Nassim Nicholas Taleb Dishes It Out!!!

Mr. Taleb has written one of the most intellectually stimulating books I’ve had the privilege to read this year titled the Black Swan. The black swan is a metaphor for those totally out-of-the-blue extraordinary events that when they occur literally change everything. The Lehman Shock is one example. 9/11 was another. The recent devastating earthquake that struck Japan on March 11th followed by the nuclear disaster at Fukushima is another prime example. Since I did some translation work for Tokyo Electric Power Company at the time, I know for a fact that the safeguards erected to protect the nuclear reactors’ cooling system were built to withstand a tsunami up to six meters in height. Now why six meters? Well, according to the records, the average height of all the tsunamis that ever struck that region was approximately one meter. Hence, at the time, the experts at Tokyo Electric figured that if they installed safety barriers that were at least six times the average, it would be more than sufficient to handle any onslaught of flooding waters. Turns out no such thing; the killer waves that bore down on the nuclear power plant that fateful day knocked out the cooling system resulting in one of the worst nuclear disasters in history. The earthquake and the tsunami that followed was a black swan, as totally unpredictable as the tremendous impact that ensued in its aftermath. However, what is so funny is how we humans try to rationalize what happened after the fact. Of course hindsight is always 20:20. It reminds of the saying: “If you want to make God laugh, simply make plans.” I look at my own life and am still in a daze as I become aware that things have turned out so contrary to what I had originally wanted or planned. The simple truth is WE CANNOT CONTROL OR PREDICT THE FUTURE and I submit that any control or predictive power we may seem to possess is illusory. Nassim’s book is a compelling tome on how we are regularly duped by the unexpected. His plea is simple. Learn to use uncertainty to your advantage!

“What we call a Black Swan is an event with the following three attributes. First, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility. Second, it carries an extreme impact. Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable.” –from prologue 1

“What did people learn from the 9/11 episode? Did they learn that some events, owing to their dynamics, stand largely outside the realm of the predictable? No. Did they learn the built-in defect of conventional wisdom? No. What did they figure out? They learned precise rules for avoiding Islamic prototerrorists and tall buildings.” –from prologue 4

“The human mind suffers from three ailments as it comes into contact with history, what I call the triplet of opacity. They 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) than they realize;
b) The retrospective distortion, or how we can assess matters only after the fact, as if there were a rearview mirror (history seems clearer and more organized in history books than in empirical reality); and
c) The overvaluation of factual information and the handicap of authoritative and learned people, particularly when they create categories-when they ‘platonify’.” Pg. 8

“Consider the nature of information: of the millions, maybe even trillions, of small facts that prevail before an event occurs, only a few will turn out to be relevant later to your understanding of what happened.” Pg. 12

“I noticed that very intelligent and informed persons were at no advantage over cab drivers in their predictions, but there was a crucial difference. Cab drivers did not believe that they understood as much as learned people-really, they were not the experts and they knew it.” Pg. 14

“The overlap between newspapers was so large that you would get less and less information the more you read.” Pg. 15

“During the one or two years after my arrival at Wharton, I had developed a precise but strange specialty: betting on rare and unexpected events, those that were on the Platonic fold, and considered ‘inconceivable’ by the Platonic ‘experts’. Recall that the Platonic fold is where our representation of reality ceases to apply-but we do not know it.” Pg. 19

“Do you face the possibility of an adverse event? Don’t worry. Who knows, it may turn out good for you. Doubting the consequences of an outcome will allow you to remain imperturbable.” Pg. 46

“Consider a turkey that is fed every day. Every single feeding will firm up the bird’s belief that it is the general rule of life to be fed every day by friendly members of the human race ‘looking out for its best interests,’ as a politician would say. On the afternoon of the Wednesday before Thanksgiving, something unexpected will happen to the turkey. It will incur a revision of belief.” Pg. 40

“Many people labor in life under the 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 outside. Then bang, the lumpy event comes that brings the grand vindication. Or it may never come. Believe me, it is tough to deal with the social consequences of the appearance of continuous failure. We are social animals, hell is other people.” Pg. 87

“You play tennis every day with no improvement, then suddenly you start beating the pro. Your child does not seem to have a learning impediment, but he does not seem to want to speak. The schoolmaster pressures you to start considering ‘other options,’ namely therapy. You argue with her to no avail (she is supposed to be the ‘expert’). Then, suddenly, the child starts composing elaborate sentences, perhaps a bit too elaborate for his age group. I will repeat that linear progression, a Platonic idea is not the norm.” pg. 89

“We favor the sensational and the extremely visible. This 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 than results. However, those who claim that they value process over result are not telling the whole truth, 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 autosatisfaction. But this does not mean that artists do no crave some form of attention, 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 has 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.” Pg. 89-90

“Most people engaged in pursuits that I call ‘concentrated’ spend most of their time waiting for the big day that (usually) never comes. True, this takes your mind away from the pettiness of life-the cappuccino that is too warm or too cold, the waiter too slow or intrusive, the food too spicy or not enough, the overpriced hotel room that does not quite resemble the advertised picture-all these considerations disappear because you have your mind on much bigger and better things. But this does not mean that the person insulated from materialistic pursuits becomes impervious to other pains, those issuing from disrespect. Often these Black Swan hunters feel shame, or are made to feel shame, at not contributing. ‘You betrayed those who had high hopes for you,’ they are told, increasing their feelings of guilt. The problem of lumpy payoffs is not so much in the lack of income they entail, but the pecking order, the loss of dignity, the subtle humiliations near the water cooler. It is my hope someday to see science and decision makers rediscover what the ancients have always known, namely that our highest currency is respect.” Pg. 90

“When you look at the empirical record, you not only see that venture capitalists do better than entrepreneurs, but publishers do better than writers, dealers do better than artists, and science does better than scientists (about 50% of scientific and scholarly papers, costing months, sometimes years, of effort, are never truly read). The person involved in such gambles is paid in a currency other than material success: hope.” Pg. 90

“If you are engaged in a black swan-dependent activity, it is better to be part of a group.” Pg. 94

“Numerous studies of millionaires aimed at figuring out the skills required for hotshotness follow the following methodology. They take a population of hotshots, those with big titles and big jobs, and study their attributes. They look at what those big guns have in common: courage, risk-taking, optimism, and so on, and infer those traits, most notably risk-taking, help you to become successful. You would also probably get the same impression if you read CEOs’ ghostwritten autobiographies or attended their presentations to fawning MBA 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 business publishers I know would not even consider giving them the courtesy of a returned phone call (as to a returned e-mail. Fuhgedit). Readers would not pay $26.95 for a story of failure, even if you convinced them that it had more useful tricks than a story of success. The entire notion of biography is grounded in the arbitrary ascription of a causal relationship between specified traits and subsequent events. Now consider the cemetery. The graveyard of failed persons will be full of people who shared the following traits: courage, risk taking, optimism, et cetera. Just like the population of millionaires. There may be some differences in skills, but what separates the two is for the most part a single factor: luck. Plain luck.” Pg. 106

“Have you ever wondered why so many of those straight-A students end up going nowhere in life while 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 understanding what’s going on in real life.” Pg. 125

“The policies we need to make decisions on should depend far more on the range of possible outcomes than on the expected final number. I have seen, while working for a bank, how people project cash flows for companies without wrapping them in the thinnest layer of uncertainty.” Pg. 161

“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.” Pg. 163

“Being an executive does not require very developed frontal lobes, but rather a combination of charisma, a capacity to sustain boredom, and the ability to shallowly perform on harrying schedules. Add to these tasks the ‘duty’ of attending opera performances.” Pg. 166

“Popper’s central argument is that in order to predict historical events you need to predict technological innovation, itself fundamentally unpredictable.” Pg. 171

“To understand the future to the point of being able to predict it, you need to predict elements from this future itself.” Pg. 172

“If you survive until tomorrow, it could mean either a) you are more likely to be immortal b) that you are closer to death. Both conclusions rely on the exact same data.”pg. 188

“What you should avoid is unnecessary dependence on large-scale harmful predictions-those and only those. Avoid the big subjects that may hurt your future: be fooled in small matters, not in the large. Do not listen to economic forecasters (they are mere entertainers), but do make your own forecast for the picnic; but avoid government social security forecasts for the year 2040.” Pg 203

“Indeed, we have psychological and intellectual difficulties with trial and error, and with accepting that series of small failures are necessary in life. My colleague Mark Spitznagel understood that we humans have a mental hang-up about failures: ‘You need to love to lose’ was his motto. In fact, the 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. Americas specialty is to take these small risks for the rest of the world, which explains the country’s disproportionate share in innovations. Once established, an idea or product is later ‘perfected’ over there.” Pg. 204

“People are often ashamed of losses, so they engage in strategies that produce very little volatility but contain the risk of a large loss-like collecting nickels in front of steamrollers. In Japanese culture, which is ill-adapted to randomness and badly equipped to understand that bad performance can come from bad luck, losses can severely tarnish someone’s reputation. People hate volatility, thus 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 careers that give the appearance of being stable, like jobs at IBM until the 1990s. When laid off, the employee faces a total void: he is no longer fit for anything else. The same holds for those in protected industries.” Pg. 205

PRACTICAL APPLICATION

“The legendary 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 perceived logic on its head. He knew that he could not predict individual events, but was well aware that the unpredictably, namely a movie turning into a blockbuster, would benefit him immensely. So the second lesson is more aggressive: you can actually take advantage of the problem of prediction and epistemic arrogance! As a matter of fact, I suspect that the most successful businesses are precisely those that know how to work around the inherent unpredictability and even exploit it. Here are the (modest) tricks. But note that the more modest they are, the more effective they will be.

POINT ONE:
First, make a distinction between positive contingencies and negative ones. Learn to distinguish between those human undertakings in which the lack of predictability can be (or has been) extremely beneficial and those where the failure to understand the future caused harm. There are both positive and negative Black Swans. William Goldman was involved in the movies, a positive-Black Swan business. Uncertainty did occasionally pay off there. A negative-Black-Swan business is one where the unexpected can hit hard and hurt severely. If you are in the military, in catastrophe insurance, or in homeland security, you face only downside. If you are in banking and lending, surprise outcomes are likely to be negative for you. You lend 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 you an additional dividend. Aside from the movies, examples of positive-Black Swan businesses are: some segments of publishing, scientific research, and venture capital. In these businesses, you lose small to make big. You have to lose a little per book and, for completely unexpected reasons, any given book might take off. The downside is small and easily controlled. The problem with publishers, of course, is that they regularly pay up for books, thus making their upside rather limited and their downside monstrous. (If you pay $10 million for a book, your Black Swan 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 invested in a speculative company and his stake to unimaginative investors who is the beneficiary of the Black Swan, not the ‘me, too’ investors. In these businesses you are lucky if you don’t know anything-particularly if others don’t know anything either, but aren’t aware of it. And you fare best if you know where your ignorance lies, if you are the only one looking at the unread books, so to speak. This dovetails into the ‘barbell’ strategy of taking maximum exposure to the positive Black Swans while remaining paranoid about the negative ones. For your exposure to the positive Black Swan, you do not need to have any precise understanding of the structure of uncertainty. I find it hard to explain that when you have a very limited loss you need to get as aggressive, as speculative, and sometimes 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. First, lottery tickets do not have a scalable payoff; there is a known upper limit to what they can deliver. The ludic fallacy applies here-the scalability of real-life payoffs compared to lottery ones makes the payoff unlimited or of unknown limit. Second, the lottery tickets have known rules and laboratory-style well presented possibilities; here we do not know the rules and can benefit from this additional uncertainty.

POINT TWO:
Don’t look for the precise and the local. Simply, do not be narrow-minded. The great discoverer Pasteur, who came up with the notion that chance favors the prepared, understood that you do not look for something particular every morning but work hard to let contingency enter your working life. As Yogi Berra, another great thinker, said, ‘You got to be careful if you don’t know where you’re going, because you might not get there.’ Likewise, do not try to predict precise Black Swans-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 Defense face the same problem. The impulse on the part of the military is to devote resources to predicting the next problems. These thinkers advocate the opposite: invest in preparedness, not in prediction. Remember that infinite vigilance is just not possible.

POINT THREE:
Seize any opportunity, or anything that looks like an opportunity. They are rare, much rarer than you think. Remember that positive Black Swans have a necessary first step: you need to be exposed to them. Many people do not realize that they are getting a lucky break in life when they get it. If a big publisher (or a big art dealer or a movie executive or a hotshot banker or a big thinker) suggests an appointment, cancel anything you have planned: you may never see such a window open again. I am sometimes shocked at how little people realize that these opportunities do not grow on trees. Collect as many free non-lottery tickets (those with open-ended payoffs) as you can, and, once they start paying off, do not discard them. Work hard, not in grunt work, but in chasing such opportunities and maximizing exposure to them. This makes living in big cities invaluable because you increase the odds of serendipitous encounters-you gain exposure to the envelope of serendipity. The idea of settling in a rural area on grounds that one has good communications ‘in the age of the internet’ tunnels out of such sources of positive uncertainty. Diplomats understand that very well: casual chance discussions at cocktail parties usually lead to big breakthroughs-not dry correspondence or telephone conversations. Go to parties! If you’re a scientist, you will chance upon a remark that might spark new research. And if you are autistic, send your associates to these events.

POINT FOUR:
Beware of precise plans by governments. Let governments predict (it makes officials feel better about themselves and justifies their existence) but do not set much store by what they say. Remember that the interest of these civil servants is to survive and self-perpetuate-not to get to the truth. It does not mean that governments are useless, only that you need to keep a vigilant eye on their side effects. For 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 explosive risks in their portfolios. It is not a good idea to trust corporations with matters such as rare events because the performance of these executives is not observable on a short-term basis, and they will game the system by showing good performance so they can get their yearly bonus. The Achilles’ heel of capitalism is that if you make corporations compete, it is sometimes the one that is most exposed to the negative Black Swan that will appear to be most fit for survival. Also recall that markets are not good predictors of wars. No one in particular is a good predictor of anything.

POINT FIVE:
‘There are some people who, if they don’t already know, you can’t tell ‘em,’ as the great philosopher of uncertainty Yogi Berra once said. Do not waste your time trying to fight forecasters, stock analysts, economists, and social scientists, except to play pranks on them. They 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 for it, and you cannot put an end to institutionalized frauds. If you ever have to heed a forecast, keep in mind that its accuracy degrades rapidly as you extend it through time. If you hear a ‘prominent’ economist using the word equilibrium, or normal distribution, do not argue with him; just ignore him, or try to put a rat down his shirt.” Pg. 206-210

“Is the 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 that it did the day before, and humans seem to be even more fooled by it than they were the previous day. It is becoming unbearable. I find writing these lines painful; I find the world revolting.” Pg. 215

“Take a cross section of the dominant corporations at any particular time; many of them will be out of business a few decades later, while firms nobody ever heard of will have popped onto the scene from some garage in California or from some college dorm. Consider the following sobering statistic. Out of the five hundred largest US companies in 1957, only seventy-four were still part of that select group, the Standard and Poor’s 500, forty years later. Only a few had disappeared in mergers; the rest either shrank or went bust.” Pg. 221

“If there is one thing on this planet that is not so uncertain, it is the behavior of a collection of subatomic particles! Why? Because, as I have said earlier, when you look at an object, composed of a collection on particles, the fluctuations of the particles tend to balance out. But political, social, and weather events do not have this handy property, 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 fact this may be the best way to spot a phony. ” Pg. 287

“Quitting a high-paying position, if it is your decision, will seem a better payoff than the utility of the money involved (this may seem crazy, but I’ve tried it and it works). This is the first step toward the stoic’s throwing a four-letter word at fate. You have far more control over your life if you decide on your criterion by yourself.” Pg. 297

“Imagine a speck of dust next to a planet a billion times the size of the earth. The speck of dust represents the odds in favor of your being born; the huge planet would be the odds against it. So stop sweating the small stuff. Don’t be like the ingrate who got a castle as a present and worried about the mildew in the bathroom.” Pg. 298