combination is h alf a m illion each. In Extremistan, it would be $ 5 0 , 0 0 0 a nd $ 9 5 0 , 0 0 0 . T he s ituation is even more lopsided with book sales. If I told you that two authors sold a total of a million copies of their books, the most likely c ombination is 9 9 3 , 0 0 0 c opies sold for one and 7 ,000 for the other. This is far more likely t han t hat the books each sold 5 0 0 , 0 0 0 c opies. For any large total, the breakdown will be more and more asymmetric. W hy is this so? The height problem provides a comparison. If I told you that the total height of two people is fourteen feet, you would identify the most likely breakdown as seven feet each, not two feet and twelve feet; not even eight feet and six feet! Persons taller t han e ight feet are so rare that such a combination would be impossible. Extremistan and the 80/20 Rule H ave you ever heard of the 8 0/20 rule? It is the common signature of a power law—actually it is how it all started, when Vilfredo Pareto made the observation that 80 percent of the land in Italy was owned by 2 0 per­ cent o f the people. Some use the rule to imply that 80 percent of the work is done by 2 0 percent of the people. Or that 80 percent worth of effort contributes to only 2 0 percent of results, and vice versa. As far as axioms go, this one wasn't phrased to impress you the most: it c ould easily be called the 5 0 / 0 1 rule, that is, 5 0 percent of the work c omes from 1 percent of the workers. This formulation makes the world l ook even more unfair, yet the two formulae are exactly the same. How? W ell, if there is inequality, then those who constitute the 2 0 percent in the 8 0/20 rule also contribute unequally—only a few of them deliver the lion's share of the results. This trickles d own t o about one in a h undred c on­ tributing a little more t han h alf t he total. T he 8 0/20 rule is only metaphorical; it is not a rule, even less a rigid law. In the U.S. book business, the proportions are more like 9 7/20 ( i.e., 9 7 p ercent of book sales are made by 2 0 percent of the authors); it's even worse if you focus on literary nonfiction (twenty books of close to eight thousand represent h alf t he s ales). N ote here that it is not all uncertainty. In some situations you may have a concentration, of the 8 0/20 t ype, with very predictable and tractable 236 THOSE GRAY SWANS OF EXTREMISTAN p roperties, which enables clear decision making, because you can identify beforehand w here the meaningful 2 0 percent are. These situations are very easy t o control. For instance, Malcolm Gladwell wrote in an article in The New Yorker t hat most abuse of prisoners is attributable to a very small number of vicious guards. F ilter t hose guards o ut and your rate of pris­ oner abuse d rops d ramatically. (In publishing, on the other h and, y ou do not know beforehand which book will bring home the bacon. The same with wars, as you do not know beforehand which c onflict will kill a p or­ tion of the planet's residents.) Grass and Trees I 'll s ummarize here and repeat the arguments previously made throughout the book. Measures of uncertainty that are based on the bell curve simply disregard the possibility, and the impact, of s harp j umps or discontinuities and are, therefore, inapplicable in Extremistan. Using them is like focus­ ing on the grass and missing out on the (gigantic) trees. Although unpre­ dictable l arge deviations are rare, they cannot be dismissed as outliers b ecause, c umulatively, their impact is so dramatic. T he t raditional Gaussian way of looking at the world begins by focus­ ing on the ordinary, and then deals with exceptions or so-called outliers as a ncillaries. B ut there is a second way, which takes the exceptional as a starting point and treats the ordinary as subordinate. I h ave emphasized that there are two varieties of randomness, qualita­ tively different, like air and water. One does not care about extremes; the other is severely impacted by them. One does not generate B lack S wans; the other does. We cannot use the same techniques to discuss a gas as we would use with a liquid. And if we could, we w ouldn't c all t he approach "an approximation." A gas does not "approximate" a liquid. W e c an make good use of the Gaussian approach in variables for which there is a rational reason for the largest not to be too far away from the average. If there is gravity pulling numbers d own, o r if there are physi­ cal l imitations preventing very large observations, we end up in Medioc­ ristan. If there are strong forces of equilibrium bringing things back rather rapidly after conditions diverge from equilibrium, then again you can use the Gaussian approach. Otherwise, fuhgedaboudit. This is why much of e conomics is based on the notion of equilibrium: among other benefits, it a llows y ou to treat economic phenomena as Gaussian. Note that I am not telling you that the Mediocristan type of random- THE BELL CURVE, THAT GREAT INTELLECTUAL FRAUD 2 3 7 ness does not allow for some e xtremes. But it tells you that they are so rare that they do not play a significant role in the total. The effect o f such ex­ tremes is pitifully small and decreases as your population gets larger. T o be a little bit more technical here, if you have an assortment of giants and dwarfs, that is, observations several orders of magnitude a part, you could still be in Mediocristan. How? Assume you have a sample of one thousand people, with a large spectrum r unning f rom the dwarf to the giant. You are likely to see many giants in your sample, not a rare o cca­ sional o ne. Your average will not be impacted by the occasional additional giant because some of these giants are expected to be p art o f your sample, and your average is likely to be high. In other words, the largest observa­ tion cannot be too far away from the average. The average will always c ontain b oth kinds, giants and dwarves, so that neither should be too rare—unless you get a megagiant or a microdwarf on very rare occasion. T his w ould be Mediocristan with a large unit of deviation. Note once again the following principle: the rarer the event, the higher the error in our estimation of its probability—even when using the Gauss­ ian. L et me show you how the Gaussian bell curve sucks randomness out o f life—which is why it is popular. We like it because it allows certainties! H ow? T hrough averaging, as I will discuss next. How Coffee Drinking Can Be Safe R ecall from the Mediocristan discussion in Chapter 3 that no single obser­ vation will impact your total. This property will be more and more signifi­ cant as your population increases in size. The averages will become more and more stable, to the point where all samples will look alike. I've h ad plenty of cups of coffee in my life (it's my principal addiction). I have never seen a cup jump two feet from my desk, nor has coffee spilled spontaneously on this manuscript without intervention (even in Russia). Indeed, it will take more t han a m ild coffee a ddiction to witness such an event; it would require more lifetimes t han is p erhaps c onceivable—the odds are so small, one in so many zeroes, that it would be impossible for me to write them d own in my free time. Yet p hysical reality makes it possible for my coffee c up to jump—very unlikely, b ut possible. Particles jump around all the time. How come the coffee c up, itself c omposed of jumping particles, does not? The reason is, simply, that for the cup to jump would require that all of the particles 238 THOSE GRAY SWANS OF EXTREMISTAN F IGURE 7: How the Law of L arge N umbers W orks In Mediocristan, as your sample size increases, the observed average will present it­ self with less and less dispersion—as you can see, the distribution will be narrower and narrower. This, in a nutshell, is how everything in statistical theory works (or is sup­ posed t o work). Uncertainty in Mediocristan vanishes under averaging. This illustrates the hackneyed "law of large numbers." j ump in the same d irection, and do so in lockstep several times in a row (with a compensating move of the table in the opposite direction). All sev­ eral trillion particles in my coffee c up are not going to jump in the same direction; this is not going to h appen in the lifetime of this universe. So I c an safely put the coffee c up on the edge of my writing table and worry about more serious sources of uncertainty. T he safety of my coffee c up illustrates how the randomness of the Gaussian is tamable by averaging. If my cup were one large particle, or acted as one, then its jumping would be a problem. But my cup is the sum o f t rillions of very small particles. C asino o perators u nderstand t his well, which is why they never (if they do things right) lose money. They simply do not let one gambler make a massive bet, instead preferring to have plenty of gamblers make series of bets of limited size. G amblers may bet a total of $ 2 0 million, but you n eedn't w orry about the casino's health: the bets run, say, $ 2 0 on average; the casino caps the bets at a maximum t hat will allow the casino owners to sleep at night. So the variations in the casino's r eturns a re going to be ridiculously small, no matter the total gambling activity. You will not see anyone leaving the casino with $1 billion—in the lifetime of this universe. THE BELL CURVE, THAT GREAT INTELLECTUAL FRAUD 2 3 9 T he a bove is an application of the supreme law of Mediocristan: when you have plenty of gamblers, no single gambler will impact the total more t han minutely. T he c onsequence of this is that variations around the average of the Gaussian, also called "errors," are not truly worrisome. They are small and they wash out. They are domesticated fluctuations around the mean. Love of Certainties I f you ever took a (dull) statistics class in c ollege, did not u nderstand m uch o f w hat the professor was excited about, and wondered what " standard d eviation" meant, there is nothing to worry about. The notion of s tandard deviation is meaningless outside of Mediocristan. Clearly it would have been more beneficial, and certainly more entertaining, to have taken classes in the neurobiology of aesthetics or postcolonial African dance, and this is easy to see empirically. Standard deviations do not exist outside the Gaussian, or if they do e xist they do not matter and do not explain much. But it gets worse. The Gaussian family (which includes various friends and relatives, such as the P oisson l aw) are the only class of distributions that the s tandard d eviation (and the average) is sufficient to describe. You need nothing e lse. T he bell curve satisfies the reductionism of the deluded. T here a re other notions that have little or no significance outside of the Gaussian: correlation a nd, worse, regression. hearing the word correlation. T o see how meaningless correlation can be outside of Mediocristan, take a historical series involving two variables that are patently from Ex­ tremistan, such as the bond and the stock markets, or two securities p rices, o r two variables l ike, say, changes in book sales of children's books in the United States, and fertilizer production in China; or real-estate prices in New Y ork C ity and r eturns o f the Mongolian stock market. Mea­ sure correlation between the pairs of variables in different subperiods, say, for 1 9 9 4 , 1 9 9 5 , 1 9 9 6 , etc. The correlation measure will be likely to ex­ hibit severe instability; it will depend on the period for which it was com­ puted. Y et people talk about correlation as if it were something real, making it tangible, investing it with a physical property, reifying it. T he s ame illusion of concreteness affects what we c all " standard" d eviations. Take any series of historical prices or values. B reak it up into Y et they are deeply in­ grained in our methods; it is h ard t o have a business conversation without 240 THOSE GRAY SWANS OF EXTREMISTAN subsegments and measure its " standard" d eviation. Surprised? Every sam­ ple will yield a different " standard" d eviation. Then why do people talk about s tandard d eviations? Go figure. Note here that, as with the narrative fallacy, when you look at past data and compute one single correlation or s tandard d eviation, you do not n otice such instability. How to Cause Catastrophes I f y ou use the term statistically significant, b eware of the illusions of cer­ tainties. O dds a re that someone has looked at his observation errors and assumed that they were Gaussian, which necessitates a Gaussian context, namely, Mediocristan, for it to be acceptable. T o s how how endemic the problem of misusing the Gaussian is, and how dangerous it can be, consider a (dull) book called Catastrophe by Judge Richard Posner, a prolific writer. Posner bemoans civil s ervants' mis­ understandings of randomness and recommends, among other things, that government policy makers learn statistics . . . from economists. Judge Pos­ ner appears to be trying to foment catastrophes. Yet, in spite of being one o f t hose people who should spend more time reading and less time writ­ ing, he can be an insightful, deep, and original thinker; like many people, he just isn't aware of the distinction between Mediocristan and Extremis­ tan, and he believes that statistics is a " science," never a fraud. If you run into him, please make him aware of these things. Q UÉTELET'S A VERAGE M ONSTER T his m onstrosity called the Gaussian bell curve is not Gauss's doing. Although he worked on it, he was a mathematician dealing with a theoreti­ cal p oint, not making claims about the structure of reality like statisticalminded scientists. G. H. H ardy w rote in "A Mathematician's Apology": T he " real" mathematics of the "real" mathematicians, the mathematics o f Fermât and Euler and Gauss and Abel and Riemann, is almost wholly "useless" (and this is as true o f "applied" as of "pure" mathe­ matics). As I m entioned earlier, the bell curve was mainly the concoction of a gambler, Abraham de Moivre ( 1 6 6 7 - 1 7 5 4 ) , a F rench Calvinist refugee THE BELL CURVE, THAT GREAT INTELLECTUAL FRAUD 241 w ho spent much of his life in London, though speaking heavily accented English. B ut it is Quételet, not Gauss, who counts as one of the most de­ structive fellows in the history of thought, as we will see next. Adolphe Quételet ( 1 7 9 6 - 1 8 7 4 ) c ame up with the notion of a physi­ cally average h uman, l'homme moyen. T here was nothing moyen a bout Quételet, "a man of great creative passions, a creative man full of energy." He wrote poetry and even coauthored an opera. The basic problem with Quételet was that he was a mathematician, not an empirical scientist, but he did not know it. He found harmony in the bell curve. T he p roblem exists at two levels. Primo, Q uételet had a normative idea, to make the world fit his average, in the sense that the average, to him, was the "normal." It would be wonderful to be able to ignore the contribution of the unusual, the "nonnormal," the B lack S wan, to the t otal. B ut let us leave t hat d ream for Utopia. Secondo, t here was a serious associated empirical problem. Quételet saw bell curves everywhere. He was blinded by bell curves and, I have learned, again, once you get a bell curve in your head it is h ard t o get it out. Later, Frank Ysidro Edgeworth would refer to Quételesmus as the grave mistake of seeing bell curves everywhere. Golden Mediocrity Q uételet provided a much needed product for the ideological appetites of his day. As he lived between 1 7 9 6 and 1 8 7 4 , so consider the roster of his contemporaries: Saint-Simon (1760-1825), P ierre-Joseph Proudhon ( 1 8 0 9 - 1 8 6 5 ) , a nd Karl M a r x ( 1 8 1 8 - 1 8 8 3 ) , e ach the source of a different version of socialism. Everyone in this post-Enlightenment moment was longing for the aurea mediocritas, the golden mean: in wealth, height, weight, and so on. This longing contains some element of wishful thinking m ixed w ith a great deal of harmony and . . . Platonicity. I always remember my father's injunction that in medio stat virtus, "virtue lies in moderation." W ell, f or a long time that was the ideal; medi­ ocrity, in that sense, was even deemed golden. All-embracing mediocrity. B ut Q uételet took the idea to a different level. Collecting statistics, he started creating s tandards o f "means." Chest size, height, the weight o f b abies at birth, very little escaped his standards. D eviations from the norm, he found, became exponentially more rare as the magnitude of the deviation increased. Then, having conceived of this idea of the physical c haracteristics o f l'homme moyen, M onsieur Quételet switched to 242 THOSE GRAY SWANS OF EXTREMISTAN s ocial m atters. L'homme methods. moyen h ad his habits, his consumption, his Through his construct of l'homme moyen physique a nd l'homme moyen moral, t he physically and morally average man, Quételet created a range of deviance from the average that positions all people either to the left o r right of center and, truly, punishes those who find themselves occu­ pying the extreme left or right of the statistical bell curve. They became abnormal. H ow this inspired M a r x , who cites Quételet regarding this con­ cept o f an average or normal man, is obvious: " Societal deviations in terms of the distribution of wealth for example, must be minimized," he wrote in Das Kapital. O ne h as to give some credit to the scientific establishment of Quételet's day. They did not buy his arguments at once. The philosopher/mathemati­ cian/economist A ugustin Cournot, for starters, did not believe that one c ould e stablish a s tandard h uman o n purely quantitative grounds. Such a s tandard w ould be d ependent o n the attribute under c onsideration. A measurement in one province may differ from that in another province. W hich o ne should be the standard? L'homme moyen w ould be a monster, said C ournot. I will explain his point as follows. Assuming there is something desirable in being an average man, he must have an unspecified specialty in which he would be more gifted t han o ther people—he cannot be average in everything. A pianist would be bet­ ter on average at playing the piano, but worse t han t he norm at, say, h orseback r iding. A draftsman would have better drafting skills, and so on. The notion of a man deemed average is different from that of a man who is average in everything he does. In fact, an exactly average h uman w ould have to be h alf m ale and h alf f emale. Quételet completely missed that point. God's Error A m uch more worrisome aspect of the discussion is that in Quételet's day, the name of the Gaussian distribution was la loi des erreurs, the law of er­ rors, since one of its earliest applications was the distribution of errors in astronomic measurements. Are you as worried as I am? Divergence from the mean (here the median as well) was treated precisely as an error! No wonder M a r x fell for Quételet's ideas. T his c oncept took off very quickly. The ought w as confused with the THE BELL CURVE, THAT GREAT INTELLECTUAL FRAUD 243 is, and this with the imprimatur of s cience. T he notion of the average man is steeped in the culture attending the birth of the European middle c lass, the nascent post-Napoleonic shopkeeper's culture, chary of excessive wealth and intellectual brilliance. In f act, t he dream of a society with com­ pressed outcomes is assumed to correspond to the aspirations of a rational h uman being facing a genetic lottery. If you had to pick a society to be born into for your next life, b ut could not know which outcome awaited you, it is assumed you would probably take no gamble; you would like to b elong t o a society without divergent outcomes. O ne e ntertaining effect o f the glorification of mediocrity was the c re­ ation of a political p arty in France called Poujadism, composed initially of a g rocery-store movement. It was the warm huddling t ogether of the semifavored hoping to see the rest of the universe compress i tself i nto their rank—a case of non-proletarian revolution. It had a grocery-store-owner mentality, down t o the employment of the mathematical tools. Did Gauss provide the mathematics for the shopkeepers? Poincaré to the Rescue P oincaré h imself w as quite suspicious of the Gaussian. I suspect that he felt queasy when it and similar approaches to modeling uncertainty were presented to him. Just consider that the Gaussian was initially meant to measure astronomic errors, and that Poincaré's ideas of modeling celestial m echanics were fraught with a sense of deeper uncertainty. P oincaré w rote that one of his friends, an unnamed "eminent physi­ cist," c omplained to him that physicists tended to use the Gaussian curve because they thought mathematicians believed it a mathematical necessity; mathematicians used it because they believed that physicists found it to be an empirical f act. Eliminating Unfair Influence Let me state here t hat, e xcept for the grocery-store mentality, I truly be­ lieve in the value of middleness and mediocrity—what humanist does not want to minimize the discrepancy between humans? Nothing is more re­ pugnant t han the inconsiderate ideal of the Ubermensch! My t rue p roblem is e pistemological. Reality is not Mediocristan, so we should learn to live with it. 244 THOSE GRAY SWANS OF EXTREMISTAN "The Greeks Would Have Deified It" T he list of people walking around with the bell curve stuck in their heads, thanks to its Platonic purity, is incredibly long. Sir F rancis Galton, Charles Darwin's first cousin and Erasmus Darwin's grandson, was perhaps, along with his cousin, one of the last independent gentlemen scientists—a category that also included Lord Cavendish, Lord Kelvin, Ludwig Wittgenstein (in his own way), and to s ome e xtent, our ùberphilosopher Bertrand Russell. Although John Maynard Keynes was not quite in that category, his thinking epitomizes it. Galton lived in the Victorian era when heirs and persons of leisure could, among other choices, such as horseback riding or hunting, become thinkers, scientists, or (for those less gifted) politicians. There is much to be wistful about in that era: the authenticity of someone doing science for s cience's s ake, without direct career motivations. Unfortunately, doing science for the love of knowledge does not necessarily m ean you will head in the right direction. Upon encountering and absorbing the "normal" distribution, Galton fell in love with it. He was said to have exclaimed that if the Greeks had known about it, they would have deified it. His enthusiasm may have contributed to the prevalence of the use of the Gaussian. G alton w as blessed with no mathematical baggage, but he had a rare o bsession w ith measurement. He did not know about the law of large numbers, but rediscovered it from the data itself. He built the quincunx, a pinball machine that shows the development of the bell curve—on which, more in a few paragraphs. True, Galton applied the bell curve to areas like g enetics a nd heredity, in which its use was justified. But his enthusiasm helped t hrust n ascent statistical methods into social issues. "Yes/No" Only Please L et m e discuss here the extent of the damage. If you're dealing with qualitative inference, such as in psychology or medicine, looking for yes/no answers to which magnitudes don't apply, then you can assume you're in M ediocristan w ithout serious problems. The impact of the improbable cannot be too large. You have cancer or you don't, you are pregnant or you are not, et cetera. Degrees of deadness or pregnancy are not relevant (unless you are dealing with epidemics). But if you are dealing with aggregates, w here magnitudes do matter, such as income, your wealth, return THE BELL CURVE, THAT GREAT I N T E L L E C T U A L FRAUD 2 4 5 on a portfolio, or book sales, then you will have a problem and get the wrong distribution if you use the Gaussian, as it does not belong there. One single number can disrupt all your averages; one single loss can erad­ icate a c entury of profits. You can no longer say "this is an exception." T he s tatement " Well, I c an lose money" is not informational unless you c an a ttach a quantity to that loss. You can lose all your net worth or you c an lose a fraction of your daily income; there is a difference. T his e xplains why empirical psychology and its insights on human na­ ture, which I presented in the earlier parts of this book, are robust to the mistake of using the bell curve; they are also lucky, since most of their variables allow for the application of conventional Gaussian statistics. When measuring how many people in a sample have a bias, or make a mistake, these studies generally elicit a y es/no type of result. No single ob­ servation, by itself, can disrupt t heir overall findings. I will next proceed to a sui generis presentation of the bell-curve idea from the ground up. A ( LITERARY) THOUGHT EXPERIMENT O N W HERE THE B ELL C URVE C OMES FROM C onsider a pinball machine like the one shown in Figure 8. Launch 3 2 b alls, assuming a well-balanced board so that the ball has equal odds o f falling right or left at any juncture when hitting a pin. Your expected out­ come is that many balls will land in the center columns and that the num­ ber o f balls will decrease as you move to the columns away from the center. Next, consider a gedanken, a thought experiment. A man flips a coin and after each toss he takes a step to the left or a step to the right, depend­ ing on whether the coin came up heads or tails. This is called the random walk, but it does not necessarily concern i tself w ith walking. You could identically say that instead of taking a step to the left or to the right, you would win or lose $1 at every t urn, a nd you will keep track of the cumu­ lative amount that you have in your pocket. Assume that I set you up in a (legal) wager where the odds a re neither in your favor nor against you. Flip a coin. Heads, you make $ 1 , tails, you lose $ 1 . At the first flip, you will either win or lose. At t he second flip, the number of possible outcomes doubles. Case one: 246 THOSE GRAY SWANS OF EXTREMISTAN F IGURE 8: T HE Q UINCUNX ( SIMPLIFIED)—A P INBALL M ACHINE Drop balls t hat at every pin, randomly fall right or left. Above is the most probable scenario, which greatly resembles the bell curve (a.k.a. Gaussian disribution). Cour­ tesy of Alexander Taleb. w in, win. Case two: win, lose. Case three: lose, win. Case four: lose, lose. E ach o f these cases has equivalent odds, the combination of a single win and a single loss has an incidence twice as high because cases two and three, win-lose and lose-win, amount to the same outcome. And that is the key for the Gaussian. So much in the middle washes out—and we will see that there is a lot in the middle. So, if you are playing for $1 a round, after two r ounds y ou have a 2 5 percent chance of making or losing $ 2 , but a 5 0 p ercent chance of breaking even. L et us do another round. The third flip again doubles the number of c ases, so we face eight possible outcomes. Case 1 (it was win, win in the s econd flip) branches out into win, win, win and win, win, lose. We add a win or lose to the end of each of the previous results. Case 2 branches out into win, lose, win and win, lose, lose. Case 3 branches out into lose, win, win and lose, win, lose. Case 4 branches out into lose, lose, win and lose, l ose, l ose. W e n ow have eight cases, all equally likely. Note that again you can group the middling outcomes where a win cancels out a loss. (In Galton's quincunx, situations where the ball falls left and then falls right, or vice THE BELL CURVE, THAT GREAT INTELLECTUAL FRAUD 247 v ersa, dominate so you end up with plenty in the middle.) The net, or cumulative, is the following: 1) three wins; 2 ) two wins, one loss, net one win; 3 ) two wins, one loss, net one win; 4 ) one win, two losses, net one loss; 5) two wins, one loss, net one win; 6 ) two losses, one win, net one loss; 7) t wo losses, o ne win, net one loss; a nd, finally, 8) three losses. O ut of the eight cases, the case of three wins occurs once. The case of three losses occurs once. The case of one net loss (one win, two losses) oc­ curs three times. The case of one net win (one loss, two wins) occurs three times. Play o ne more r ound, t he fourth. There will be sixteen equally likely outcomes. You will have one case of four wins, one case of four losses, four cases of two wins, four cases of two losses, and six break-even cases. T he q uincunx (its name is derived from the Latin for five) in the pinball e xample shows the fifth r ound, w ith sixty-four possibilities, easy to track. Such was the concept behind the quincunx used by Francis Galton. Galton was both insufficiently lazy and a bit too innocent of mathematics; instead of building the contraption, he could have worked with simpler algebra, or perhaps u ndertaken a thought experiment like this one. Let's keep playing. Continue until you have forty flips. You can per­ form them in minutes, but we will need a calculator to work out the num­ ber of outcomes, which are taxing to our simple thought method. You will have about 1 ,099,511,627,776 p ossible combinations—more t han o ne thousand billion. Don't bother doing the calculation manually, it is two multiplied by i tself forty times, since each branch doubles at every junc­ ture. ( Recall t hat we added a w in and a lose at the end of the alternatives o f the third r ound t o go to the fourth r ound, t hus d oubling the number of alternatives.) Of these combinations, only one will be up forty, and only one will be down forty. The rest will hover around the middle, here zero. We c an already see that in this type of randomness extremes are ex­ ceedingly rare. One in 1 ,099,511,627,776 is up forty out of forty tosses. I f you perform the exercise of forty flips once per hour, the odds o f getting 4 0 ups in a row are so small that it would take quite a bit of forty-flip tri­ als to see it. Assuming you take a few breaks to eat, argue with your friends and roommates, have a beer, and sleep, you can expect to wait c lose t o four million lifetimes to get a 40-up outcome (or a 40-down out­ come) j ust once. And consider the following. Assume you play one addi­ tional r ound, f or a total of 4 1 ; t o get 4 1 straight heads would take eight million lifetimes! Going from 4 0 to 4 1 halves the odds. This is a key at- 248 THOSE GRAY SWANS OF EXTREMISTAN F IGURE 9 : N UMBERS OF W INS T OSSED Result of forty tosses. We see the proto-bell curve emerging. t ribute of the nonscalable framework to analyzing randomness: extreme deviations decrease at an increasing rate. You can expect to toss 5 0 heads in a row once in four billion lifetimes! W e a re not yet fully in a Gaussian bell curve, but we are getting dan­ gerously c lose. T his is still proto-Gaussian, but you can see the gist. (Actu­ ally, y ou will never encounter a Gaussian in its purity since it is a Platonic form—you just get closer but cannot attain it.) However, as you can see in Figure 9, the familiar bell shape is starting to emerge. How do we get even closer to the perfect Gaussian bell curve? By refin­ ing the flipping process. We can either flip 4 0 times for $1 a flip or 4 , 0 0 0 t imes for ten cents a flip, and add up the results. Your expected risk is a bout the same in both situations—and that is a trick. The equivalence in the two sets of flips has a little nonintuitive hitch. We multiplied the number of bets by 1 0 0 , but divided the bet size by 10—don't look for a reason now, just assume that they are "equivalent." The overall risk is equivalent, but now we have opened up the possibility of winning or l os­ ing 4 0 0 times in a row. The odds a re about one in 1 with 1 2 0 zeroes after i t, t hat is, one in 1 , 0 0 0 , 0 0 0 , 0 0 0 , 0 0 0 , 0 0 0 , 0 0 0 , 0 0 0 , 0 0 0 , 0 0 0 , 0 0 0 , 0 0 0 , 0 0 0 , 000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000, 0 0 0 , 0 0 0 , 0 0 0 , 0 0 0 , 0 0 0 , 0 0 0 , 0 0 0 , 0 0 0 , 0 0 0 , 0 0 0 , 0 0 0 , 0 0 0 t imes. Continue the process for a while. We go from 4 0 tosses for $1 each to 4 , 0 0 0 t osses for 10 cents, to 4 0 0 , 0 0 0 t osses for 1 cent, getting close and c loser t o a Gaussian. Figure 10 shows results spread between -40 and 4 0 , namely eighty plot points. The next one would bring that up to 8 ,000 p oints. THE BELL CURVE, THAT GREAT INTELLECTUAL FRAUD 249 FIGURE 10: A MORE A BSTRACT V ERSION: P LATO'S C URVE An infinite number of tosses. Let's k eep going. We can flip 4 , 0 0 0 t imes staking a tenth of a penny. How about 4 0 0 , 0 0 0 times at 1 /1000 o f a penny? As a Platonic form, the pure G aussian curve is principally what h appens w hen he have an infinity o f tosses per r ound, w ith each bet infinitesimally small. Do not bother try­ ing to visualize the results, or even make sense out of them. We can no longer t alk about an "infinitesimal" bet size (since we have an infinity of t hese, and we are in what mathematicians c all a c ontinuous framework). T he g ood news is that there is a substitute. We h ave moved from a simple bet to something completely abstract. We have moved from observations into the realm of mathematics. In mathematics things have a purity t o them. Now, something completely abstract is not supposed to exist, so please do not even make an attempt to understand Figure 10. J ust be aware of its use. T hink of it as a thermometer: you are not supposed to u nderstand w hat the temperature means in order to talk about it. You just need to know the correspondence between temperature and comfort (or some other empirical consideration). S ixty degrees corresponds to pleasant weather; ten below is not something to look forward to. You d on't n eces­ sarily c are about the actual speed of the collisions among particles that more technically explains temperature. Degrees are, in a way, a means for your mind to translate some external phenomena into a number. Likewise, the Gaussian bell curve is set so that 6 8 . 2 percent of the observations fall between minus one and plus o ne s tandard d eviations away from the aver­ age. I r epeat: do not even try to u nderstand w hether standard deviation is average deviation—it is not, and a large (too large) number of people 250 THOSE GRAY SWANS OF EXTREMISTAN using the word standard deviation d o not u nderstand this point. Standard deviation is just a number that you scale things to, a matter of mere corre­ spondence if phenomena were Gaussian. T hese s tandard d eviations are often nicknamed "sigma." People also t alk a bout "variance" (same thing: variance is the square of the sigma, i.e., o f t he s tandard d eviation). Note the symmetry in the curve. You get the same results whether the sigma is positive or negative. The odds o f falling below -4 sigmas are the same as those of exceeding 4 sigmas, here 1 in 3 2 , 0 0 0 t imes. As t he reader can see, the main point of the Gaussian bell curve is, as I have been saying, that most observations hover around the mediocre, the mean, while the odds o f a deviation decline faster and faster (exponen­ tially) as you move away from the mean. If you need to retain one single p iece o f information, just remember this dramatic speed of decrease in the o dds as you move away from the average. Outliers are increasingly un­ likely. Y ou can safely ignore them. T his p roperty also generates the supreme law of Mediocristan: given the paucity of large deviations, their contribution to the total will be vanishingly s mall. In t he height example earlier in this chapter, I used units of deviations o f t en centimeters, showing how the incidence declined as the height in­ creased. T hese were one sigma deviations; the height table also provides an example of the operation of "scaling to a sigma" by using the sigma as a unit of measurement. Those Comforting Assumptions N ote the central assumptions we made in the coin-flip game that led to the proto-Gaussian, or mild randomness. First central assumption: t he flips are independent of one another. The c oin h as no memory. The fact that you got heads or tails on the previous flip does not change the odds o f your getting heads or tails on the next o ne. Y ou do not become a "better" coin flipper over time. If you introduce memory, or skills in flipping, the entire Gaussian business becomes shaky. R ecall o ur discussions in Chapter 14 on preferential attachment and cumulative advantage. Both theories assert that winning today makes you more likely to win in the future. Therefore, probabilities are dependent on history, and the first central assumption leading to the Gaussian bell curve THE BELL CURVE, THAT GREAT INTELLECTUAL FRAUD 251 fails in reality. In games, of course, past winnings are not supposed to translate into an increased probability of future gains—but not so in real life, which is why I worry about teaching probability from games. But when winning leads to more winning, you are far more likely t o see forty wins in a row than with a proto-Gaussian. Second central assumption: n o "wild" j ump. The step size in the build­ ing block of the basic random walk is always known, namely one step. There is no uncertainty as to the size o f the step. We did not encounter sit­ uations in which the move varied wildly. Remember t hat if either of these two central assumptions is not met, your moves (or coin tosses) will n ot cumulatively lead to the bell curve. Depending on what happens, they can lead to the wild M andelbrotianstyle scale-invariant randomness. "The Ubiquity of the Gaussian" One of the problems I face in life is that whenever I tell people that the Gaussian bell curve is not ubiquitous in real life, only in the minds of sta­ tisticians, they require me to "prove it"—which is easy to do, as we will see in the next two chapters, yet nobody has managed to prove the oppo­ site. Whenever I suggest a process that is not Gaussian, I am asked to jus­ tify my suggestion and to, beyond the phenomena, "give them the theory behind it." We saw in Chapter 14 the rich-get-richer models that were proposed in order to justify not using a Gaussian. Modelers were forced to spend their time writing theories on possible Jnodels that generate the scalable—as if they needed to be apologetic about it. Theory shmeory! I have an epistemological problem with that, with the need to justify the world's failure to resemble an idealized model that someone blind to r eal­ ity has managed to promote. My technique, instead of studying the possible models generating non-bell curve randomness, hence making the same e rrors o f blind theo­ rizing, is to do the opposite: to know the bell curve as intimately as I can and identify where it can and cannot hold. I know where Mediocristan is. To me it is frequently (nay, almost always) the users of the bell curve who do not understand it well, and have to justify it, and not the opposite. This ubiquity of the Gaussian is not a property of the world, but a problem in our minds, stemming from the way we look at it. 252 THOSE GRAY SWANS OF EXTREMISTAN T he n ext chapter will address the scale invariance of n ature and address the properties of the fractal. The chapter after that will probe the misuse o f t he Gaussian in socioeconomic life a nd "the need to produce theories." I s ometimes get a little emotional because I've spent a large p art o f my life t hinking about this problem. S ince I s tarted thinking about it, and con­ ducting a variety of thought experiments as I have above, I have not for the life o f me been able to find anyone around me in the business and sta­ tistical w orld who was intellectually consistent in that he both accepted the B lack S wan and rejected the Gaussian and Gaussian tools. Many peo­ ple accepted my B lack S wan idea but could not take it to its logical con­ clusion, w hich is that you cannot use one single measure for randomness c alled s tandard d eviation (and c all it " risk"); y ou cannot expect a simple a nswer to characterize uncertainty. To go the extra step requires courage, commitment, an ability to connect the dots, a desire to understand r an­ domness fully. It also means not accepting other people's wisdom as g ospel. T hen I started finding physicists who had rejected the Gaussian t ools b ut fell for another sin: gullibility about precise predictive models, m ostly e laborations around the preferential attachment of Chapter 1 4 — another form of P latonicity. I c ould not find anyone with depth and scien­ tific t echnique who looked at the world of randomness and understood its nature, who looked at calculations as an aid, not a principal aim. It took me close to a decade and a h alf t o find that thinker, the man who made many swans gray: Mandelbrot—the great Benoît Mandelbrot. THE A ESTHETICS OF R ANDOMNESS Mandelbrot's library—Was Galileo blind?—Pearls to swine—Self-affinity—How the world can be complicated in a simple way, or, perhaps, simple in a very complicated way T HE P OET O F R ANDOMNESS It was a melancholic afternoon when I smelled the old books in B enoît M andelbrot's library. This was on a hot day in August 2 0 0 5 , a nd the heat e xacerbated the musty odor of the glue of old French books bringing on powerful olfactory nostalgia. I usually succeed in repressing such nostalgic e xcursions, b ut not when they sneak up on me as music or smell. The odor o f M andelbrot's books was that of French literature, of my parents' li­ brary, of the h ours spent in bookstores and libraries when I was a teenager when many books a round m e were ( alas) in French, when I thought that Literature was above anything and everything. (I haven't been in contact with many French books since my teenage days.) However abstract I wanted it to be, Literature had a physical embodiment, it had a smell, and this was it. T he a fternoon was also gloomy because Mandelbrot was moving away, exactly when I had become entitled to c all h im at crazy h ours j ust b ecause I h ad a question, such as why people d idn't r ealize that the 8 0/20 254 THOSE GRAY SWANS OF EXTREMISTAN c ould b e 5 0 / 0 1 . M andelbrot had decided to move to the B oston a rea, not to retire, but to work for a research center sponsored by a national laboratory. S ince he was moving to an apartment in Cambridge, and leaving his oversize house in the Westchester suburbs of New Y ork, he had invited me to come take my pick of his books. E ven t he titles of the books had a nostalgic ring. I filled up a box with F rench t itles, such as a 1 9 4 9 copy of Henri Bergson's Matière et mémoire, w hich it seemed Mandelbrot bought when he was a student (the s mell!). After h aving mentioned his name left a nd right throughout this book, I w ill finally introduce Mandelbrot, principally as the first person with an a cademic t itle with whom I ever spoke about randomness without feeling defrauded. Other mathematicians of probability would throw at me theorems with Russian names such as " Sobolev," " Kolmogorov," Wiener measure, without which they were lost; they had a h ard t ime getting to the heart of the subject or exiting their little box long enough to consider its e mpirical flaws. With Mandelbrot, it was different: it was as if we both originated from the same country, meeting after years of frustrating e xile, a nd were finally able to speak in our mother tongue without straining. He is t he only flesh-and-bones teacher I ever had—my teachers are usually b ooks in my library. I had way too little respect for mathematicians dealing with uncertainty and statistics to consider any of them my teachers— in my mind mathematicians, trained for certainties, had no business dealing with randomness. Mandelbrot proved me wrong. He speaks an unusually precise and formal French, much like that spoken by Levantines of my parents' generation or Old World aristocrats. T his m ade it odd to hear, on occasion, his accented, but very s tandard, c olloquial A merican English. He is tall, overweight, which makes him look b aby-faced ( although I've never seen him eat a large m eal), and has a strong physical presence. F rom t he outside one would think that what Mandelbrot and I have in c ommon is wild uncertainty, B lack S wans, and dull (and sometimes less dull) statistical notions. But, although we are collaborators, this is not what our major conversations revolve a round. It is mostly matters literary and aesthetic, or historical gossip about people of extraordinary intellectual refinement. I mean refinement, not achievement. Mandelbrot could tell s tories about the phenomenal array of hotshots he has worked with o ver t he past century, but somehow I am programmed to consider scientists' p ersonae far less interesting t han t hose of colorful erudites. L ike m e, Mandelbrot takes an interest in urbane individuals who combine traits THE AESTHETICS OF RANDOMNESS 2 5 5 generally thought not to coexist together. One person he often mentions is B aron Pierre Jean de Menasce, whom he met at Princeton in the 1 950s, w here de Menasce was the roommate of the physicist Oppenheimer. De M enasce w as exactly the kind of person I am interested in, the embodi­ ment of a B lack S wan. He came from an opulent Alexandrian Jewish mer­ chant family, French and Italian-speaking like all sophisticated Levantines. His forebears had taken a Venetian spelling for their Arabic name, added a H ungarian noble title along the way, and socialized with royalty. De M enasce n ot only converted to Christianity, but became a Dominican priest and a great scholar of Semitic and Persian languages. Mandelbrot kept questioning me about Alexandria, since he was always looking for such characters. T rue, i ntellectually sophisticated characters were exactly what I looked for in life. M y erudite and polymathic father—who, were he still alive, would have only been two weeks older t han B enoît M.—liked the com­ pany of extremely cultured Jesuit priests. I remember these Jesuit visitors occupying my chair at the dining table. I recall that one had a medical de­ gree and a PhD in physics, yet t aught A ramaic to locals in Beirut's Institute o f E astern Languages. His previous assignment could have been teaching high school physics, and the one before that was p erhaps in the medical s chool. T his kind of erudition impressed my father far more t han scientific assembly-line work. I may have something in my genes driving me away from bildungsphilisters. A lthough Mandelbrot often expressed amazement at the temperament o f high-flying erudites and remarkable but not-so-famous scientists, such as his old friend Carleton Gajdusek, a man who impressed him with his ability t o uncover the causes of tropical diseases, he did not seem eager to t rumpet his association with those we consider great scientists. It took me a while to discover that he had worked with an impressive list of scientists in seemingly every field, something a name-dropper would have brought up continuously. Although I have been working with him for a few years now, only the other day, as I was chatting with his wife, did I discover that he spent two years as the mathematical collaborator of the psychologist J ean P iaget. Another shock came when I discovered that he had also worked with the great historian Fernand Braudel, but Mandelbrot did not seem t o be interested in Braudel. He did not care to discuss John von Neuman with whom he had worked as a postdoctoral fellow. His scale was in­ verted. I asked him once about Charles Tresser, an unknown physicist I met at a party who wrote p apers o n chaos theory and supplemented his re- 256 THOSE GRAY SWANS OF EXTREMISTAN s earcher's income by making pastry for a shop he ran near New Y ork City. He was emphatic: "un homme extraordinaire," he called Tresser, and could not stop praising him. But when I asked him about a particular famous hotshot, he replied, "He is the prototypical bon élève, a student w ith good grades, no depth, a nd no vision." That hotshot was a Nobel laureate. T HE P LATONICITY O F T RIANGLES N ow, why am I calling this business Mandelbrotian, or fractal, randomness? E very single bit and piece of the puzzle has been previously mentioned by someone e lse, such as Pareto, Y ule, a nd Zipf, but it was Mandelbrot who a) connected the dots, b) linked randomness to geometry (and a special brand at that), and c) took the subject to its natural conclusion. Indeed many mathematicians are famous today partly because he dug out their works to back up his claims—the strategy I am following here in this book. "I had to invent my predecessors, so people take me seriously," he once told me, and he used the credibility of big guns as a rhetorical device. One can almost always ferret out predecessors for any thought. You can always find someone who worked on a p art o f your argument and use his contribution as your backup. The scientific association with a big idea, the "brand name," goes to the one who connects the dots, not the one who makes a casual observation—even Charles Darwin, who uncultured scientists claim "invented" the survival of the fittest, was not the first to mention it. He wrote in the introduction of The Origin of Species t hat the facts he presented were not necessarily original; it was the consequences that he thought were "interesting" (as he put it with characteristic V ictorian modesty). In the end it is those who derive consequences and seize the importance of the ideas, seeing their real value, who win the day. They are the ones who can talk about the subject. S o let me describe Mandelbrotian geometry. The Geometry of Nature T riangles, s quares, c ircles, a nd the other geometric concepts that made many of us yawn in the classroom may be beautiful and pure n otions, but they seem more present in the minds of architects, design artists, modern art buildings, and schoolteachers t han in n ature itself. That's fine, except that most of us aren't aware of this. Mountains are not triangles or pyra- THE AESTHETICS OF R A N D O M N E S S 2 5 7 mids; trees are not c ircles; s traight lines are almost never seen anywhere. M other N ature did not attend high school geometry courses or read the b ooks o f Euclid of Alexandria. Her geometry is jagged, but with a logic of its o wn and one that is easy to u nderstand. I have said that we seem naturally inclined to Platonify, and to think exclusively in terms of studied material: nobody, whether a bricklayer or a natural philosopher, can easily escape the enslavement of such condition­ ing. C onsider that the great Galileo, otherwise a debunker of falsehoods, wrote the following: The great book of Nature lies ever open before our eyes and the true philosophy is written in it. . . . But we cannot read it unless we have first learned the language and the characters in which it is written. . . . It is written in mathematical language and the characters are triangles, circles and other geometric figures. Was G alileo legally blind? Even the great Galileo, with all his alleged independence of mind, was not capable of taking a clean look at Mother Nature. I am confident that he had windows in his house and that he ven­ tured outside from time to time: he should have known that triangles are not easily found in nature. We are so easily brainwashed. We are either blind, or illiterate, or both. That nature's geometry is not Euclid's w as so obvious, and nobody, almost nobody, saw it. T his (physical) blindness is identical to the ludic fallacy that makes us think casinos represent randomness. Fractality But first, a description of fractals. Then we will show how they link to what we c all p ower laws, or scalable laws. Fractal is a word Mandelbrot coined to describe the geometry of the rough and broken—from the Latin fractus, t he origin of fractured. Frac­ tality is the repetition of geometric patterns at different scales, revealing smaller and smaller versions of themselves. Small p arts r esemble, to some degree, the whole. I will try to show in this chapter how the fractal applies to the brand of uncertainty that should bear Mandelbrot's name: Mandel­ brotian randomness. T he veins in leaves look like branches; branches look like trees; rocks 258 THOSE GRAY SWANS OF EXTREMISTAN l ook l ike small mountains. There is no qualitative change when an o bject c hanges size. If you look at the coast of Britain from an airplane, it resem­ bles w hat you see when you look at it with a magnifying glass. This char­ acter o f self-affinity implies that one deceptively short and simple rule of iteration can be used, either by a computer or, more randomly, by Mother Nature, to build shapes of seemingly great complexity. This can come in h andy f or computer graphics, but, more important, it is how n ature w orks. Mandelbrot designed the mathematical o bject n ow known as the Mandelbrot set, the most famous o bject in the history of mathematics. It b ecame p opular with followers of chaos theory because it generates pic­ tures of ever increasing complexity by using a deceptively minuscule recur­ sive r ule; recursive m eans that something can be reapplied to itself infinitely. Y ou can look at the set at smaller and smaller resolutions with­ out ever r eaching the limit; you will continue to see recognizable shapes. T he shapes are never the same, yet they bear an affinity to one another, a strong family resemblance. T hese o bjects play a role in aesthetics. Consider the following applica­ tions: Visual arts: M ost computer-generated objects are now based on some version of the Mandelbrotian fractal. We can also see fractals in architec­ ture, paintings, and many works of visual a rt—of c ourse, not consciously incorporated by the work's creator. Music: S lowly hum the four-note opening of Beethoven's Fifth Sym­ phony: ta-ta-ta-ta. T hen replace each individual note with the same fournote opening, so that you end up with a measure of sixteen notes. You will see (or, rather, hear) that each smaller wave resembles the original larger o ne. B ach a nd Mahler, for instance, wrote submovements that resemble the larger movements of which they are a p art. Poetry: E mily Dickinson's poetry, for instance, is fractal: the large re­ sembles t he small. It has, according to a commentator, "a consciously made assemblage of dictions, metres, rhetorics, gestures, and tones." F ractals i nitially made Benoît M . a pariah in the mathematical estab­ lishment. French mathematicians were horrified. What? Images? Mon dieu! I t was like showing a porno movie to an assembly of devout Eastern Orthodox grandmothers in my ancestral village of Amioun. So Mandel­ brot spent time as an intellectual refugee at an I B M research center in upstate New Y ork. It was a f * * * you money s ituation, as IBM let him do whatever he felt like doing. THE AESTHETICS OF RANDOMNESS 2 5 9 B ut t he general public (mostly computer geeks) got the point. Mandelbrot's book The Fractal Geometry of Nature m ade a splash when it came out a quarter century ago. It spread t hrough a rtistic c ircles a nd led to studies in aesthetics, architectural design, even large industrial applications. B enoît M . was even offered a position as a professor of m edicine! S upposedly the lungs are self-similar. His talks were invaded by all sorts of artists, earning him the nickname the R ock S tar of Mathematics. The computer age helped him become one of the most influential mathematicians in history, in terms of the applications of his work, way before his acceptance by the ivory tower. We will see that, in addition to its universality, his work offers an unusual a ttribute: it is remarkably easy to u nderstand. A few w ords o n his biography. Mandelbrot came to France from Warsaw in 1 936, at the age of twelve. Owing to the vicissitudes of a clandestine life during N azi-occupied France, he was spared some of the conventional G allic e ducation with its uninspiring algebraic drills, becoming largely self-taught. He was later deeply influenced by his uncle Szolem, a prominent member of the French mathematical establishment and holder of a c hair at the Collège de France. Benoît M . later settled in the United States, working most of his life as an industrial scientist, with a few transitory and varied academic appointments. T he c omputer played two roles in the new science Mandelbrot helped c onceive. F irst, fractal o bjects, as we have seen, can be generated with a simple rule applied to itself, which makes them ideal for the automatic activity o f a computer (or Mother Nature). Second, in the generation of visual intuitions lies a dialectic between the mathematician and the objects generated. Now let us see how this takes us to randomness. In fact, it is with probability t hat Mandelbrot started his career. A Visual Approach to Extremistan/Mediocristan I a m looking at the rug in my study. I f I examine it with a microscope, I will see a very rugged terrain. If I look at it with a magnifying glass, the terrain will be smoother but still highly uneven. But when I look at it from a standing position, it appears uniform—it is almost as smooth as a sheet o f paper. The rug at eye level corresponds to Mediocristan and the law of large n umbers: I am seeing the sum of undulations, and these iron out. T his is like Gaussian randomness: the reason my cup of coffee does not 260 THOSE GRAY SWANS OF EXTREMISTAN j ump is that the sum of all of its moving particles becomes smooth. L ike­ wise, y ou reach certainties by a dding up small Gaussian uncertainties: this is t he law of large numbers. T he G aussian is not self-similar, and that is why my coffee cup does not jump on my desk. Now, consider a t rip up a mountain. No matter how high you go on the surface of the earth, it will remain jagged. This is even t rue a t a height o f 3 0 , 0 0 0 feet. When you are flying above the Alps, you will still see j agged m ountains in place of small stones. So some surfaces are not from Mediocristan, and changing the resolution does not make them much smoother. (Note that this effect o nly disappears when you go up to more extreme heights. Our planet looks smooth to an observer from space, but this is because it is too small. If it were a bigger planet, then it would have mountains that would dwarf the Himalayas, and it would require obser­ vation from a greater distance for it to look smooth. Likewise, if the planet had a larger population, even maintaining the same average wealth, we would be likely to find someone whose net worth would vastly surpass that of Bill G ates.) Figures 11 and 12 illustrate the above point: an observer looking at the first picture might think that a lens cap has fallen on the ground. R ecall o ur b rief d iscussion of the coast of B ritain. I f you look at it from an airplane, its contours are not so different from the contours you see on the shore. The change in scaling does not alter the shapes or their degree o f s moothness. Pearls to Swine W hat does fractal geometry have to do with the distribution of wealth, the size o f c ities, r eturns in the financial markets, the number of casualties in war, or the size of planets? Let us connect the dots. T he k ey here is that the fractal has numerical or statistical measures that are (somewhat) preserved across scales—the ratio is the same, unlike the Gaussian. Another view of such self-similarity is presented in Figure 13. As w e saw in Chapter 1 5 , the superrich are similar to the rich, only richer—wealth is scale independent, or, more precisely, of unknown scale dependence. I n t he 1 960s M andelbrot presented his ideas on the prices of com­ modities and financial securities to the economics establishment, and the financial e conomists g ot all excited. In 1 9 6 3 the then dean of the Uni ver- THE A E S T H E T I C S OF R A N D O M N E S S 2 6 1 FIGURE 11 : Apparently, a lens cap has been dropped on the ground. Now turn the page. sity o f Chicago Graduate S chool o f B usiness, G eorge Shultz, offered him a professorship. This is the same George Shultz who later became Ronald R eagan's s ecretary of state. Shultz c alled him one evening to rescind the offer. At the time of writing, forty-four years later, nothing has happened in e conomics and social science statistics—except for some cosmetic fiddling that treats the world as if we were subject only to mild randomness—and yet N obel medals were being distributed. Some papers were written offer­ ing "evidence" that Mandelbrot was wrong by people who do not get the central argument of this book—you can always produce data "corroborat­ ing" t hat the underlying process is Gaussian by finding periods that do not have rare events, just like you can find an afternoon during w hich no one killed anyone and use it as "evidence" of honest behavior. I will repeat that, because o f the asymmetry with induction, just as it is easier to r eject i nno­ cence t han accept it, it is easier to r eject a bell curve than accept it; con­ versely, it is more difficult to reject a fractal than to accept it. Why? Because a single event can destroy the argument that we face a G aussian bell curve. In sum, four decades ago, Mandelbrot gave pearls to economists and résumé-building philistines, which they rejected because the ideas were 2 62 T H O S E GRAY S W A N S OF E X T R E M I S T A N F IGURE 12: The object is not in fact a lens cap. These two photos illustrate scale in­ variance: the terrain is fractal. Compare it to man-made objects such as a car or a house. Source: Professor Stephen W. Wheatcraft, University of Nevada, Reno. t oo good for them. It was, as the saying goes, margaritas p earls before swine. ante porcos, In t he rest of this chapter I will explain how I can endorse Mandelbrot­ ian fractals as a representation of much of randomness without necessar­ ily a ccepting their precise use. Fractals should be the default, the approximation, the framework. They do not solve the B lack Swan prob­ lem a nd do not t urn all B lack S wans into predictable events, but they sig­ nificantly m itigate the B lack S wan problem by making such large events c onceivable. (It makes them gray. Why gray? Because only the Gaussian give y ou certainties. More on that, later.) T HE L OGIC O F F RACTAL R ANDOMNESS ( WITH A W ARNING)* I h ave shown in the wealth lists in Chapter 15 the logic of a fractal distri­ bution: if wealth doubles from 1 million to 2 million, the incidence of peo* T he nontechnical reader c an skip from here until the end of the chapter. THE AESTHETICS OF RANDOMNESS 2 63 FIGURE 13: THE PURE FRACTAL S TATISTICAL M OUNTAIN The degree of inequality will be the same in all sixteen subsections of the graph. In the Gaussian world, disparities in wealth (or any other quantity) decrease when you look at the upper end—so billionaires should be more equal in relation to one an­ other than millionaires are, and millionaires more equal in relation to one another than the middle class. This lack of equality at all wealth levels, in a nutshell, is statisti­ cal self-similarity. pie with at least that much money is cut in four, which is an exponent o f t wo. If the exponent were one, then the incidence of that wealth or more would be cut in two. The exponent is called the "power" (which is why some people use the term power law). L et us c all t he number of oc­ currences higher than a certain level an "exceedance"—an exceedance of two million is the number of persons with wealth more than two million. O ne main property of these fractals (or another way to express their main property, scalability) is that the ratio of two exceedances* is going to be the ratio of the two numbers to the negative power of the power exponent. * By using symmetry we could also examine the incidences below the number. 264 THOSE GRAY SWANS OF EXTREMISTAN T ABLE 2: A SSUMED E XPONENTS FOR VARIOUS P HENOMENA* Phenomenon Assumed Exponent (vague approximation) 1.2 1.4 1.5 1.22 2.8 2.14 0.8 0.8 1.1 1 Frequency of use of words Number of hits on websites Number of books sold in the U.S. Telephone calls received Magnitude of earthquakes Diameter of moon craters Intensity of solar flares Intensity of wars Net worth of Americans Number of persons per family name Population of U.S. cities Market moves Company size People killed in terrorist attacks 1.3 3 (or lower) 1.5 2 (but possibly a much lower exponent) * Source: M.E.J. Newman (2005) and the author's own calculations. L et us illustrate this. Say that you "think" that only 96 books a year will sell m ore t han 2 5 0 , 0 0 0 c opies (which is what happened last year), and that you "think" that the exponent is around 1.5. You can extrapolate to estimate that around 3 4 books will sell more t han 5 0 0 , 0 0 0 c opies— simply 9 6 times ( 5 0 0 , 0 0 0 / 2 5 0 , 0 0 0 ) . W e can continue, and note that around 8 books should sell more t han a m illion copies, here 9 6 times (l,000,000/250,000) . Let me show the different measured exponents for a variety of phenomena. L et m e tell you upfront that these exponents mean very little in terms o f n umerical precision. We will see why in a minute, but just note for now that we do not observe t hese parameters; we simply guess them, or infer them for statistical information, which makes it h ard a t times to know the 15 15 THE AESTHETICS OF RANDOMNESS 2 6 5 TABLE 3: T HE M EANING OF T HE E XPONENT Exponent 1 1.1 1.2 1.3 1.4 1.5 2 2.5 3 Share of the top 1% 99.99%* 66% 47% 34% 27% 22% 10% 6% 4.6% Share of the top 20% 99.99% 86% 76% 69% 63% 58% 45% 38% 34% * Clearly, you do not observe 100 percent In a finite sample. true p arameters—if it in f act e xists. L et us first examine the practical con­ sequences o f an exponent. T able 2 i llustrates the impact of the highly improbable. It shows the contributions of the top 1 percent and 2 0 percent to the total. The lower the exponent, the higher those contributions. But look how sensitive the process is: between 1.1 and 1.3 you go from 6 6 percent of the total to 3 4 p ercent. Just a 0.2 difference in the exponent changes the result dramatically—and such a difference can come from a simple measurement error. This difference is not trivial: just consider that we have no precise idea what the exponent is because we cannot measure it directly. All we do is e stimate from past data or rely on theories that allow for the building of some model that would give us some idea—but these models may have hidden w eaknesses that prevent us from blindly applying them to reality. S o keep in mind that the 1.5 exponent is an approximation, that it is h ard t o compute, that you do not get it from the gods, at least not easily, and that you will have a monstrous sampling error. You will observe that the number of books selling above a million copies is not always going to be 8—It could be as high as 2 0 , or as low as 2 . M ore significantly, this exponent begins to apply at some number c alled " crossover," and addresses numbers larger t han this crossover. It 266 THOSE GRAY SWANS OF EXTREMISTAN m ay start at 2 0 0 , 0 0 0 b ooks, or p erhaps o nly 4 0 0 , 0 0 0 b ooks. Likewise, wealth has different properties before, say, $ 6 0 0 m illion, when inequality grows, t han i t does below such a number. How do you know where the c rossover p oint is? This is a problem. My colleagues and I worked with around 2 0 million pieces of financial data. We all had the same data set, yet w e never agreed on exactly what the exponent was in our sets. We knew the data revealed a fractal power law, but we learned that one could not produce a precise number. But what we did know—that the distribu­ tion is scalable and fractal—was sufficient for us to operate and make de­ cisions. The Problem of the Upper Bound S ome p eople have researched and accepted the fractal "up to a point." T hey a rgue that wealth, book sales, and market r eturns all have a certain level w hen things stop being fractal. "Truncation" is what they propose. I agree that there is a level where fractality might s top, but where? Saying that there is an upper l imit but I don't know how high it is, a nd saying there is no limit c arry the same consequences in practice. Proposing an u pper l imit is highly unsafe. You may say, Let us cap wealth at $ 1 5 0 bil­ lion in our analyses. Then someone else might say, Why not $ 151 b illion? O r w hy not $ 1 5 2 billion? We might as well consider that the variable is unlimited. Beware the Precision I h ave learned a few tricks from experience: whichever exponent I try to measure will be likely to be overestimated (recall that a higher exponent implies a s maller role for large deviations)—what you see is likely to be less B lack S wannish t han w hat you do not see. I c all this the masquerade problem. L et's say I generate a process that has an exponent of 1.7. You do not see w hat is inside the engine, only the data coming out. If I ask you what the exponent is, o dds a re that you will compute something like 2 . 4 . You would do so even i f you had a million data points. The reason is that it takes a long time for some fractal processes to reveal their properties, and you underestimate the severity of the shock. S ometimes a f ractal can make you believe that it is Gaussian, particu­ larly w hen the cutpoint starts at a high number. With fractal distributions, THE AESTHETICS OF R A N D O M N E S S 2 6 7 e xtreme d eviations of that kind are rare enough to smoke you: you d on't recognize t he distribution as fractal. The Water Puddle Revisited As you have seen, we have trouble knowing the parameters of whichever model we assume runs t he world. So with Extremistan, the problem of induction p ops up again, this time even more significantly t han a t any previous time in this book. Simply, if a mechanism is fractal it can deliver large values; therefore the incidence of large deviations is possible, but how possible, how often they should occur, will be h ard t o know with any p recision. T his is similar to the water puddle p roblem: plenty of ice cubes c ould have generated it. As someone who goes from reality to possible ex­ planatory models, I face a c ompletely different • s pate of problems from those who do the opposite. I have just read three "popular s cience" b ooks that summarize the re­ search in complex systems: Mark Buchanan's Ubiquity, P hilip B all's Criti­ cal Mass, and Paul Ormerod's Why Most Things Fail. T hese three authors present the world of social science as full of power laws, a view with which I most certainly agree. They also claim that there is universality o f many of these phenomena, that there is a wonderful similarity between various processes in n ature a nd the behavior of social groups, which I agree with. They back their studies with the various theories on networks and show the wonderful correspondence between the so-called critical phenomena in natural science and the self-organization of social groups. T hey bring together processes that generate avalanches, social contagions, and what they c all i nformational cascades, which I agree with. Universality is one of the reasons physicists find power laws associated with critical points particularly interesting. There are many situations, both in dynamical systems theory and statistical mechanics, where many o f the properties of the dynamics around critical points are independent of the details of the underlying dynamical system. The exponent at the criti­ cal p oint may be the same for many systems in the same group, even though many other aspects of the system are different. I almost agree with this notion of universality. Finally, all three authors encourage us to apply techniques from statistical physics, avoiding econometrics and Gaussianstyle n onscalable distributions like the plague, and I couldn't agree more. B ut all three authors, by producing, or promoting precision, fall into the t rap o f not differentiating between the forward and the backward 268 T H O S E GRAY SWANS OF EXTREMISTAN p rocesses ( between the problem and the inverse problem)—to me, the greatest scientific a nd epistemological sin. They are not alone; nearly everyone who works with data but doesn't make decisions on the basis of these data tends to be guilty of the same sin, a variation of the narrative fallacy. I n the absence of a feedback process you look at models and think that they confirm reality. I believe in the ideas of these three books, but not in the way they are being used—and certainly not with the precision the authors ascribe to them. As a matter of f act, c omplexity theory should make us more s uspicious of scientific c laims of precise models of reality. It does not make all the swans white; that is predictable: it makes them gray, and only gray. As I h ave said earlier, the world, epistemologically, is literally a differ­ ent place to a bottom-up empiricist. We d on't have the luxury of sitting d own t o read the equation that governs the universe; we just observe data and make an assumption about what the real process might be, and " cal­ ibrate" b y adjusting our equation in accordance with additional informa­ tion. As events present themselves to us, we compare what we see to what we expected to see. It is usually a humbling process, particularly for some­ one aware of the narrative fallacy, t o discover that history runs f orward, not backward. As much as one thinks that businessmen have big egos, these people are often humbled by reminders of the differences between d ecision a nd results, between precise models and reality. W hat I a m talking about is opacity, incompleteness of information, the i nvisibility o f the generator of the world. History does not reveal its mind to us—we need to guess what's inside of it. From Representation to Reality T he a bove idea links all the p arts o f this book. While many study p sychol­ ogy, m athematics, or evolutionary theory and look for ways to take it to the bank by applying their ideas to business, I suggest the e xact o pposite: study t he intense, uncharted, humbling uncertainty in the markets as a means to get insights about the n ature o f randomness that is applicable to p sychology, p robability, mathematics, decision theory, and even statistical p hysics. Y ou will see the sneaky manifestations of the narrative fallacy, the ludic fallacy, a nd the great errors of Platonicity, of going from representa­ tion to reality. W hen I first met Mandelbrot I asked him why an established scientist THE AESTHETICS OF RANDOMNESS 2 6 9 like him who should have more valuable things to do with his life w ould take an interest in such a vulgar topic as finance. I thought that finance and economics were just a place where one learned from various empiri­ cal p henomena and filled up one's bank account with f* * * you c ash before leaving for bigger and better things. Mandelbrot's answer was, Data, a gold m ine of data." Indeed, everyone forgets that he started in economics before m oving on to physics and the geometry of nature. Working with such a bundant d ata humbles us; it provides the intuition of the following error: traveling the road between representation and reality in the wrong direction. T he p roblem of the circularity of statistics ( which we can also c all t he s tatistical regress argument) is as follows. Say you need past data to dis­ cover w hether a probability distribution is Gaussian, fractal, or something else. Y ou will need to establish whether you have enough data to back up your claim. How do we know if we have enough data? From the proba­ bility d istribution—a distribution does tell you whether you have enough data to "build confidence" about what you are inferring. If it is a Gauss­ ian bell curve, then a few points will suffice (the law of large numbers once a gain). And how do you know if the distribution is Gaussian? W ell, f rom the data. So we need the data to tell us what the probability distribution i s, and a probability distribution to tell us how much data we need. This causes a severe regress argument. T his regress does not occur if you assume beforehand t hat the distrib­ ution is Gaussian. It h appens t hat, for some reason, the Gaussian yields its properties rather easily. Extremistan distributions do not do so. So s elect­ ing the Gaussian while invoking some general law appears to be conve­ nient. The Gaussian is used as a default distribution for that very reason. As I keep repeating, assuming its application beforehand may work with a small number of fields such as crime statistics, mortality rates, matters from M ediocristan. But not for historical data of unknown attributes and not for matters from Extremistan. Now, why aren't statisticians who work with historical data aware of this problem? First, they do not like to hear that their entire business has been c anceled by the problem of induction. Second, they are not con­ fronted with the results of their predictions in rigorous ways. As we saw with the Makridakis competition, they are grounded in the narrative fal­ lacy, a nd they do not want to hear it. 11 270 THOSE GRAY SWANS OF EXTREMISTAN O NCE A GAIN, B EWARE THE FORECASTERS L et m e take the problem one step higher up. As I mentioned earlier, plenty o f f ashionable models attempt to explain the genesis of Extremistan. In f act, t hey are grouped into two broad classes, but there are occasionally more approaches. The first class includes the simple rich-get-richer (or bigget-bigger) style model that is used to explain the lumping of people around c ities, t he market domination of Microsoft and VHS (instead of Apple and B etamax), t he dynamics of academic reputations, etc. The sec­ ond class concerns what are generally called "percolation models," which address not the behavior of the individual, but rather the terrain in which he operates. When you p our w ater on a porous surface, the structure of that surface matters more t han does the liquid. When a grain of sand hits a pile of other grains of sand, how the terrain is organized is what deter­ mines whether there will be an avalanche. M ost m odels, of course, attempt to be precisely predictive, not just descriptive; I find this infuriating. They are nice tools for illustrating the genesis of Extremistan, but I insist that the "generator" of reality does not appear to obey them closely enough to make them helpful in precise fore­ casting. A t least to judge by anything you find in the current literature on the subject of Extremistan. Once again we face grave calibration prob­ lems, s o it would be a great idea to avoid the common mistakes made while calibrating a nonlinear process. R ecall t hat nonlinear processes have greater degrees of freedom t han l inear ones (as we saw in Chapter 11), with the implication that you run a great risk of using the wrong model. Y et o nce in a while you run into a book or articles advocating the applica­ tion of models from statistical physics to reality. Beautiful books like Philip B all's i llustrate and inform, but they should not lead to precise quantita­ tive models. Do not take them at face v alue. B ut let us see what we can t ake home from these models. Once Again, a Happy Solution F irst, in assuming a scalable, I accept that an arbitrarily large number is p ossible. In other words, inequalities should not stop above some known m aximum bound. Say t hat the book The Da Vinci Code sold around 6 0 million copies. ( The B ible sold about a billion copies but let's ignore it and limit our analysis to lay books written by individual authors.) Although we have THE AESTHETICS OF R A N D O M N E S S 2 7 1 never known a lay book to sell 2 0 0 million copies, we can consider that the possibility is not zero. It's small, but it's not zero. For every three Da Vinci C ode-style bestsellers, there might be one superbestseller, and though one has not happened so far, we cannot rule it out. And for every fifteen Da Vinci Codes t here will be one superbestseller selling, say, 5 0 0 million c opies. Apply the same logic to wealth. Say the richest person on earth is worth $ 5 0 billion. There is a nonnegligible probability that next year s omeone w ith $ 1 0 0 billion or more will pop out of nowhere. For every three people with more t han $ 5 0 billion, there could be one with $ 1 0 0 b il­ lion o r more. There is a much smaller probability of there being someone with more t han $ 2 0 0 b illion—one third of the previous probability, but nevertheless not zero. There is even a minute, but not zero probability of there being someone worth more t han $ 5 0 0 b illion. T his tells me the following: I can make inferences about things that I do not see in my data, but these things should still belong to the realm of p ossibilities. T here is an invisible bestseller out there, one that is absent from the past data but that you need to account for. R ecall m y point in Chapter 13: it makes investment in a book or a drug b etter t han s tatistics on past data might suggest. But it can make stock market losses worse t han w hat the past shows. W ars a re fractal in nature. A war that kills more people t han t he dev­ astating Second World War is possible—not likely, but not a zero proba­ bility, a lthough such a war has never happened in the past. S econd, I will introduce an illustration from n ature t hat will help to make the point about precision. A mountain is somewhat similar to a s tone: it has an affinity with a stone, a family resemblance, but it is not i dentical. T he word to describe such resemblances is self-affine, n ot the precise self-similar, b ut Mandelbrot had trouble communicating the no­ tion of affinity, and the term self-similar spread with its connotation of precise r esemblance rather t han family resemblance. As with the mountain and the stone, the distribution of wealth above $1 billion is not exactly the same as that below $1 billion, but the two distributions have "affinity." T hird, I said earlier that there have been plenty of p apers in the world o f e conophysics (the application of statistical physics to social and e co­ nomic p henomena) aiming at such calibration, at pulling numbers from the world of phenomena. Many try to be predictive. Alas, we are not able to predict "transitions" into crises or contagions. M y friend Didier S or­ nette attempts to build predictive models, which I love, except that I can- 272 THOSE GRAY SWANS OF EXTREMISTAN n ot use them to make predictions—but please d on't tell him; he might stop building them. That I can't use them as he intends does not invalidate his work, it just makes the interpretations require broad-minded thinking, un­ like m odels in conventional economics that are fundamentally flawed. We may be able to do well with some of Sornette's phenomena, but not all. W HERE I S T HE G RAY SWAN? I h ave written this entire book about the B lack S wan. This is not because I a m in love with the B lack S wan; as a humanist, I hate it. I hate most of the unfairness and damage it causes. Thus I would like to eliminate many B lack S wans, or at least to mitigate their effects and be protected from them. Fractal randomness is a way to reduce these surprises, to make some o f t he swans appear possible, so to speak, to make us aware of their con­ sequences, t o make them gray. But fractal randomness does not yield pre­ cise answers. T he benefits are as follows. If you know that the stock market can c rash, as it did in 1 9 8 7 , then such an event is not a B lack S wan. T he crash of 1 9 8 7 is not an outlier if you use a fractal with an ex­ ponent of three. If you know that biotech companies can deliver a m egablockbuster drug, bigger t han all we've had so far, then it won't be a B lack S wan, and you will not be surprised, should that drug appear. Thus Mandelbrot's fractals allow us to account for a few B lack S wans, but not all. I said earlier that some B lack S wans arise because we ignore s ources o f randomness. Others arise when we overestimate the fractal ex­ ponent. A gray swan concerns modelable extreme events, a black swan is about unknown unknowns. I s at d own a nd discussed this with the great man, and it became, as usual, a linguistic game. In Chapter 9 I presented the distinction econo­ mists make between Knightian uncertainty (incomputable) and Knightian r isk ( computable); this distinction cannot be so original an idea to be ab­ sent in our vocabulary, and so we looked for it in French. Mandelbrot mentioned one of his friends and prototypical heroes, the aristocratic mathematician Marcel-Paul Schiitzenberger, a fine erudite who (like this author) was easily bored and could not work on problems beyond their point of diminishing returns. Schiitzenberger insisted on the clear-cut dis­ tinction in the French language between hasard a nd fortuit. Hasard, from the Arabic az-zahr, i mplies, like alea, d ice—tractable randomness; fortuit is m y B lack S wan—the purely accidental and unforeseen. We went to the Petit Robert d ictionary; the distinction effectively exists there. Fortuit THE AESTHETICS OF RANDOMNESS 2 7 3 seems t o correspond to my epistemic opacity, l'imprévu et non quantifi­ able; hasard t o the more ludic type of uncertainty that was proposed by the Chevalier de Méré in the early gambling literature. Remarkably, the Arabs may have introduced another word to the business of uncertainty: rizk, m eaning property. I r epeat: Mandelbrot deals with gray swans; I deal with the B lack S wan. S o Mandelbrot domesticated many of my B lack S wans, but not all o f t hem, not completely. But he shows us a glimmer of hope with his method, a way to start thinking about the problems of uncertainty. You are indeed much safer if you know where the wild animals are. Chapter Seventeen L OCKE'S M ADMEN, OR BELL C URVES IN THE W RONG P LACES* What?—Anyone can become president—Alfred Nobel's legacy—Those medieval days I h ave in my house two studies: one real, with interesting books and liter­ ary material; the other nonliterary, where I do not enjoy working, where I relegate matters prosaic and narrowly focused. In the nonliterary study is a w all full of books on statistics and the history of statistics, books I never had the fortitude to b urn o r throw away; though I find them largely useless outside of their academic applications (Carneades, Cicero, and F oucher k now a lot more about probability t han all these pseudosophisticated volumes). I cannot use them in class because I promised myself never to teach trash, even if dying of starvation. Why can't I use them? Not one o f t hese books deals with Extremistan. Not one. The few books that do are not by statisticians but by statistical physicists. We are teaching people methods from Mediocristan and t urning t hem loose in Extremistan. It is like d eveloping a medicine for plants and applying it to humans. It is no wonder that we run the biggest risk of all: we handle matters that belong * This is a simple illustration of the general point of this book in finance and eco­ nomics. If you do not believe in applying the bell curve t o social variables, and if, like many professionals, you are already convinced that "modern" financial theory is dangerous junk science, you can safely skip this chapter. L O C K E ' S M A D M E N , O R B E L L C U R V E S IN T H E W R O N G P L A C E S 2 7 5 to Extremistan, but treated as if they belonged "approximation." to Mediocristan, as an Several hundred t housand students in business schools and social s ci­ ence d epartments from Singapore to Urbana-Champaign, as well as peo­ ple in the business world, continue to study " scientific" methods, all grounded in the Gaussian, all embedded in the ludic fallacy. T his c hapter examines disasters stemming from the application of phony mathematics to social s cience. T he real topic might be the dangers to our society brought about by the Swedish academy that a wards t he N obel Prize. Only Fifty Years Let us return t o the story of my business life. L ook at the g raph in F ig­ ure 14. In the last fifty years, the ten most extreme days in the financial markets represent h alf t he returns. Ten days in fifty years. Meanwhile, we are mired in chitchat. Clearly, a nyone who wants more t han t he high number of six sigma as p roof t hat markets are from Extremistan needs to have his head exam­ ined. Dozens of p apers s how the inadequacy of the Gaussian family of dis­ tributions and the scalable n ature o f markets. R ecall t hat, over the years, I myself have run statistics backward and forward on 2 0 million pieces of data that made me despise anyone talking about markets in Gaussian terms. But people have a h ard t ime making the leap to the consequences of this knowledge. T he strangest thing is that people in business usually agree with me when they listen to me talk or hear me make my c ase. B ut when they go to the office the next day they revert to the Gaussian tools so entrenched in their habits. Their minds are domain-dependent, so they can exercise criti­ cal t hinking at a conference while not doing so in the office. F urthermore, the Gaussian tools give them numbers, which seem to be "better t han n othing." The resulting measure of future uncertainty satisfies our in­ grained desire to simplify even if that means squeezing into one single number matters that are too rich to be described that way. The Clerks' Betrayal I ended Chapter 1 with the stock market crash of 1 987, w hich allowed me to aggressively pursue my B lack S wan idea. Right after the crash, when I 276 THOSE GRAY SWANS OF EXTREMISTAN F IGURE 14 3 000 I 2 500 I 2 000 I o YEARS By removing the ten biggest one-day moves from the U.S. stock market over the past fifty years, we see a huge difference in returns—and yet conventional finance sees these one-day jumps as mere anomalies. (This is only one of many such tests. While it is quite convincing on a casual read, there are many more-convincing ones from a mathematical standpoint, such as-the incidence of 10 sigma events.) s tated that those using sigmas ( i.e., s tandard d eviations) as a measure of the degree of risk and randomness were charlatans, everyone agreed with m e. I f the world of finance were Gaussian, an episode such as the crash (more t han t wenty s tandard d eviations) would take place every several bil­ lion lifetimes of the universe (look at the height example in Chapter 15). According to the circumstances of 1 987, p eople accepted that rare events take place and are the main source of uncertainty. They were just unwill­ ing to give up on the Gaussian as a central measurement tool—"Hey, we have nothing e lse." P eople want a number to anchor on. Yet the two methods are logically incompatible. Unbeknownst to me, 1 9 8 7 was not the first time the idea of the Gauss­ ian was shown to be lunacy. Mandelbrot proposed the scalable to the e co­ nomics e stablishment around 1 9 6 0 , and showed them how the Gaussian curve did not fit prices then. B ut after they got over their excitement, they realized that they would have to relearn their trade. One of the influential e conomists o f the day, the late Paul Cootner, wrote, "Mandelbrot, like Prime Minister Churchill before him, promised us not Utopia, but blood, sweat, toil, and tears. If he is right, almost all our statistical tools are ob­ solete [or] meaningless." I propose two corrections to Cootner's state­ ment. First, I would replace almost all w ith all. S econd, I disagree with the blood and sweat business. I find Mandelbrot's randomness considerably L O C K E ' S M A D M E N , O R B E L L C U R V E S IN T H E W R O N G P L A C E S 2 7 7 easier t o u nderstand t han t he conventional statistics. If you come fresh to the business, do not rely on the old theoretical tools, and do not have a high expectation of certainty. Anyone Can Become President And now a b rief h istory of the "Nobel" Prize in economics, which was es­ tablished by the B ank o f Sweden in honor of Alfred Nobel, who may be, according to his family who wants the prize abolished, now rolling in his grave with disgust. An activist family member c alls t he prize a public rela­ tions coup by economists aiming to put their field on a higher footing t han it deserves. True, the prize has gone to some valuable thinkers, such as the empirical psychologist Daniel Kahneman and the thinking economist Friedrich Hayek. But the committee has gotten into the habit of handing out Nobel Prizes to those who "bring rigor" to the process with pseudoscience a nd phony mathematics. After t he stock market crash, they re­ warded t wo theoreticians, Harry Markowitz and William Sharpe, who built beautifully Platonic models on a Gaussian base, contributing to what is called Modern Portfolio Theory. Simply, if you remove their Gaussian assumptions and treat prices as scalable, you are left w ith hot air. The Nobel Committee could have tested the Sharpe and Markowitz models— they work like quack remedies sold on the Internet—but nobody in S tock­ holm seems to have thought of it. Nor did the committee come to us practitioners to ask us our opinions; instead it relied on an academic vet­ ting process that, in some disciplines, can be corrupt all the way to the marrow. After that award I made a prediction: "In a world in which these two get the Nobel, anything can h appen. A nyone can become president." So the B ank o f Sweden and the Nobel Academy are largely responsible for giving credence to the use of the Gaussian Modern Portfolio Theory as institutions have found it a great cover-your-behind approach. Software vendors have sold "Nobel crowned" methods for millions of dollars. How could you go wrong using it? Oddly enough, everyone in the business world initially knew that the idea was a fraud, but people get used to such methods. Alan Greenspan, the chairman of the Federal Reserve bank, sup­ posedly blurted out, "I'd rather have the opinion of a trader t han a m ath­ ematician." Meanwhile, the Modern Portfolio Theory started spreading. I will r epeat the following until I am hoarse: it is contagion that determines the fate of a theory in s ocial s cience, n ot its validity. I only realized later that Gaussian-trained finance professors were tak- 278 T H O S E GRAY SWANS OF EXTREMISTAN ing over business schools, and therefore M B A programs, and producing c lose t o a h undred t housand students a y ear in the United States alone, all brainwashed by a phony portfolio theory. No empirical observation could halt the epidemic. It seemed better to teach students a t heory based on the Gaussian t han t o teach them no theory at all. It looked more "scientific" t han giving them what Robert C. Merton (the son of the sociologist R obert K . Merton we discussed earlier) called the "anecdote." Merton wrote that before portfolio theory, finance was "a collection of anecdotes, rules of thumb, and manipulation of accounting data." Portfolio theory allowed "the subsequent evolution from this conceptual p otpourri t o a rigorous economic theory." For a sense of the degree of intellectual seri­ ousness involved, and to compare neoclassical economics to a more hon­ est s cience, c onsider this statement from the nineteenth-century father of modern medicine, Claude Bernard: "Facts for now, but with scientific as­ pirations for later." You should send economists to medical school. S o t he Gaussian* pervaded our business and scientific cultures, and terms such as sigma, variance, standard deviation, correlation, R square, a nd the eponymous Sharpe ratio, all directly linked to it, pervaded the l ingo. I f you read a m utual fund prospectus, or a description of a hedge fund's e xposure, odds a re that it will supply you, among other informa­ tion, with some quantitative summary claiming to measure "risk." That measure will be based on one of the above buzzwords derived from the bell c urve and its kin. Today, for instance, pension funds' investment pol­ icy a nd choice of funds a re vetted by "consultants" who rely on portfolio theory. If there is a problem, they can claim that they relied on s tandard scientific m ethod. More Horror T hings g ot a lot worse in 1 997. T he Swedish academy gave another r ound o f G aussian-based Nobel Prizes to Myron Scholes and Robert C. Merton, who had improved on an old mathematical formula and made it com­ patible with the existing grand Gaussian general financial equilibrium * G ranted, the Gaussian has been tinkered with, using such methods as complemen­ tary "jumps," stress testing, regime switching, or the elaborate methods known as G ARCH, but while these methods represent a good effort, they fail to address the bell curve's fundamental flaws. Such methods are not scale-invariant. This, in my opinion, can explain the failures of sophisticated methods in real life as shown by the M akridakis competition. L O C K E ' S M A D M E N , O R B E L L C U R V E S IN T H E W R O N G P L A C E S 2 7 9 t heories—hence acceptable to the economics establishment. The formula was now "useable." It had a list of long forgotten "precursors," among whom was the mathematician and gambler Ed Thorp, who had authored the bestselling Beat the Dealer, a bout how to get ahead in blackjack, but somehow people believe that Scholes and Merton invented it, when in fact they just made it acceptable. The formula was my bread and butter. Traders, bottom-up people, know its wrinkles better t han a cademics by dint o f spending their nights worrying about their risks, except that few of them could express their ideas in technical terms, so I felt I was represent­ ing them. Scholes and Merton made the formula d ependent o n the Gauss­ ian, but their "precursors" subjected it to no such restriction.* T he p ostcrash years were entertaining for me, intellectually. I attended c onferences in finance and mathematics of uncertainty; not once did I find a speaker, Nobel or no Nobel, who understood what he was talking about when it came to probability, so I could freak them out with my questions. T hey did "deep work in mathematics," but when you asked them where they got their probabilities, their explanations made it clear that they had fallen for the ludic fallacy—there was a strange cohabitation of technical skills and absence of u nderstanding t hat you find in idiot savants. Not o nce did I get an intelligent answer or one that was not ad hominem. S ince I w as questioning their entire business, it was understandable that I d rew all m anner of insults: "obsessive," "commercial," "philosophical," "es­ sayist," "idle man of leisure," "repetitive," "practitioner" (this is an insult in academia), "academic" (this is an insult in business). B eing o n the re­ ceiving end of angry insults is not that bad; you can get quickly used to it and focus on what is not s aid. Pit t raders a re trained to handle angry rants. If you work in the chaotic pits, someone in a particularly bad mood from losing money might start cursing at you until he injures his vocal cords, then forget about it and, an hour later, invite you to his Christmas party. So you become numb to insults, particularly if you teach yourself to imagine that the person uttering them is a variant of a noisy ape with lit­ tle p ersonal control. Just keep your composure, smile, focus on analyzing the speaker not the message, and you'll win the argument. An ad hominem * M ore technically, remember my career as an option professional. Not ony does an option on a very long shot benefit from Black Swans, but it benefits disproportion­ ately from them—something Scholes and Merton's "formula" misses. The option payoff is so powerful t hat you do not have to be right on the odds: you can be wrong on the probability, but get a monstrously large payoff. I've called this the "double bubble": the rriispricing o f the probability and t hat o f the payoff. 280 THOSE GRAY SWANS OF EXTREMISTAN a ttack a gainst an intellectual, not against an idea, is highly flattering. It in­ dicates t hat the person does not have anything intelligent to say about your message. T he p sychologist Philip T etlock (the expert buster in Chapter 1 0), after listening to one of my talks, reported that he was struck by the presence of an acute state of cognitive dissonance in the audience. But how people re­ solve t his cognitive tension, as it strikes at the core of everything they have been t aught a nd at the methods they practice, and realize that they will continue to practice, can vary a lot. It was symptomatic that almost all people who attacked my thinking attacked a deformed version of it, like " it is all random and unpredictable" rather t han " it is largely random," or g ot m ixed up by showing me how the bell curve works in some physical domains. S ome even had to change my biography. At a panel in Lugano, M yron S choles o nce got in to a state of rage, and went after a transformed version of my ideas. I could see pain in his f ace. O nce, in Paris, a prominent member of the mathematical establishment, who invested p art o f his life o n some minute sub-sub-property of the Gaussian, blew a fuse—right when I showed empirical evidence of the role of B lack S wans in markets. He t urned red with anger, had difficulty breathing, and started hurling in­ sults at me for having desecrated the institution, lacking pudeur (mod­ esty); he shouted "I am a member of the Academy of S cience!" t o give more strength to his insults. (The French translation of my book was out o f s tock the next day.) M y best episode was when Steve R oss, an econo­ mist p erceived to be an intellectual far superior to S choles and Merton, and deemed a formidable debater, gave a rebuttal to my ideas by signaling s mall e rrors or approximations in my presentation, such as "Markowitz was not the first to . . ." t hus certifying that he had no answer to my main point. Others who had invested much of their lives in these ideas resorted to vandalism on the Web. Economists often invoke a strange argument by M ilton F riedman that states that models do not have to have realistic as­ sumptions to be acceptable—giving them license to produce severely de­ fective m athematical representations of reality. The problem of course is that these Gaussianizations do not have realistic assumptions and do not produce reliable results. They are neither realistic nor predictive. Also note a m ental bias I encounter on the occasion: people mistake an event with a s mall p robability, say, one in twenty years for a periodically occurring one. T hey t hink that they are safe if they are only exposed to it for ten years. I h ad trouble getting the message about the difference between Medioc ristan and Extremistan through—many arguments presented to me were L O C K E ' S M A D M E N , O R B E L L C U R V E S IN T H E W R O N G P L A C E S 2 8 1 a bout how society has done well with the bell curve—just look at credit bureaus, etc. T he o nly comment I found unacceptable was, "You are right; we need you to remind us of the weakness of these methods, but you cannot throw the baby out with the bath water," meaning that I needed to accept their reductive Gaussian distribution while also accepting that large deviations could occur—they didn't realize the incompatibility of the two approaches. It was as if one could be h alf d ead. Not one of these users of portfolio theory in twenty years of debates, explained how t hey could accept the Gaussian framework as well as large deviations. Not one. Confirmation A long the way I saw enough of the confirmation error to make Karl Pop­ per stand up with rage. People would find data in which there were no jumps or extreme events, and show me a "proof" that one could use the Gaussian. This was exactly like my example of the "proof" that O. J . Simpson is not a killer in Chapter 5. The entire statistical business con­ fused absence of proof with proof of absence. Furthermore, people did not u nderstand t he elementary asymmetry involved: you need one single ob­ servation to r eject t he Gaussian, but millions of observations will not fully confirm the validity of its application. Why? B ecause t he Gaussian bell curve disallows large deviations, but tools of Extremistan, the alternative, do not disallow long quiet stretches. I did not know that Mandelbrot's work mattered outside aesthetics and geometry. Unlike him, I was not ostracized: I got a lot of approval from practitioners and decision makers, though not from their research staffs. But suddenly I got the most unexpected vindication. IT W AS J UST A B LACK S WAN R obert M erton, Jr., and Myron S choles w ere founding p artners in the large speculative t rading firm called Long-Term Capital Management, or L TCM, w hich I mentioned in Chapter 4 . It was a collection of people with top-notch résumés, from the highest ranks of academia. They were consid­ ered geniuses. The ideas of portfolio theory inspired their risk manage­ ment of possible outcomes—thanks to their sophisticated "calculations." T hey m anaged to enlarge the ludic f allacy t o industrial proportions. 282 THOSE GRAY SWANS OF EXTREMISTAN T hen, during t he summer of 1 998, a c ombination of large events, trig­ gered by a Russian financial crisis, took place that lay outside their mod­ els. I t was a B lack S wan. L T C M w ent bust and almost took down the entire financial system with it, as the exposures were massive. Since their models ruled out the possibility of large deviations, they allowed them­ selves t o take a monstrous amount of risk. The ideas of Merton and S choles, as well as those of Modern Portfolio Theory, were starting to go bust. The magnitude of the losses was spectacular, too spectacular to allow us to ignore the intellectual comedy. Many friends and I thought that the portfolio theorists would suffer the fate of tobacco companies: they were endangering people's savings and would soon be brought to ac­ count for the consequences of their Gaussian-inspired methods. None of that happened. Instead, M BAs in business schools went on learning portfolio theory. And the option formula went on bearing the name B lack-Scholes-Merton, i nstead of reverting to its t rue o wners, Louis B achelier, E d Thorp, and oth­ ers. How to "Prove" Things M erton the younger is a representative of the school of neoclassical e co­ nomics, w hich, as we have seen with L TCM, r epresents most powerfully the dangers of Platonified knowledge.* Looking at his methodology, I see the following pattern. He starts with rigidly Platonic assumptions, com­ pletely unrealistic—such as the Gaussian probabilities, along with many more equally disturbing ones. Then he generates "theorems" and "proofs" from these. The math is tight and elegant. The theorems are compatible with other theorems from Modern Portfolio Theory, themselves compati­ ble w ith still other theorems, building a grand theory of how people con­ sume, save, face u ncertainty, spend, and project the future. He assumes that we know the likelihood of events. The beastly word equilibrium is al­ ways present. But the whole edifice is like a game that is entirely closed, l ike M onopoly with all of its rules. * I a m selecting Merton because I found him very illustrative of academically stamped o bscurantism. I discovered Merton's shortcomings from an angry and threatening seven-page letter he sent me t hat gave me the impression that he was n ot t oo familiar with how we t rade options, his very subject matter. H e seemed to be under the impression t hat traders rely on "rigorous" economic theory—as if birds had to study (bad) engineering in order t o fly. L O C K E ' S M A D M E N , O R B E L L C U R V E S IN T H E W R O N G P L A C E S 2 8 3 A s cholar who applies such methodology resembles Locke's definition o f a m adman: someone "reasoning correctly from erroneous premises." Now, elegant mathematics has this property: it is perfectly right, not 9 9 p ercent so. This property appeals to mechanistic minds who do not want to deal with ambiguities. Unfortunately you have to cheat some­ where to make the world fit perfect mathematics; and you have to fudge your assumptions somewhere. We have seen with the H ardy q uote that p rofessional " pure" m athematicians, however, are as honest as they come. So w here matters get confusing is when someone like Merton tries to be m athematical and airtight rather t han f ocus on fitness to reality. T his is where you learn from the minds of military people and those who have responsibilities in security. They do not care about "perfect" ludic reasoning; they want realistic ecological assumptions. In the end, they care about lives. I m entioned in Chapter 11 how those who started the game of "formal thinking," by manufacturing phony premises in order to generate "rigor­ ous" theories, were Paul Samuelson, Merton's t utor, a nd, in the United K ingdom, J ohn Hicks. These two wrecked the ideas of John Maynard K eynes, w hich they tried to formalize (Keynes was interested in uncer­ tainty, and complained about the mind-closing certainties induced by m odels). O ther participants in the formal thinking venture were Kenneth Arrow and Gerard Debreu. All four were Nobeled. All four were in a delu­ sional state under t he effect o f mathematics—what Dieudonné called "the music of reason," and what I c all L ocke's madness. All of them can be safely a ccused of having invented an imaginary world, one that lent i tself t o their mathematics. The insightful scholar Martin Shubik, who held that the degree of e xcessive a bstraction of these models, a few steps beyond ne­ cessity, m akes them totally unusable, found himself ostracized, a common fate for dissenters.* I f you question what they do, as I did with Merton J r., t hey will ask for "tight proof." So they set the rules of the game, and you need to play by them. Coming from a practitioner background in which the principal asset is being able to work with messy, but empirically acceptable, mathematics, * Medieval medicine was also based on equilibrium ideas when it was top-down and similar t o theology. Luckily its practitioners went out of business, as they could not compete with the bottom-up surgeons, ecologically driven former barbers w ho gained clinical experience, and after w hom a-Platonic clinical science was b orn. If I am alive, today, it is because scholastic top-down medicine went out of business a few centuries a go. 284 T H O S E GRAY SWANS OF EXTREMISTAN T ABLE 4: TWO WAYS T O APPROACH RANDOMNESS Skeptical Empiricism and the a-Platonic School Interested in what lies outside the Pla­ tonic fold Respect for those who have the guts to say "I don't know" Fat Tony Thinks of Black Swans as a dominant source of randomness The Platonic Approach Focuses on the inside of the Platonic fold "You keep criticizing these models. These models are all we have." Dr. John Thinks of ordinary fluctuations as a dominant source of randomness, with jumps as an afterthought Top-down Wears dark suits, white shirts; speaks in a boring tone Precisely wrong Everything needs to fit some grand, general socioeconomic model and "the rigor of economic theory"; frowns on the "descriptive" Built their entire apparatus on the as­ sumptions that we can compute probabilities Model: Laplacian mechanics, the world and the economy like a clock Bottom-up Would ordinarily not wear suits (except to funerals) Prefers to be broadly right Minimal theory, consides theorizing as a disease to resist Does not believe that we can easily compute probabilities Model: Sextus Empiricus and the school of evidence-based, minimumtheory empirical medicine Develops intuitions from practice, goes from observations to books Not inspired by any science, uses messy mathematics and computa­ tional methods Ideas based on skepticism, on the un­ read books In the library Assumes Extremistan as a starting point Sophisticated craft Seeks to be approximately right across a broad set of eventualities Relies on scientific papers, goes from books to practice Inspired by physics, relies on abstract mathematics Ideas based on beliefs, on what they think they know Assumes Mediocristan as a starting point Poor science Seeks to be perfectly right in a narrow model, under precise assumptions L O C K E ' S M A D M E N , O R B E L L C U R V E S IN T H E W R O N G P L A C E S 2 8 5 I c annot accept a pretense of s cience. I m uch prefer a sophisticated craft, focused o n tricks, to a failed science looking for certainties. Or could these n eoclassical m odel builders be doing something worse? Could it be that they are involved in what Bishop Huet calls the manufacturing of certain­ ties? L et us see. S keptical e mpiricism advocates the opposite method. I care about the premises more t han t he theories, and I want to minimize reliance on theo­ ries, stay light on my feet, and reduce my surprises. I want to be broadly right rather t han precisely wrong. Elegance in the theories is often indica­ tive o f Platonicity and weakness—it invites you to seek elegance for e le­ gance's s ake. A theory is like medicine (or government): often useless, sometimes necessary, always self-serving, and on occasion lethal. So it needs to be used with care, moderation, and close a dult s upervision. T he d istinction in the above table between my model modern, skepti­ cal e mpiricist and what Samuelson's puppies r epresent can be generalized a cross disciplines. I've presented my ideas in finance because that's where I refined them. Let us now examine a category of people expected to be more thoughtful: the philosophers. THE U NCERTAINTY OF THE PHONY Philosophers in the wrong places—Uncertainty about (mostly) lunch—What I don't care about—Education and intelligence T his final chapter of Part Three' focuses on a major ramification of the ludic fallacy: how those whose job it is to make us aware of uncertainty fail us and divert us into bogus certainties t hrough t he back door. L UDIC FALLACY REDUX I h ave explained the ludic fallacy with the casino story, and have insisted that the sterilized randomness of games does not resemble randomness in real life. L ook again at Figure 7 in Chapter 15. The dice average out so q uickly t hat I can say with certainty that the casino will beat me in the very near long run at, say, roulette, as the noise will cancel out, though not the skills (here, the casino's advantage). The more you extend the period ( or r educe the size of the bets) the more randomness, by virtue of averag­ ing, d rops o ut of these gambling constructs. T he ludic fallacy is present in the following chance setups: random walk, dice throwing, coin flipping, the infamous digital "heads or tails" e xpressed as 0 or 1, Brownian motion (which corresponds to the move­ ment of pollen particles in water), and similar examples. These setups gen- THE UNCERTAINTY OF THE PHONY 2 8 7 erate a quality of randomness that does not even qualify as randomness— protorandomness w ould be a more appropriate designation. At their c ore, all t heories built around the ludic f allacy i gnore a layer of uncertainty. W orse, t heir proponents do not know it! O ne severe application of such focus on small, as opposed to large, un­ certainty c oncerns the hackneyed greater uncertainty principle. Find the Phony T he g reater uncertainty principle states that in q uantum p hysics, one can­ not measure certain pairs of values (with arbitrary precision), such as the position and momentum of particles. You will hit a lower bound of mea­ surement: what you gain in the precision of one, you lose in the other. So there is an incompressible uncertainty that, in theory, will defy s cience a nd forever r emain an uncertainty. This minimum uncertainty was discovered by W erner Heisenberg in 1 9 2 7 . I find it ludicrous to present the uncer­ tainty principle as having anything to do with uncertainty. Why? First, this uncertainty is Gaussian. On average, it will disappear—recall that no one person's weight will significantly change the total weight of a thousand people. We may always remain uncertain about the future positions of small p articles, but these uncertainties are very small and very numerous, and they average out—for Pluto's sake, they average out! They obey the law of large numbers we discussed in Chapter 1 5. M ost other types of ran­ domness do not average out! If there is one thing on this planet that is not so u ncertain, it is the behavior of a collection of subatomic particles! W hy? B ecause, as I have said earlier, when you look at an o bject, c om­ posed of a collection of particles, the fluctuations of the particles tend to b alance o ut. But p olitical, s ocial, a nd weather events do not have this h andy p rop­ erty, and we patently cannot predict them, so when you hear "experts" presenting the problems of uncertainty in terms of subatomic particles, odds are that the expert is a phony. As a matter of f act, t his may be the best w ay to spot a phony. I often hear people say, " O f course there are limits to our knowledge," then invoke the greater uncertainty principle as they try to explain that "we cannot model everything"—I have heard such types as the economist M yron S choles say this at conferences. But I am sitting here in New Y ork, in August 2 0 0 6 , trying to go to my ancestral village of Amioun, Lebanon. Beirut's a irport is closed owing to the c onflict b etween Israel and the Shi- 288 THOSE GRAY SWANS OF EXTREMISTAN ite m ilitia Hezbollah. There is no published airline schedule that will in­ form m e when the war will end, if it ends. I can't figure out if my house w ill b e standing, if Amioun will still be on the map—recall that the family house was destroyed once before. I can't figure out whether the war is going to degenerate into something even more severe. Looking into the outcome of the war, with all my relatives, friends, and property exposed to i t, I face true l imits of knowledge. Can someone explain to me why I should care about subatomic particles that, anyway, converge to a Gauss­ ian? P eople can't predict how long they will be h appy w ith recently ac­ quired o bjects, h ow long their marriages will last, how their new j obs will t urn o ut, yet it's subatomic particles that they c ite as "limits of predic­ tion." They're ignoring a mammoth standing in front of them in favor of matter even a microscope would not allow them to see. Can Philosophers Be Dangerous to Society? I w ill go further: people who worry about pennies instead of dollars can be d angerous to society. They mean well, but, invoking my B astiat argu­ ment of Chapter 8, they are a threat to us. They are wasting our studies of uncertainty by focusing on the insignificant. Our resources (both cognitive and scientific) a re limited, p erhaps t oo limited. Those who distract us in­ crease t he risk of B lack S wans. T his c ommoditization of the notion of uncertainty as symptomatic of B lack S wan blindness is worth discussing further here. G iven t hat people in finance and economics are seeped in the Gaussian to the point of choking on it, I looked for financial economists with philo­ sophical b ents to see how their critical thinking allows them to handle this problem. I found a few. One such person got a PhD in philosophy, then, f our y ears later, another in finance; he published p apers in both fields, as well as numerous textbooks in finance. But I was disheartened by him: he seemed t o have compartmentalized his ideas on uncertainty so that he had two distinct professions: philosophy and quantitative finance. The prob­ lem o f induction, Mediocristan, epistemic opacity, or the offensive as­ sumption of the Gaussian—these did not hit him as t rue p roblems. His numerous textbooks drilled Gaussian methods into students' heads, as though their author had forgotten that he was a philosopher. Then he promptly remembered that he was when writing philosophy texts on s eemingly s cholarly matters. THE UNCERTAINTY OF THE PHONY 289 T he same context specificity leads people to take the escalator to the S tairMasters, b ut the philosopher's case is far, far more dangerous since he uses up our storage for critical thinking in a sterile occupation. Philoso­ phers like to practice philosophical thinking on me-too subjects that other philosophers c all p hilosophy, and they leave their minds at the door when they are outside of these subjects. The Problem of Practice As m uch as I rail against the bell curve, Platonicity, and the ludic fallacy, my principal problem is not so much with statisticians—after all, these are computing people, not thinkers. We should be far less tolerant of philoso­ phers, with their bureaucratic apparatchiks closing our minds. Philoso­ phers, the watchdogs of critical thinking, have duties beyond those of other professions. H OW M ANY W ITTGENSTEINS C AN D ANCE O N T HE HEAD O F A P IN? A n umber of semishabbily dressed (but thoughtful-looking) people gather in a room, silently looking at a guest speaker. They are all professional philosophers attending the prestigious weekly colloquium at a New Y o r k area university. The speaker sits with his nose drowned in a set of type­ written pages, from which he reads in a monotone v oice. H e is h ard t o follow, so I daydream a bit and lose his thread. I can vaguely tell that the discussion revolves a round s ome "philosophical" debate about Martians invading your head and controlling your will, all the while preventing you from k nowing it. There seem to be several theories concerning this idea, but the speaker's opinion differs from those of other writers on the sub­ ject. H e spends some time showing where his research on these headhijacking M artians is unique. After his monologue (fifty-five m inutes of relentless r eading of the typewritten material) there is a short break, then another fifty-five minutes of discussion about Martians planting chips and other outlandish conjectures. Wittgenstein is occasionally mentioned (you c an always mention Wittgenstein since he is vague enough to always seem r elevant). Every Friday, at four P . M . , t he paychecks of these philosophers will hit their respective bank accounts. A fixed p roportion of their earnings, about 1 6 p ercent on average, will go into the stock market in the form of an au- 290 THOSE GRAY SWANS OF EXTREMISTAN t omatic i nvestment into the university's pension plan. These people are p rofessionally e mployed in the business of questioning what we take for granted; they are trained to argue about the existence of g od(s), the defini­ tion of t ruth, t he redness of red, the meaning of meaning, the difference between the semantic theories of t ruth, c onceptual and nonconceptual representations . . . Yet they believe blindly in the stock market, and in the a bilities o f their pension plan manager. Why do they do so? Because they a ccept t hat this is what people should do with their savings, because "ex­ perts" tell them so. They d oubt t heir own senses, but not for a second do they d oubt t heir automatic purchases in the stock market. This domain dependence of skepticism is no different from that of medical doctors (as we saw in Chapter 8). B eyond t his, they may believe without question that we can predict so­ cietal e vents, that the Gulag will toughen you a bit, that politicians know more about what is going on t han t heir drivers, that the chairman of the F ederal R eserve saved the economy, and so many such things. They may a lso believe that nationality matters (they always stick "French," "Ger­ man," or "American" in front of a philosopher's name, as if this has some­ thing to do with anything he has to say). Spending time with these people, whose curiosity is focused on regimented on-the-shelf topics, feels stifling. Where Is Popper When You Need Him? I h ope I've sufficiently drilled home the notion that, as a practitioner, my thinking is rooted in the b elief t hat you cannot go from books to prob­ lems, b ut the reverse, from problems to books. This approach incapaci­ tates much of that career-building verbiage. A scholar should not be a library's tool for making another library, as in the j oke by Daniel Dennett. O f c ourse, w hat I am saying here has been said by philosophers before, at least by the real ones. The following remark is one reason I have inor­ dinate respect for Karl Popper; it is one of the few quotations in this book that I am not attacking. T he degeneration of philosophical schools in its turn is the conse­ quence of the mistaken belief that one can philosophize without having been compelled to philosophize by problems outside philosophy. . . . Genuine philosophical problems are always rooted outside philosophy and they die if these roots decay. . . . [emphasis mine] These roots are THE UNCERTAINTY OF THE PHONY 2 9 1 easily forgotten by philosophers who "study" philosophy instead of being forced into philosophy by the pressure of nonphilosophical problems. Such t hinking may explain Popper's success outside philosophy, par­ ticularly w ith scientists, traders, and decision makers, as well as his rela­ tive failure inside of it. (He is rarely studied by his fellow philosophers; they prefer to write essays on Wittgenstein.) A lso n ote that I do not want to be d rawn i nto philosophical debates with my B lack S wan idea. What I mean by Platonicity is not so metaphysi­ cal. Plenty of people have argued with me about whether I am against "essentialism" ( i.e., things that I hold don't have a Platonic e ssence), i f I believe t hat mathematics would work in an alternative universe, or some such thing. Let me set the record straight. I am a no-nonsense practitioner; I a m not saying that mathematics does not correspond to an o bjective structure of reality; my entire point is that we are, epistemologically speaking, putting t he cart before the horse and, of the space of possible m athematics, risk using the wrong one and being blinded by it. I truly be­ lieve t hat there are some mathematics that work, but that these are not as easily w ithin our reach as it seems to the "confirmators." The Bishop and the Analyst I a m most often irritated by those who attack the bishop but somehow fall for the securities analyst—those who exercise their skepticism against re­ ligion b ut not against economists, social scientists, and phony statisticians. Using the confirmation bias, these people will tell you that religion was horrible for mankind by counting deaths from the Inquisition and various religious wars. But they will not show you how many people were killed by n ationalism, social s cience, a nd political theory u nder S talinism or dur­ ing the Vietnam War. Even priests don't go to bishops when they feel i ll: their first stop is the doctor's. But we stop by the offices o f many pseudoscientists and "experts" without alternative. We no longer believe in papal infallibility; we seem to believe in the infallibility of the Nobel, though, as we saw in Chapter 17. 292 THOSE GRAY SWANS OF EXTREMISTAN Easier Than You Think: The Problem of Decision Under Skepticism I h ave said all along that there is a problem with induction and the B lack S wan. I n f act, m atters are far worse: we may have no less of a problem with phony skepticism. a. I can't do anything to stop the sun from nonrising tomorrow (no matter how hard I try), b . I c an't do anything about whether or not there is an afterlife, c . I c an't do anything about Martians or demons taking hold of my brain. B ut I h ave plenty of ways to avoid being a sucker. It is not much more difficult t han that. I c onclude Part Three by reiterating that my antidote to B lack S wans is p recisely t o be noncommoditized in my thinking. But beyond avoiding b eing a sucker, this attitude lends i tself t o a protocol of how to act—not how to think, but how to convert knowledge into action and figure out what knowledge is worth. Let us examine what to do or not do with this in t he concluding section of this book. p art à THE E N" Chapter Nineteen HALF AND HALF, OR HOW T O GET EVEN W ITH THE BLACK SWAN The other half—Remember Apelles—When missing a train can be painful It is now time for a few last words. H alf t he time I am a hyperskeptic; the other h alf I h old certainties and c an be intransigent about them, with a very stubborn disposition. O f c ourse I a m hyperskeptic where others, particularly those I c all bildungsphilisters, are gullible, and gullible where others seem skeptical. I am skeptical a bout confirmation—though only when errors are costly—not about disconfirmation. Having plenty of data will not provide confirma­ tion, but a single instance can disconfirm. I am skeptical when I suspect wild randomness, gullible when I believe that randomness is mild. H alf t he time I hate B lack S wans, the other h alf I l ove them. I like the randomness that produces the texture of life, t he positive accidents, the success o f Apelles the painter, the potential gifts you do not have to pay for. F ew u nderstand the beauty in the story of Apelles; in f act, m ost peo­ ple exercise their error avoidance by repressing the Apelles in them. H alf the time I am hyperconservative in the conduct of my own affairs; the other h alf I a m hyperaggressive. This may not seem exceptional, ex­ cept t hat my conservatism applies to what others c all r isk taking, and my aggressiveness t o areas where others recommend caution. I w orry less about small failures, more about large, potentially termi- 296 THE END n al ones. I worry far more about the "promising" stock market, particu­ larly t he " safe" blue chip stocks, than I do about speculative ventures— the former present invisible risks, the latter offer no surprises since you know how volatile they are and can limit your downside by investing s maller a mounts. I w orry less about advertised and sensational risks, more about the more vicious hidden ones. I worry less about terrorism than about dia­ betes, less about matters people usually worry about because they are ob­ vious worries, and more about matters that lie outside our consciousness and common discourse (I also have to confess that I do not worry a lot— I t ry to worry about matters I can do something about). I worry less about embarrassment than about missing an opportunity. In t he end this is a trivial decision making rule: I am very aggressive when I can gain exposure to positive B lack S wans—when a failure would be o f small moment—and very conservative when I am under t hreat from a n egative B lack S wan. I am very aggressive when an error in a model can benefit m e, and paranoid when the error can h urt. T his may not be too in­ teresting except that it is exactly what other people do not do. In finance, f or i nstance, people use flimsy theories to manage their risks and put wild ideas u nder " rational" scrutiny. H alf t he time I am intellectual, the other h alf I a m a no-nonsense prac­ titioner. I am no-nonsense and practical in academic matters, and intellec­ tual when it comes to practice. H alf t he time I am shallow, the other h alf I w ant to avoid shallowness. I a m shallow when it comes to aesthetics; I avoid shallowness in the con­ text o f risks and returns. My aestheticism makes me put poetry before prose, Greeks before Romans, dignity before elegance, elegance before culture, culture before erudition, erudition before knowledge, knowledge b efore i ntellect, and intellect before t ruth. B ut only for matters that are B lack S wan free. Our tendency is to be very rational, except when it comes to the B lack S wan. H alf t he people I know c all m e irreverent (you have read my comments about your local Platonified professors), h alf c all me fawning (you have seen m y slavish devotion to Huet, B ayle, Popper, Poincaré, Montaigne, Hayek, and others). H alf t he time I hate Nietzsche, the other h alf I like his prose. HALF AND HALF, OR H O W T O G E T EVEN WITH THE BLACK SWAN 2 9 7 W HEN M ISSING A T RAIN I S P AINLESS I o nce received another piece of life-changing advice, which, unlike the ad­ vice I g ot from a friend in Chapter 3 , 1 find applicable, wise, and empiri­ cally v alid. My classmate in Paris, the novelist-to-be Jean-Olivier Tedesco, pronounced, as he prevented me from r unning t o catch a subway, "I d on't run for trains." S nub y our destiny. I have t aught m yself t o resist r unning t o keep on schedule. This may seem a very small piece of advice, but it registered. In refusing to run to catch trains, I have felt the t rue value of elegance a nd aesthetics in behavior, a sense of being in control of my time, my schedule, and my life. Missing a train is only painful if you run after it! L ikewise, not matching the idea of success others expect from you is only painful if that's what you are seeking. Y ou s tand above the rat race and the pecking order, not outside o f it, if you do so by c hoice. Q uitting a high-paying position, if it is your d ecision, will seem a bet­ ter payoff t han t he utility of the money involved (this may seem crazy, but I've tried it and it w orks). T his is the first step toward the stoic's throwing a four-letter word at fate. You have far more control over your life i f you decide on your criterion by yourself. Mother Nature has given us some defense mechanisms: as in Aesop's f able, o ne of these is our ability to consider that the grapes we cannot (or did not) reach are sour. But an aggressively stoic prior disdain and r ejec­ tion of the grapes is even more rewarding. Be aggressive; be the one to resign, if you have the guts. It is more difficult to be a loser in a game you set up yourself. In B lack S wan terms, this means that you are exposed to the improba­ ble o nly if you let it control you. You always control what you d o; so make this your end. T HE E ND But all these ideas, all this philosophy of induction, all these problems with knowledge, all these wild opportunities and scary possible losses, everything palls in front of the following metaphysical consideration. I a m sometimes taken aback by how people can have a miserable day o r get angry because they feel c heated by a bad meal, cold c offee, a s ocial rebuff, or a rude r eception. R ecall m y discussion in Chapter 8 on the dif- 298 THE END ficulty in seeing the true odds of the events that run your own life. W e are q uick t o forget that just being alive is an extraordinary piece of good luck, a r emote event, a chance occurrence of monstrous proportions. I magine a s peck of dust n ext to a planet a billion times the size of the earth. The speck of dust r epresents the odds in favor of your being born; the huge planet would be the odds against it. So stop sweating the small stuff. D on't be like the ingrate who got a castle as a present and worried about the mildew in the bathroom. Stop looking the gift horse in the mouth—remember that you are a B lack S wan. And thank you for reading my book. Epilogue YEVGENIA'S W HITE SWANS Yevgenia K rasnova went into the long hibernation that was necessary for producing a new book. She stayed in New Y ork City, where she found it easiest t o find tranquillity, alone with her text. It was easiest to concentrate after long periods during w hich she was s urrounded by crowds, hoping to run into Nero so she could make a snide remark to him, p erhaps h umili­ ate him, possibly win him back. She canceled her e-mail account, switched to writing longhand, since she found it soothing, and hired a secretary to type her text. She spent eight years writing, erasing, correcting, venting her o ccasional anger at the secretary, interviewing new secretaries, and quietly rewriting. Her apartment was full of smoke, with p apers s trewn on every surface. L ike all artists she remained dissatisfied with the state of comple­ tion of her work, yet she felt t hat she had gone far deeper t han w ith her first b ook. She laughed at the public who extolled her earlier work, for she now found it shallow, hurriedly completed, and undistilled. W hen the new book, which was aptly called The Loop, c ame out, Y ev­ genia was wise enough to avoid the press and ignore her reviews, and stayed insulated from the external world. As expected by her publisher, the reviews were laudatory. But, strangely, few were buying. People must be t alking about the book without reading it, he thought. Her fans had been w aiting for it and talking about it for years. The publisher, who now owned a very large collection of pink glasses and led a flamboyant lifestyle, w as presently betting the farm on Y evgenia. H e had no other hits 300 EPILOGUE a nd none in sight. He needed to score big to pay for his villa in Carpentras in Provence and his dues o n the financial settlement with his estranged w ife, as well as to buy a new convertible Jaguar (pink). He had been cer­ tain that he had a good shot with Yevgenia's long-awaited book, and he could not figure out why almost everyone called it a masterpiece yet no one was buying it. A year and a h alf later, The Loop w as effectively out of p rint. T he publisher, now in severe financial distress, thought he knew the reason: the book was "too f***ing long!"—Yevgenia should have written a s horter one. After a long but soothing lachrymal episode, Yevgenia thought of the characters in the rainy novels of Georges Simenon and Graham Greene. They lived in a state of numbing and secure mediocrity. Second-rateness had charm, Yevgenia thought, and she had always pre­ ferred charm over beauty. S o Y evgenia's second book too was a B lack S wan. A CKNOWLEDGMENTS I derived an unexpected amount of enjoyment in writing this book—in f act, it just wrote itself—and I want the reader to experience the same. I would like to thank the following friends. M y friend and adviser R olf D obelli, t he novelist, entrepreneur, and vo­ racious reader, kept up with the various versions of this text. I also built up a large debt toward Peter B evelin, an erudite and p ure " thinking doer" with extreme curiosity who spends his waking hours chasing ideas and spotting the papers I am usually looking for; he scrutinized the text. Yechezkel Z ilber, a Jerusalem-based idea-starved autodidact who sees the world ab ovo, from the egg, asked very tough questions, to the point of making me ashamed of the formal education I received and uncomfortable for n ot being a true autodidact like him—it is thanks to no-nonsense peo­ ple that I am grounding my B lack S wan idea in academic libertarianism. T he s cholar Philip T etlock, w ho knows more about prediction than any­ one since the Delphic times, went through the manuscript and scrutinized my arguments. Phil is so valuable and thorough that he was even more in­ formational with the absence of comments than he was with his com­ ments. I owe a big debt to Danny Kahneman who, in addition to the long conversations on my topics of human nature (and noting with horror that I r emembered almost every comment), put me in contact with Phil T et­ lock. I t hank Maya Bar Hillel for inviting me to address the S ociety o f Judgment and Decision Making at their annual meeting in Toronto in No- 302 ACKNOWLEDGMENTS v ember 2005—thanks to the generosity of the researchers there, and the stimulating discussions, I came back having taken away far more t han I g ave. R obert Shiller asked me to purge s ome "irreverent" comments, but the fact that he criticized the aggressiveness of the delivery, but not the content, was quite informational. Mariagiovanna Muso was the first to b ecome c onscious of the B lack S wan effect o n the arts and sent me along the right lines of research in sociology and anthropology. I had long dis­ cussions with the literary scholar Mihai Spariosu on Plato, B alzac, e cologi­ cal i ntelligence, and cafés in Bucharest. Didier Sornette, always a phone c all away, kept e-mailing me p apers o n various unadvertised, but highly relevant, subjects in statistical physics. Jean-Philippe Bouchaud offered a great deal of help on the problems associated with the statistics of large deviations. Michael Allen wrote a monograph for writers looking to get published, based on the ideas of Chapter 8—I subsequently rewrote Chap­ ter 8 t hrough t he eyes of a writer looking at his lot in life. M ark Blyth was always helpful as a sounding board, reader, and adviser. My friends at the D oD, Andy Marshall and Andrew Mays, supplied me with ideas and questions. Paul Solman, a voracious mind, went t hrough the manuscript with severe scrutiny. I owe the term Extremistan t o Chris Anderson, who found my earlier designation too bookish. Nigel Harvey guided me t hrough t he literature on forecasting. I plied the following scientists with questions: Terry Burnham, Robert T rivers, R obyn Dawes, Peter Ayton, S cott A tran, Dan Goldstein, Alexan­ der R eisz, A rt De Vany, Raphael Douady, Piotr Zielonka, Gur Huberman, Elkhonon Goldberg, and Dan Sperber. Ed Thorp, the true living owner o f t he " Black-Scholes f ormula" was helpful; I realized, speaking to him, that economists ignore intellectual productions outside their club— regardless how valuable. Lorenzo Perilli was extremely generous with his comments about Menodotus and helped correct a few errors. Duncan Watts allowed me to present the third p art o f this book at a Columbia University seminar in sociology and c ollect all manner of comments. David Cowan supplied the g raph in the Poincaré discussion, making mine pale by comparison. I also benefited from James Montier's wonderful b rief pieces o n h uman n ature. Bruno Dupire, as always, provides the best walk­ ing conversations. I t d oes not pay to be the loyal friend of a pushy a uthor too close to his manuscript. Marie-Christine Riachi was given the thankless task of read­ ing chapters in inverse order; I only gave her the incomplete pieces and, of ACKNOWLEDGMENTS 303 t hose, only the ones (then) patently lacking in clarity. Jamil Baz received the full text every time but chose to read it backwards. Laurence Zuriff read and commented on every chapter. Philip Halperin, who knows more about risk management t han a nyone (still) alive, offered wonderful com­ ments and observations. Other victims: Cyrus Pirasteh, Bernard Oppetit, P ascal B oulard, Guy Riviere, J oëlle W eiss, Didier J avice, A ndreea Munteanu, Andrei Pokrovsky, Philippe Asseily, Farid Karkaby, George Nasr, Alina Stefan, George Martin, Stan Jonas, and Flavia Cymbalista. I received helpful comments from the voracious intellectual Paul Solman (who went through the manuscript with a microscope). I owe a lot to Phil Rosenczweig, Avishai Margalit, Peter Forbes, Michael Schrage, Driss Ben B rahim, Vinay Pande, Antony Van Couvering, Nicholas Vardy, Brian Hinchcliffe, A aron Brown, Espen Haug, Neil Chriss, Zvika Afik, Shaiy Pilpel, Paul Kedrosky, Reid Bernstein, Claudia Schmid, Jay Leonard, Tony Glickman, Paul Johnson, Chidem Kurdas (and the N Y U Austrian economists), Charles B abbitt, plus so many anonymous persons I have forgotten about* . . . Ralph Gomory and J esse A usubel of the Sloan Foundation run a re­ search funding program called the Known, the Unknown, and the Un­ knowable. They offered their moral and financial help for the promotion o f my ideas—I took the invaluable moral option. I also thank my business partners, coauthors, and intellectual associates: Espen Haug, Mark Spitznagel, Benoît Mandelbrot, Tom Witz, Paul Wilmott, Avital Pilpel, and Emanuel Derman. I also thank John Brockman and Katinka Matson for making this book possible, and M a x Brockman for his comments on the draft. I thank Cindy, Sarah, and Alexander for their tolerance. In addition, Alexander helped with the g raphs a nd Sarah worked on the bibliography. I tried to give my editor, Will Murphy, the impression of being an un­ bearably stubborn author, only to discover that I was fortunate that he was an equally stubborn editor (but good at hiding it). He protected me from the intrusions of the standardizing editors. They have an uncanny ability to inflict maximal damage by breaking the internal rhythm of one's prose with the minimum of changes. Will M . is also the right kind of p arty * I lost his business c ard, but would like to warmly thank a scientist traveling to Vi­ enna aboard British Airways flight 7 0 0 on December 11, 2 0 0 3 , for suggesting the billiard ball illustration in Chapter 1 1. All I know about him is t hat he was fiftytwo, gray-haired, English-born, wrote poetry on yellow notepads, and was travel­ ing with seven suitcases since he was moving in with his thirty-five-year-old Viennese girlfriend. 304 ACKNOWLEDGMENTS a nimal. I was also flattered that Daniel Menaker took the time to edit my t ext. I a lso thank Janet Wygal and Steven Meyers. The s taff a t Random House was accommodating—but they never got used to my phone p ranks (like m y trying to pass for Bernard-Henri L evy). O ne of the highlights of my writing career was a long lunch with William Goodlad, my editor at Penguin, and Stefan McGrath, the managing director of the group. I sud­ denly realized that I could not separate the storyteller in me from the sci­ entific t hinker; as a matter of f act, t he story came first to my mind, rather t han as an after-the-fact illustration of the concept. Part Three of this book inspired my class lectures at the University of Massachusetts at Amherst. I also thank my second home, the Courant In­ stitute of Mathematical S ciences o f New Y ork University, for allowing me to lecture for three quarters of a decade. I t is unfortunate that one learns most from people one disagrees with—something Montaigne encouraged h alf a m illennium ago but is rarely practiced. I discovered that it puts y our arguments t hrough r obust seasoning since you know that these people will identify the slightest c rack—and y ou get information about the limits of their theories as well as the weaknesses of your own. I tried to be more graceful with my detrac­ tors t han w ith my friends—particularly those who were (and stayed) civi­ lized. S o, over my career, I learned a few tricks from a series of public debates, correspondence, and discussions with Robert C. Merton, Steve R oss, M yron S choles, P hilippe J orion, a nd dozens of others (though, aside f rom E lie A yache's critique, the last time I heard something remotely new against my ideas was in 1 994). T hese debates were valuable since I was l ooking for the extent of the counterarguments to my B lack S wan idea and trying to figure out how my detractors think—or what they did not think about. Over the years I have ended up reading more material from those I disagree with t han f rom those whose opinion I share—I read more S amuelson t han H ayek, more Merton (the younger) t han M erton (the e lder), m ore Hegel t han M ontaigne, and more Descartes t han S extus. It is the duty o f every author to represent the ideas of his adversaries as faith­ fully as possible. M y g reatest accomplishment in life is to have managed to befriend people, such as E lie A yache and Jim Gatheral, in spite of some intellectual disagreements. M ost o f this book was written during a p eripatetic period when I freed m yself o f (almost) all business obligations, routines, and pressures, and went on meditative u rban w alks in a variety of cities where I gave a series ACKNOWLEDGMENTS 305 o f lectures on the B lack S wan idea.* I wrote it largely in cafés—my pref­ erence has always been for dilapidated (but elegant) c afés in regular neigh­ borhoods, as unpolluted with persons of commerce as possible. I also spent much time in Heathrow Terminal 4 , absorbed in my writing to the point that I forgot about my allergy to the presence of strained business­ men around me. * It is impossible t o go very deep into an idea when y ou run a business, no m atter the number of hours the occupation entails—simply put, unless you are insensitive, the worries and feelings o f responsibility occupy precious cognitive space. Y ou may be able to study, meditate, and write if you are an employee, but not when you own a business—unless you are o f an irresponsible nature. I thank my partner, M ark Spitznagel, for allowing me—thanks t o the clarity o f his mind and his highly sys­ tematic, highly disciplined, and well engineered a pproach—to gain exposure to highimpact rare events without my having to get directly involved in business activities. G LOSSARY A cademic libertarian: s omeone (like myself) who considers that knowl­ edge is subjected to strict rules but not institutional authority, as the in­ terest of organized knowledge is self-perpetuation, not necessarily t ruth (as with governments). Academia can suffer from an acute e xpert problem (q.v.), p roducing cosmetic but fake knowledge, particularly in narrative disciplines ( q.v.), a nd can be a main source of B lack S wans. Apelles-style strategy: A s trategy of seeking gains by collecting positive ac­ cidents from maximizing exposure to "good B lack S wans." Barbell strategy: a m ethod that consists of taking both a defensive a ttitude and an excessively aggressive one at the same time, by protecting assets from all sources of uncertainty while allocating a small portion for high-risk strategies. Bildungsphilister: a p hilistine with cosmetic, nongenuine culture. Nietz­ sche used this term to refer to the dogma-prone newspaper reader and opera lover with cosmetic exposure to culture and shallow d epth. I e x­ tend it to the buzzword-using researcher in nonexperimental fields who lacks in imagination, curiosity, erudition, and culture and is closely c entered on his ideas, on his "discipline." This prevents him from seeing the conflicts between his ideas and the texture of the world. B lack Swan blindness: t he underestimation of the role of the B lack S wan, and occasional overestimation of a specific one. 308 GLOSSARY B lack Swan ethical problem: O wing to the nonrepeatable aspect of the B lack S wan, there is an asymmetry between the r ewards o f those who prevent and those who cure. C onfirmation e rror ( or P latonic confirmation): Y ou look for instances that c onfirm y our b eliefs, y our construction (or model)—and find them. E mpty-suit p roblem (or " expert p roblem "): S ome professionals have no differential a bilities from the rest of the population, but for some rea­ son, and against their empirical records, are believed to be experts: c linical p sychologists, academic economists, risk "experts," statisti­ cians, p olitical analysts, financial "experts," military analysts, C EOs, et c etera. They dress up their expertise in beautiful language, jargon, m athematics, a nd often wear expensive suits. Epilogism: A theory-free method of looking at history by accumulating f acts w ith minimal generalization and being conscious of the side ef­ fects o f making causal claims. E pistemic a rrogance: M easure the difference between what someone actu­ ally k nows and how much he thinks he knows. An excess will imply a rrogance, a deficit humility. An epistemocrat is someone of epistemic humility, who holds his own knowledge in greatest suspicion. E pistemic o pacity: R andomness is the result of incomplete information at s ome layer. It is functionally indistinguishable from "true" or "physi­ cal" r andomness. E xtremistan: t he province where the total can be conceivably impacted by a single observation. F allacy o f silent evidence: L ooking at history, we do not see the full story, o nly t he rosier p arts o f the process. F ooled by r andomness: t he general confusion between luck and determin­ ism, w hich leads to a variety of superstitions with practical conse­ quences, such as the b elief t hat higher earnings in some professions are generated by skills when there is a significant component of luck in them. F uture blindness: o ur n atural i nability to take into account the properties o f t he future—like autism, which prevents one from taking into ac­ count the existence of the minds of others. Locke's m adman: s omeone who makes impeccable and rigorous reasoning f rom faulty premises-—such as Paul Samuelson, Robert Merton the minor, and Gerard Debreu—thus producing phony models of uncer­ tainty that make us vulnerable to B lack S wans. L ottery-ticket fallacy: t he naive analogy equating an investment in c ollect- GLOSSARY 3 0 9 ing positive B lack S wans to the accumulation of lottery tickets. Lottery t ickets a re not scalable. Ludic fallacy (or uncertainty o f the n erd): t he manifestation of the Platonic fallacy in the study o f uncertainty; basing studies of chance on the nar­ row world of games and dice. A-Platonic randomness has an addi­ tional layer of uncertainty concerning the rules of the game in real life. T he bell curve (Gaussian), or GIF (Great Intellectual Fraud), is the ap­ plication of the ludic fallacy to randomness. M andelbrotian G ray Swan: B lack S wans that we can somewhat take into account—earthquakes, blockbuster books, stock market crashes—but for w hich it is not possible to completely figure out the properties and produce precise calculations. M ediocristan: t he province dominated by the mediocre, with few extreme successes o r failures. No single observation can meaningfully affect t he aggregate. The bell curve is g rounded in Mediocristan. There is a quali­ tative difference between Gaussians and scalable laws, much like gas and water. N arrative discipline: t he discipline that consists in fitting a convincing and well-sounding story to the past. Opposed to experimental discipline. N arrative fallacy: o ur need to fit a story or p attern t o a series of connected o r d isconnected f acts. T he statistical application is data mining. N erd knowledge: t he b elief t hat what cannot be Platonized and studied does not exist at all, or is not worth considering. There even exists a form of skepticism practiced by the nerd. Platonic fold: the place where our Platonic representation enters into con­ tact w ith reality and you can see the side effects of models. Platonicity: t he focus on those p ure, well-defined, and easily discernible objects like triangles, or more social notions like friendship or love, at the c ost o f ignoring those objects of seemingly messier and less tractable structures. Probability distribution: t he model used to calculate the odds o f different events, how they are "distributed." When we say that an event is dis­ tributed according to the bell curve, we mean that the Gaussian bell curve can help provide probabilities of various occurrences. Problem o f induction: t he logical-philosophical extension of the B lack Swan p roblem. Randomness as incomplete information: simply, what I cannot guess is random because my knowledge about the causes is incomplete, not necessarily b ecause the process has truly unpredictable properties. 310 GLOSSARY R etrospective d istortion: examining past events without adjusting for the forward passage of time. It leads to the illusion of posterior pre­ dictability. R everse-engineering p roblem: It is easier to predict how an ice cube would m elt i nto a puddle t han, looking at a puddle, t o guess the shape of the ice c ube that may have caused it. This "inverse problem" makes narra­ tive disciplines and accounts (such as histories) suspicious. Round-trip f allacy: t he confusion of absence of evidence of B lack Swans ( or s omething else) for evidence of absence of B lack S wans (or some­ thing e lse). It affects s tatisticians and other people who have lost p art o f t heir reasoning by solving too many equations. S candal o f prediction: the poor prediction record in some forecasting entities (particularly narrative disciplines) mixed with verbose com­ mentary and a l ack o f awareness of their own dire past record. S corn o f the abstract: favoring contextualized thinking over more ab­ stract, though more relevant, matters. "The death of one child is a tragedy; the death of a million is a statistic." S tatistical regress argument (or the problem of the circularity of s tatistics): W e need data to discover a probability distribution. How do we know i f w e have enough? From the probability distribution. If it is a Gauss­ ian, then a few points of data will suffice. H ow do we know it is a G aussian? F rom the data. So we need the data to tell us what probabil­ ity d istribution to assume, and we need a probability distribution to tell us how much data we need. This causes a severe regress argument, which is somewhat shamelessly circumvented by resorting to the Gaussian and its kin. Uncertainty of the deluded: people who tunnel on sources of uncertainty b y p roducing precise sources like the great uncertainty principle, or similar, less consequential matters, to real life; w orrying about sub­ atomic p articles while forgetting that we can't predict tomorrow's c rises. NOTES B EHIND T HE C URTAIN: A DDITIONAL N OTES, T ECHNICAL C OMMENTS, R EFERENCES, A ND R EADING R ECOMMENDATIONS I separate topics thematically; so general references will mostly be found in the chapter in which they first occur. I prefer to use a logical sequence here rather than stick to chapter division. PROLOGUE a nd C HAPTER 1 Black Swan in logic: First, mine is not a problem in logic. The philosophical problem is about the possibility of a Black Swan. Mine is about the impact. Also, it may not be too relevant who came up with the metaphor first, but the earliest mention of Black Swan problem I could find is in John Stuart Mill's A System of Logic. It was later used by many (including Charles Sanders Peirce) before it became associated with Karl Popper. Bell curve: When I write bell curve I mean the Gaussian bell curve, a.k.a. normal distri­ bution. All curves look like bells, so this is a nickname. Also, when I write the Gauss­ ian basin I mean all distributions that are similar and for which the improbable is inconsequential and of low impact (more technically, nonscalable—all moments are finite). Note that the visual presentation of the bell curve in histogram form masks the contribution of the remote event, as such an event will be a point to the far right or far left of the center. Diamonds: See Eco ( 2002). Platonicity: I'm simply referring to incurring the risk of using a wrong form—not that forms don't exist. I am not against essentialisms; I am often skeptical of our reverse engineering and identification of the right form. It is an inverse problem! Empiricist: If I call myself an empiricist, or an empirical philosopher, it is because I am just suspicious of confirmatory generalizations and hasty theorizing. Do not confuse this with the British empiricist tradition. Also, many statisticians, as we will see with the Makridakis competition, call themselves "empirical" researchers, but are in fact just the opposite—they fit theories to the past. Mention of Christ: See Flavius Josephus's The Jewish War. Great War and prediction: Ferguson ( 2006b). 312 NOTES Hindsight bias (retrospective distortion): See Fischhoff ( 1982b). Historical fractures: Braudel ( 1985), p. 169, quotes a little known passage from Gautier. He writes, " This long history,' wrote Emile-Félix Gautier, 'lasted a dozen centuries, longer than the entire history of France. Encountering the first Arab sword, the Greek language and thought, all that heritage went up in smoke, as if it never happened.' For discussions of discontinuity, see also Gurvitch ( 1957), Braudel ( 1953), Harris ( 2004). Religions spread as bestsellers: Veyne ( 1971). See also Veyne ( 2005). Clustering in political opinions: Pinker ( 2002). Categories: Rosch ( 1973, 1978). See also Umberto Eco's Kant and the Platypus. Ontological uncertainty: Some of the literature discusses my categorization problem as ontological uncertainty, meaning there can be uncertainty concerning the entities themselves. Historiography and philosophy of history: Bloch ( 1953), Carr (1961), Gaddis ( 2002), Braudel ( 1969,1990), Bourdé and Martin ( 1989), Certeau ( 1975), Muqaddamat Ibn Khaldoun illustrate the search for causation, which we see already present in Hero­ dotus. For philosophy of history, Aron ( 1961), Fukuyama ( 1992). For postmodern views, see Jenkins ( 1991). I show in Part Two how historiographers are unaware of the epistemological difference between forward and backward processes (i.e., be­ tween projection and reverse engineering). Information and markets: See Shiller ( 1981, 1989), DeLong et al. ( 1991), and Cutler et al. (1989). The bulk of market moves does not have a "reason," just a contrived ex­ planation. Of descriptive value for crashes: See Galbraith ( 1997), Shiller ( 2000), and Kindleberger ( 2001). M C HAPTER 3 Movies: See De Vany ( 2002). See also Salganik et al. ( 2006) for the contagion in music buying. Religion and domains of contagion: See Boyer ( 2001). Wisdom (madness) of crowds: Collectively, we can both get wiser or far more foolish. We may collectively have intuitions for Mediocristan-related matters, such as the weight of an ox (see Surowiecki, 2 004), but my conjecture is that we fail in more compli­ cated predictions (economic variables for which crowds incur pathologies—two heads are worse than one). For decision errors and groups, see Sniezek and Buckley ( 1993). Classic: Charles Mackay's Extraordinary Popular Delusions and the Mad­ ness of Crowds. Increase in the severity of events: Zajdenweber ( 2000). Modern life: The nineteenth-century novelist Emile Zola welcomed the arrival of the mar­ ket for culture in the late 1 800s, of which he seemed to be one of the first beneficia­ ries. He predicted that the writers' and artists' ability to exploit the commercial system freed them from a dependence on patrons' whims. Alas, this was accompanied with more severe concentration—very few people benefited from the system. Lahire ( 2006) shows how most writers, throughout history, have starved. Remarkably, we have ample data from France about the literary tradition. C HAPTER 4 Titanic: The quote is from Dave Ingram's presentation at the Enterprise Risk Manage­ ment Symposium in Chicago on May 2, 2 005. For more on LTCM, see Lowenstein ( 2000), Dunbar ( 1999). Hume's exposition: Hume ( 1748, 2000). Sextus Empriricus: "It is easy, I think, to reject the method of induction (eTra-ywyn). For since by way of it they want to make universals convincing on the basis of particu- NOTES 3 1 3 lars, they will do this surveying all the particulars or some of them. But if some, the induction will be infirm, it being that some of the particulars omitted in the induction should be contrary to the universal; and if all, they will labor at an impossible task, since the particulars and infinite are indeterminate. Thus in either case it results, I think, that induction totters." Outline of Pyrrhonism, Book II, p. 204. Bayle: The Dictionnaire historique et critique is long (twelve volumes, close to 6 ,000 pages) and heavy (40 pounds), yet it was an intellectual bestseller in its day, before being supplanted by the philosophes. It can be downloaded from the French Bibliothèque Nationale at www.bn.fr. Hume's inspiration from Bayle: See Popkin ( 1951, 1 955). Any reading of Bishop Huet (further down) would reveal the similarities with Hume. Pre-Bayle thinkers; Dissertation sur la recherche de la vérité, Simon Foucher, from around 1 673. It is a delight to read. It makes the heuristics and biases tradition look like the continuation of the pre-Enlightenment prescientific revolution atmosphere. Bishop Huet and the problem of induction: "Things cannot be known with perfect certainty because their causes are infinite," wrote Pierre-Daniel Huet in his Philosophical Treatise on the Weaknesses of the Human Mind. Huet, former bishop of Avranches, wrote this under the name Théocrite de Pluvignac, Seigneur de la Roche, Gentilhomme de Périgord. The chapter has another exact presentation of what became later known as "Hume's problem." That was in 1690, when the future David Home (later Hume) was minus twenty-two, so of no possible influence on Monseigneur Huet. Brochard's work: I first encountered the mention of Brochard's work ( 1888) in Nietzsche's Ecce Homo, in a comment where he also describes the skeptics as straight talkers. "An excellent study by Victor Brochard, Les sceptiques grecs, in which my Laertiana are also employed. The skeptics! the only honourable type among the two and five fold ambiguous philosopher crowd!" More trivia: Brochard taught Proust (see Kristeva, 1 998). Brochard seems to have understood Popper's problem (a few decades before Popper's birth). He presents the views of the negative empiricism of Menodotus of Nicomedia in similar terms to what we would call today "Popperian" empiricism. I wonder if Popper knew anything about Menodotus. He does not seem to quote him anywhere. Brochard published his doctoral thesis, De l'erreur, in 1878 at the University of Paris, on the subject of error—wonderfully modern. Epilogism: We know very little about Menodotus except for attacks on his beliefs by his detractor Galen in the extant Latin version of the Outline of Empiricism (Subfiguratio empirica), hard to translate: Memoriam et sensum et vocans epilogismum hoc tertium, multotiens autem et prêter memoriam nihil aliud ponens quam epilogismum. (In addition to perception and recollection, the third method is epilogism sensum, as the practitioner has, besides memory, nothing other than epilogism senses; Perilli's correction. But there is hope. Perilli ( 2004) reports that, according to a letter by the translator Is-haq Bin Hunain, there may be a "transcription" of Menodotus's work in Arabic somewhere for a scholar to find. Pascal: Pascal too had an idea of the confirmation problem and the asymmetry of inference. In his preface to the Traité du vide, Pascal writes (and I translate): In the judgment they made that nature did not tolerate a vacuum, they only meant nature in the state in which they knew it, since, so claim so in general, it would not be sufficient to witness it in a hundred different encounters, nor in a thousand, not in any other number no matter how large, since it would be a single case that would deny the general definition, and if one was contrary, a single one . . . 314 NOTES Hume's biographer: Mossner ( 1970). For a history of skepticism, Victor Cousin's lectures Leçons d'histoire de la philosophie à la Sorbonne ( 1828) and Hippolyte Taine's Les philosophes classiques, 9th edition ( 1868,1905). Popkin ( 2003) is a modem account. Also see Heckman ( 2003) and Bevan ( 1913). I have seen nothing in the modern phi­ losophy of probability linking it to skeptical inquiry. Sextus: See Popkin ( 2003), Sextus, House ( 1980), Bayle, Huet, Annas and Barnes ( 1985), and Julia Anna and Barnes's introduction in Sextus Empiricus ( 2000). Favier ( 1906) is hard to find; the only copy I located, thanks to Gur Huberman's efforts, was rotten—it seems that it has not been consulted in the past hundred years. Menodotus of Nicomedia and the marriage between empiricism and skepticism: Accord­ ing to Brochard ( 1887), Menodotus is responsible for the mixing of empiricism and Pyrrhonism. See also Favier ( 1906). See skepticism about this idea in Dye ( 2004), and Perilli ( 2004). Function not structure; empirical tripod: There are three sources, and three only, for ex­ perience to rely upon: observation, history (i.e., recorded observation), and judgment by analogy. Algazel: See his Tahafut al falasifah, which is rebutted by Averroës, a.k.a. Ibn-Rushd, in Tahafut Attahafut. Religious skeptics: There is also a medieval Jewish tradition, with the Arabic-speaking poet Yehuda Halevi. See Floridi ( 2002). Algazel and the ultimate/proximate causation: " . . . their determining, from the sole ob­ servation, of the nature of the necessary relationship between the cause and the effect, as if one could not witness the effect without the attributed cause of the cause with­ out the same effect." (Tahafut) At the core of Algazel's idea is the notion that if you drink because you are thirsty, thirst should not be seen as a direct cause. There may be a greater scheme being played out; in fact, there is, but it can only be understood by those familiar with evo­ lutionary thinking. See Tinbergen ( 1963, 1 968) for a modern account of the proxi­ mate. In a way, Algazel builds on Aristotle to attack him. In his Physics, Aristotle had already seen the distinction between the different layers of cause (formal, efficient, final, and material). Modern discussions on causality: See Reichenbach ( 1938), Granger ( 1999), and Pearl ( 2000). Children and natural induction: See Gelman and Coley ( 1990), Gelman and Hirschfeld ( 1999), and Sloman ( 1993). Natural induction: See Hespos ( 2006), Clark and Boyer ( 2006), Inagaki and Hatano ( 2006), Reboul ( 2006). See summary of earlier works in Plotkin ( 1998). C HAPTERS 5 -7 "Economists": What I mean by "economists" are most members of the mainstream, neo­ classical economics and finance establishment in universities—not fringe groups such as the Austrian or the Post-Keynesian schools. Small numbers: Tversky and Kahneman ( 1971), Rabin ( 2000). Domain specificity: Williams and Connolly ( 2006). We can see it in the usually overinterpreted Wason Selection Test: Wason ( 1960, 1 968). See also Shaklee and Fischhoff ( 1982), Barron Beaty, and Hearshly ( 1988). Kahneman's "They knew better" in Gilovich et al. ( 2002). Updike: The blurb is from Jaynes ( 1976). Brain hemispheric specialization: Gazzaniga and LeDoux ( 1978), Gazzaniga et al. ( 2005). Furthermore, Wolford, Miller, and Gazzaniga ( 2000) show probability match­ ing by the left brain. When you supply the right brain with, say, a lever that produces desirable goods 60% of the time, and another lever 40%, the right brain will cor­ rectly push the first lever as the optimal policy. If, on the other hand, you supply the left brain with the same options, it will push the first lever 60 percent of the time and NOTES 3 1 5 the other one 40—it will refuse to accept randomness. Goldberg ( 2005) argues that, the specialty is along different lines: left-brain damage does not bear severe effects in children, unlike right-brain lesions, while this is the reverse for the elderly. I thank Elkhonon Goldberg for referring me to Snyder's work; Snyder ( 2001). The experi­ ment is from Snyder et al. ( 2003). Sock selection and retrofit explanation: The experiment of the socks is presented in Carter ( 1999); the original paper appears to be Nisbett and Wilson ( 1977). See also Montier ( 2007). Astebro: Astebro ( 2003). See "Searching for the Invisible Man," The Economist, March 9, 2 006. To see how the overconfidence of entrepreneurs can explain the high failure rate, see Camerer ( 1995). Dopamine: Brugger and Graves ( 1997), among many other papers. See also Mohr et al. ( 2003) on dopamine asymmetry. Entropy and information: I am purposely avoiding the notion of entropy because the way it is conventionally phrased makes it ill-adapted to the type of randomness we expe­ rience in real life. Tsallis entropy works better with fat tails. Notes on George Perec: Eco ( 1994). Narrativity and illusion of understanding: Wilson, Gilbert, and Center bar ( 2003): "Help­ lessness theory has demonstrated that if people feel that they cannot control or predict their environments, they are at risk for severe motivational and cognitive deficits, such as depression." For the writing down of a diary, see Wilson ( 2002) or Wegner ( 2002). E . M . Forster's example: reference in Margalit ( 2002). National character: Terracciano et al. ( 2005) and Robins ( 2005) for the extent of individ­ ual variations. The illusion of nationality trait, which I usually call the "nationality heuristic," does connect to the halo effect: see Rosenzweig ( 2006) and Cialdini ( 2001). See Anderson ( 1983) for the ontology of nationality. Consistency bias: What psychologists call the consistency bias is the effect of revising memories in such a way to make sense with respect to subsequent information. See Schacter ( 2001). Memory not like storage on a computer: Rose ( 2003), Nader and LeDoux ( 1999). The myth of repressed memory: Loftus and Ketcham ( 2004). Chess players and disconfirmation: Cowley and Byrne ( 2004). Quine's problem: Davidson ( 1983) argues in favor of local, but against total, skepticism. Narrativity: Note that my discussion is not existential here, but merely practical, so my idea is to look at narrativity as an informational compression, nothing more involved philosophically (like whether a self is sequential or not). There is a literature on the "narrative self"—Bruner ( 2002) or whether it is necessary—see Strawson ( 1994) and his attack in Strawson ( 2004). The debate: Schechtman ( 1997), Taylor ( 1999), Phelan ( 2005). Synthesis in Turner ( 1996). "Postmodernists" and the desirability of narratives: See McCloskey ( 1990) and Frank­ furter and McGoun ( 1996). Narrativity of sayings and proverbs: Psychologists have long examined the gullibility of people in social settings when faced with well-sounding proverbs. For instance, ex­ periments have been made since the 1960s where people are asked whether they be­ lieve that a proverb is right, while another cohort is presented with the opposite meaning. For a presentation of the hilarious results, see Myers ( 2002). Science as a narrative: Indeed scientific papers can succeed by the same narrativity bias that "makes a story." You need to get attention. Bushman and Wells ( 2001). Discovering probabilities: Barron and Erev ( 2003) show how probabilities are underesti­ mated when they are not explicitly presented. Also personal communication with Barron. Risk and probability: See Slovic, Fischhoff, and Lichtenstein ( 1976), Slovic et al. ( 1977), and Slovic ( 1987). For risk as analysis and risk as feeling theory, see Slovic et al. ( 2002, 2 003), and Taleb ( 2004c). See Bar-Hillel and Wagenaar ( 1991). 316 NOTES Link between narrative fallacy and clinical knowledge: Dawes ( 1999) has a message for economists: see here his work on interviews and the concoction of a narrative. See also Dawes ( 2001) on the retrospective effect. Two systems of reasoning: See Sloman ( 1996, 2 002), and the summary in Kahneman and Frederick ( 2002). Kahneman's Nobel lecture sums it all up; it can be found at www.nobel.se. See also Stanovich and West ( 2000). Risk and emotions: Given the growing recent interest in the emotional role in behavior, there has been a growing literature on the role of emotions in both risk bearing and risk avoidance: the "risk as feeling" theory. See Loewenstein et al. ( 2001) and Slovic et al. ( 2003a). For a survey see Slovic et al. ( 2003b) and see also Slovic ( 1987). For a discussion of the "affect heuristic," see Finucane et al. ( 2000). For modularity, see Bates ( 1994). Emotions and cognition: For the effect of emotions on cognition, see LeDoux ( 2002). For risk, see Bechara et al. ( 1994). Availability heuristic (how easily things come to mind): See Tversky and Kahneman ( 1973). Real incidence of catastrophes: For an insightful discussion, see Albouy ( 2002), Zajdenweber ( 2000), or Sunstein ( 2002). Terrorism exploitation of the sensational: See the essay in Taleb ( 2004c). General books on psychology of decision making (heuristics and biases): Baron ( 2000) is simply the most comprehensive on the subject. Kunda ( 1999) is a summary from the standpoint of social psychology (sadly, the author died prematurely); shorter: Pious ( 1993). Also Dawes ( 1988) and Dawes ( 2001). Note that a chunk of the original pa­ pers are happily compiled in Kâhneman et al. ( 1982), Kahneman and Tversky ( 2000), Gilovich et al. ( 2002), and Slovic ( 2001a and 2 001b). See also Myers ( 2002) for an account on intuition and Gigerenzer et al. ( 2000) for an ecological presentation of the subject. The most complete account in economics and finance is Montier ( 2007), where his beautiful summary pieces that fed me for the last four years are compiled— not being an academic, he gets straight to the point. See also Camerer, Loewenstein, and Rabin ( 2004) for a selection of technical papers. A recommended review article on clinical "expert" knowledge is Dawes ( 2001). M ore general psychology of decision presentations: Klein ( 1998) proposes an alternative model of intuition. See Cialdini ( 2001) for social manipulation. A more specialized work, Camerer ( 2003), focuses on game theory. General review essays and comprehensive books in cognitive science: Newell and Simon ( 1972), Varela ( 1988), Fodor ( 1983), Marr ( 1982), Eysenck and Keane ( 2000), Lakoff and Johnson ( 1980). The MIT Encyclopedia of Cognitive Science has review articles by main thinkers. Evolutionary theory and domains of adaptation: See the original Wilson ( 2000), Kreps and Davies ( 1993), and Burnham ( 1997, 2 003). Very readable: Burnham and Phelan ( 2000). The compilation of Robert Trivers's work is in Trivers ( 2002). See also Wrangham ( 1999) on wars. Politics: "The Political Brain: A Recent Brain-imaging Study Shows That Our Political Predilections Are a Product of Unconscious Confirmation Bias," by Michael Shermer, Scientific American, September 26, 2 006. Neurobiology of decision making: For a general understanding of our knowledge about the brain's architecture: Gazzaniga et al. ( 2002). Gazzaniga ( 2005) provides literary summaries of some of the topics. More popular: Carter ( 1999). Also recommended: Ratey ( 2001), Ramachandran ( 2003), Ramachandran and Blakeslee ( 1998), Carter ( 1999, 2 002), Conlan ( 1999), the very readable Lewis, Amini, and Lannon ( 2000), and Goleman ( 1995). See Glimcher ( 2002) for probability and the brain. For the emotional brain, the three books by Damasio ( 1994, 2 000, 2 003), in addition to LeDoux ( 1998) and the more detailed LeDoux ( 2002), are the classics. See also the shorter Evans ( 2002). For the role of vision in aesthetics, but also in interpretation, Zeki ( 1999). NOTES 3 1 7 General works on memory: In psychology, Schacter ( 2001) is a review work of the mem­ ory biases with links to the hindsight effects. In neurobiology, see Rose ( 2003) and Squire and Kandel ( 2000). A general textbook on memory (in empirical psychology) isBaddeley ( 1997). Intellectual colonies and social life: See the account in Collins ( 1998) of the "lineages" of philosophers (although I don't think he was aware enough of the Casanova problem to take into account the bias making the works of solo philosophers less likely to sur­ vive). For an illustration of the aggressiveness of groups, see Uglow ( 2003). Hyman Minsky's work: Minsky ( 1982). Asymmetry: Prospect theory (Kahneman and Tversky [ 1979] and Tversky and Kahne­ man [ 1992]) accounts for the asymmetry between bad and good random events, but it also shows that the negative domain is convex while the positive domain is con­ cave, meaning that a loss of 100 is less painful than 100 losses of 1 but that a gain of 1 00 is also far less pleasurable than 100 times a gain of 1. Neural correlates of the asymmetry: See Davidson's work in Goleman ( 2003), Lane et al. ( 1997), and Gehring and Willoughby ( 2002). Csikszentmihalyi ( 1993, 1 998) further explains the attractiveness of steady payoffs with his theory of "flow." Deferred rewards and its neural correlates: McLure et al. ( 2004) show the brain activa­ tion in the cortex upon making a decision to defer, providing insight on the limbic impulse behind immediacy and the cortical activity in delaying. See also Loewenstein et al. ( 1992), Elster ( 1998), Berridge ( 2005). For the neurology of preferences in Ca­ puchin monkeys, Chen et al. ( 2005). Bleed or blowup: Gladwell ( 2002) and Taleb ( 2004c). Why bleed is painful can be explained by dull stress; Sapolsky et al. ( 2003) and Sapolsky ( 1998). For how companies like steady returns, Degeorge and Zeckhauser ( 1999). Poetics of hope: Mihailescu ( 2006). Discontinuities and jumps: Classified by René Thorn as constituting seven classes; Thorn ( 1980). Evolution and small probabilities: Consider also the naive evolutionary thinking positing the "optimality" of selection. The founder of sociobiology, the great E . O. Wilson, does not agree with such optimality when it comes to rare events. In Wilson ( 2002), he writes: The human brain evidently evolved to commit itself emotionally only to a small piece of geography, a limited band of kinsmen, and two or three generations into the future. To look neither far ahead nor far afield is el­ emental in a Darwinian sense. We are innately inclined to ignore any dis­ tant possibility not yet requiring examination. It is, people say, just good common sense. Why do they think in this shortsighted way? The reason is simple: it is a hardwired part of our Paleolithic her­ itage. For hundreds of millennia, those who worked for short-term gain within a small circle of relatives and friends lived longer and left more offspring—even when their collective striving caused their chiefdoms and empires to crumble around them. The long view that might have saved their distant descendants required a vision and extended altruism instinc­ tively difficult to marshal. See also Miller ( 2000): "Evolution has no foresight. It lacks the long-term vision of drug company management. A species can't raise venture capital to pay its bills while its research team . . . This makes it hard to explain innovations. " Note that neither author considered my age argument. C HAPTER 8 Silent evidence bears the name wrong reference class in the nasty field of philosophy of probability, anthropic bias in physics, and survivorship bias in statistics (economists pre- 318 NOTES sent the interesting attribute of having rediscovered it a few times while being severely fooled by it). Confirmation: Bacon says in On Truth, "No pleasure is comparable to the standing upon the vantage ground of truth (a hill not to be commanded and where the air is always clear and serene), and to see the errors, and wanderings, and mists, and tempests, in the vale below." This easily shows how great intentions can lead to the confirmation fallacy. Bacon did not understand the empiricists: He was looking for the golden mean. Again, from On Truth: There are three sources of error and three species of false philosophy; the sophistic, the empiric and the superstitious Aristotle affords the most eminent instance of the first; for he corrupted natural philosophy by logic—thus he formed the world of categories. . . . Nor is much stress to be laid on his frequent recourse to experiment in his books on animals, his problems and other treatises, for he had already decided, without having properly consulted experience as the basis of his decisions and axioms. . . . The empiric school produces dogmas of a more deformed and monstrous nature than the sophistic or theoretic school; not being founded in the light of common notions (which however poor and super­ stitious, is yet in a manner universal and of general tendency), but in the confined obscurity of a few experiments. Bacon's misconception may be the reason it took us a while to understand that they treated history (and experiments) as mere and vague "guidance," i.e., epilogy. Publishing: Allen ( 2005), Klebanoff ( 2002), Epstein ( 2001), de Bellaigue ( 2004), and Blake ( 1999). For a funny list of rejections, see Bernard ( 2002) and White ( 1982). Michael Korda's memoir, Korda ( 2000), adds some color to the business. These books are anecdotal, but we will see later that books follow steep scale-invariant structures with the implication of a severe role for randomness. Anthropic bias: See the wonderful and comprehensive discussion in Bostrom ( 2002). In physics, see Barrow and Tipler ( 1986) and Rees ( 2004). Sornette ( 2004) has Gott's derivation of survival as a power law. In finance, Sullivan et al. ( 1999) discuss sur­ vivorship bias. See also Taleb ( 2004a). Studies that ignore the bias and state inappro­ priate conclusions: Stanley and Danko ( 1996) and the more foolish Stanley ( 2000). Manuscripts and the Phoenicians: For survival and science, see Cisne ( 2005). Note that the article takes into account physical survival (like fossil), not cultural, which implies a selection bias. Courtesy Peter Bevelin. Stigler's law of eponymy: Stigler ( 2002). French book statistics: Lire, April 2 005. Wliy dispersion matters: More technically, the distribution of the extremum (i.e., the maximum or minimum) of a random variable depends more on the variance of the process than on its mean. Someone whose weight tends to fluctuate a lot is more likely to show you a picture of himself very thin than someone else whose weight is on average lower but remains constant. The mean (read skills) sometimes plays a very, very small role. Fossil record: I thank the reader Frederick Colbourne for his comments on this subject. The literature calls it the "pull of the recent," but has difficulty estimating the effects, owing t o disagreements. See Jablonski et al. ( 2003). Undiscovered public knowledge: Here is another manifestation of silent evidence: you can actually do lab work sitting in an armchair, just by linking bits and pieces of re­ search by people who labor apart from one another and miss on connections. Using bibliographic analysis, it is possible to find links between published information that had not been known previously by researchers. I "discovered" the vindication of the NOTES 3 1 9 armchair in Fuller ( 2005). For other interesting discoveries, see Spasser ( 1997) and Swanson ( 1986a, 1 986b, 1 987). Crime: The définition of economic "crime" is something that comes in hindsight. Regula­ tions, once enacted, do not run retrospectively, so many activities causing excess are never sanctioned (e.g., bribery). Bastiat: See Bastiat ( 1862-1864). Casanova: I thank the reader Milo Jones for pointing out to me the exact number of vol­ umes. See Masters ( 1969). Reference point problem: Taking into account background information requires a form of thinking in conditional terms that, oddly, many scientists (especially the better ones) are incapable of handling. The difference between the two odds is called, sim­ ply, conditional probability. We are computing the probability of surviving condi­ tional on our being in the sample itself. Simply put, you cannot compute probabilities if your survival is part of the condition of the realization of the process. Plagues: See McNeill ( 1976). C HAPTER 9 Intelligence and Nobel: Simonton ( 1999). If IQ scores correlate, they do so very weakly with subsequent success. "Uncertainty": Knight ( 1923). My definition of such risk (Taleb, 2 007c) is that it is a nor­ mative situation, where we can be certain about probabilities, i.e., no metaprobabilities. Whereas, if randomness and risk result from epistemic opacity, the difficulty in seeing causes, then necessarily the distinction is bunk. Any reader of Cicero would recognize it as his probability; see epistemic opacity in his De Divinatione, Liber primus, LVI, 1 27: Qui enim teneat causas rerum futurarum, idem necesse est omnia teneat quae futura sint. Quod cum nemo facere nisi deus possit, relinquendum est homini, ut signis quibusdam consequentia declarantibus futura praesentiat. "He who knows the causes will understand the future, except that, given that nobody outside God possesses such faculty . . . " Philosophy and epistemology of probability: Laplace. Treatise, Keynes ( 1920), de Finetti ( 1931), Kyburg ( 1983), Levi ( 1970), Ayer, Hacking ( 1990, 2 001), Gillies ( 2000), von Mises ( 1928), von Plato ( 1994), Carnap ( 1950), Cohen ( 1989), Popper ( 1971), Eatwell et al. ( 1987), and Gigerenzer et al. ( 1989). History of statistical knowledge and methods: I found no intelligent work in the history of statistics, i.e., one that does not fall prey to the ludic fallacy or Gaussianism. For a conventional account, see Bernstein ( 1996) and David ( 1962). General books on probability and information theory: Cover and Thomas ( 1991); less technical but excellent, Bayer ( 2003). For a probabilistic view of information theory: the posthumous Jaynes ( 2003) is the only mathematical book other than de Finetti's work that I can recommend to the general reader, owing t o his Bayesian approach and his allergy for the formalism of the idiot savant. Poker: It escapes the ludic fallacy; see Taleb ( 2006a). Plato's normative approach to left and right hands: See McManus ( 2002). Nietzsche's bildungsphilister: See van Tongeren ( 2002) and Hicks and Rosenberg ( 2003). Note that because of the confirmation bias academics will tell you that intellectuals "lack rigor," and will bring examples of those who do, not those who don't. Economics books that deal with uncertainty: Carter et al. ( 1962), Shackle ( 1961, 1 973), Hayek ( 1994). Hirshleifer and Riley ( 1992) fits uncertainty into neoclassical economics. Incomputability: For earthquakes, see Freedman and Stark ( 2003) (courtesy of Gur Huberman). 320 NOTES Academia and philistinism: There is a round-trip fallacy; if academia means rigor (which I doubt, since what I saw called "peer reviewing" is too often a masquerade), nonaca­ demic does not imply nonrigorous. Why do I doubt the "rigor"? By the confirmation bias they show you their contributions yet in spite of the high number of laboring academics, a relatively minute fraction of our results come from them. A dispropor­ tionately high number of contributions come from freelance researchers and those dissingly called amateurs: Darwin, Freud, M arx, Mandelbrot, even the early Einstein. Influence on the part of an academic is usually accidental. This even held in the Mid­ dle Ages and the Renaissance, see Le Goff ( 1985). Also, the Enlightenment figures (Voltaire, Rousseau, d'Holbach, Diderot, Montesquieu) were all nonacademics at a time when academia was large. C HAPTER 10 Overconfidence: Albert and Raiffa ( 1982) (though apparently the paper languished for a decade before formal publication). Lichtenstein and, Fischhoff ( 1977) showed that overconfidence can be influenced by item difficulty; it typically diminishes and turns into underconfidence in easy items (compare with Armelius [ 1979]). Plenty of papers since have tried to pin down the conditions of calibration failures or robustness (be they task training, ecological aspects of the domain, level of education, or national­ ity): Dawes ( 1980), Koriat, Lichtenstein, and Fischhoff ( 1980), Mayseless and Kruglanski ( 1987), Dunning et al. ( 1990), Ayton and McClelland ( 1997), Gervais and Odean ( 1999), Griffin and Varey ( 1996), Juslin ( 1991, 1 993, 1 994), Juslin and Olsson ( 1997), Kadane and Lichtenstein ( 1982), May ( 1986), McClelland and Bolger ( 1994), Pfeifer ( 1994), Russo and Schoernaker ( 1992), Klayman et al. ( 1999). Note the decrease (unexpectedly) in overconfidence under group decisions: see Sniezek and Henry ( 1989)—and solutions in Pious ( 1995). I am suspicious here of the Mediocristan/Extremistan distinction and the unevenness of the variables. Alas, I found no paper making this distinction. There are also solutions in Stoll ( 1996), Arkes et al. ( 1987). For overconfidence in finance, see Thorley ( 1999) and Barber and Odean ( 1999). For cross-boundaries effects, Yates et al. ( 1996, 1 998), Angele et al. ( 1982). For simultaneous overconfidence and underconfidence, see Erev, Wallsten, and Budescu ( 1994). Frequency vs. probability—the ecological problem: Hoffrage and Gigerenzer ( 1998) think that overconfidence is less significant when the problem is expressed in frequen­ cies as opposed to probabilities. In fact, there has been a debate about the difference between "ecology" and laboratory; see Gigerenzer et al. ( 2000), Gigerenzer and Richter ( 1990), and Gigerenzer ( 1991). We are "fast and frugal" (Gigerenzer and Gold­ stein [ 1996]). As far as the Black Swan is concerned, these problems of ecology do not arise: we do not live in an environment in which we are supplied with frequencies or, more generally, for which we are fit. Also in ecology, Spariosu ( 2004) for the ludic as­ pect, Cosmides and Tooby ( 1990). Leary ( 1987) for Brunswikian ideas, as well as Brunswik ( 1952). Lack of awareness of ignorance: "In short, the same knowledge that underlies the ability to produce correct judgment is also the knowledge that underlies the ability to recog­ nize correct judgment. To lack the former is to be deficient in the latter." From Kruger and Dunning ( 1999). Expert problem in isolation: I see the expert problem as indistinguishable from Matthew effects and Extremism fat tails (more later), yet I found no such link in the literatures of sociology and psychology. Clinical knowledge and its problems: See Meehl ( 1954) and Dawes, Faust, and Meehl ( 1989). Most entertaining is the essay "Why I Do Not Attend Case Conferences" in Meehl ( 1973). See also Wagenaar and Keren ( 1985, 1 986). Financial analysts, herding, and forecasting: See Guedj and Bouchaud ( 2006), Abarbanell and Bernard ( 1992), Chen et al. ( 2002), De Bondt and Thaler ( 1990), Easterwood NOTES 3 2 1 and Nutt ( 1999), Friesen and Weller ( 2002), Foster ( 1977), Hong and Kubik ( 2003), Jacob et al. ( 1999), Lim ( 2001), Liu ( 1998), Maines and Hand ( 1996), Mendenhall ( 1991), Mikhail et al. ( 1997,1999), Zitzewitz ( 2001), and El-Galfy and Forbes ( 2005). For a comparison with weather forecasters (unfavorable): Tyszka and Zielonka ( 2002). Economists and forecasting: Tetlock ( 2005), Makridakis and Hibon ( 2000), Makridakis et al. ( 1982), Makridakis et al. ( 1993), Gripaios ( 1994), Armstrong ( 1978, 1981); and rebuttals by McNees ( 1978), Tashman ( 2000), Blake et al. ( 1986), Onkal et al. ( 2003), Gillespie ( 1979), Baron ( 2004), Batchelor ( 1990, 2001), Dominitz and Grether ( 1999). Lamont ( 2002) looks for reputational factors: established forecasters get worse as they produce more radical forecasts to get attention—consistent with Tetlock's hedgehog effect. Ahiya and Doi ( 2001) look for herd behavior in Japan. See McNees ( 1995), Remus et al. ( 1997), O'Neill and Desai ( 2005), Bewley and Fiebig ( 2002), Angner ( 2006), Bénassy-Quéré ( 2002); Brender and Pisani ( 2001) look at the Bloomberg consensus; De Bondt and Kappler ( 2004) claim evidence of weak persistence in fifty-two years of data, but I saw the slides in a presentation, never the paper, which after two years might never materialize. Overconfidence, Braun and Yaniv ( 1992). See Hahn ( 1993) for a general intellectual discussion. More general, Clemen ( 1986, 1989). For Game theory, Green ( 2005). Many operators, such as James Montier, and many newspapers and magazines (such as The Economist), run casual tests of prediction. Cumulatively, they must be taken seriously since they cover more variables. Popular culture: In 1931, Edward Angly exposed forecasts made by President Hoover in a book titled Oh Yeah? Another hilarious book is Cerf and Navasky ( 1998), where, incidentally, I got the p re-1973 oil-estimation story. Effects of information: The major paper is Bruner and Potter ( 1964). I thank Danny Kahneman for discussions and pointing out this paper to me. See also Montier ( 2007), Oskamp ( 1965), and Benartzi ( 2001). These biases become ambiguous information (Griffin and Tversky [ 1992]). For how they fail to disappear with expertise and training, see Kahneman and Tversky ( 1982) and Tversky and Kahneman ( 1982). See Kunda ( 1990) for how preference-consistent information is taken at face value, while preference-inconsistent information is processed critically. Planning fallacy: Kahneman and Tversky ( 1979) and Buehler, Griffin, and Ross ( 2002). The planning fallacy shows a consistent bias in people's planning ability, even with matters of a repeatable nature—though it is more exaggerated with nonrepeatable events. Wars: Trivers ( 2002). Are there incentives to delay?: Flyvbjerg et al. ( 2002). Oskamp: Oskamp ( 1965) and Montier ( 2007). Task characteristics and effect on decision making: Shanteau ( 1992). Epistèmê vs. Technë: This distinction harks back to Aristotle, but it recurs then dies? down—it most recently recurs in accounts such as tacit knowledge in "know how." See Ryle ( 1949), Polanyi ( 1958/1974), and Mokyr ( 2002). Catherine the Great: The number of lovers comes from Rounding ( 2006). Life expectancy: www.annuityadvantage.com/lifeexpectancy.htm. For projects, I have used a probability of exceeding with a power-law exponent of 3 /2: f= Kx . Thus the conditional expectation of x, knowing that x exceeds a m C HAPTERS 1 1-13 a f(x)dx Serendipity: See Koestler ( 1959) and Rees ( 2004). Rees also has powerful ideas on forecastability. See also Popper's comments in Popper ( 2002), and Waller ( 2002a), Cannon 322 NOTES ( 1940), Mach ( 1896) (cited in Simonton [ 1999]), and Merton and Barber ( 2004). See Simonton ( 2004) for a synthesis. For serendipity in medicine and anesthesiology, see Vale et al. ( 2005). "Renaissance man": See www.bell-labs.com/project/feature/archives/cosmology/. Laser: As usual, there are controversies as to who "invented" the technology. After a suc­ cessful discovery, precursors are rapidly found, owing to the retrospective distortion. Charles Townsend won the Nobel prize, but was sued by his student Gordon Gould, who held that he did the actual work (see The Economist, June 9 , 2 005). Darwin/Wallace: Quammen ( 2006). Popper's attack on historicism: See Popper ( 2002). Note that I am reinterpreting Popper's idea in a modern manner here, using my own experiences and knowledge, not com­ menting on comments about Popper's work—with the consequent lack of fidelity to his message. In other words, these are not directly Popper's arguments, but largely mine phrased in a Popperian framework. The conditional expectation of an uncondi­ tional expectation is an unconditional expectation. Forecast for the future a hundred years earlier: Bellamy ( 1891) illustrates our mental pro­ jections of the future. However, some stories might be exaggerated: "A Patently False Patent Myth still! Did a patent official really once resign because he thought nothing was left to invent? Once such myths start they take on a life of their own." Skeptical Inquirer, M ay-June, 2 003. Observation by Peirce: Olsson ( 2006), Peirce ( 1955). Predicting and explaining: See Thorn ( 1993). Poincaré: The three body problem can be found in Barrow-Green ( 1996), Rollet ( 2005), and Galison ( 2003). On Einstein, Pais ( 1982). More recent revelations in Hladik ( 2004). Billiard balls: Berry ( 1978) and Pisarenko and Sornette ( 2004). Very general discussion on "complexity": Benkirane ( 2002), Scheps ( 1996), and Ruelle ( 1991). For limits, Barrow ( 1998). Hayek: See www.nobel.se. See Hayek ( 1945, 1 994). Is it that mechanisms do not correct themselves from railing by influential people, but either by mortality of the operators, or something even more severe, by being put out of business? Alas, because of conta­ gion, there seems to be little logic to how matters improve; luck plays a part in how soft sciences evolve. See Ormerod ( 2006) for network effects in "intellectuals and so­ cialism" and the power-law distribution in influence owing to the scale-free aspect of the connections—and the consequential arbitrariness. Hayek seems to have been a prisoner of Weber's old differentiation between Natur-Wissenschaften and Geistes Wissenschaften—but thankfully not Popper. Insularity of economists: Pieters and Baumgartner ( 2002). One good aspect of the insu­ larity of economists is that they can insult me all they want without any consequence: it appears that only economists read other economists (so they can write papers for other economists to read). For a more general case, see Wallerstein ( 1999). Note that Braudel fought "economic history." It was history. Economics as religion: Nelson ( 2001) and Keen ( 2001). For methodology, see Blaug ( 1992). For high priests and lowly philosophers, see Boettke, Coyne, and Leeson ( 2006). Note that the works of Gary Becker and the Platonists of the Chicago School are all marred by the confirmation bias: Becker is quick to show you situations in which people are moved by economic incentives, but does not show you cases (vastly more numerous) in which people don't care about such materialistic incentives. The smartest book I've seen in economics is Gave et al. ( 2005) since it transcends the constructed categories in academic economic discourse (one of the authors is the journalist Anatole Kaletsky). General theory: This fact has not deterred "general theorists." One hotshot of the Platonifying variety explained to me during a long plane ride from Geneva to New York that the ideas of Kahneman and his colleagues must be rejected because they do not NOTES 3 2 3 allow us to develop a general equilibrium theory, producing "time-inconsistent pref­ erences." For a minute I thought he was joking: he blamed the psychologists' ideas and human incoherence for interfering with his ability to build his Platonic model. Samuelson: For his optimization, see Samuelson ( 1983). Also Stiglitz ( 1994). Plato's dogma on body symmetry: "Athenian Stranger to Cleinias: In that the right and left hand are supposed to be by nature differently suited for our various uses of them; whereas no difference is found in the use of the feet and the lower limbs; but in the use of the hands we are, as it were, maimed by the folly of nurses and mothers; for al­ though our several limbs are by nature balanced, we create a difference in them by bad habit," in Plato's Laws. See McManus ( 2002). Drug companies: Other such firms, I was told, are run by commercial persons who tell re­ searchers where they find a "market need" and ask them to "invent" drugs and cures accordingly—which accords with the methods of the dangerously misleading Wall Street security analysts. They formulate projections as if they know what they are going to find. Models of the returns on innovations: Sornette and Zajdenweber ( 1999) and Silverberg and Verspagen ( 2005). Evolution on a short leash: Dennet ( 2003) and Stanovich and West ( 2000). Montaigne: We don't get much from the biographies of a personal essayist; some infor­ mation in Frame ( 1965) and Zweig ( 1960). Projectibility and the grue paradox: See Goodman ( 1955). See also an application (or per­ haps misapplication) in King and Zheng ( 2005). Constructionism: See Berger and Luckmann ( 1966) and Hacking ( 1999). Certification vs, true skills or knowledge: See Donhardt ( 2004). There is also a franchise protection. Mathematics may not be so necessary a tool for economics, except to pro­ tect the franchise of those economists who know math. In my father's days, the selec­ tion process for the mandarins was made using their abilities in Latin (or Greek). So the class of students groomed for the top was grounded in the classics and knew some interesting subjects. They were also trained in Cicero's highly probabilistic view of things—and selected on erudition, which carries small side effects. If anything it allows you to handle fuzzy matters. My generation was selected according to mathe­ matical skills. You made it based on an engineering mentality; this produced man­ darins with mathematical, highly structured, logical minds, and, accordingly, they will select their peers based on such criteria. So the papers in economics and social science gravitated toward the highly mathematical and protected their franchise by putting high mathematical barriers to entry. You could also smoke the general public who is unable to put a check on you. Another effect of this franchise protection is that it might have encouraged putting "at the top" those idiot-savant-like researchers who lacked in erudition, hence were insular, parochial, and closed to other disciplines. Freedom and determinism: a speculative idea in Penrose ( 1989) where only the quantum effects (with the perceived indeterminacy there) can justify consciousness. Projectibility: uniqueness assuming least squares or MAD. Chaos theory and the backward/forward confusion: Laurent Firode's Happenstance, a.k.a. Le battement d'ailes du papillon I The Beating of a Butterfly's Wings ( 2000). Autism and perception of randomness: See Williams et al. ( 2002). Forecasting and misforecasting errors in hedonic states: Wilson, Meyers, and Gilbert ( 2001), Wilson, Gilbert, and Centerbar ( 2003), and Wilson et al. ( 2005). They call it "emotional evanescence." Forecasting and consciousness: See the idea of "aboutness" in Dennett ( 1995, 2 003) and Humphrey ( 1992). However, Gilbert ( 2006) believes that we are not the only animal that forecasts—which is wrong as it turned out. Suddendorf ( 2006) and Dally, Emery, and Clayton ( 2006) show that animals too forecast! Russell's comment on Pascal's wager: Ayer ( 1988) reports this as a private communica­ tion. 324 NOTES History: Carr (1961), Hexter ( 1979), and Gaddis ( 2002). But I have trouble with histori­ ans throughout, because they often mistake the forward and the backward processes. Mark Buchanan's Ubiquity and the quite confused discussion by Niall Ferguson in Nature. Neither of them seem to realize the problem of calibration with power laws. See also Ferguson, Why Did the Great War?, to gauge the extent of the forwardbackward problems. For the traditional nomological tendency, i.e., the attempt to go beyond cause into a general theory, see Muqaddamah by Ibn Khaldoun. See also Hegel's Philoso­ phy of History. Emotion and cognition: Zajonc ( 1980, 1984). Catastrophe insurance: Froot (2001) claims that insurance for remote events is overpriced. How he determined this remains unclear (perhaps by backfltting or bootstraps), but reinsurance companies have not been making a penny selling "overpriced" insurance. Postmodernists: Postmodernists do not seem to be aware of the differences between nar­ rative and prediction. Luck and serendipity in medicine: Vale et al. ( 2005). In history, see Cooper ( 2004). See also Ruffié ( 1977). More general, see Roberts ( 1989). Affective forecasting: See Gilbert ( 1991), Gilbert et al. ( 1993), and Montier ( 2007). C HAPTERS 1 4-17 This section will also serve another purpose. Whenever I talk about the Black Swan, peo­ ple tend to supply me with anecdotes. But these anecdotes are just corroborative: you need to show that in the aggregate the world is dominated by Black Swan events. To me, the rejection of nonscalable randomness is sufficient to establish the role and significance of Black Swans. Matthew effects: See Merton ( 1968, 1973a, 1988). Martial, in his Epigrams: "Semper pauper eris, si pauper es, Aemiliane./Dantur opes nullis (nunc) nisi divitibus. " (Epigr. V 8 1). See also Zuckerman ( 1997,1998). Cumulative advantage and its consequences on social fairness: review in DiPrete et al. ( 2006). See also Brookes-Gun and Duncan ( 1994), Broughton and Mills ( 1980), Dannefer ( 2003), Donhardt ( 2004), Hannon ( 2003), and Huber ( 1998). For how it may explain precocity, see Elman and O'Rand ( 2004). Concentration and fairness in intellectual careers: Cole and Cole ( 1973), Cole ( 1970), Conley ( 1999), Faia (1975), Seglen ( 1992), Redner ( 1998), Lotka ( 1926), F ox and Kochanowski ( 2004), and Huber ( 2002). Winner take all: Rosen ( 1981), Frank (1994), Frank and Cook ( 1995), and Attewell ( 2001). Arts: Bourdieu ( 1996), Taleb ( 2004e). Wars: War is concentrated in an Extremistan manner: Lewis Fry Richardson noted last century the uneveness in the distribution of casualties (Richardson [ I960]). Modern wars: Arkush and Allen ( 2006). In the study of the Maori, the pattern of fighting with clubs was sustainable for many centuries—modern tools cause 2 0,000 to 5 0,000 deaths a year. We are simply not made for technical warfare. For an anecdotal and causative account of the history of a war, see Ferguson ( 2006). S&P 500: See Rosenzweig ( 2006). The long tail: Anderson ( 2006). Cognitive diversity: See Page ( 2007). For the effect of the Internet on schools, see Han et al. (2006). Cascades: See Schelling ( 1971,1978) and Watts ( 2002). For information cascades in eco­ nomics, see Bikhchandani, Hirshleifer, and Welch ( 1992) and Shiller ( 1995). See also Surowiecki ( 2004). Fairness: Some researchers, like Frank (1999), see arbitrary and random success by oth­ ers as no different from pollution, which necessitates the enactment of a t ax. De Vany, Taleb, and Spitznagel ( 2004) propose a market-based solution to the problem of al- NOTES 3 2 5 location through the process of voluntary self-insurance and derivative products. Shiller ( 2003) proposes cross-country insurance. The mathematics of preferential attachment: This argument pitted Mandelbrot against the cognitive scientist Herbert Simon, who formalized Zipf's ideas in a 1955 paper (Simon [ 1955]), which then became known as the Zipf-Simon model. Hey, you need to allow for people to fall from favor! Concentration: Price ( 1970). Simon's "Zipf derivation," Simon ( 1955). More general bibliometrics, see Price ( 1976) and Glânzel ( 2003). Creative destruction revisited: See Schumpeter ( 1942). Networks: Barabâsi and Albert ( 1999), Albert and Barabâsi ( 2000), Strogatz ( 2001, 2 003), Callaway et al. ( 2000), Newman et al. ( 2000), Newman, Watts, and Strogatz ( 2000), Newman ( 2001), Watts and Strogatz ( 1998), Watts ( 2002, 2 003), and Amaral et al. ( 2000). It supposedly started with Milgram ( 1967). See also Barbour and Reinert ( 2000), Barthélémy and Amaral ( 1999). See Boots and Sasaki ( 1999) for in­ fections. For extensions, see Bhalla and Iyengar ( 1999). Resilence, Cohen et al. ( 2000), Barabâsi and Bonabeau ( 2003), Barabâsi ( 2002), and Banavar et al. ( 2000). Power laws and the Web, Adamic and Huberman ( 1999) and Adamic ( 1999). Statis­ tics of the Internet: Huberman ( 2001), Willinger et al. ( 2004), and Faloutsos, Faloutsos, and Faloutsos ( 1999). For DNA, see Vogelstein et al. ( 2000). Self-organized criticality: Bak ( 1996). Pioneers of fat tails: For wealth, Pareto ( 1896), Yule ( 1925,1944). Less of a pioneer Zipf ( 1932, 1 949). For linguistics, see Mandelbrot ( 1952). Pareto: See Bouvier ( 1999). Endogenous vs. exogenous: Sornette et al. ( 2004). Sperber's work: Sperber ( 1996a, 1 996b, 1 997). Regression: If you hear the phrase least square regression, you should be suspicious about the claims being made. As it assumes that your errors wash out rather rapidly, it un­ derestimates the total possible error, and thus overestimates what knowledge one can derive from the data. The notion of central limit: very misunderstood: it takes a long time to reach the central limit—so as we do not live in the asymptote, we've got problems. All various random variables (as we started in the example of Chapter 1 6 with a +1 or - 1 , which is called a Bernouilli draw) under summation (we did sum up the wins of the 40 tosses) be­ come Gaussian. Summation is key here, since we are considering the results of adding up the 40 steps, which is where the Gaussian, under the first and second central as­ sumptions becomes what is called a "distribution." (A distribution tells you how you are likely to have your outcomes spread out, or distributed.) However, they may get there at different speeds. This is called the central limit theorem: if you add random variables coming from these individual tame jumps, it will lead to the Gaussian. Where does the central limit not work? If you do not have these central assump­ tions, but have jumps of random size instead, then we would not get the Gaussian. Furthermore, we sometimes converge very slowly to the Gaussian. For preasymptotics and scalability, Mandelbrot and Taleb ( 2007a), Bouchaud and Potters ( 2003). For the problem of working outside asymptotes, Taleb ( 2007). Aureas mediocritas: historical perspective, in Naya and Pouey-Mounou ( 2005) aptly called Éloge de la médiocrité. Reification (hypostatization): Lukacz, in Bewes ( 2002). Catastrophes: Posner ( 2004). Concentration and modem economic life: Zajdenweber ( 2000). Choices of society structure and compressed outcomes: The classical paper is Rawls ( 1971), though Frohlich, Oppenheimer, and Eavy ( 1987a, 1 987b), as well as Lissowski, Tyszka, and Okrasa ( 1991), contradict the notion of the desirability of Rawl's veil (though by experiment). People prefer maximum average income subjected to a floor constraint on some form of equality for the poor, inequality for the rich type of environment. 326 NOTES Gaussian contagion: Quételet in Stigler ( 1986). Francis Galton (as quoted in Ian Hack­ ing's The Taming of Chance): "I know of scarcely anything so apt to impress the imagination as the wonderful form of cosmic order expressed by 'the law of error.' " "Finite variance" nonsense: Associated with CUT is an assumption called "finite vari­ ance" that is rather technical: none of these building-block steps can take an infinite value if you square them or multiply them by themselves. They need to be bounded at some number. We simplified here by making them all one single step, or finite stan­ dard deviation. But the problem is that some fractal payoffs may have finite variance, but still not take us there rapidly. See Bouchaud and Potters ( 2003). Lognormal: There is an intermediate variety that is called the lognormal, emphasized by one Gibrat (see Sutton [ 1997]) early in the twentieth century as an attempt to explain the distribution of wealth. In this framework, it is not quite that the wealthy get wealthier, in a pure preferential attachment situation, but that if your wealth is at 100 you will vary by 1, but when your wealth is at 1,000, you will vary by 10. The rela­ tive changes in your wealth are Gaussian. So the lognormal superficially resembles the fractal, in the sense that it may tolerate some large deviations, but it is dangerous because these rapidly taper off at the end. The introduction of the lognormal was a very bad compromise, but a way to conceal the flaws of the Gaussian. Extinctions: Sterelny ( 2001). For extinctions from abrupt fractures, see Courtillot ( 1995) and Courtillot and Gaudemer ( 1996). Jumps: Eldredge and Gould. F RACTALS, POWER LAWS, a nd S CALE-FREE DISTRIBUTIONS Definition: Technically, P = K x~ where a is supposed to be the power-law exponent. It is said to be scale free, in the sense that it does not have a characteristic scale: rela­ tive deviation of does not depend on x, but on n—for x "large enough." Now, in the other class of distribution, the one that I can intuitively describe as nonscalable, with the typical shape p(x) = Exp [-a x], the scale will be a. Problem of "how large": Now the problem that is usually misunderstood. This scalabil­ ity might stop somewhere, but I do not know where, so I might consider it infinite. The statements very large and I don't know how large and infinitely large are epistemologically substitutable. There might be a point at which the distributions flip. This will show once we look at them more graphically. Log P >x = -a Log X +C - for a scalable. When we do a log-log plot (i.e., plot P >x and x on a logarithmic scale), as in Figures 15 and 16, we should see a straight line. Fractals and power laws: Mandelbrot ( 1975,1982). Schroeder ( 1991) is imperative. John Chipman's unpublished manuscript The Paretian Heritage (Chipman [ 2006]) is the best review piece I've seen. See also Mitzenmacher ( 2003). "To come very near true theory and to grasp its precise application are two very different things as the history of science teaches us. Everything of importance has been said before by somebody who did not discover it." Whitehead ( 1925). Fractals in poetry: For the quote on Dickinson, see Fulton ( 1998). Lacunarity: Brockman ( 2005). In the arts, Mandelbrot ( 1982). Fractals in medicine: "New Tool to Diagnose and Treat Breast Cancer," Newswise, July 1 8, 2 006. General reference books in statistical physics: The most complete (in relation to fat tails) is Sornette ( 2004). See also Voit ( 2001) or the far deeper Bouchaud and Potters ( 2002) for financial prices and econophysics. For "complexity" theory, technical books: Bocarra ( 2004), Strogatz ( 1994), the popular Ruelle ( 1991), and also Prigogine ( 1996). Fitting processes: For the philosophy of the problem, Taleb and Pilpel ( 2004). See also Pisarenko and Sornette ( 2004), Sornette et al. ( 2004), and Sornette and Ide ( 2001). Poisson jump: Sometimes people propose a Gaussian distribution with a small probabil­ ity of a "Poisson" jump. This may be fine, but how do you know how large the jump is going to be? Past data might not tell you how large the jump is. >x 1 a NOTES 3 2 7 FIGURE 15: T YPICAL D ISTRIBUTION W ITH P OWER-LAW T AILS ( HERE A S TUDENT T ) N onscalable segment: inconsequential in its cumulative i mpact S tart o f scalability: c a n be progressive 1 f 0 .001 0.01 0.1 LOG (X) 1 10 100 FIGURE 16 S calable: s traight l ine (slope close t o 1.5) t o ' infinity* i t might b e c o m e v ertical some­ w h e r e (i.e., a - > -Infinity) but 1 2 5 10 LOG (X) 20 50 100 The two exhaustive domains of attraction: vertical or straight line with slopes either negative infinity or constant negative a. Note that since probabilities need t o add up to 1 (even in France) there cannot be other alternatives to the two basins, which is why I narrow it down to these two exclusively. My ideas are made very simple with this clean cut polarization—added to the problem of not knowing which basin we are in owing to the scarcity of data on the far right. 328 NOTES Small sample effect: Weron ( 2001). Officer ( 1972) is quite ignorant of the point. Recursivity of statistics: Taleb and Pilpel ( 2004), Blyth et al. ( 2005). Biology: Modern molecular biology pioneers Salvador Luria and Max Delbruck wit­ nessed a clustering phenomenon with the occasional occurrence of extremely large mutants in a bacterial colony, larger than all other bacteria. Thermodynamics: Entropy maximization without the constraints of a second moment leads to a Levy-stable distribution—Mandelbrot's thesis of 1952 (see Mandelbrot [ 1997a]). Tsallis's more sophisticated view of entropy leads to a Student T Imitation chains and pathologies: An informational cascade is a process where a purely rational agent elects a particular choice ignoring his own private information (or judgment) to follow that of others. You run, I follow you, because you may be aware of a danger I may be missing. It is efficient to do what others do instead of having to reinvent the wheel every time. But this copying the behavior of others can lead to imi­ tation chains. Soon everyone is running in the same direction, and it can be for spu­ rious reasons. This behavior causes stock market bubbles and the formation of massive cultural fads. Bikhchandani et al. ( 1992). In psychology, see Hansen and Donoghue ( 1977). In biology/selection, Dugatkin ( 2001), Kirpatrick and Dugatkin ( 1994). Self-organized criticality: Bak and Chen ( 1991), Bak ( 1996). Economic variables: Bundt and Murphy ( 2006). Most economic variables seem to follow a "stable" distribution. They include foreign exchange, the GDP, the money supply, interest rates (long and short term), and industrial production. Statisticians not accepting scalability: Flawed reasoning mistaking for sampling error in the tails for a boundedness: Perline ( 2005), for instance, does not understand the dif­ ference between absence of evidence and evidence of absence. Time series and memory: You can have "fractal memory," i.e., the effect of past events on the present has an impact that has a "tail." It decays as power-law, not exponentially. Marmott's work: Marmott ( 2004). C HAPTER 18 Economists: Weintraub ( 2002), Szenberg ( 1992). Portfolio theory and modern finance: Markowitz ( 1952, 1 959), Huang and Litzenberger ( 1988) and Sharpe ( 1994, 1 996). What is called the Sharpe ratio is meaningless out­ side of Mediocristan. The contents of Steve Ross's book (Ross [ 2004]) on "neoclassi­ cal finance" are completely canceled if you consider Extremistan in spite of the "elegant" mathematics and the beautiful top-down theories. "Anecdote" of Merton minor in Merton ( 1992). Obsession with measurement: Crosby ( 1997) is often shown to me as convincing evidence that measuring was a great accomplishment not knowing that it applied to Medioc­ ristan and Mediocristan only. Bernstein ( 1996) makes the same error. Power laws in finance: Mandelbrot ( 1963), Gabaix et al. ( 2003), and Stanley et al. ( 2000). Kaizoji and Kaizoji ( 2004), Véhel and Walter ( 2002). Land prices: Kaizoji ( 2003). Magisterial: Bouchaud and Potters ( 2003). Equity premium puzzle: If you accept fat tails, there is no equity premium puzzle. Benartzi and Thaler ( 1995) offer a psychological explanation, not realizing that variance is not the measure. So do many others. Covered writes: a sucker's game as you cut your upside—conditional on the upside being breached, the stock should rally a lot more than intuitively accepted. For a represen­ tative mistake, see Board et al. ( 2000). Nobel family: "Nobel Descendant Slams Economics Prize," The Local, September 28, 2 005, Stockholm. Double bubble: The problem of derivatives is that if the underlying security has mild fat tails and follows a mild power law (i.e., a tail exponent of three or higher), the deriva­ tive will produce far fatter tails (if the payoff is in squares, then the tail exponent of NOTES 3 2 9 the derivatives portfolio will be half that of the primitive). This makes the BlackScholes-Merton equation twice as unfit! Poisson busting: The best way to figure out the problems of the Poisson as a substitute for a scalable is to calibrate a Poisson and compute the errors out of sample. The same applies to methods such as GARCH—they fare well in sample, but horribly, horribly outside (even a trailing three-month past historical volatility or mean deviation will outperform a GARCH of higher orders). Why the Nobel: Derman and Taleb ( 2005), Haug ( 2007). Claude Bernard and experimental medicine: "Empiricism pour le présent, avec direction a aspiration scientifique pour l'avenir. " From Claude Bernard, Principe de la médecine expérimentale. See also Fagot-Largeault ( 2002) and Ruffie ( 1977). Modern evidencebased medicine: Ierodiakonou and Vandenbroucke ( 1993) and Vandenbroucke ( 1996) discuss a stochastic approach to medicine. C HAPTER 19 Popper quote; From Conjectures and Refutations, pages 9 5-97. The lottery paradox: This is one example of scholars not understanding the high-impact rare event. There is a well-known philosophical conundrum called the "lottery para­ dox," originally posed by the logician Henry Kyburg (see Rescher [ 2001] and Clark [ 2002]), which goes as follows: "I do not believe that any ticket will win the lottery, but I do believe that all tickets will win the lottery." To me (and a regular person) this statement does not seem to have anything strange in it. Yet for an academic philoso­ pher trained in classical logic, this is a paradox. But it is only so if one tries to squeeze probability statements into commonly used logic that dates from Aristotle and is all or nothing. An all or nothing acceptance and rejection ("I believe" or "I do not be­ lieve") is inadequate with the highly improbable. We need shades of belief, degrees of faith you have in a statement other than 100% or 0%. One final philosophical consideration. For my friend the options trader and Talmudic scholar Rabbi Tony Glickman: life is convex and to be seen as a series of derivatives. Simply put, when you cut the negative exposure, you limit your vulnera­ bility to unknowledge, Taleb ( 2005). B IBLIOGRAPHY Abarbanell, Jeffery S., and Victor L . Bernard, 1992, "Test of Analysts' Overreaction/Underreaction of Earnings Information as an Explanation for Anomalous Stock Price Behavior." Journal of Finance 4 7: 1181-1207. Aczel, Amir D, 2 004, Chance: A Guide to Gambling, Love, the Stock Market, and Just About Everything Else. 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INDEX A a-Platonic(ity), 125, 182, 283n, 284, 309 academic libertarianism, 183, 307 Aczel, Amir, 128 aesthetics, 62, 99, 138, 2 5 3 - 7 3 , 2 96, 297 Al-Ghazali, 47, 171n Alpher, Ralph, 168 Amioun, 4, 45, 65, 140, 154, 1 5 5 , 1 7 1 , 2 58, 2 87, 288 Anderson, Chris, 223 Apelles-style strategy, 204, 295, 307 Apelles the Painter, 204, 295 Aristotle, 202 Aron, Raymond, 12 Arrow, Kenneth, 283 autism, 194, 323 Averroës, 47, l/^ln Barabâsi, Albert-Laszlo, 226 barbell strategy, 2 0 5 - 6 , 2 07, 307 Barron, Gerg, 77 Bastiat, Frédéric, 111, 112, 288 Bateson, Gregory, 25 Baudelaire, Charles, 71 Baumol, William, 90 Bayle, Pierre, 48, 296 bell curve, see Gaussian distribution Bernard, Claude, 278 Berra, Yogi, 136, 199n, 208 Berry, Michael, 178 Bethe, Hans, 168 bildungsphilister, 1 31, 255, 295, 307, 319 bin Laden, Osama, 16 biology, 2 19, 328 Black Swan, defined, xvii-xviii, x ix, B Bachelier, Louis, 282 Bacon, Sir Francis, 101, 102, 167 Bail, Philip, 267, 270 Balzac, Honoré de, 103, 104, 105 banks, 43, 123, 208, 2 2 5 - 2 6 x x-xxi, xxv, xxvii Black Swan blindness, xxiii, 7 7 - 7 9 , 1 41-42, 2 88, 307 Black Swan ethical problem, defined, 3 08 Bloch, Marc, 101 Bohr, Niels, 1 36n 360 INDEX Bois-Reymond, Emil du, 173 Borges, Jorge Luis, 12 Bouchaud, Jean Philippe, 1 50 Bourdieu, Pierre, 22, 218 Braudel, Fernand, 255 Brochard, Victor, 57n Brown, Aaron, 196 Buchanan, Mark, 267 Buck, Pearl, 222 Buffett, Warren, 183 Bush, George W., 152 Buzzati, Dino, 9 2 confirmation error, 5 0, 85, 1 2 0 , 1 2 9 , 281, 3 08 Cootner, Paul, 276 Cournot, Augustin, 2 42 Cowan, David, 1 77 cumulative advantage, 217, 218, 250, 324 D Darwin, Charles, 167, 244, 256 Darwin, Erasmus, 244 Dawes, Robyn, 81, 146 de Menasce, Pierre Jean, 2 55 c Caligula, xxv Callas, Maria, 143 Camus, Albert, 104 Caravaggio, 164 Carlyle, Thomas, 198 Carneades, 274 Carr, Edward Hallett, 101, 199 Casanova, Giovanni Giacomo, 1 1 2 - 1 5 , 1 17-19, 1 20 casinos, 35, 67, 109, 117, 126-28, 1 29-30, 2 38, 257, 286 Catherine II of Russia, 139, 142, 164n causality, 46, 48, 66, 70, 75, 88, 110, 1 19-20, 1 4 3 , 3 1 4 Cavendish, Lord, 244 central limit theorem, 325 chaos theory, 176, 179, 197, 258, 323 Chardon, Lucien, 104, 105 Chevalier de Mere, 273 Christie, Agatha, 70 Churchill, Winston, 276 Cicero, Marcus Tullius, 1 0 0 , 1 0 2 , 1 2 8 , 2 74 circularity of statistics, see statistical regress argument Comte, Auguste, 173 de Moivre, Abraham, 240-41 de Rubempré, Lucien, 104, 105 De Vany, Art, 31 Debreu, Gerard, 283 Dennett, Daniel, 1 89, 290 derivatives, 20n, 3 2 8 - 2 9 Diagoras, 100 Dickens, Charles, 104 Dickinson, Emily, 258 Diodorus Siculus, 1 98 distribution, see probability distribution Dostoyevsky, Fyodor, 104 Drogo, Giovanni, 92-93 du Gard, Roger Martin, 222 Duby, Georges, 11 Durant, Will and Ariel, 103 E earthquakes, 35, 44, 61n, 76, 155, 211, 2 64, 3 09, 319 E co, Umberto, 1, 140, 179, 185 economics, as "religion," 3 22 economists, defined, 3 14 econophysicists, 2 71, 326 empirics, 111, 182, 2 0 3 - 4 empty-suit problem, xx-xxi, 145-56, 308 Engel, Robert, 155 INDEX 3 6 1 entropy, 315, 328 envelope of serendipity, 209 epidemics, xviii, xxiiw, xxiv, 118, 120, 1 35, 2 20, 2 44 epilogism, 1 99, 199n, 308, 313 epistemic arrogance, 1 7, 1 38-41, 1 42, 1 4 5 , 1 5 0 , 1 6 5 , 1 6 6 , 1 9 0 , 2 03, 206, 211,308 epistemic opacity, 273, 288, 308, 319 epistemocrats, 1 90-91, 1 92, 308 epistemology, 20, 49, 106, 126, 319 equilibrium, 4, 8, 210, 236, 278, 282, 2 83n,323 equity premium puzzle, 328 Erev, Ido, 77 erudition, 48, 125, 131n, 156, 225, 296, 3 23 expert problem, see empty-suit problem exponents, 231, 250, 2 63-66, 2 67, 272, 3 21, 3 26, 328 Extremistan and 8 0/20 rule, 2 3 5 - 3 6 and correlation, 239 defined, 2 6, 308 and Gaussian distribution, 269 genesis of, 270 and insurance, 208 and knowledge, 3 4 in London Business School study, 7 9,162 vs. Mediocristan, 33, 34, 3 5-37, 6 1, 8 3, 8 5, 2 33-35, 2 74, 2 8 0 - 8 1 , 2 84, 3 20, 3 28 from mild to wild randomness and b ack,215-28 and modern world, 61 and prediction, 149, 159 and problem of induction, 267 and R-square, 187n and risk, 96 and scalable variables, 159 and underestimation, 142 visual approach, 2 5 9 - 6 0 and war, 3 24 F fallacy of silent evidence, 50, 1 00-121, 131,169, 308,317 Fat Tony (fictional character), 1 22-25, 1 81 Ferguson, Niall, 14n Fichte, Johann Gottlieb, 12, 45, 101 Fisk, Robert, 16 Fleming, Alexander, 1 67-68 fooled by randomness, defined, 3 08 Forster, E . M., 70, 76 fossil record, 3 18 Foucher, Simon, 274 France, Anatole, 222 Friedman, Milton, 280 Fukuyama, Francis, 1 01 future blindness, 1 94, 211, 308 G Gaddis, William, 218 Galileo, 167, 257 Galton, Sir Francis, 2 44 games, 125, 127, 1 2 8 , 1 2 9 , 2 51, 286, 309 Gamow, George, 168 Gates, Bill, 33, 260 Gauss, Carl Friedrich, 3 6n, 230, 240, 2 41, 2 43 Gaussian distribution, 3 6 , 2 2 9 - 5 2 , 2 59-63, 2 69, 2 75-82, 2 88, 311, 325, 326 Gibbon, Edward, 198 Gilbert, Dan, 195, 203n Gladwell, Malcolm, 81, 236 Glaucias of Tarentum, 1 82 Goethe, Johann Wolfgang von, 31 362 INDEX Goldberg, Bruce, 3 2 Goldman, William, 206 Goldstein, Dan, 79, 81 Goodman, Nelson, 1 88 Gore, Al, 152 Grasso, Richard, xxiii Gray Swan, 36, 37, 213, 272, 273, 309 Green, J ack, 2 18 Greene, Graham, 300 induction, see problem of induction inequality, 36, 108, 216, 219, 224, 227, 2 3 4 - 3 5 , 2 63, 266, 325 insurance, 2 0, 77, 123, 124, 1 41,146, 1 59, 2 06, 2 08, 2 11, 2 28, 3 24, 325 Internet, xviii, 1 5, 79, 118, 135, 169, 172, 2 09, 2 23, 224, 2 26-27, 3 24 inverse problem, 268, 311 see also reverse-engineering problem H Hadamard, Jacques, 1 79 Hardy, G. H., 240 Hayek, Friedrich, 1 79-80, 1 81, 182, 183, 1 85, 2 77, 296 hedge funds, 43, 278 Hegel, Georg Wilhelm Friedrich, 1 2, 45, 101,199 Heisenberg, Werner, 2 87 Helenus (in The Iliad), 1 95-96 Herodotus, 101, 199 heuristics, 81, 158, 185, 313, 316 Hibon, Michèle, 154, 155 Hicks, John, 283 Hilbert, David, 173 Hinchcliffe, Brian, 1 58 historical ruptures, 9, 312 historicism, 171, 322 Hitler, Adolf, x xi Horowitz, Vladimir, 29 Huet, Pierre-Daniel, 48, 296 Hugo, Victor, 104 Hume, David, 45, 48, 60 Hussein, Saddam, 74 j Jaynes, Julian, 5 9 Jesus of Nazareth, 11 John, Dr. (fictional character), 1 23-25, 181 K Kahneman, Daniel, 5 3, 76, 77, 81, 116, 158,195,277 Kant, Immanuel, 45 Kelvin, Lord, 2 44 Kennedy, Jacqueline, 143 Keynes, John Maynard, 1 79,185,244, 2 83 Khaldoun, Ibn, 101, 199 Koestler, Arthur, 1 67 Kolmogorov, Andrey Nikolayevich, 6 8 Krasnova, Yevgenia Nikolayevna (fictional character), 2 3-25, 2 6, 27, 9 2, 9 3-94, 9 5-96, 1 22, 223, 299, 3 00 L languages, 4, 24, 72, 181, 219, 255 lasers, 1 35, 1 69-70, 3 22 law of large numbers, 238, 244, 2 59-60, 2 69, 2 87 Lebanon, 3 , 4, 8, 9 , 1 0 , 11, 1 3 , 1 5 , 1 6 , 1 8 , 2 1 , 4 0 , 6 5, 79, 1 1 8 , 1 4 0 , 1 5 4 , 2 87 I idiot savants, 185, 279, 319, 323 incomplete information, see randomness as incomplete information INDEX 3 6 3 life expectancy, 159, 321 literature, 2 22, 253 Livy, 1 98 Locke's madman, 283, 308 Lorenz, Edward, 179, 196 lottery-ticket fallacy, 73, 77, 118, 206, 2 07, 3 08-9 Lucas, Robert, 155 ludic fallacy, 1 22-37, 2 07, 225n, 257, 2 68, 2 75, 279, 281, 2 8 6 - 8 9 , 3 09, 3 19 and measurement, 328 and prediction, 149, 159, 211 and Sharpe ratio, 328 and standard deviation, 2 3 9 - 4 0 and statisticians, 223 and underestimation, 142 visual approach, 2 5 9 - 6 0 Meehl, Paul, 146 Menodotus of Nicomedia, 46, 182, 199, 3 14 Merton, Robert C , 278, 279, 279n, 280, 2 8 1 , 2 8 2 , 2 83 Merton, Robert K., 2 16-17, 2 18, 278 meta-analysis, 75 Michelet, Jules, 101, 198 Michelson, Albert, 173n mild, 29, 35, 36, 61n, 1 27-28, 1 59, 250, 2 61, 2 95 Mill, John Stuart, 52 Minsky, Hyman, 78 Mistral, Frédéric, 2 22 Mittag-Leffer, Gôsta, 176 Montaigne, Michel de, 92, 101, 1 91-92, 2 96 Moynihan, B., 105n N Nabokov, Vladimir, 10 Nader, Ralph, 112 narrative discipline, xxvii, 75, 309 narrative fallacy, 50, 6 2-84, 1 20, 153, 1 54, 1 55, 187n, 188, 199, 205n, 211,240, 268-69, 309,316 Nash, John, 155 neoclassical economics, 184, 278, 282, 2 85, 3 14, 319, 328 nerd knowledge, 1 80, 309 see also Platonicity networks, 226, 267, 322, 325 M Makridakis, Spyros, 1 5 4 , 1 5 5 , 2 69 Mallarmé, Stéphane, 104 Malraux, André, 104 Mandelbrot, Benoît, 12n, 2 53-56, 2 57, 2 58-59, 2 60-62, 2 68-69, 2 72, 273, 2 76, 2 81 Mandelbrotian, 36, 37, 128, 213, 2 32-34, 2 51, 256, 2 57-58, 2 62, 2 72-73, 3 09 Markowitz, Harry, 2 77 Marmot, Michael, 2 27-28 Marshall, Andy, 208 M arx, Karl, 1 2, 101, 171, 199, 241, 242 Matthew effect, 2 16-17, 3 20, 324 Mays, Andrew, 208 Mediocristan absence of Black Swan problem, 4 9 - 5 0 and bell curve, 230, 2 35-36, 2 40, 2 44-45, 2 50, 251, 269 defined, 2 6, 309 vs. Extremistan, 33, 34, 3 5-37, 6 1, 83, 8 5, 2 33-35, 2 74, 2 80-81, 2 84, 320 and gambling, 239 law of large numbers in, 238 in London Business School study, 79, 1 62 364 INDEX Nicolas of Autrecourt, 4 8 Nietzsche, Friedrich, 6 , 131, 132, 296 nightingales, 1 04, 105 Nobel, Alfred, 277 normal distribution, see Gaussian distribution Popper, Karl Raimund, 5 7-58, 1 71, 1 73, 1 79, 1 92-93, 2 00, 281, 291, 2 96 Posner, Richard, 240 post-Keynesian, 78, 314 power laws, 3 7, 219, 234, 235, 257, 263, 2 66, 2 67, 3 18, 3 21, 3 22, 3 24, 3 25, 3 26, 3 27, 328 prediction errors, x x, 1 4 8 , 1 5 9 - 6 0 , 1 94-95, 2 05 preferential attachment, 2 18-19, 2 21, 2 22, 2 50, 3 25, 3 26 probability distribution, 36, 269, 309 problem of induction, 27, 4 0-41, 4 5, 49, 6 4, 1 3 1 , 1 9 9 , 2 67, 269, 288, 309, 3 13 problem of the circularity of statistics, see statistical regress argument Proudhon, Pierre-Joseph, 1 01, 171, 241 Prudhomme, Sully, 2 22 O Onassis, Aristotle, 1 43-44 Oppenheimer, J . Robert, 255 options, 2 05, 282n, 329 Ormerod, Paul, 267 Orwell, George, 162 Oskamp, Stuart, 144 P Pareto, Vilfredo, 219, 235, 256 Pascal, Biaise, 210 Pasteur, Louis, 170, 208 Paul, D., 105n Paul, Saint, 5 Peirce, Charles Sanders, 57n, 173 Penzias, Arno, 168 Perec, Georges, 69n Perse, Saint John, 2 22 Philnus of Cos, 182 phony mathematics, 136, 275, 277 Plato, xxv, 101 Platonic confirmation, see confirmation error Platonic fold, x xi, 19, 129, 284, 309 Platonicity, xxv, 15, 16, 48, 55, 69, 180, 2 41, 2 52, 2 5 6 - 6 2 , 2 68, 285, 289, 291,309,311 Plutarch, 1 98 Poe, Edgar Allen, xxii Poincaré, Henri, 1 74-77, 1 78-79, 2 43, 2 96 Poisson, 2 39, 326, 327, 329 Q quants, 1 9-20, 2 1, 28, 54, 148, 154 Quételet, Adolphe, 2 41-42 Quine, W. V., 72 R randomness as incomplete information, 5 7, 1 97-98, 3 09 see also epistemic opacity Reagan, Ronald, 261 reinsurance, 2 08n religion, 4 , 11, 48, 208n, 227, 291, 312, 3 22 Renan, Ernest, 198 retrospective distortion, 8 , 1 2 , 13, 310, 312,322 reverse-engineering problem, 196, 197, 310,311,312 INDEX 3 6 5 Rimbaud, Arthur, xxii Rolland, Romain, 222 Rosen, Sherwin, 216 Ross, Steve, 280 round-trip fallacy, 52, 54, 82, 310, 320 Rowling, J . K., 28, 33 Rubinstein, Arthur, 29 Rushdie, Salman, 156 Russell, Bertrand, 4 0, 201, 210, 244 S Samuelson, Paul, 1 84-85, 2 83, 285 Sartre, Jean-Paul, 1 04 savants, see idiot savants scandal of prediction, 138, 203, 310 Scholes, Myron, 278, 279, 279n, 280, 2 8 1 , 2 8 2 , 2 87 Schopenhauer, Arthur, 45 Schiitzenberger, Marcel-Paul, 272 scorn of the abstract, xxi, 77, 121, 310 self-organized criticality, 325, 328 Semmelweis, Ignaz, 183 Serapion of Alexandria, 182 serendipity, 166, 170, 204, 209, 3 21-22, 3 24 Sextus Empiricus, 46, 83, 192, 204 Shackle, G.L.S., 179, 185 Sharpe, William, 277 Shirer, William, 12-14 Shubik, Martin, 283 Shultz, George, 261 Simenon, Georges, 300 Simon, Saint, 241 Simpson, O. J ., 5 1, 281 Slovic, Paul, 76, 81, 145 Smith, E . J ., 4 2 Snyder, Alan, 66 Spengler, Oswald, 101 Spitznagel, Mark, 127n stability of species, 108 standard deviation, 2 3 9 - 4 0 , 2 4 9 - 5 0 , 2 52, 2 76, 3 26 Stanzione, Dan, 168 statistical regress argument, 269, 310 Stendhal, 104 Strogatz, Steven, 226 Suetonius, 198 swimmer's body, 109-10 system 1, 81, 82, 83, 133, 159 system 2, 81, 82 T Tedesco, John-Olivier, 297 Tetlock, Philip, 151, 153, 280 Thorp, Edward O., 279, 282 three body problem, 1 76-77, 3 22 Townes, Charles, 169-70 Toynbee, Arnold, 12, 101 Tresser, Charles, 255-56 Trivers, Robert, 147, 195 Tulip, Nero (fictional character), 9 4 - 9 9 Tversky, Amos, 53, 76, 77, 81, 158 Tyszka, Tadeusz, 150 U Ullmann-Margalit, Edna, xxvii uncertainty of the deluded, 2 39, 310 uncertainty of the nerd, 1 27-29, 3 09 unknowledge, 1 38, 185, 198, 329 V variance, defined, 2 50 Veyne, Paul, 11 von Neuman, John, 255 W Wallace, Alfred Russel, 167 Wason, P. C , 58 366 INDEX water puddle problem, 2 67-68 see also reverse-engineering problem Watson, Thomas, 168 Watts, Duncan, 226 Wegner, Jochen, 5 7 Whitehead, Alfred North, 181n Wikipedia, 224n wild, 3 5, 36, 64, 116, 128, 213, 251, 254, 2 95 Willis, J . C . , 2 1 9 Wilmott, Paul, 196 Wittgenstein, Ludwig, xxvi, 244, 289 writers, 2 4, 25, 42, 8 9-90, 1 03-4, 2 18, 2 24n, 3 12 Y Yule, G. U., 219, 256 Z Zielonka, Piotr, 150 Zipf, George, 219, 256 ABOUT THE AUTHOR N A S S I M N I C H O L A S T A L E B , p art literary essayist, p art empiricist, p art no-nonsense trader, has devoted his life t o immersing himself in problems of luck, uncertainty, probability, and knowledge. Taleb was born into a Greek-Orthodox family in Lebanon. He worked as a derivatives trader o n his own and with Wall Street firms and as a floor t rader in the Chicago pits before opting for more con­ templative, and what he calls "nontransactional," pursuits. He has an M .B.A. from the W harton School and a Ph.D. from the University of Paris. While trading, he taught the application of probability the­ ory t o risk management for seven years (part-time) at the Courant Institute o f Mathematical Sciences of New Y ork University. He is currently taking a break from active life by serving as the Dean's Professor in the Sciences of Uncertainty at the University of Massa­ chusetts at Amherst. His last book, the bestseller Fooled by Random­ ness, has been published in twenty languages (even F rench). Taleb lives mostly in New Y ork. ABOUT THE TYPE This book was set in Sabon, a typeface designed by the well-known German typographer Jan Tschichold ( 1 9 0 2 - 7 4 ) . Sabon's design is based upon the original letter forms of Claude Garamond and was created specifically to be used for hand composition, Linotype, and Monotype. Tschichold named his typeface for the famous Frankfurt typefounder J acques Sabon, who died in 1 5 8 0 . ...
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