The Black Swan: All in the Mind?

The Black Swan: The Impact of the Highly Improbable by Nassim Nicholas Taleb, Penguin, 2007.

I had a mixed reaction to this book, spending much of it trying to avoid being suffocated by Taleb’s ego. More serious was the ignoring of Taleb’s bar-room philosophy (see my previous article) as he pontificated on anything that lurched into view on his meander to the meat of the book in part 3 (p. 213). He says that he gets emotional (p. 252) because of the irrationality of those around him in not coming round to he is way of thinking (and he does have a point) but there is nothing rational about being ’emotional’ and the various rage fits he seems to enjoy provoking in others (p. 64) or indulging in himself (p. 128). Interestingly Taleb’s mother elicits the most revealing passage:

I am reminded of a measure my mother concocted, as a joke, when I decided to become a businessman. Being ironic 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 the price 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 insecurity concealed under a confident exterior; though I keep telling her I am an introspector–she remain skeptical. Introspector shmintrospector, she still jokes at the time of writing that I am still a little ahead of myself.

Why don’t we all listen to our mothers more. As this article is not nearly flattering enough I guess it will never be read but should Taleb ever read these words I really think he should find out just what humility, what its cause are and what it looks like. Humility comes from inner confidence but bluster comes from insecurity. We all have to do battle with our insecurities and arrogant demons but it is going to be much more difficult if these categories are confused.

Of course Taleb does have an important story to tell. Part of it builds on the work of the great Benoit Mandelbrot. From Larry Elliot’s review:

Taleb is a fan of the Polish-born French mathematician Benoit Mandelbrot, who gives short shrift to those who believe financial markets resemble a bell curve, with modest movements the norm and violent moves infinitesimally rare. Looking at the daily movements of the DJIA [Dow Jones Industrial Average] from 1916 to 2003, Mandelbrot said that according to the neat bell curve analysis, there should have been 58 days when the Dow moved more than 3.4%, when in fact there were 1,001.

Instead of just six days when there were movements of more than 4.5% there were 366. Only once in every 300,000 years should there have been a day when the Dow moved by 7% or more, but it happened 48 times. “Extreme price swings are the norm in financial markets – not aberrations that can be ignored. Price movements do not follow the well-mannered bell curve assumed by modern finance; they follow a more violent curve that makes an investor’s ride much bumpier,” Mandelbrot says in his book The (Mis)Behaviour of Markets (Profile Books). “A sound trading strategy would build this cold, hard fact into its foundations”.

At the moment, it seems highly unlikely that this “cold, hard fact” has been built into market thinking, where the abiding sense is that this is forever summer. That, of course, is precisely Taleb’s point.

This distills the two of Taleb’s basic points concerning the poor (objective) models being used to model the financial markets and the (subjective) narrative. The preferred subjective narrative is being allowed to drive the models with a scant regard for how well they match the objective reality and this leads us into periodic trouble and will ultimately lead us into big trouble.

Narratives

We all use narratives to structure reality in order to make it manageable. Yet these narratives inevitably have boundaries in time and space where the narrative stops working, not least that they may only suit the person holding the narrative (and a small number like-minded people). Taleb proclaims throughout the book that he is an empirical skeptic which is supposed to make him and the other members of this select group less prone to getting duped by the false narratives we create for ourselves. However I think this is mistaken for two reasons: any thoughtful and sharp person (they need not be intellectual–I am inclined to put Taleb’s mother in this category, who may of course be an intellectual for all I know) will be on the lookout for this kind of thing–it’s what it means to be thoughtful and sharp. Secondly, I don’t think it is a case of trying to separate out the false narratives from the good narratives so much as being aware of the narratives you subscribe to and making a constant effort to find their boundaries.

We see this happening all the time and of course politicians are constantly trying to shape the narratives around them or give them the slip. Taleb doesn’t read newspapers and neither do I (I am even more wary of broadcast media), and I think for the same reason, that they are so narrative driven and it seems to be almost impossible for even honest and sceptical journalists to escape these narratives–any attempt to do so will generally be undercut (the so-called electric fence—see Media Lens, and Flat Earth News).

One narrative that I thought Taleb leaned on extraordinarily heavily was that of evolution.

Some people 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 ourselves, and allows us to repeat our performance without our being there by spreading our genes down the generations. (p. 30)

To my mind this is really naive, because I think we have no idea of the boundaries of the ‘evolution’ narrative that we are so incredibly fond of, sup[porting as it does the mechanistic, materialistic view of life (despite physicists long ago abandoning this view of reality) and enshrining selfishness as a principle in nature thereby acting as a perpetual justification for selfish behaviour (notwithstanding the vehement denial of the neo-Darwinians). Taleb even talked about a ‘risk-taking gene’ without explaining why a mechanism for controlling the synthesis of protein should have anything to do with risk taking (see Sheldrake’s Presence of the Past for an explanation of this point, which can be read as a sharp critique of neo-Darwinism without accepting Sheldrake’s [positive] proposals).

Taleb claims to be cautious evolution (p. 189) and intervenes in the Intelligent Design debate with the observation (footnote, p. 170) that it is hard to look at a computer and a car and consider them the result of an aimless process, yet they are. This misses the point. Proponents of I.D. (and I am ambivalent) point to watches and cars and say that just as there is evidence that an intelligent agent has shaped the evolution of these artefacts we can see the same kinds of features in the way the world works around us. Whether a single person has sat down and planned out the evolution of ‘the car’ is not the point.

Anyway this is my own skepticism. My point is that we are all dependent upon narratives–we all see the world from a point of view. The key is to avoid clinging on to those narratives too tightly, to be aware that others may have different needs and that your own needs may change over time. It is called keeping an open mind.

Unknown Unknowns

Taleb spends much of the book discussing his black swans. The name is taken from the induction-breaking observation of an antipodean black swan that forces the observer to conclude that all swans aren’t white after all. On the one hand he seems to go somewhat over the top and the reference to ‘Unknown Unknowns‘ and the fashion for worrying about it in military circles I think is quite ironic. The initial reference was in a situation in where the speaker wanted to suggest that horrific human catastrophe had somehow happened due to some unforseen circumstances that had nothing to do with the gentleman’s own arrogance and actions. It had all been for seen of course, by those had studies their history. For this reason I find Taleb’s suggestion that we should “downgrade ‘soft’ areas such as history and social science to a level slightly above aesthetics and entertainment” (p. 171) a bit wide of the mark. It is because it is so difficult to do well that we should pay great attention to history and those that are good at it, and from as many different perspectives as possible (and the same is true of the analysis of intelligence). (See earlier article Of Causation and History).

The more interesting point that Taleb is making the illusion of stability in the world around us, until something happens to turn our world upside down–the arrival of a black swan. In one of the best passages in the early part of the book he describes the way centuries of peaceful coexistence were blown apart by the 1970s civil war in Lebanon. Of course nobody foresaw it and nobody could have been expected to foresee it. Taleb observes that we have a strong tendency to construct cozy narratives about living in a stable world when we have that good fortune to find ourselves in a settled situation, but this is an illusion. (And indeed it is.) Part of our world lies in what Taleb calls Extremistan.

Extremistan

Taleb’s idea of Extremistan is probably the most important contribution of the book.  (I don’t know whether he started writing about it before The Black Swan: this is the first book I have read by him.)  When you are not in Extremistan you are in Mediocristan according to Taleb, where everything is reasonably linear, linear and predictable and populations can be modeled well by Gaussian bell curves.

In this setup the configuration of the system is often limited by physical realities.  So in a population of people, biometric data will generally cluster around the mean with outliers becoming rapidly more improbable as we dart from the mean.  ‘Ya can’t change the laws of physics!’  As Galileo observed Physics doesn’t scale, so we won’t find people 100m tall.  But that doesn’t stop them being 1cm tall; nevertheless the fact remains that populations can be modeled very well by bell curves where physical characteristics are concerned.  And this extends to jobs that are tied to tactile, physical realities, such as income earned according to the number of hours you spend teaching pupils or the number of widgets you assemble.  As long as you are being paid according to physical criteria, according to the effort you put in then the pay of a population of school teachers or widget assemblers can be modeled reasonably well with a bell curve and you will see few surprises.

Taleb’s point is that you can’t measure pay in general with bell curves.  It will work for a while, but once Bill Gates or a J.K. Rowling turns up in your population of school teachers and widget assemblers the whole thing blows up irretrievable.  The concentrations are so high that the total wealth of a huge population of average wage earners can be doubled by the addition of one high-earner.  This is the problem with a world that is mostly Mediocristan, or gives the appearance of being Mediocristan, but is actually Extremistan.  It is Extremistan because these outliers must be taken into account because they can turn up in your population; they will eventually turn up in your population, and then all your assumptions will get blown away.

Being a quant trader Taleb is interested in the markets on which the world financial system and all our pensions are based.  The people operating the markets (safeguarding all our pensions) and those regulating them have to make sure that the markets don’t break down and that they don’t wipe out our pensions and savings.  What Madlebrot and Taleb have observed  is that they are assuming that the markets are Gaussian and belong to Mediocristan whereas they very much belong to Extremistan.  Given how interconnected all the financial markets are nowadays we really should be taking an interest in avoiding catastrophic failures.  By continuing to live in a pleasant fantasy that they are more table than they are we are inviting problems.  By using Mandlebrot’s models we can eliminate a class of surprises.

What is Really Going On

While some things that may belong to Extremistan are physical in nature, most of them are actually ideal in nature.  Robert Duquette has commented that the weather belongs to Extremistan, for example.  The weather can be quite placid and stable, only to flip quite quickly with the arising or arrival of a tornado.  Weather is know to be chaotic and phsyical (I will come back to this).

However, most of Taleb’s examples are actually ideal phenomena and not physical, such as the money that all our markets ultimately trade (there may be bartering exchanges but I think we can say they are a minority).  The way that money flows is also ideal, it depends upon the preferences of people.  When those preferences are anchored in physical expectations, such as the number of hours worked and so on, and when there is a healthy market for the skills concerned, then extremities are avoided and we see stable, predictable and (IMHO) generally-healthy Mediocristan.

When there isn’t a healthy market and large populations of people start chasing a rarefied resource then that can lead to large concentrations of wealth and we realise we are in unstable, unpredictable and generally-pathological Extremistan.  Notice the ideal nature of this phenomenon.  It is because large populations of people are behaving according to preferences with no real-world physical restraints.  So we get Beatlemania and suddenly all the teenagers are rushing into the shops to buy records from a single pop band, driving up the profile of the band and so on.  Feedback mechanisms, that are ideal in nature, are easy to set up in our modern world of mass communications.  I am not the first and I won’t be the last to observe that this underlies the increasingly chaotic features of modernity.

Final Reflections

One final, way-out observation, and one that is more mundane.  Taleb makes an interesting observation about the phony use of quantum mechanics to justify an indeterminate reality and makes the excellent observation that quantum systems are the very systems that do scale to produce predictable behaviour.  This is a fine observation.  The interesting thing is that when we try to burrow down into physical reality we come smack up against ideal reality.  This I believe is the lesson of the quantum-theoretic revolution in physics which has yet to be more widely understood (its over a hundred years and counting–see my Consciousness Explained? or Stapp’s Mindful Universe for more on this).

Quantum mechanics suggests that unpredictable physical systems may indicate that we are looking at boundaries between the mental and physical, at least in the very small.  There are indeed many problems with mechanical ideas of causation (see my recent article, its commentary and the article it is discussion and its commentary and the random link that Word Press has conveniently found.)  Although may appear far-out, definitely an absurd idea for the mechanicals, could it be that chaotic macro-events like weather may have an ideal aspect after all.  I am just floating the idea.

The more prosaic point is this, and also quite ideal and ethical.  Taleb talks much about epistemologically arrogant we are, that we almost always overestimate the quality of our knowledge.  And indeed this is true.  But I would say the more important underlying point is that we are always overestimating our consequence.  We are habitually selfish and arrogant.  If we were to take an interest in pushing back on plain arrogance, cultivating an inner confidence and honest humility then this would get to the root of the problem.  No?

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