Black Swan Logic: Thinking outside the Norm
"The only thing I know is that I do not know" - Socrates
The following is based on ideas from The Black Swan: The Impact of the Highly Improbable
by Nassim Nicholas Taleb (Hardback published by Random House (US) and Allen Lane (UK), 2007. Paperback published by Penguin, 2008)
Before I add any comments, let’s let the man speak for himself. The following has been extracted from The Prologue of The Black Swan
. It is a brilliant summary of the main themes in the book — which I urge you to read in full. After that I summerise Taleb's ideas and to relate them to the rationale of the Developing Group.
The next Developing Group will focus on 'positive' Black Swans —
Maximising Serendipity:The art of recognising and fostering potential
In Taleb's own words (pp. xvii-xxviii)
On the plumage of birds
Before this discovery of Australia, people in the Old World were convinced that all swans were white, an unassailable belief as it seemed completely confirmed by empirical evidence. The sighting of the first black swan might have been an interesting surprise for a few ornithologists, but that is not where the significance of the story lies. It illustrates a severe limitation to our learning from observations or experience and the fragility of our knowledge. One single observation can invalidate a general statement derived from millennia of confirmatory sightings of millions of white swans. All you need is one single black bird.
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 it’s occurrence after the fact, making it [seem] explainable and predictable.
I stop and summarize the triplet: rarity, extreme impact, and retrospective (though not prospective) predictability. A small number of Black Swans explain almost everything in our world, from the success of ideas and religions, to the dynamics of historical events, to elements of our own personal lives. Ever since we left the Pleistocene, some ten millennia ago, the effect of these Black Swans has been increasing. It started accelerating during the industrial revolution, as the world started getting more complicated, while ordinary events, the ones we study and discuss and try to predict from reading the newspapers, have become increasingly inconsequential.
Just image how little your understanding of the world on the eve of events of 1914 would have helped you guess what was to happen next. How about the rise of Hitler and the subsequent war? How about the precipitous decline of the Soviet bloc? How about the rise of Islamic fundamentalism? How about the spread of the Internet? How about the market crash of 1987 (and the more unexpected recovery)? Fads, epidemics, fashion, ideas, the emergence of art genres and schools. All follow these Black swan dynamics. Literally, just about everything of significance around you might qualify.
It is easy to see that life is the cumulative effect of a handful of significant shocks. It is not so hard to identify the role of Black Swans, from your armchair (or bar stool). Go through the following exercise. Look into your own existence. Count the significant events, the technological changes, and the innovations that have taken place in our environment since you were born and compare them to what was expected before their advent. How many of them came on schedule?
Experts and “empty suits”
Our inability to predict in environments subjected to the Black Swan, coupled with a general lack of awareness of this state of affairs, means that certain professionals, while believing they are experts, are in fact not. Based on their empirical record, they do not know more about their subject matter than the general populations, but they are much better at narrating — or, worse, at smoking you with mathematical models. They are also more likely to wear a tie.
Black Swans being unpredictable, we need to adjust to their existence (rather than naively try to predict them). There are so many things we can do if we focus on anti-knowledge, or what we do not know. You can set yourself up to collect serendipitous Black Swans (of the positive kind) by maximising your exposure to them. Indeed, in some domains — such as scientific discovery and venture capital investments — there is a disproportionate payoff from the unknown, since you typically have little to lose and plenty to gain from a rare event. Contrary to social-science wisdom, almost no discovery, no technologies of note, came from design and planning — they were just Black Swans. The strategy is, then, to tinker as much as possible and try to collect as many Black Swan opportunities as you can.
What you do not know
Black Swan logic makes what you don’t know far more relevant than what you do know.
combination of low predictability and large impact makes the Black Swan
a great puzzle; but that is not yet the core concern of this book. The
central idea of this book concerns our blindness with respect to
randomness, particularly large deviations, in spite of the obvious
evidence of their huge influence.
What I call Platonicity is what
makes us think that we understand more than we actually do. I am not
saying that Platonic forms don’t exist. Models and constructions, these
intellectual maps of reality, are not always wrong. The difficulty is
that a) you do not know beforehand (only after the fact) where the 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.
Learning to learn
We do not spontaneously learn that we don’t learn that we don’t learn. The problem lies in the structure of our minds: we don’t learn rules, just facts, and only facts. Meta-rules (such as the rule that we have a tendency to not learn rules) we don’t seem to be good at getting.
Life is very unusual
Almost everything in social life is produced by rare but consequential shocks and jumps; all the while almost everything studied about social life focuses on the “normal”, particularly with “bell curve” methods of inference that tell you close to nothing. The bell curve ignores large deviations, cannot handle them, yet makes us confident that we have tamed uncertainty.
The bottom line
The beast in this book is not just the bell curve and self-deceiving statisticians, nor the Platonified scholar who needs theories to fool himself with. It is the drive to “focus” on what makes sense to us. Living on our planet, today, requires a lot more imagination than we are made to have.
To summarize: in this (personal) essay, I claim that our world is dominated by the extreme, the unknown, and the very improbable — and all the while we spend our time engaged in small talk, focussing 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 exception to be pushed under the rug. I also make the bolder claim that in spite of our progress and growth, the future will be increasingly less predictable, while both human nature and social “science” seem to conspire to hide this idea from us.
Examples of Black Swan events:
“In the summer of 1982, large American banks lost close to all their past earnings (cumulatively), about everything they had ever made in the history of American banking — everything” (p. 43, Taleb)
“In the last 50 years, the ten most extreme days in the US stock market represents half of all returns.” (p. 275, Taleb)
“September 1987, the Dow Jones fell by almost a third in less than a week, with just a single day showing a collapse of over 20 percent.” (p. 173, Ormerod)
In just 15 years Enron grew from nowhere to become America's seventh largest company. Fortune magazine named Enron ‘America's Most Innovative Company’ for six consecutive years from 1996 to 2001. By the end of that year, Enron had declared itself bankrupt leaving behind $31.8bn (£18bn) of debts, its shares worthless, and 21,000 workers around the world lost their jobs. (news.bbc.co.uk/1/hi/business/3398913.stm)
September 11, 2001
November 9, 1989 — The fall of Berlin Wall (and the disintegration of the Soviet Block)
Indian Ocean tsunami of December 2004.
Today’s sub-prime credit crisis.
Penicillin was mold that Alexander Fleming happened to notice.
When the laser was first invented it had no known application.
According to Taleb, as a rule ‘positive’ Black Swans start slowly and grow over time, ‘negative’ Black Swans make their impact felt almost instantly.
Concepts within the fields of emergence, networks, and self-organising systems related to Black Swan Logic:
- Nonlinearity, Fat tails, Power Laws, Fractals
- Punctuated Equilibrium
- Tipping Points
If you have been attending the Developing Group for a while (or reading the notes on the web
site), you’ll have recognised that we’ve covered many of this ideas before. Previous Developing Group days that have touched on Black Swan thinking are:
2001 Oct 13 Big Fish in a Small Pond: The importance of scale
2002 Feb 16 What is Emergence?
2004 Feb 7 Self-Deception, Self-Delusion and Self-Denial
2004 Jun 5 Thinking Networks - Part 1 (& Part 2 - Jun 3, 2006)
2005 Jun 4 Feedback Loops
2006 Apr 1 Becausation
Topics within the work of David Grove and it’s derivatives related to Black Swan thinking:
- Not Knowing
- Defining Moments
- Unpredictability of change
- Maturing Changes
- Bottom-up modelling
- Recursion and feedback loops
- Noticing the idiosyncratic
- “Looking for what’s not there, that has to be there, for what is there to exit” (Grove)
Expression that may indicate a personal Black Swan event:
It came out of the blue / left field.
I was totally unprepared for it.
It hit me like a thunderbolt.
It was off the scale.
Nothing like that had ever happened to me before.
It was a one in a million chance.
I never thought it could happen.
Things were going along so nicely.
I just happened to be in the right place at the right time.
I hadn’t bargained for that.
It was an act of God.
I was astonished / shocked.
No one anticipated it.
It arrived unannounced.
How was I suppose to know?
I must be cursed.
I was taken aback by the sheer size of it.
I just wasn’t expecting that.
I didn’t think i was taking a risk.
Who would have thought?
No one warned me this might happen.
I felt so safe.
How lucky can you get?
It never occurred to us.
My whole world turned upside down.
I never thought in my wildest dreams this would come up.
There is a summary of the book at: en.wikipedia.org/wiki/The_Black_Swan_(book).
If you prefer to listen rather than read there is a 1:23 hour podcast at: www.econtalk.org/archives/2007/04/taleb_on_black.html
Nassim Nicholas Taleb's Home Page, www.fooledbyrandomness.com
has links to many articles and reviews.
For an article on unexpected creativity in businesses, see:
‘Corporate Creativity: It’s Not What You Expect’, Alan G. Robinson and Sam Stern
Innovative Leader Volume 6, Number 10, October 1997www.winstonbrill.com/bril001/html/article_index/articles/301-350/article301_body.html
Other books that have contributed to my knowledge of this subject
(Note, I am not listing all the books on the subject that I haven’t read!):
Philip Ball, Critical Mass: How one thing leads to another (Arrow, 2005)
Mark Buchanan, Ubiquity: Why catastrophes happen (Three Rivers, 2002)
James Gleick, Chaos: The amazing science of the unpredictable (Vintage, 1998)
Paul Ormerod, Why Most things Fail ... an how to avoid it (Faber & Faber, 2006)
Nassim Nicholas Taleb, Fooled by Randomness: The hidden role of chance in the markets and life (Texere, 2001)
Mark Ward, Universality: The underlying theory behind life, the universe and everything (Pan 2002)
Albert-Laszlo Barabasi, Linked: How everything is connected (Plume, 2003)
Mark Buchanan, Nexus: Small worlds and the science of networks (Norton, 2002)
Fritjof Capra, The Web of Life: A new synthesis of mind and matter (HarperCollins, 1996)
Fritjof Capra, Hidden Connections: Integrating the biological, cognitive and social (Doubleday, 2002)
Jack Cohen & Ian Stewart, The Collapse of Chaos: Discovering simplicity in a complex world (Penguin, 1995)
Murray Gell-Mann, The Quark and the Jaguar: Adventures in the simple and the complex (Abacus, 1995)
Malcolm Gladwell, The Tipping Point: How little things can make a big difference (Black Bay, 2002)
Neil Johnson, Two’s Company, Three’s Complexity (Oneworld , 2007)
Bart Kosko, Fuzzy thinking: The nw science of fuzzy thinking (Flamingo, 1994)
Roger Lewin, Complexity: Life at the edge of Chaos (Phoenix, 1993)
Steven Johnson, Emergence: The connected lives of ants, brains, cities and software (Allen Lane, 2001)
Steven Strogatz, Sync: Rhythms of nature, rhythms of ourselves (Allen Lane, 2003)
Duncan Watts, Six Degrees: The Science of a connected age (Norton, 2003)
Stephen Wolfram, A New Kind of Science (Wolfram Media, 2002)
Page 2 of these notes will review more of Taleb’s ideas separated into four levels:
I. The nature of uncertainty, unpredictability and randomness.
II. How we get fooled by I
III. Why we don’t seem to learn from II
IV. And how we can.
[Note the parallels with the four levels of Self-Deception, Delusion and Denial