The Black Swan

This 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 cannot compete with action movies or memoirs of adventurers more accomplished than myself, so I will stick to my specialties of chance and uncertainty.

ANATOMY OF A BLACK SWAN

For more than a millennium the eastern Mediterranean seaboard called Syria Libanensis, or Mount Lebanon, had been able to accommodate at least a dozen different sects, ethnicities, and beliefs – it worked like magic. The place resembled major cities of the eastern Mediterranean (called the Levant) more than it did the other parts in the interior of the Near East (it was easier to move by ship than by land through the mountainous terrain). The Levantine cities were mercantile in nature; people dealt with one another according to a clear protocol, preserving a peace conducive to commerce, and they socialized quite a bit across communities. This millennium of peace was interrupted only by small occasional friction within Moslem and Christian communities, rarely between Christians and Moslems. While the cities were mercantile and mostly Hellenistic, the mountains had been settled by all manner of religious minorities who claimed to 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 estate. The mosaic of cultures and religions there was deemed an example of coexistence: Christians of all varieties (Maronites, Armenians, Greco-Syrian Byzantine Orthodox, even Byzantine Catholic, in addition to the few Roman Catholics left over from the Crusades); Moslems (Shiite and Sunni); Druzes; and a few Jews. It was taken for granted that people learned to be tolerant there; I recall how we were taught in school how far more civilized and wiser we were than those in the Balkan communities, where not only did the locals refrain from bathing but also fell prey to fractious righting. Things appeared to be in a state of stable equilibrium, evolving out of a historical tendency for betterment and tolerance. The terms balance and equilibrium were often used.

Both sides of my family came from the Greco-Syrian community, the last Byzantine outpost in northern Syria, which included what is now called Lebanon. Note that the Byzantines called themselves “Romans” – Roumi (plural Roum) in the local languages. We originate from the olive-growing area at the base of Mount Lebanon – we chased the Maronite Christians into the mountains in the famous battle of Amioun, my ancestral village. Since the 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 Byzantine emperors, we managed to pay taxes to both sides and get protection from both. We thus managed to live in peace for more than a millennium almost devoid of bloodshed: our last true problem 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 uninteresting pursuit of commerce and the less dangerous one of scholarship (like the translation of Aramaic and Greek texts).

By any standard the country called Lebanon, to which we found ourselves suddenly incorporated after the fall of the Ottoman Empire, in the early twentieth century, appeared to be a stable paradise; it was also cut in a way to be predominantly Christian. People were suddenly brainwashed to believe in the nation-state as an entity.[5] The Christians convinced themselves that 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 thinking, 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 through the ancient world. 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 California, with snow-covered mountains jutting above the Mediterranean. It attracted a collection of spies (both Soviet and Western), prostitutes (blondes), writers, poets, drug dealers, 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 James Bond movie, or the days when playboys smoked, drank, and, instead of going to the gym, cultivated relationships with good tailors.

The main 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 than it actually was.

I was 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 of luxury and its obsession with things monetary.

As a teenager, I could not wait to go settle in a metropolis with fewer James Bond types around. Yet 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 of 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 France, as both my grandfathers were – my paternal namesake in 1912 and my mother’s father in 1929. Two thousand years earlier, by the same instinct of linguistic distinction, the snobbish Levantine patricians wrote in Greek, not the vernacular Aramaic. (The New Testament was written in the bad local patrician Greek of our capital, Antioch, prompting Nietzsche to shout that “God spoke bad Greek”.) And, after Hellenism declined, they took up Arabic. So in addition to being called a “paradise”, the place was also said to be a miraculous crossroads of what are superficially tagged “Eastern” and “Western” cultures.

My ethos was shaped when, at fifteen, I was put in jail for (allegedly) attacking a policeman with a slab of concrete during a student riot – an incident 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 recall being at the center of the riot, and feeling a huge satisfaction upon my capture while my friends were scared of both prison and their parents. We frightened the government so much that we were granted amnesty.

There were some obvious benefits in showing one’s ability to act on one’s opinions, and not compromising an inch to avoid “offending” or bothering others. I was in a state of rage and didn’t care what my parents (and grandfather) thought of me. This made them quite scared of me, so I could not afford to back down, or even blink. Had I concealed my participation 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 black sheep. It is one thing to be cosmetically defiant of authority by wearing unconventional clothes – what social scientists and economists call “cheap signaling” – and another to prove willingness to translate belief into action.

My paternal uncle was not too bothered by my political ideas (these come and go); he was outraged that I used them as an excuse to dress sloppily. To him, inelegance on the part of a close family member was the mortal offense.

Public knowledge of my capture had another major benefit: it allowed me to avoid the usual outward signs of teenage rebellion. I discovered that 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.

The Lebanese “paradise” suddenly evaporated, after a few bullets and mortar shells. A few months after my jail episode, after close to thirteen centuries of remarkable ethnic coexistence, a Black Swan, coming out of nowhere, transformed the place from heaven to hell. A fierce civil war 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 hundred feet from the war zone). The conflict lasted more than a decade and a half. I will not get too descriptive. It may be that the invention of gunfire and powerful weapons turned what, 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 turned out 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 three thousand years. Christians had been leaving the area since Ottoman times – those who moved to the West took Western first names and melded in. Their exodus accelerated. The number of cultured people dropped below some critical level. Suddenly the place became a vacuum. Brain drain is hard to reverse, and some of the old refinement may be lost forever.

The next time you experience a blackout, take some solace by looking at the sky. You will not recognize it. Beirut had frequent power shutdowns during the war. Before people 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 television drove to watch the erupting lights of nighttime battles. They appeared to prefer the risk of being blown up by mortar shells to the boredom of a dull evening.

So you could see the stars with great clarity. I had been told in high school that the planets are in something called equilibrium, so we did not have to worry about the stars hitting us unexpectedly. To me, that eerily resembled the stories we were also told about the “unique historical stability” of Lebanon. The very idea of assumed equilibrium bothered me. I looked at the constellations in the sky and did not know what to believe.

HISTORY AND THE TRIPLET OF OPACITY

History is opaque. You see what comes out, not the script that produces events, the 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 call the generator of historical events is different from the events themselves, much as the minds of the gods cannot be read just by witnessing their deeds. You are very likely to be fooled about their intentions.

This disconnect 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 last time I brunched at a certain Chinese restaurant on Canal Street in downtown Manhattan, I saw a rat coming out of the kitchen.)

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 they were in 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”.

The 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 than it actually is.

I was constantly told by adults that the war, which ended up lasting close to seventeen years, was going to end in “only a matter of days”. They seemed quite confident in their forecasts of duration, as can be evidenced 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 solution (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 different”. Somehow what he detected in others did not seem to apply to him.

This duration blindness in the middle-aged exile is quite a widespread disease. Later, when I decided to avoid the exile’s obsession with his roots (exiles’ roots penetrate their personalities a bit too deeply), I studied exile literature precisely to avoid the traps of a consuming and obsessive nostalgia. These exiles seemed to have become prisoners of their memory of idyllic 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 counterfactuals in their minds, generating alternative scenarios that could have happened and prevented these historical ruptures, such as “if the Shah had not named this incompetent man as prime minister, we would still be there”. It was as if the historical rupture had 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 behavior during exile. Almost all act in the same way.

One hears endless stories of Cuban refugees with suitcases still half packed who came to Miami in the 1960s 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 1978 thinking that their absence would be a brief vacation. A few are still waiting, more than a quarter century later, for the return. Many Russians who left in 1917, such as the writer Vladimir Nabokov, settled in Berlin, perhaps to be close enough for a quick return. Nabokov himself lived all his life in temporary housing, in both indigence and luxury, ending his days at the Montreux Palace hotel on Lake Geneva.

There was, of course, some wishful thinking in all of these forecasting errors, the blindness of hope, but there was a knowledge problem as well. The dynamics of the Lebanese conflict had been patently unpredictable, yet people’s reasoning as they examined the events showed a constant: almost 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 forecast them. Much of what took place would have been deemed completely crazy with respect to the past. Yet it did not seem that crazy after the events. This retrospective plausibility causes a discounting of the rarity and conceivability of the event. I later saw the exact same illusion of understanding in business success and the financial markets.

Later, upon replaying 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 of making sense out of almost anything, capable of mounting explanations for all manner of phenomena, and generally incapable of accepting the idea of unpredictability. These events were unexplainable, but intelligent people thought they were capable of providing convincing explanations 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.

So I left the place called Lebanon as a teenager, but, since a large number of my relatives and friends remained there, I kept coming back to visit, especially during the hostilities. The war was not continuous: there were periods of fighting interrupted by “permanent” solutions. I felt closer to my roots during times of trouble and experienced the urge to come back and show support to those left behind who were often demoralized by the departures – and envious of the fair-weather friends who could seek economic and personal safety only to return for vacations during these occasional lulls in the conflict. I was unable to work or read when I was outside Lebanon while people were dying, but, paradoxically, I was less concerned by the events and able to pursue my intellectual interests guilt-free when I was inside Lebanon. Interestingly, people partied quite heavily during the war and developed an even bigger taste for luxuries, making the visits quite attractive in spite of the fighting.

There were a few difficult questions. How could one have predicted that people who seemed a model of tolerance could become the purest of barbarians overnight? Why was the change so abrupt? I initially thought that perhaps the Lebanese war was truly not possible to predict, unlike other conflicts, and 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 local property.

The Levant 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 of Nazareth – in The Jewish Wars of Josephus – which itself may have been added later 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 than the rise of Christianity, it was the spread of Islam (the third edition, so to speak) that carried full unpredictability; many historians looking at the record have been taken aback by the swiftness of the change. Georges Duby, for one, expressed his amazement about how quickly close to 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 Veyne, aptly 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 of the past in the greatest of detail does not teach you much about the mind of History; it only gives you the illusion of understanding it.

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.

It struck me, a belief that has never left me since, that we are just a great machine for looking backward, and that humans are great at self-delusion. Every year that goes by increases my belief in this distortion.

Events present themselves to us in a distorted way. 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. Because your memory is limited and filtered, you will be inclined to remember those data that subsequently match the facts, unless you are like the eponymous Funes in the short story by Jorge Luis Borges, “Funes, the Memorious”, who forgets nothing and seems condemned to live with the burden of the accumulation of unprocessed information. (He does not manage to live too long.)

I had my first exposure to the retrospective distortion as follows. During 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 manner of books. School was 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[6] – though being forced to read for lack of other activities is not as enjoyable as reading out of one’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. Circumstances motivated me to study theoretical 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, the 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. It occurred to me that the Journal offered an unusual perspective. I had already read (or read about) the works of Hegel, Marx, Toynbee, Aron, and Fichte on 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 something to understand in these theories. I did not grasp much, except that history had some logic and that things developed through contradiction (or opposites) in a way that elevated mankind into higher forms of society – that kind 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 taught me (albeit inadvertently) the most about philosophy and theoretical history – and, we will see, about science as well, since I learned the difference between forward and backward processes.

How? Simply, the diary purported to describe the events as they were taking place, not after. I was in a basement with history audibly unfolding above me (the sound of mortar shells kept me up all night). I was a teenager attending the funerals of classmates. I was experiencing a nontheoretical unfolding of History and I was reading about someone apparently experiencing history as it went along. I made efforts to mentally produce a movielike 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 more … historical. There was a difference between the before and the after.

The journal was purportedly written without Shirer knowing what was going to happen next, when the information available to him was not corrupted by the subsequent outcomes. Some comments here and there were quite illuminating, particularly those concerning the French belief that Hitler was a transitory phenomenon, which explained their lack of preparation and subsequent rapid capitulation. At no time was the extent of the ultimate devastation deemed possible.

While we have a highly unstable memory, a diary provides indelible facts recorded more or less immediately; it thus allows the fixation of an unrevised perception and enables us to later study events in their own context. Again, it is the purported method of description of the event, not its execution, that was important. In fact, it is likely that Shirer and his editors did some cheating, since the book was published in 1941 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 removing at the time of publication elements that did not turn out to be relevant to what happened, thus enhancing those that may interest the public. Indeed the editing process can be severely distorting, particularly when the author is assigned what is called a “good editor”.) Still, encountering Shirer’s book provided me with an intuition about the workings of history. One would suppose that people living through the beginning of WWII had an inkling that something momentous was taking place. Not at all.[7]

Shirer’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 adventure (rather to the adventurous practice of uncertainty) and also to mathematical and scientific pursuits instead.

I will introduce the third element of the triplet, the curse of learning, as follows. I closely watched my grandfather, who was minister of defense, and later minister of the interior and deputy prime minister in the early days of the war, before the fading of his political role. In spite of his position 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 knows” as his main commentary on events, transferring the task of understanding higher up.

I noticed that very intelligent and informed persons were at no advantage over cabdrivers in their predictions, but there was a crucial difference. Cabdrivers 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 because they were elite thinkers, and if you’re a member of the elite, you automatically know more than the nonelite.

It is not just knowledge but information that can be of dubious value. It came to my notice that almost everybody was acquainted with current events in their smallest details. The overlap between newspapers was so large that you would get less and less information the more you read. Yet everyone was so eager to become familiar with every fact that 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 became encyclopedias of who had met with whom and which politician said what to which other politician (and with what tone of voice: “Was he more friendly than usual?”). Yet to no avail.

CLUSTERS

I also noticed during the Lebanese war that journalists tended to cluster not necessarily around the same opinions but frequently around the same framework of analyses. They assign the same importance to the same sets of circumstances and cut reality into the same categories – once again the manifestation of Platonicity, the desire to cut reality into crisp shapes. What Robert Fisk calls “hotel journalism” further increased the mental contagion. While Lebanon in earlier journalism was part of the Levant, i.e., the eastern Mediterranean, it now suddenly became part of the Middle East, as if someone had managed to transport it closer to the sands of Saudi Arabia. The island of Cyprus, around sixty miles from my village in northern Lebanon, and with almost identical food, churches, and habits, suddenly became part of Europe (of course the natives on both sides became subsequently conditioned). While in the past a distinction had been drawn between Mediterranean and non-Mediterranean (i.e., between the olive oil and the butter), in the 1970s the 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 Christians (or Jews) in that story. Categorizing is necessary for humans, but it becomes pathological 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 hundred independent-minded journalists capable of seeing factors in isolation from one another, you would get one hundred different opinions. But the process of having these people report in lockstep caused the dimensionality of the opinion set to shrink considerably – they converged on opinions and used the same items as causes. For instance, to depart from Lebanon for a moment, all reporters now refer to the “roaring eighties”, assuming that there was something particularly distinct about that exact decade. And during the Internet bubble of the late 1990s, journalists agreed on crazy indicators as explanatory of the quality of worthless companies that everyone wanted very badly.[8]

If you want to see what I mean by the arbitrariness of categories, check the 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 sexual freedom need to be against individual economic liberty?

I noticed the absurdity of clustering when I was quite young. By some farcical turn of events, in that civil war of Lebanon, Christians became pro-free market and the capitalistic system – i.e., what a journalist would call “the Right” – and the Islamists became socialists, getting support from Communist regimes (Pravda, the organ of the Communist regime, called them “oppression fighters”, though subsequently when the Russians invaded Afghanistan, it was the Americans who sought association with bin Laden and his Moslem peers).

The best way to prove the arbitrary character of these categories, and the contagion effect they produce, is to remember how frequently these clusters reverse in history. Today’s alliance between Christian fundamentalists and the Israeli lobby would certainly seem puzzling to a nineteenth-century intellectual – Christians used to be anti-Semites and Moslems were the protectors of the Jews, whom they preferred to Christians. Libertarians used to be left-wing. What is interesting to me as a probabilist is that some random event makes one group that initially supports an issue ally itself with another group that supports another issue, thus causing the two items to fuse and unify … until the surprise of the separation.

Categorizing always produces reduction in true complexity. It is a manifestation of the Black Swan 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 uncertainty; it drives us to a misunderstanding of the fabric of the world. For instance, you 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.

It was a few years after the beginning of the Lebanese war, as I was attending the Wharton School, at 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 derive profits from traded securities since these instruments have automatically incorporated all the available information. Public information can therefore be useless, particularly to a businessman, since prices can already “include” all such information, and news shared with millions gives you no real advantage. Odds are that one or more of the hundreds of millions of other readers of such information will already have bought the security, thus pushing up the price. I then completely gave up reading newspapers and watching television, which freed up a considerable amount of time (say one hour or more a day, enough time to read more than a hundred additional books per year, which, after a couple of decades, starts mounting). But this argument was not quite the entire reason for my dictum 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.

Why someone with plans to become a “philosopher” or a “scientific philosopher of history” would wind up in business school, and the Wharton School no less, still escapes me. There I saw that it was not merely some inconsequential 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 what is going on. What 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 executives of 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 than a possibility. I felt in my spine the weight of the epistemic arrogance of the human race.[9]

I became obsessive. At the time, I started becoming conscious of my subject – the highly improbable consequential event. And it was not only well-dressed, testosterone-charged corporate executives who were usually fooled by this concentrated luck, but persons of great learning. This awareness turned my Black Swan from a problem of lucky or unlucky people in business into a problem of knowledge and science. My idea is that not only are some scientific results useless in real life, because they underestimate the impact of the highly improbable (or lead us to ignore it), but that many of them may be actually creating Black Swans. These are not just taxonomic errors that can make you flunk a class in ornithology. I started to see the consequences of the idea.

8¾ LBS LATER

Four and a half years after my graduation from Wharton (and 8¾ pounds heavier), on October 19, 1987, I walked home from the offices of the investment bank Credit Suisse First Boston in Midtown Manhattan to the Upper East Side. I walked slowly, as I was in a bewildered state.

That day saw a traumatic financial event: the largest market drop 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 shocks. The drop was not even the response to any discernible news. The occurrence of the event lay outside anything one could have imagined on the previous day – had I pointed out its possibility, I would have been called a lunatic. It qualified as a Black Swan, but I did not know the expression then.

I ran 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 on?” People on the sidewalk looked dazed. Earlier I had seen a few adults silently sobbing in the trading room of First Boston. I had spent the day at the epicenter of the events, with shell-shocked people running around 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 upper-floor apartment. It did not even feel eerie. It felt like Lebanon, with a twist: having seen both, I was struck that financial distress could be more demoralizing than war (just consider that financial problems and the accompanying humiliations can lead to suicide, but war doesn’t appear to do so directly).

I feared a Pyrrhic victory: I had been vindicated intellectually, but I was afraid of being too right and seeing the system crumble under my feet. I did not really want to be that right. I will always remember the late Jimmy P. who, seeing his net worth in the process of melting down, kept 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 trumpet 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 sensation, perhaps a mixture of joy, pride, and terror.

And I felt vindicated? How?

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.

For I was early to embrace, as a day job, the profession of “quantitative finance”. I became a “quant” and trader at the same time – a quant is a brand of industrial scientist who applies mathematical models of uncertainty to financial (or socioeconomic) data and complex financial instruments. Except that I was a quant exactly in reverse: I studied the flaws and the limits of these models, looking for the Platonic fold where they break down. Also 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 traders were 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.

Also, the technical baggage that comes with being a quant (a mixture of applied mathematics, engineering, and statistics), in addition to the immersion in practice, turned out to be very useful for someone wanting to be a philosopher.[10] First, when you spend a couple of decades doing mass-scale empirical work with data and taking risks based on such studies, you can 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 of times series data, which is a succession of numbers in time, a sort of historical document containing numbers instead of words. And numbers are easy to process on computers. Studying historical data makes you conscious that history runs forward, not backward, and that it is messier than narrated accounts. Epistemology, the philosophy of history, and statistics aim at understanding truths, investigating the mechanisms that generate them, and separating regularity from the coincidental in historical matters. They all address the question of what one knows, except that they are all to be found in different buildings, so to speak.

That night, on October 19, 1987, I slept for twelve hours straight.

It was hard to tell my friends, all hurt 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. This is sometimes called “f*** you money”, which, in spite of its coarseness, means 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 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 astonishingly 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 ashamed whenever I diverted time away from study for the pursuit of material wealth. Note that the designation f*** you corresponds to the exhilarating ability to pronounce that compact phrase before hanging up the phone.

These were the days when it was extremely common for traders to break phones when they lost money. Some resorted to destroying chairs, tables, or whatever would make noise. Once, in the Chicago pits, another trader tried to strangle me and it took four security guards to drag him away. He was irate because I was standing in what he deemed his “territory”. Who would want to leave such an environment? Compare it to lunches in a drab university cafeteria with gentle-mannered professors discussing the latest departmental intrigue. So I stayed in the quant and trading businesses (I’m still there), but organized myself to 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 don’t read books, and take a sabbatical year for every three on average to fill up gaps in my scientific and philosophical culture. To slowly distill my single idea, I wanted to become a flâneur, a professional meditator, sit in cafés, lounge, unglued to desks and organization structures, sleep as long as I needed, read voraciously, and not owe any explanation to anybody. I wanted to be left alone in order to build, small steps at a time, an entire system of thought based on my Black Swan idea.

The war in Lebanon and the crash of 1987 seemed identical phenomena. It became 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, perhaps even biological, blindness; the problem lay not in the nature of events, but in the way we perceived them.

I end this autobiographical prelude with the following story. I had no defined specialty (outside of my day job), and wanted none. When people at cocktail parties asked me what I did for a living, I was tempted to answer, “I am a skeptical empiricist and a flâneur-reader, someone committed to getting very deep into an idea”, but I made things simple by saying that I was a limousine driver.

Once, on a transatlantic flight, I found myself upgraded to first class next to an expensively dressed, high-powered lady dripping with gold and jewelry who 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 French, since she saw me reading a book (in French) by the sociologist-philosopher Pierre Bourdieu – which, ironically, dealt with the marks of social distinction. 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.

Yevgenia’s rise from the second basement to superstar is possible in only one environment, which I call Extremistan.[12] I will soon introduce the central distinction between the Black Swan-generating province of Extremistan and the tame, quiet, and uneventful province of Mediocristan.

THE BEST (WORST) ADVICE

When I play back in my mind all the “advice” people have given me, I see that only a couple of ideas have stuck with me for life. The rest has been mere words, and I am glad that I did not heed most of it. Most consisted of recommendations such as “be measured and reasonable in your statements”, contradicting the Black Swan idea, since empirical reality is not “measured”, and its own version of “reasonableness” does not correspond to the conventional middlebrow definition. To be genuinely empirical 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 of the monk whom Ivan the Terrible put to death for delivering uninvited (and moralizing) advice. It works as a short-term cure.

The most important piece of advice was, in retrospect, bad, but it was also, paradoxically, the most consequential, as it pushed me deeper into the dynamics of the Black Swan. It came when I was twenty-two, one February afternoon, in the corridor of a building at 3400 Walnut Street in Philadelphia, where I lived. A second-year Wharton student told me to get a profession that is “scalable”, that is, one in which you are not paid by the hour and thus subject to the limitations of the amount of your labor. It was a very simple way to discriminate among professions and, from that, to 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 Black Swan. It allowed me to turn the Black 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 nature of uncertainty? Some professions, such as dentists, consultants, or massage professionals, cannot 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 restaurant, you will at best steadily fill up the room (unless you franchise it). In these professions, no matter how highly paid, your income is subject to gravity. Your revenue depends on your continuous efforts more than 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 of a single day more significant than that of the rest of your life. In other words, it will not be Black Swan driven. Yevgenia Nikolayevna would not have been able to cross the chasm between underdog and supreme hero overnight had she been a tax accountant or a hernia specialist (but she would not have been an underdog either).

Other professions allow you to add zeroes to your output (and your income), if you do well, at little or no extra effort. Now being lazy, considering laziness as an asset, and eager to free up the maximum amount of time in my day to meditate and read, I immediately (but mistakenly) drew a conclusion. I separated the “idea” person, who sells an intellectual product in the form of a transaction or a piece of work, from the “labor” person, who sells you his work.

If you 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 thousand. In quant trading, the same amount of work is involved in buying a hundred shares as in buying a hundred thousand, or even a million. It is the same phone call, the same computation, the same legal document, the same expenditure of brain cells, the same effort in verifying that the transaction is right. Furthermore, you can work from your bathtub or from a bar in Rome. You can use leverage as a replacement for work! Well, okay, I was a little wrong about trading: one cannot work from a bathtub, but, when done right, the job allows considerable free time.

The same 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 expends the same effort to attract one single reader as she would to capture several hundred million. J. K. Rowling, the author of the Harry Potter books, 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 of bread in order to satisfy each additional customer.

So the distinction between writer and baker, speculator and doctor, fraudster and prostitute, is a helpful way to look at the world of activities. It separates 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.

BEWARE THE SCALABLE

But why was the advice from my fellow student bad?

If the 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 lucky and happened to be “in the right place at the right time”, as the saying goes. If I myself had to give advice, I would recommend someone pick a profession that is not scalable! A scalable profession is good only if you are successful; they are more competitive, produce monstrous inequalities, 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 entirely at no fault of their own.

One category of profession is driven by the mediocre, the average, and the middle-of-the-road. In it, the mediocre is collectively consequential. The other has either giants or dwarves – more precisely, a very small number of giants and a huge number of dwarves.

Let us see what is behind the formation of unexpected giants – the Black Swan formation.

Consider the fate of Giaccomo, an opera singer at the end of the nineteenth century, before sound recording was invented. Say he performs in a small and remote town in central Italy. He is shielded from those big egos at La Scala in Milan and other major opera houses. He feels safe as his vocal cords 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 local franchise. 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 unevenly 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 audiences and get more invitations than the small guy, but this is not too worrisome. Inequalities exist, but let us call them mild. There is no scalability yet, no way to double the largest in-person audience without having to sing twice.

Now consider the effect of 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 Rachmaninoff’s Preludes, instead of to the local Russian émigré musician (still living), who is now reduced to giving piano lessons to generally un-talented children for close to minimum wage. Horowitz, though dead, is putting the poor man out of business. I would rather listen to Vladimir Horowitz or Arthur Rubinstein for $10.99 a CD than pay $9.99 for one by some unknown (but very talented) graduate of the Juilliard School or the Prague Conservatory. If you ask me why I select Horowitz, I will answer that it is because of the order, rhythm, or passion, when in fact there are 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 just as well.

Some people naïvely 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 performance without our being there by spreading our genes down the generations. Evolution is scalable: the DNA that wins (whether by luck or survival advantage) will reproduce itself, like a bestselling book or a successful record, and become pervasive. Other DNA will vanish. Just consider 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 social life came not with the gramophone, but when someone had the great but unjust idea to invent the alphabet, thus allowing us to store information and reproduce it. It accelerated further when another inventor had the even more dangerous and iniquitous notion of starting a printing press, thus promoting texts across boundaries and triggering what ultimately grew into a winner-take-all ecology. Now, 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 author’s part for the subsequent performances. He didn’t even have to be alive for them – death is often a good career move for an author. This implies that those who, for some reason, start getting some attention can quickly reach more minds than others 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.

By the same mechanism, the advent of the cinema displaced neighborhood actors, putting the small guys out of business. But there is a difference. In pursuits that have a technical component, like being a pianist or a brain surgeon, talent is easy to ascertain, with subjective opinion playing a relatively small part. The inequity comes when someone perceived as being marginally better gets the whole pie.

In the arts – say the cinema – things are far more vicious. What we call “talent” generally comes from success, rather than its opposite. A great deal of empiricism has been done on the subject, most notably by Art De Vany, an insightful and original thinker who singlemindedly studied wild uncertainty in the movies. He showed that, sadly, much of what we ascribe to skills is an after-the-fact attribution. The movie makes the actor, he claims – and a large dose of nonlinear luck makes the movie.

The success of movies depends severely on contagions. Such contagions do not just apply to the movies: they seem to affect a wide range of cultural 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 that they belong to a community. By imitating, we get closer to others – that is, other imitators. It fights solitude.

This discussion shows the difficulty in predicting outcomes in an environment of concentrated success. So for now let us note that the division between professions can be used to understand the division between types of random variables. Let us go further into the issue of knowledge, of inference about the unknown and the properties of the known.

SCALABILITY AND GLOBALIZATION

Whenever you hear a snotty (and frustrated) European middlebrow presenting 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 middlebrows call “high culture” – like knowledge of Goethe’s inspirational (and central) trip to Italy, or familiarity with the Delft school of painting. Yet the person making these statements is likely to be addicted to his iPod, wear blue jeans, and use Microsoft Word to jot down his “cultural” statements on his PC, with some Google searches here and there interrupting his composition. Well, it so happens that America is currently far, far more creative than these nations of museumgoers and equation solvers. It is also far more tolerant of bottom-up tinkering and undirected trial and error. And globalization has allowed the United States to specialize in the creative aspect of things, the production of concepts and ideas, that is, the scalable part of the products, and, increasingly, by exporting jobs, separate 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, Dell, and Boeing can get paid for just thinking, organizing, and leveraging their know-how and ideas while subcontracted factories in developing countries do the grunt work and engineers in cultured and mathematical states do the noncreative technical grind. The American economy has leveraged itself heavily on the idea generation, which explains why losing manufacturing jobs can be coupled with a rising standard of living. Clearly the drawback of a world economy where the payoff goes to ideas is higher inequality among the idea generators together with a greater role for both opportunity and luck – but I will leave the socio-economic discussion for Part Three and focus here on knowledge.

TRAVELS INSIDE MEDIOCRISTAN

This scalable/nonscalable distinction allows us to make a clear-cut differentiation between two varieties of uncertainties, two types of randomness.

Let’s play the following thought experiment. Assume that you round 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 Frenchmen (but please, not too many out of consideration for the others in the group), Mafia members, non-Mafia members, and vegetarians.

Imagine the heaviest person you can think of and add him to that sample. Assuming he weighs three times the average, between four hundred and five hundred pounds, he will rarely represent more than a very small fraction of the weight of the entire population (in this case, about a half of a percent).

You can get even more aggressive. If you picked the heaviest biologically possible human on 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 negligible increase. And if you had ten thousand persons, his contribution would be vanishingly small.

In the Utopian province of Mediocristan, particular events don’t contribute much individually – only collectively. I can state the supreme law of Mediocristan as follows: When your sample is large, no single instance will significantly change the aggregate or the total. The largest observation will remain impressive, but eventually insignificant, to the sum.

I’ll borrow another example from my friend Bruce Goldberg: your caloric consumption. Look at how much you consume per year – if you are classified as human, close to eight hundred thousand calories. No single 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 calories would not seriously affect your yearly consumption.

Now, if I told you that it is possible to run into someone who weighs several thousand tons, or stands several hundred 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 extreme variations with a different brand of quantities, to which we turn next.

Consider 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 Gates, the founder of Microsoft. Assume his net worth to be close to $80 billion – with the total capital of the others around a few million. How much of the total wealth would he represent? 99.9 percent? Indeed, all the others would represent no more than a rounding error for his net worth, the variation of his personal portfolio over the past second. For someone’s weight to represent such a share, he would need to weigh fifty million pounds!

Try it again with, say, book sales. Line up a thousand authors (or people begging to get published, but calling themselves authors instead of waiters), and check their book sales. Then add the living writer who (currently) has the most readers. J. K. Rowling, the author of the Harry Potter series, with several hundred million books sold, will dwarf the remaining thousand authors with, say, collectively, a few hundred thousand 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 call these social matters, as they are man-made, 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. Another 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 necessitating 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 hard to kill many people if you need to slaughter them one at the time. Today, with tools of mass destruction, all it takes is a button, a nutcase, or a small error to wipe out the planet.

Look at the implication for the Black Swan. Extremistan can produce Black Swans, and does, since a few occurrences have had huge influences on history. This is the main idea of this book.

Extremistan and Knowledge

While this distinction (between Mediocristan and Extremistan) has severe ramifications for both social fairness and the dynamics of events, let us see its application to knowledge, which is where most of its value lies. If 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 hundred humans to get a good picture of the average height. If you live in Mediocristan, you can be comfortable with what you have measured – provided that you know for sure that it comes from Mediocristan. You can also be comfortable with what you have learned from the data. The epistemological consequence is that with Mediocristan-style randomness it is not possible[13] to have a Black Swan surprise such that a single event can dominate a phenomenon. Primo, the first hundred days should reveal all you need to know about the data. Secondo, even if you do have a surprise, as we saw in the case of the heaviest human, it would not be consequential.

If you 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 Extremistan, one unit can easily affect the 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?

What you can know from data in Mediocristan augments very rapidly with the supply of information. But knowledge in Extremistan grows slowly and erratically with the addition of data, some of it extreme, possibly at an unknown rate.

If we follow my distinction of scalable versus nonscalable, we can see clear differences shaping up between Mediocristan and Extremistan. Here are a few examples.

Matters that seem to belong to Mediocristan (subjected to what we call 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 case, assuming the person goes to a casino and maintains a constant betting size), car accidents, mortality rates, “IQ” (as measured).

Matters that seem to belong to Extremistan (subjected to what we call type 2 randomness): wealth, income, book sales per author, book citations per author, name recognition as a “celebrity”, number of references on Google, populations of cities, uses of words 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 mice), financial markets (but your investment manager does not know it), commodity prices, inflation rates, economic data. The Extremistan list is much longer than the prior one.

Another way to rephrase the general distinction is as follows: Mediocristan is where we must endure the tyranny of the collective, the 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 hard as you try, you will never lose a lot of weight in a single day; you need the collective effect of many days, weeks, even months. Likewise, if you work as a dentist, you will never get rich in a single day – but you can do very well over thirty years of motivated, diligent, disciplined, and regular attendance to teeth-drilling sessions. If you are subject to Extremistan-based speculation, however, you can gain or lose your fortune in a single minute.

Table 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.

This framework, showing that Extremistan is where most of the Black Swan action is, is only a rough approximation – please do not Platonify it; don’t simplify it beyond what’s necessary.

Extremistan does not always imply Black Swans. Some events can be rare and consequential, but somewhat predictable, particularly to those who are prepared for them and have the tools to understand them (instead of listening to statisticians, economists, and charlatans of the bell-curve variety). They are near-Black Swans. They are somewhat tractable scientifically – knowing about their incidence should lower your surprise; these events are rare but expected. I call this 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, and fractal laws, and we will leave them aside for now since they will be covered in some depth in Part Three. They are scalable, according 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.

You can still experience severe Black Swans 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 Black Swans result from this “tunneling” disease, which I will discuss in Chapter 9.

This has been a “literary” overview of the central distinction of this book, offering a trick to distinguish between what can belong in Mediocristan and what belongs in Extremistan. I said that I will get into a more thorough examination in Part Three, so let us focus on epistemology for now and see how the distinction affects our knowledge.

Which brings us to the Black Swan Problem in its original form.

Imagine someone of authority and rank, operating in a place where rank matters – say, a government agency or a large corporation. He could be a verbose political commentator on Fox News stuck in front of you at the health club (impossible to avoid looking at the screen), the chairman of a company discussing the “bright future ahead”, a Platonic medical doctor who has categorically ruled out the utility of mother’s milk (because he did not see anything special in it), or a Harvard Business School professor who does not laugh at your jokes. He takes what he knows a little too seriously.

Say that a prankster surprises him one day by surreptitiously sliding a thin feather up his nose during a moment 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 brief moment, before he regains his bearings, you will see disarray in his face.

I confess having developed an incorrigible taste for this kind of prank during my first sleepaway summer camp. Introduced into the nostril of a sleeping camper, a feather would induce sudden panic. I spent part of 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 practice on my younger brother. An equally effective prank would be to drop an ice cube down someone’s collar when he expects it least, say during an official dinner. I had to stop these pranks as I got deeper into adulthood, 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 talking about random events with plenty of “because” in their conversation. I zoom in on one of them and imagine the ice cube sliding down his back – it would be less fashionable, though certainly more spectacular, if you put a living mouse there, particularly if the person is ticklish and is wearing a tie, which would block the rodent’s normal route of exit.[15]

Pranks can be compassionate. I remember in my early trading days, 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 $100 bill as a tip, just to give him a little jolt and get a kick 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 experiment: it felt elevating to make someone’s day with the trifle of $100. I eventually stopped; we all become stingy and calculating when our wealth grows and we start taking money seriously.

I don’t need much help from fate to get larger-scale entertainment: reality provides such forced revisions of beliefs at quite a high frequency. Many are quite spectacular. In fact, the entire knowledge-seeking enterprise is based on taking conventional wisdom and accepted scientific beliefs and shattering them into pieces with new counterintuitive evidence, whether at a micro scale (every scientific discovery is an attempt to produce a micro-Black Swan) or at a larger one (as with Poincaré’s and Einstein’s relativity). Scientists may be in the business of laughing at their predecessors, but owing to an array of human mental dispositions, few realize that someone will laugh at their beliefs in the (disappointingly near) future. In this case, my readers and I are laughing at the present state of social knowledge. These big guns do not see the inevitable overhaul of their work coming, which means that you can usually count on them to be in for a surprise.

HOW TO LEARN FROM THE TURKEY

The überphilosopher Bertrand Russell presents a particularly toxic variant of my surprise jolt in his illustration of what people in his line of business call the Problem of Induction or Problem of Inductive Knowledge (capitalized for its seriousness) – certainly the mother of all problems in life. How can we logically go 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 traps built 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 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.[16]

The rest of this chapter will outline the Black Swan 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 than it thinks, and it is just that “little less” that may make all the difference.

The turkey problem can be generalized to any situation where the same hand that feeds you can be the one that wrings your neck. Consider the case of the increasingly integrated German Jews in the 1930s – or my description in Chapter 1 of how the population of Lebanon got lulled into a false sense of security by the appearance of mutual friendliness and tolerance.

Let us go one step further and consider induction’s most worrisome aspect: learning backward. Consider that the turkey’s experience may have, rather than no value, a negative value. It learned from observation, as we are all advised to do (hey, after all, this is what is believed to be the scientific method). 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 that; it strikes at the nature of empirical knowledge itself. Something has worked in the past, until – well, it unexpectedly no longer does, and what we have learned from the past turns out 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. You observe a hypothetical variable for one thousand days. It could be anything (with a few mild transformations): book sales, blood 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 concerning the properties of the pattern with 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 unprepared for by the past.

Consider 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, surprise! It turned out to be the deadliest conflict, up until then, in the history of mankind.

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 1987 half of America’s traders braced for another one every October – not taking into account that there was no antecedent for the first one. We worry too late – ex post. Mistaking a naïve observation of the past as something definitive or representative of the future is the one and only cause of our inability to understand the Black Swan.

It would 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 consequents”. Those who believe in the unconditional benefits of past experience should consider this pearl of wisdom allegedly voiced by a famous ship’s captain:

Captain Smith’s ship sank in 1912 in what became the most talked-about shipwreck in history.[17]

Similarly, think of a bank chairman whose institution makes steady profits over a long time, only to lose everything in a single reversal of fortune. Traditionally, bankers of the lending variety have been pear-shaped, cleanshaven, 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 people 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 1982, large American banks lost close to 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, into believing that they were “conservative”. They are not conservative; just phenomenally skilled at self-deception by burying the possibility of a large, devastating loss under the rug. In fact, the travesty repeated itself a decade later, with the “risk-conscious” large banks once again under financial strain, many of them near-bankrupt, after the real-estate collapse of the early 1990s in which the now defunct savings and loan industry required a taxpayer-funded bailout of more than half a trillion dollars. The Federal Reserve bank protected them at our expense: when “conservative” bankers make profits, they get the benefits; when they are hurt, we pay the costs.

After graduating from Wharton, I initially went to work for Bankers Trust (now defunct). There, the chairman’s office, rapidly forgetting about the story of 1982, broadcast the results of every quarter with an announcement explaining how smart, profitable, conservative (and good looking) they were. It was obvious that their profits were simply cash borrowed from destiny with some random payback time. I have no problem with risk taking, just please, please, do not call yourself conservative and act superior to other businesses who are not as vulnerable to Black Swans.

Another recent event is the almost-instant bankruptcy, in 1998, of a financial investment company (hedge fund) called Long-Term Capital Management (LTCM), which 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 themselves that it was great science and thus turning the entire financial establishment into suckers. One of the largest trading losses ever in history took place in almost the blink of an eye, with no warning signal (more, much more on that in Chapter 17).[18]

From the standpoint of the turkey, the nonfeeding of the one thousand and first day is a Black Swan. For the butcher, it is not, since its occurrence is not unexpected. So you can see here that the Black Swan is a sucker’s problem. In other words, it occurs relative to your expectation. You realize that you can eliminate a Black Swan by science (if you’re able), or by keeping an open mind. Of course, like the LTCM people, you can create Black Swans with science, by giving people confidence that the Black Swan cannot happen – this is when science turns normal citizens into suckers.

Note that these events do not have to be instantaneous surprises. Some of the historical fractures I mention in Chapter 1 have lasted a few decades, like, say, the computer that brought consequential effects on society without its invasion of our lives being noticeable from day to day. Some Black Swans 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 1990s took 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 are Black Swans that can take decades. In general, positive Black Swans take time to show their effect while negative ones happen very quickly – it is much easier and much faster to destroy than to build. (During the Lebanese 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 explains the difficulty in reversing time.)

A BRIEF HISTORY OF THE BLACK SWAN PROBLEM

This turkey 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 local philosophy professor.

People imagine us skeptics and empiricists to be morose, paranoid, and tortured in our private lives, which may be the exact opposite of what history (and my private experience) reports. Like many of the skeptics I hang around with, Hume was jovial and a bon vivant, eager for literary fame, salon company, and pleasant conversation. His life was not devoid of anecdotes. He once fell into 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, which, 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 imbecile”, writes a biographer.

Strangely, Hume during his day was not mainly known for the works that generated his current reputation – he became rich and famous through writing a bestselling history of England. Ironically, when Hume was alive, his philosophical works, to which we now attach his fame, “fell deadborn 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 to shame almost all current thinkers, and certainly the entire German graduate curriculum. Unlike Kant, Fichte, Schopenhauer, and Hegel, Hume is the kind of thinker who is sometimes read 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 than the interesting Scotsman, perhaps as old as philosophy itself, maybe as old as olive-grove conversations. Let us go back into the past, as it was formulated with no less precision by the ancients.

The violently antiacademic writer, and antidogma activist, Sextus Empiricus operated close to a millennium and a half before Hume, and formulated 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 of philosophical 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 school of medicine called “empirical”, since its practitioners doubted theories and causality and relied on past experience as guidance in their treatment, though not putting much trust in it. Furthermore, they did not trust that anatomy revealed function too obviously. The most famous proponent of the empirical school, Menodotus of Nicomedia, who merged empiricism and philosophical skepticism, was said to keep medicine an art, not a “science”, and insulate its practice from the problems of dogmatic science. The practice of medicine explains the addition of empiricus (“the empirical”) to Sextus’s name.

Sextus represented and jotted down the ideas of the school of the Pyrrhonian skeptics who were after some form of intellectual therapy resulting from the suspension of belief. Do you face the possibility of an adverse event? Don’t worry. Who knows, it may turn out to be good for you. Doubting the consequences of an outcome will allow you to remain imperturbable. The Pyrrhonian skeptics were docile citizens who followed customs and traditions whenever possible, but taught themselves to systematically doubt everything, and thus attain a level of serenity. But while conservative in their habits, they were rabid in their fight against dogma.

Among the surviving works of Sextus’s is a diatribe with the beautiful title Adversos Mathematicos, sometimes translated as Against the Professors. Much of it could have been written last Wednesday night!

Where Sextus is mostly interesting for my ideas is in his rare mixing of philosophy and decision making in his practice. He was a doer, hence classical scholars don’t say nice things about him. The methods of empirical medicine, relying on seemingly purposeless trial and error, will be central to my ideas on planning and prediction, on how to benefit from the Black Swan.

In 1998, when I went out on my own, I called my research laboratory and trading 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 before medicine changed and finally became adogmatic, suspicious of theorizing, profoundly skeptical, and evidence-based! Lesson? That awareness of a problem does not mean much – particularly when you have special interests and self-serving institutions in play.

The third major thinker who dealt with the problem was the eleventh-century Arabic-language skeptic Al-Ghazali, known in Latin as Algazel. His name for a class of dogmatic scholars was ghabi, literally “the imbeciles”, an Arabic form that is funnier than “moron” and more expressive than “obscurantist”. Algazel wrote his own Against the Professors, a diatribe called Tahafut al falasifa, which I translate as “The Incompetence of Philosophy”. It was directed at the school called falasifah – the Arabic intellectual establishment was the direct heir of the classical philosophy of the academy, and they managed to reconcile it with Islam through rational argument.

Algaze’s attack on “scientific” knowledge started a debate with Averroës, the medieval philosopher who ended up having the most profound influence of any medieval thinker (on Jews and Christians, though not on Moslems). The debate between Algazel and Averroës was finally, but sadly, won by both. In its aftermath, many Arab religious thinkers integrated and exaggerated Algazel’s skepticism of the scientific method, preferring to leave causal considerations to God (in fact it was a stretch of his idea). The West embraced Averroës’s rationalism, built upon Aristotle’s, which survived through Aquinas 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 mysticism, in which the worshipper attempts to enter into communion with God, severing all connections with earthly matters. All of this came from the Black Swan problem.

While the ancient skeptics advocated learned ignorance as the first step in honest inquiries toward truth, later medieval skeptics, both Moslems and Christians, used skepticism as a tool to avoid accepting what today we call science. Belief in the importance of the Black Swan problem, worries about induction, and skepticism can make some religious arguments more appealing, though in stripped-down, anticlerical, theistic form. This idea of relying on faith, not reason, was known as fideism. So there is a tradition of Black Swan skeptics who found solace in religion, best represented by Pierre Bayle, a French-speaking Protestant erudite, philosopher, and theologian, who, exiled in Holland, built an extensive philosophical architecture related to the Pyrrhonian skeptics. Bayle’s writings exerted some considerable influence on Hume, introducing him to ancient skepticism – to the point where Hume took ideas wholesale from Bayle. Bayle’s Dictionnaire historique et critique was the most read piece of scholarship of the eighteenth century, but like many of my French heroes (such as Frédéric Bastiat), Bayle does not seem to be part of 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 of the ideas of skepticism, until recently, remains the work of a powerful Catholic bishop who was an august member of the French Academy. Pierre-Daniel Huet wrote his Philosophical Treatise on the Weaknesses of the Human Mind in 1690, a remarkable book that tears through dogmas and questions human perception. Huet presents arguments against causality that are quite potent – he states, for instance, that any event can have an infinity of possible causes.

Both Huet and Bayle were 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 meals and breaks and thus avoid lost time. He was deemed the most read person in his day. Let me insist that erudition is important to me. It signals genuine intellectual curiosity. It accompanies an open mind and the desire to probe the ideas of others. Above all, an erudite can be dissatisfied with his own knowledge, and such dissatisfaction is a wonderful shield against Platonicity, the simplifications of the five-minute manager, or the philistinism of the overspecialized scholar. Indeed, scholarship without erudition can lead to disasters.

But promoting philosophical skepticism is not quite the mission of this book. If awareness of the Black Swan problem can lead us into withdrawal and extreme skepticism, I take here the exact opposite direction. I am interested in deeds and true empiricism. So, this book was not written by a Sufi mystic, 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 abandoned such ideas when it came to daily life, since 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 decision without being the turkey.

Many middlebrows have asked me over the past twenty years, “How do you, Taleb, cross the street given your extreme risk consciousness?” or have stated the more foolish “You are asking us to take no risks”. Of 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.

I have just presented the Black Swan 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.

You can see that it is extremely convenient for us to assume that we live in Mediocristan. Why? Because it allows you to rule out these Black Swan surprises! The Black Swan 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. The statistician can do away with epistemology.

Wishful thinking! We do not live in Mediocristan, so the Black Swan needs a different mentality. As we cannot push the problem under the rug, we will have to dig deeper into it. This is not a terminal difficulty – and we can even benefit from it.

Now, there are other themes arising from our blindness to the Black Swan:

a. We focus on preselected segments of the seen and generalize from it to the unseen: the error of confirmation.

b. We fool ourselves with stories that cater to our Platonic thirst for distinct patterns: the narrative fallacy.

c. We behave as if the Black Swan does not exist: human nature is not programmed for Black Swans.

d. What we see is not necessarily all that is there. History hides Black Swans from us and gives us a mistaken idea about the odds of these events: this is the distortion of silent evidence.

e. We “tunnel”: that is, we focus on a few well-defined sources of uncertainty, on too specific a list of Black Swans (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 topic.

As much as it is ingrained in our habits and conventional wisdom, confirmation 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 1990s) was not a criminal. Look, the other day I had breakfast with him and he didn’t kill anybody. I am 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 call a shrink, an ambulance, or perhaps even the police, since you might think that I spent too much time in trading rooms or in cafés thinking about this Black Swan topic, and that my logic may represent such an immediate danger to society that I myself need to be locked up immediately.

You would have the same reaction if I told you that I took a nap the other day on the railroad track in New Rochelle, New York, and 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 of the possibility of large events, i.e., Black Swans. You are likely to confuse that statement, however, particularly if you do not pay close attention, with the statement that there is evidence of no possible Black Swans. Even though it is in fact vast, the logical distance 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 likely to retain the second, inaccurate version – that there is proof of no Black Swans. I call this confusion the round-trip fallacy, since these statements are not interchangeable.

Such confusion of the two statements partakes of a trivial, very trivial (but crucial), logical error – but we are not immune to trivial, logical errors, nor are professors and thinkers particularly immune to them (complicated equations do not tend to cohabit happily with clarity of mind). Unless we concentrate very hard, 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.

Many people confuse the statement “almost all terrorists are Moslems” with “almost all Moslems are terrorists”. Assume that the first statement is true, that 99 percent of terrorists are Moslems. This would mean that only about .001 percent of Moslems are terrorists, since there are more than one billion Moslems and only, say, ten thousand terrorists, one in a hundred thousand. So the logical mistake makes you (unconsciously) overestimate the odds of a randomly drawn individual Moslem person (between the age of, say, fifteen and fifty) being a terrorist by close to fifty thousand times!

The reader might see in this round-trip fallacy the unfairness of stereotypes – minorities in urban areas in the United States have suffered from the 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 meant to say that stupid people are generally Conservative”, John Stuart Mill once complained. This problem is chronic: if you tell people that the key to 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 complicated environment in which a statement changes markedly when its wording is slightly modified. Consider that in a primitive environment there is no consequential difference between the statements most killers are wild animals and most wild animals are killers. There 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 difference.

All zoogles are boogies. You saw a boogie. Is it a zoogle? Not necessarily, since not all boogies are zoogles; adolescents who make a mistake in answering this kind of question on their SAT test might not make it to college. Yet another person can get very high scores on the SATs and 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 sophistication from one situation to another, or from theory to practice, is a quite disturbing attribute of human nature.

Let us call it the domain specificity of 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 psychologists call the “domain” of the object or the event. The classroom is a domain; real life is another. We react to a piece of information not on its logical merit, but on the basis of which framework surrounds it, and how it registers with our social-emotional system. Logical problems approached one way in the classroom might be treated differently in daily life. Indeed they are treated differently in daily life.

Knowledge, 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. Statisticians, 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 1971, the psychologists Danny Kahneman and Amos Tversky plied professors of statistics with statistical questions not phrased as statistical questions. One was similar to the following (changing the example for clarity): Assume that you live in a town with two hospitals – one large, the other small. On a given day 60 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, 50 percent for each of the sexes – than smaller samples. These statisticians would have flunked their own exams. During my days as a quant I counted hundreds of such severe inferential mistakes made by statisticians who forgot that they were statisticians.

For another illustration of the way we can be ludicrously domain-specific in daily life, go to the luxury Reebok Sports Club in New York City, and look at the number of people who, after riding the escalator for a couple of floors, head directly to the StairMasters.

This domain specificity of our inferences and reactions works both ways: some problems we can understand in their applications but not in textbooks; others we are better at capturing in the textbook than in the practical application. People can manage to effortlessly solve a problem in a social 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 situations.

And as I’ve said, we can commit a logical mistake in reality but not in the classroom. This asymmetry is best visible in cancer detection. Take doctors examining a patient for signs of cancer; tests are typically done on patients who want to know if they are cured or if there is “recurrence”. (In fact, recurrence is a misnomer; it simply means that the treatment did not kill all the cancerous cells and that these undetected malignant cells have started to multiply out of control.) It is not feasible, in the present state of technology, to examine every single one of the patient’s cells to 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 routine cancer checkup, “Stop worrying, we have evidence of cure”. “Why?” I asked. “There is evidence of no cancer” was the reply. “How do you know?” I asked. He replied, “The scan is negative”. Yet he went around calling himself doctor!

An acronym used in the medical literature is NED, which stands for No Evidence of Disease. There is no such thing as END, Evidence of No Disease. Yet my experience discussing this matter with plenty of doctors, even those who publish papers on their results, is that many slip into the round-trip fallacy during conversation.

Doctors in the midst of the scientific arrogance of the 1960s looked down at mothers’ milk as something primitive, as if it could be replicated by their laboratories – not realizing that mothers’ milk might include useful components that could have eluded their scientific understanding – a simple confusion of absence of evidence of the benefits of mothers’ milk with evidence of absence of the benefits (another case of Platonicity as “it did not make sense” to breast-feed when we could simply use bottles). Many people paid the price for this naïve inference: those who were not breast-fed as infants turned out to be at an increased risk of a collection of health problems, including a higher likelihood of developing certain types of cancer – 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 with tonsils: the removal of tonsils may lead to a higher incidence 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 1960s found it useless because they saw no immediate evidence of its necessity, and so they created a malnourished generation. Fiber, it turns out, acts to slow down the absorption of sugars in the blood and scrapes the intestinal tract of precancerous cells. Indeed medicine has caused plenty of damage throughout history, owing to this simple kind of inferential confusion.

I am not saying here that doctors should not have beliefs, only 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 skeptical-empirical medicine that avoided theorizing. Medicine has gotten better – but many kinds of knowledge have not.

By a mental mechanism I call 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 fools, anything can be easy to find. You take past instances that corroborate your theories and you treat them as evidence. For instance, a diplomat will show you his “accomplishments”, not what he failed to do. Mathematicians will try to convince you that their science 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 nature of elegant mathematical theories.

Even in testing a hypothesis, we tend to look for instances where the hypothesis proved true. Of course we can easily find confirmation; all we have to do is look, or have a researcher do it for us. I can find confirmation for just about anything, the way a skilled London cabbie can find traffic to increase the fare, even on a holiday.

Some people go further and give me examples of events that we have been able to foresee with some success – indeed there are a few, like landing a man on the moon and the economic growth of the twenty-first century. One can find plenty of “counterevidence” to the points in this book, the best being that newspapers are excellent at predicting movie and theater schedules. Look, I predicted yesterday that the sun would rise today, and it did!

NEGATIVE EMPIRICISM

The good news is that there is a way around this naïve empiricism. I am saying that a series of corroborative facts is not necessarily evidence. Seeing white swans does not confirm the nonexistence of black swans. There is an exception, however: I know what statement is wrong, but not necessarily what statement is correct. If I see a black swan I can certify that all swans are not white! If I see someone kill, then I can be practically certain that he is a criminal. If I don’t see him kill, I cannot be certain that he is innocent. The same applies to cancer detection: the finding of a single malignant 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.

We can get closer to the truth by negative instances, not by verification! It is misleading to build a general rule from observed facts. Contrary to conventional wisdom, our body of knowledge does not increase from a series of confirmatory observations, like the turkey’s. But there are some things I can remain skeptical about, and others I can safely consider certain. This makes the consequences of observations one-sided. It is not much more difficult than that.

This asymmetry is immensely practical. It tells us that we do not have to be complete skeptics, just semiskeptics. The subtlety of real life over the books is that, in your decision making, you need be interested only in one side of the story: if you seek certainty about whether the patient has cancer, not certainty about whether he is healthy, then you might be satisfied with negative inference, since it will supply you the certainty you seek. So we can learn a lot from data – but not as much as we expect. Sometimes a lot of data can be meaningless; at other times one single piece of information can be very meaningful. It is true that a thousand days cannot prove you right, but one day can prove you to be wrong.

The person who promoted this idea of one-sided semiskepticism is Sir Doktor Professor Karl Raimund Popper, who may be the only philosopher of 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 of 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 modern 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 understanding how to act under conditions of incomplete information is the highest and most urgent human pursuit.

Popper 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 obvious to them; it is the way they run their business. The philosopher maudit Charles Sanders Peirce, who, like an artist, got only posthumous respect, also came up with a version of this Black Swan solution when Popper was wearing diapers – some people even called it the Peirce-Popper approach. Popper’s far more powerful and original idea is the “open” society, one that relies on skepticism as a modus operandi, refusing and resisting 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 unpredictability of the world, and that I will leave for the chapter on prediction.[19]

Of course, 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 mistaken “no”. The doctor discovering cancer cells might have faulty equipment causing optical illusions; or he could be a bell-curve-using economist 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 confidence 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 alternative to our search for confirmatory instances. If you think the task is easy, you 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.

Cognitive scientists have studied our natural tendency to look only for corroboration; they call this vulnerability to the corroboration error the confirmation bias. There are some experiments showing that people focus only on the books read in Umberto Eco’s library. You can test a given rule either directly, by looking at instances where it works, or indirectly, by focusing on where it does not work. As we saw earlier, disconfirming instances are far more powerful in establishing truth. Yet we tend to not be aware of this property.

The first experiment I know of concerning this phenomenon was done by the psychologist P. C. Wason. He presented subjects with the three-number sequence 2, 4, 6, and asked them to try to guess the rule generating it. Their method of guessing was to produce other three-number sequences, to which the experimenter would respond “yes” or “no” depending on whether the new sequences were consistent with the rule. Once confident with their answers, the subjects would formulate the rule. (Note the similarity of this experiment to the discussion in Chapter 1 of the way history presents itself to us: assuming history is generated according to some logic, we 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 “no” 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. Subjects tenaciously kept trying to confirm the rules that they had made up.

This experiment inspired a collection of similar tests, of which another example: Subjects were asked which questions to ask to find out whether a person was extroverted or not, purportedly for another type of experiment. It was established that subjects supplied mostly questions for which a “yes” answer would support the hypothesis.

But 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 don’t play chess to practice skepticism. Scientists believe that it is the search for their own weaknesses that makes them good chess players, not the practice of chess that turns them into skeptics. Similarly, the speculator George Soros, when making a financial bet, keeps looking for instances that would prove his initial theory wrong. This, perhaps, is true self-confidence: the ability to look at the world without the need to find signs that stroke one’s ego.[20]

Sadly, the notion of corroboration is rooted in our intellectual habits and discourse. Consider this comment by the writer and critic John Updike: “When Julian Jaynes … speculates that until late in the second millennium B.C. men had no consciousness but were automatically obeying the voices of gods, we are astounded but compelled to follow this remarkable thesis through all the corroborative evidence”. Jaynes’s thesis may be right, but, Mr. Updike, the central problem of knowledge (and the point of this chapter) is that there is no such animal as corroborative evidence.

The following point further illustrates the absurdity of confirmation. If you believe that witnessing an additional white swan will bring confirmation that there are no black swans, then you should also accept the statement, on purely logical grounds, that the sighting of a red Mini Cooper should confirm that there are no black swans.

Why? Just consider that the statement “all swans are white” implies that all nonwhite objects are not swans. What confirms the latter statement should confirm the former. Therefore, the sighting of a nonwhite object that 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 one 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, Nassim, look! No Black Swan!”

We are not naïve enough to believe that someone will be immortal because we have never seen him die, or that someone is innocent of murder because we have never seen him kill. The problem of naïve generalization does not plague us everywhere. But such smart pockets of inductive skepticism tend to involve events that we have encountered in our natural environment, matters from which we have learned to avoid foolish generalization.

For instance, when children are presented with the picture of a single member of a group and are asked to guess the properties of other unseen members, they are capable of selecting which attributes to generalize. Show a child 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 will (most likely) not 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.

So 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 experience and empirical observations, it was shown from studies of infant behavior that we come equipped with mental machinery that causes us to selectively generalize from experiences (i.e., to 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.

And we may have learned things wrong from our ancestors. I speculate here that we probably inherited the instincts adequate for survival in the East African Great Lakes region where we presumably hail from, but these instincts are certainly not well adapted to the present, post-alphabet, intensely informational, and statistically complex environment.

Indeed our environment is a bit more complex than we (and our institutions) seem to realize. How? The modern world, being Extremistan, is dominated by rare – very rare – events. It can deliver a Black Swan after thousands and thousands of white ones, so we need to withhold judgment for longer than we are inclined to. As I said in Chapter 3, it is impossible – biologically impossible – to run into a human several hundred miles tall, so our intuitions rule these events out. But the sales of a book or the magnitude of social events do not follow such strictures. It takes a lot more than a thousand days to accept that a writer is ungifted, a market will not crash, a war will not happen, a project is hopeless, a country is “our ally”, a company will not go bust, a brokerage-house security analyst is not a charlatan, or a neighbor will not attack us. In the distant past, humans could make inferences far more accurately and quickly.

Furthermore, the sources of Black Swans today have multiplied beyond measurability.[21] In the primitive environment they were limited to newly encountered wild animals, new enemies, and abrupt weather changes. These events were repeatable enough for us to have built an innate 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 of known Black Swans) remains rather ingrained in us. This instinct, in a word, is our predicament.

ON THE CAUSES OF MY REJECTION OF CAUSES

During the fall of 2004, I attended a conference on aesthetics and science in Rome, perhaps the best possible location for such a meeting since aesthetics permeates everything there, down to one’s personal behavior and tone of voice. At lunch, a prominent professor from a university in southern Italy greeted me with extreme enthusiasm. I had listened earlier that morning to his impassioned presentation; he was so charismatic, so convinced, and so convincing that, although I could not understand much of what he said, I found myself 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 lunch to congratulate me for showing the effects of those causal links that are more prevalent in the human mind than in reality. The conversation got so animated that we stood together near the buffet table, blocking the other delegates from getting close to 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 interrupt a conversation of such importance and animation. He was emphatic about my previous book on randomness, a sort of angry trader’s reaction against blindness to luck in life and in the markets, which had been published there under the musical title Giocati dal caso. I had been lucky to have a translator who knew almost more about the topic than I did, and the book found a small following among Italian intellectuals. “I am a huge fan of your ideas, but I feel slighted. 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 of chance on society and the overestimation of cause and effect. You show how stupid we are to systematically try to explain skills”. He stopped, then added, in a calmer tone: “But, mon cher ami, let me tell you quelque chose [uttered very slowly, with his thumb hitting his index and middle fingers]: had you grown up in a Protestant society where people are told that efforts are linked to rewards and individual responsibility is emphasized, you would never have seen the world in such a manner. You were able to see luck and separate cause and effect because of your Eastern Orthodox Mediterranean heritage”. He was using the French à cause. And 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 reduce the dimension of matters. The first of the problems of human nature that we examine in this section, the one just illustrated above, is what I call the narrative fallacy. (It is actually a fraud, but, to be more polite, I will call it a fallacy.) The fallacy is associated with our vulnerability to overinterpretation and our predilection for compact stories over raw truths. It severely distorts our mental representation of the world; it is particularly acute when it comes to the rare event.

Notice how 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 than part of a story. He had to invent a cause. Furthermore, he was not aware of his having fallen into the causation trap, nor was I immediately aware of it myself.

The narrative fallacy addresses our limited ability to look at sequences of facts without weaving an explanation into them, or, equivalently, forcing a logical link, an arrow of relationship, upon them. Explanations bind facts together. They make them all the more easily remembered; they help them make more sense. Where this propensity can go wrong is when it increases our impression of understanding.

This chapter will cover, just like the preceding one, a single problem, but seemingly in different disciplines. The problem of narrativity, although extensively studied in one of its versions by psychologists, is not so “psychological”: something about the way disciplines are designed masks the point that it is more generally a problem of information. While narrativity comes from an ingrained biological need to reduce dimensionality, robots would be prone to the same process of reduction. Information wants to be reduced.

To help the reader locate himself: in studying the problem of induction in the previous chapter, we examined what could be inferred about the unseen, what lies outside our information set. Here, we look at the seen, what lies within the information set, and we examine the distortions in the act of processing it. There is plenty to say on this topic, but the angle I take concerns narrativity’s simplification of the world around us and its effects on our perception of the Black Swan and wild uncertainty.

SPLITTING BRAINS

Ferreting out antilogies is an exhilarating activity. For a few months, you experience the titillating sensation that you’ve just entered a new world. After that, the novelty fades, and your thinking returns to business as usual. The world is dull again until you find another subject to be excited about (or manage to put another hotshot in a state of total rage).

For me, one such antilogic came with the discovery – thanks to the literature on cognition – that, counter to what everyone believes, not theorizing is an act – that theorizing can correspond to the absence of willed activity, the “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 our control: it is largely anatomical, part of our biology, so fighting it requires fighting one’s own self. So 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.

Try to be a true skeptic 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 true skepticism; but you have to go through the back door rather than engage 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 always 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 preferred. The researchers then asked the women their reasons for their choices. Texture, “feel”, and color featured among the selected reasons. All the pairs of stockings were, in fact, identical. The women supplied backfit, post hoc explanations. 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 convincing 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 how it is detected.

Split-brain patients have no connection between the left and the right sides of their brains, which prevents information from being shared between the two cerebral hemispheres. These patients are jewels, rare and invaluable 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 of the hemispheres. This splitting is usually the result of surgery to remedy more serious conditions like severe epilepsy; no, scientists in Western countries (and most Eastern ones) are no longer allowed to cut human brains in half, even if it is for the pursuit of 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 fact you know that there is no reason for it other than 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 some 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 my usual “because I am originally from the Greek Orthodox village of Amioun, northern Lebanon”, et cetera.

Now, if you do the opposite, namely instruct the isolated left hemisphere of a right-handed person to perform an act and ask the right hemisphere 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” against attempts to build a neural map: all I’m trying to show is the biological basis of this tendency toward causality, not its precise location. There are reasons for us to be suspicious of these “right brain/left brain” distinctions and subsequent pop-science generalizations about personality. Indeed, the idea that the left brain controls language may not be so accurate: the left brain seems more precisely to be where pattern recognition resides, and it may control language only insofar 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 perceives the patterns, the gestalt (the general, or the forest).

To see an illustration of our biological dependence on a story, consider the following experiment. First, read this:

Do you see anything unusual? Try again.[22]

The Sydney-based brain scientist Alan Snyder (who has a Philadelphia accent) made the following discovery. If you inhibit the left hemisphere of a right-handed person (more technically, by directing low-frequency magnetic pulses into the left frontotemporal lobes), you lower his rate of error in reading the above caption. Our propensity to impose meaning and concepts blocks our awareness of the details making up the concept. However, if you zap people’s left hemispheres, they become more realistic – they can draw better and with more verisimilitude. Their minds become better at seeing the objects themselves, cleared of theories, narratives, and prejudice.

Why 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.

What makes nontheorizing cost you so much more energy than theorizing? First, there is the impenetrability of the activity. I said that much of it takes place outside of our awareness: if you don’t know that you are making the inference, how can you stop yourself unless you stay in a continuous 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.

In addition to the story of the left-brain interpreter, we have more physiological evidence of our ingrained pattern seeking, thanks to our growing knowledge of the role of neurotransmitters, the chemicals that are assumed to transport signals between different parts of the brain. It appears that pattern perception increases along with the concentration in the brain of 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 than on the right side). A higher concentration of dopamine appears to lower skepticism and result in greater vulnerability to pattern detection; an injection of L-dopa, a substance used to treat patients with Parkinson’s disease, seems to increase such activity and lowers one’s suspension of belief. The 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 than $200,000 – an amount he allegedly lost 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 out that one of the side effects of L-dopa is that a small but significant minority of patients become compulsive gamblers. Since such gambling 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 call “knowledge” (and what I call narrative) are an ailment.

Once again, I warn the reader that I am not focusing on dopamine as the reason for our overinterpreting; rather, my point is that there is a physical and neural correlate to such operation and that our minds are largely victims of our physical embodiment. Our minds are like inmates, captive to our biology, unless we manage a cunning escape. It is the lack of our control of such inferences that I am stressing. Tomorrow, someone may discover another chemical or organic basis for our perception of patterns, or counter what I said about the left-brain interpreter by showing the role of a more complex structure; but it would not negate the idea that perception of causation has a biological foundation.

There is another, even deeper reason for our inclination to narrate, and it is not psychological. It has to do with the effect of order on information storage and retrieval in any system, and it’s worth explaining here because of what I consider the central problems of probability and information theory.

The first problem is that information is costly to obtain.

The second problem is that information is also costly to store – like real estate in New York. The more orderly, less random, patterned, and narratized a series of words or symbols, the easier it is to store that series in one’s mind or jot it down in a book so your grandchildren can read it someday.

Finally, information is costly to manipulate and retrieve.

With so many brain cells – one hundred billion (and counting) – the attic is quite large, so the difficulties probably do not arise from storage-capacity limitations, but may be just indexing problems. Your conscious, or working, memory, the one you are using to read these lines and make sense of their meaning, is considerably smaller than the attic. Consider that your working memory has difficulty holding a mere phone number longer than seven digits. Change metaphors slightly and imagine that your consciousness 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 performance of conscious work.

Consider a collection of words glued together to constitute a 500-page book. If the words are 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 100,000 words to carry the exact message of a random 100,000 words with you on your next trip to 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 happened to be in the right place at the right time and claims credit for the company’s success, without making a single allowance for luck”, running ten times per page for 500 pages. The entire book can be accurately compressed, as I have just done, into 34 words (out of 100,000); you could reproduce 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 pattern is obviously more compact than raw information. You looked into the book and found a rule. It is along these lines that the great probabilist Andrey Nikolayevich Kolmogorov defined the degree of randomness; it is called “Kolmogorov complexity”.

We, members of the human variety 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 them into our heads. The more random information is, the greater the dimensionality, and thus the 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 Black Swan is what we leave out of simplification. Both the 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 yourself tempted 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 impart order to the disorder of human perception and the perceived “chaos of human experience”.[23]

Indeed, many severe psychological disorders accompany the feeling of loss of control of – being able to “make sense” of – one’s environment.

Platonicity 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 of science is to get to the truth, not to give you a feeling of organization or make you feel better. We tend to use knowledge as therapy.

To view 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 exercise, presented by the novelist E. M. Forster, shows the distinction between mere succession of information and a plot. But notice the hitch here: although we added information to the second statement, we effectively reduced the dimension of the total. The second sentence is, 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 remember it with less effort, we can also sell it to others, that is, market it better as a packaged idea. This, in a nutshell, is the definition and function of a narrative.

To 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 be plausibly deemed guilty. Now question your subject about the probabilities of each character’s being the murderer. Unless she writes down the percentages to keep an exact tally of them, they should add up to well over 100 percent (even well over 200 percent for a good novel). The better the detective writer, the higher that number.

REMEMBRANCE OF THINGS NOT QUITE PAST

Our tendency to perceive – to impose – narrativity and causality are symptoms 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.

But memory and the arrow of time can get mixed up. Narrativity can viciously affect the 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 to 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 impossible to ignore posterior information when solving a problem. This simple inability to remember not the true sequence of events but a reconstructed one will make history appear in hindsight to be far more explainable than it actually was – or is.

Conventional wisdom holds that memory is like a serial recording device like a computer diskette. In reality, memory is dynamic – not static – like a paper on which new texts (or new versions of the same text) will be continuously recorded, thanks to the power of posterior information. (In a remarkable insight, the nineteenth-century Parisian poet Charles Baudelaire compared our memory to a palimpsest, a type of parchment on which old texts can be erased and new ones written over them.) Memory is more 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 process called reverberation, a memory corresponds to the strengthening of connections from an increase of brain activity in a given sector of the brain – the more activity, the stronger the memory. While we believe that the memory is fixed, constant, and connected, all this is very far from truth. What makes sense according to information obtained subsequently will be remembered more vividly. We invent some of our memories – a sore point in courts of law since it has been shown that plenty of people have invented child-abuse stories by dint of listening to theories.

We have far too many possible ways to interpret past events for our own good.

Consider the behavior of paranoid people. I have had the privilege to work with colleagues who have hidden paranoid 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 interpretations of the most innocuous remark. If I say to them, “I am afraid that … ”, in reference to an undesirable state of the world, they may interpret it literally, that I am experiencing actual fright, and it triggers an episode of fear on the part of the paranoid person. Someone hit with such a disorder can muster the most insignificant of details and construct an elaborate and coherent theory of why there is a conspiracy against him. And if you gather, say, ten paranoid people, all in the same state of episodic delusion, the ten of them will provide ten distinct, yet coherent, interpretations of events.

When I was about seven, my schoolteacher showed us a painting of an assembly of impecunious Frenchmen in the Middle Ages at a banquet held by one 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 hungry”. 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).

Beyond our 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? Consider that two people can hold incompatible beliefs based on the exact same data. Does this mean that there are possible 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 famous argument, the logician W. V. Quine showed that there exist families of logically consistent interpretations and theories that can match a given series of facts. Such insight should warn us that mere absence of nonsense may not be sufficient to make something true.

Quine’s problem is related to his finding difficulty in translating statements between languages, simply because one could interpret any sentence in an infinity of ways. (Note here that someone splitting hairs could find a self-canceling aspect to Quine’s own writing. I wonder how he expects us to understand this very point in a noninfinity of ways).

This 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 predictions.[24] The psychology experiments I am discussing here do so: they select a population and run a test. The results should hold in Tennessee, in China, even in France.

If narrativity causes us to see past events as more predictable, more expected, and less random than they actually were, then we should be able to make it work for us as therapy against some of the stings of randomness.

Say some unpleasant event, such as a car accident for which you feel indirectly responsible, 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. Your mind keeps playing alternative scenarios branching out of a main tree: if you did not wake up three minutes later than usual, you would have avoided the car accident. It was not your intension to injure your passengers, yet your mind is inhabited with remorse and guilt. People in professions with high randomness (such as in the markets) can suffer more than their share of the toxic effect of look-back stings: I should have sold my portfolio 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 professional, you can feel that you “made a mistake”, or, worse, that “mistakes were made”, when you failed to do the equivalent of buying the winning lottery ticket for your investors, and feel the need to apologize for your “reckless” investment strategy (that is, what seems reckless in retrospect).

How 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 appropriate 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? Well, with a narrative. Patients 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 happen.

If you work in a randomness-laden profession, as we see, you are likely to suffer burnout effects from that constant second-guessing of your past actions in terms of what played out subsequently. Keeping a diary is the least you can do in these circumstances.

TO BE WRONG WITH INFINITE PRECISION

We harbor a crippling dislike for the abstract.

One day in December 2003, when Saddam Hussein was captured, Bloomberg News flashed the following headline at 13:01:

U.S. TREASURIES RISE; HUSSEIN CAPTURE MAY NOT CURB TERRORISM.

Whenever there is a market move, the news media feel obligated to give the “reason”. Half an hour later, they had to issue a new headline. As these U.S. Treasury 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: Saddam’s capture (the same Saddam). At 13:31 they issued the next bulletin:

U.S. TREASURIES FALL; HUSSEIN CAPTURE BOOSTS ALLURE OF RISKY ASSETS.

So it was the same capture (the cause) explaining one event and its exact opposite. Clearly, this can’t be; these two facts cannot be linked.

Do media 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 happens 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 election, you 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 accepting 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 back 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 checking how many traders with my background who experienced the same war became skeptical empiricists, and found none out of twenty-six. This nationality business helps you make a great story and satisfies your hunger for ascription of causes. It seems to be the dump site where all explanations go until one can ferret out a more obvious one (such as, say, some evolutionary argument that “makes sense”). Indeed, people tend to fool themselves with their self-narrative of “national identity”, which, in a breakthrough paper in Science by sixty-five authors, was shown to be a total fiction. (“National traits” might be great for movies, they might 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 erroneously believe in an English “national temperament”.) Empirically, sex, social class, and profession seem to be better predictors of someone’s behavior than nationality (a male from Sweden resembles a male from Togo more than a female from Sweden; a philosopher from Peru resembles a philosopher from Scotland more than a janitor from Peru; and so on).

The problem of overcausation does not lie with the journalist, but with the public. Nobody would pay one dollar to buy a series of abstract statistics reminiscent of a boring college lecture. We want to be told stories, and there is nothing wrong with that – except that we should check more thoroughly whether the story provides consequential distortions of reality. Could it be that fiction reveals truth while nonfiction is a harbor for the liar? Could it be that fables and stories are closer to the truth than is the thoroughly fact-checked ABC News? Just consider that the newspapers try to get impeccable facts, but weave them into a narrative in such a way as to convey the impression of causality (and knowledge). There are fact-checkers, not intellect-checkers. Alas.

But there 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 catch up to them in Chapter 10, on prediction.

Besides narrative 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 than it is. The next time you are asked to discuss world events, plead ignorance, and give the arguments I offered in this chapter casting doubt on the visibility of the immediate cause. You will be told that “you overanalyze”, or that “you are too complicated”. All you will be saying is that you don’t know!

Now, 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, emphasizing titles and “sexy” attention-grabbing punch lines over more substantive matters. They too are human and get their attention from sensational matters. The way to remedy this is through meta-analyses of scientific studies, in which an überresearcher peruses the entire literature, which includes the less-advertised articles, and produces a synthesis.

THE SENSATIONAL AND THE BLACK SWAN

Let us see how narrativity affects our understanding of the Black Swan. Narrative, as well as its associated mechanism of salience of the sensational fact, can mess up our projection of the odds. Take the following experiment 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 than a thousand people die.

b. An earthquake in California, causing massive flooding, in which more than a thousand people die.

Respondents estimated the first event to be less likely than the second. An earthquake in California, however, is a readily imaginable cause, which greatly increases the mental availability – hence the assessed probability – of the flood scenario.

Likewise, if I asked you how many cases of lung cancer are likely to take place in the country, you would supply some number, say half a million. Now, if instead I asked you many cases of lung cancer are likely to take place because of smoking, odds are that you would give me a much higher number (I would guess more than twice as high). Adding the because makes these matters far more plausible, and far more likely. Cancer from smoking seems more likely than cancer without a cause attached to it – an unspecified cause means no cause at all.

I return to the example of E. M. Forster’s plot from earlier in this chapter, but seen from the standpoint of probability. Which of these two statements seems more likely?

Joey seemed happily married. He killed his wife.

Joey seemed happily married. He killed his wife to get her inheritance.

Clearly the second statement seems more likely at first blush, which is a pure mistake of logic, 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 state of delusion and mistook her for a financial forecaster.

All this can lead to pathologies in our decision making. How?

Just imagine that, as shown by Paul Slovic and his collaborators, people are more likely to pay for terrorism insurance than for plain insurance (which covers, among other things, terrorism).

The Black Swans we imagine, discuss, and worry about do not resemble those likely to be Black Swans. We worry about the wrong “improbable” events, as we will see next.

The first question about the paradox of the perception of Black Swans is as follows: How is it that some Black Swans are overblown in our minds when the topic of this book is that we mainly neglect Black Swans?

The answer is that there are two varieties of rare events: a) the narrated Black Swans, 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 ashamed discussing in public because they do not seem plausible. I can safely say that it is entirely compatible with human nature that the incidences of Black Swans would be overestimated in the first case, but 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 that they treat odds of one in a thousand and one in a million almost in the same way.

Much of the empirical research agrees with this pattern of overestimation and underestimation of Black Swans. Kahneman and Tversky initially showed that people overreact to low-probability outcomes when you discuss the event with them, when you make them aware of it. If you ask someone, “What is the probability of death from a plane crash?” for instance, they will raise it. However, Slovic and his colleagues found, in insurance patterns, neglect of these highly improbable events in people’s insurance purchases. They call it the “preference for insuring against probable small losses” – at the expense of the less probable but larger impact 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 experiments in which they derive the probabilities themselves, when they are not supplied with the odds. If you draw 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 short-termist yet survive in an environment that is not entirely from Mediocristan. One day, looking at the gray beard that makes me look ten years older than I am and thinking about the pleasure I derive from exhibiting it, I realized the following. Respect for elders in many societies might be a kind of compensation for our short-term memory. The word senate comes from senatus, “aged” in Latin; sheikh in Arabic means both a member of the ruling elite and “elder”. Elders are repositories of complicated inductive learning that includes information about rare events. Elders can scare us with stories – which is why we become overexcited when we think of a specific Black Swan. I was excited to find out that this also holds true in the animal kingdom: a paper in Science showed that elephant matriarchs play the role of superadvisers on rare events.

We learn from repetition – at the expense of events that have not happened before. Events that are nonrepeatable are ignored before their occurrence, and overestimated after (for a while). After a Black Swan, such as September 11, 2001, people expect it to recur when in fact the odds of that happening have arguably been lowered. We like to think about specific and known Black Swans when in fact the very nature of randomness lies in its abstraction. As I said in the Prologue, it is the wrong definition of a god.

The economist Hyman Minsky sees the cycles of risk taking in the economy as following a pattern: stability and absence of crises encourage risk taking, complacency, and lowered awareness of the possibility of problems. Then a crisis occurs, resulting in people being shell-shocked and scared of investing their resources. Strangely, both Minsky and his school, dubbed Post-Keynesian, and his opponents, the libertarian “Austrian” economists, have the same analysis, except that the first group recommends governmental intervention to smooth out the cycle, while the second believes that civil servants 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 economic departments (though they have large followings among businessmen and nonacademics). No doubt this emphasis on fundamental uncertainty bothers the Platonifiers.

All the tests of probability I discussed in this section are important; they show how we are fooled by the rarity of Black Swans but not by the role they play in the aggregate, their impact. In a preliminary study, the psychologist Dan Goldstein and I subjected students at the London Business School to examples from two domains, Mediocristan and Extremistan. We selected height, weight, and Internet hits per website. The subjects were good at guessing the role of rare events in Mediocristan-style environments. But their intuitions failed when it came to variables outside Mediocristan, showing that we are effectively not skilled at intuitively gauging the impact of the improbable, such as the contribution of a blockbuster to total book sales. In one experiment they underestimated by thirty-three times the effect of a rare event.

Next, let us see how this lack of understanding of abstract matters affects us.

Indeed, abstract statistical information does not sway us as much as the anecdote – no matter how sophisticated the person. I will give a few instances.

The Italian Toddler. In the late 1970s, a toddler fell into a well in Italy. The 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 was concerned with his fate; the entire country hung on the frequent news updates. The child’s cries produced acute pains of guilt in the powerless rescuers and reporters. His picture was prominently displayed on magazines and newspapers, and you could hardly walk in the center of Milan without being reminded of his plight.

Meanwhile, the civil war was raging in Lebanon, with an occasional hiatus in the conflict. While in the midst of their mess, the Lebanese were also absorbed in the fate of that child. The Italian child. 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 relief upon his eventual rescue.

As Stalin, who knew something about the business of mortality, supposedly said, “One death is a tragedy; a million is a statistic”. Statistics stay silent in us.

Terrorism kills, but the biggest killer remains the environment, responsible for close to 13 million deaths annually. But terrorism causes outrage, which makes us overestimate the likelihood of a potential terrorist attack – and react more violently to one when it happens. We feel the sting of man-made damage far more than that caused by nature.

Central Park. You are on a plane on your way to spend a long (bibulous) weekend in New York City. You are sitting next to an insurance salesman who, being a salesman, cannot stop talking. For him, not talking is the effortful activity. He tells you that his cousin (with whom he will celebrate the holidays) worked in a law office with someone whose brother-in-law’s business partner’s twin brother was mugged and killed in Central Park. Indeed, Central Park in glorious New York City. That was in 1989, if he remembers it well (the year is now 2007). The poor victim was only thirty-eight 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.

Well, you are likely to avoid Central Park during your stay. You know you can get crime statistics from the Web or from any brochure, rather than anecdotal information from a verbally incontinent salesman. But you can’t help it. For a while, the name Central Park will conjure up the image of that that poor, undeserving man lying on the polluted grass. It will take a lot of statistical information to override your hesitation.

Motorcycle Riding. Likewise, the death of a relative in a motorcycle accident is far more likely to influence your attitude toward motorcycles than volumes of statistical analyses. You can effortlessly look up accident statistics on 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 logic, I am 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 concoct some form of story about ourselves. It is just that narrative can be lethal when used in the wrong places.

THE SHORTCUTS

Next 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 Society of Judgment and Decision Making (the only academic and professional society of which I am a member, and proudly so; its gatherings are the only ones where I do not have tension in my shoulders or anger fits). It is associated with the school of research started by Daniel Kahneman, Amos Tversky, and their friends, such as Robyn Dawes and Paul Slovic. It 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 look for regularities. Note that empirical psychologists use the bell curve to gauge errors in their testing methods, but as we will see more technically in Chapter 15, this is one of the rare adequate applications of the bell curve in social science, owing to the nature of the experiments. We have seen such types of experiments earlier in this chapter with the flood in California, and with the identification of the confirmation bias in Chapter 5. These researchers have mapped our activities into (roughly) a dual mode of thinking, which they separate as “System 1” and “System 2”, or the experiential and the cogitative. The distinction is straightforward.

System 1, the experiential one, is effortless, automatic, fast, opaque (we do not know that we are using it), parallel-processed, and can lend itself to errors. It is what we call “intuition”, and performs these quick acts of prowess that became popular under the name blink, after the title of Malcolm 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 and frugal”. Others prefer to call them “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 approach (heuristics corresponds to the study of shortcuts, biases stand for mistakes).

System 2, the cogitative one, is what we normally call thinking. It is what you use in a classroom, as it is effortful (even for Frenchmen), reasoned, slow, logical, serial, progressive, and self-aware (you can follow the steps in your reasoning). It makes fewer mistakes than the experiential system, and, since you know how you derived your result, you can retrace your steps and correct them in an adaptive manner.

Most of 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 without thinking and introspection, the main property of System 1 is our lack of awareness of using it!

Recall the round-trip error, our tendency to confuse “no evidence of Black Swans” with “evidence of no Black Swans”; it shows System 1 at work. You have to make an effort (System 2) to override your first reaction. Clearly Mother Nature makes you use the fast System 1 to get out of trouble, so that you do not sit down and cogitate whether there is truly a tiger attacking you or if it is an optical illusion. You run immediately, before you become “conscious” of the presence of the tiger.

Emotions are assumed to be the weapon System 1 uses to direct us and force us to act quickly. It mediates risk avoidance far more effectively than our cognitive system. Indeed, neurobiologists who have studied the emotional system show how it often reacts to the presence of danger long before we 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 human nature resides in our inability to use much of System 2, or to use it in a prolonged way without having to take a long beach vacation. In addition, we often just forget to use it.

Note that neurobiologists make, roughly, a similar distinction to that between System 1 and System 2, except that they operate along anatomical lines. Their distinction differentiates between parts of the brain, the cortical part, which we are supposed to use for thinking, and which distinguishes us from other animals, and the fast-reacting limbic brain, which is the center of emotions, and which we share with other mammals.

As a skeptical 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 observe 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 complicated machinery than we think; its anatomy has fooled us repeatedly in the past. We can, however, assess regularities by running precise and thorough experiments on how people react under certain conditions, and keep a tally of what we see.

For an example that justifies skepticism about unconditional reliance on neurobiology, and vindicates the ideas of the empirical school of medicine to 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 humans have the largest cortex, followed by bank executives, dolphins, and our cousins the apes. Well, it turns out that some birds, such as parrots, have a high level of intelligence, equivalent to that of dolphins, but that the intelligence of birds correlates with the size of another part of the brain, called the hyperstriatum. So neurobiology with its attribute of “hard science” can sometimes (though not always) fool you 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 part in intellectual history. As a skeptical empiricist I prefer the experiments of empirical psychology to the theories-based MRI scans of neurobiologists, even if the former appear less “scientific” to the public.

I’ll conclude by saying that our misunderstanding of the Black Swan 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 of 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 Black Swans immediately after one occurs – 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 Black Swans, just 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 Extremistan, 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 that I have lived largely deprived of information, I’ve often felt that I inhabit a different planet than my peers, which can sometimes be extremely painful. It’s like they have a virus controlling their brains that prevents them from seeing things going forward – the Black Swan around the corner.

The way to avoid the ills of the narrative fallacy is to favor experimentation over storytelling, experience over history, and clinical knowledge over theories. Certainly the newspaper cannot perform an experiment, but it can choose one report over another – there is plenty of empirical research to present and interpret from – as I am doing in this book. Being empirical does not mean running a laboratory in one’s basement: it is just a mind-set that favors a certain class of knowledge over others. I do not forbid myself from using the word cause, but the causes I discuss are either bold speculations (presented as such) or the result of experiments, not stories.

Another approach is to predict and keep a tally of the predictions.

Finally, there 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.

So far we have discussed two internal mechanisms behind our blindness to Black Swans, the confirmation bias and the narrative fallacy. The next chapters will look into an external mechanism: a defect in the way we receive and interpret recorded events, and a defect in the way we act on them.

Assume that, like Yevgenia, your activities depend on a Black Swan surprise – i.e., you are a reverse turkey. Intellectual, scientific, and artistic activities belong 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 counterexample, a nondull 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.

PEER CRUELTY

Every morning you leave your cramped apartment in Manhattan’s East Village to go to your laboratory at the Rockefeller University in the East Sixties. You return in the late evening, and people in your social network ask you if you had a good day, just to be polite. At the laboratory, people are more tactful. Of course you did not have a good day; you found nothing. You are not a watch repairman. Your finding nothing is very valuable, since it is part of the process of discovery – hey, you know where not to look. Other researchers, knowing your results, would avoid trying your special experiment, provided a journal is thoughtful enough to consider your “found nothing” as information and publish it.

Meanwhile your brother-in-law is a salesman for a Wall Street firm, and keeps getting large commissions – large and steady commissions. “He is doing very well”, you hear, particularly from your father-in-law, with a small pensive nanosecond of silence after the utterance – which makes you realize that he just made a comparison. It was involuntary, but he made one.

Holidays can be terrible. You run into your brother-in-law at family reunions and, invariably, detect unmistakable signs of frustration on the part of your wife, who, briefly, fears that she married a loser, before remembering the logic of your profession. But she has to fight her first impulse. Her sister will not stop talking about their renovations, their new wallpaper. Your wife will be a little more silent than usual on the drive home. This sulking will be made slightly worse because the car you are driving is rented, since you cannot afford to garage a car in Manhattan. What should you do? Move to Australia and thereby make family reunions less frequent, or switch brothers-in-laws by marrying someone with a less “successful” brother?

Or should you dress like a hippie and become defiant? That may work for an artist, but not so easily for a scientist or a businessman. You are trapped.

You work on a project that does not deliver immediate or steady results; 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 society rather than living in an insulated community or an artist colony.

Positive lumpy outcomes, for which we either collect big or get nothing, prevail in numerous occupations, those invested with a sense of mission, such as doggedly pursuing (in a smelly laboratory) the elusive cure for cancer, writing a book that will change the way people view the world (while living hand to mouth), making music, or painting miniature icons on subway trains and considering it a higher form of art despite the diatribes of the antiquated “scholar” Harold Bloom.

If you are a researcher, you will have to publish inconsequential articles in “prestigious” publications so that others say hello to you once in a while when you run into them at conferences.

If you run a public corporation, things were great for you before you had shareholders, when you and your partners were the sole owners, along with savvy venture capitalists who understood uneven results and the lumpy nature of economic life. But now you have a slow-thinking thirty-year-old security analyst at a downtown Manhattan firm who “judges” your results and reads too much into them. He likes routine rewards, and the last thing you can deliver are routine rewards.

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.

Our intuitions are not cut out for nonlinearities. Consider our life in a primitive environment where process and result are closely connected. You 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 stone house, more work will lead to more apparent results, so your mood is propped up by visible continuous feedback.

In a primitive environment, the relevant is the sensational. This applies to our knowledge. When we try to collect information about the world around us, we tend to be guided by our biology, and our attention flows effortlessly toward the sensational – not the relevant so much as the sensational. Somehow 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 input in one variable should always yield a result in the other one. Our emotional apparatus is designed for linear causality. For instance, if you study every day, you expect to learn something in proportion to your studies. If you feel that 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 come to you in a flash.

Researchers spent some time dealing with this notion of gratification; neurology has been enlightening us about the tension between the notions of immediate rewards and delayed ones. Would you like a massage today, or two next week? Well, the news is that the logical part of our mind, that “higher” one, which distinguishes us from animals, can override our animal instinct, which asks for immediate rewards. So we are a little better than animals, after all – but perhaps not by much. And not all of the time.

The situation can get a little more tragic – the world is more nonlinear than we think, and than scientists would like to think.

With linearities, relationships between variables are clear, crisp, and constant, therefore Platonically easy to grasp in a single sentence, such as “A 10 percent increase in money in the bank corresponds to a 10 percent increase in interest income and a 5 percent increase in obsequiousness on the part of the personal banker”. If you have more money in the bank, you get more interest. Nonlinear relationships can vary; perhaps 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 increases your well-being significantly. More water means more pleasure. But what if I gave you a cistern of water? Clearly your well-being becomes 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 with additional quantities.

These nonlinear relationships are ubiquitous in life. Linear relationships are truly the exception; we only focus on them in classrooms and textbooks because they are easier to understand. Yesterday 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 than someone hunting for squares or triangles could find them in the rain forest – or, as we will see in Part Three, any more than someone looking for bell-shape randomness finding it in socioeconomic phenomena.

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.

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 not 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. Even a philosopher the caliber of Hume spent a few weeks sick in bed after the trashing of his masterpiece (what later became known as his version of the Black Swan problem) by some dim-thinking reviewer – whom he knew to be wrong and to have missed his whole point.

Where it gets painful is when you see one of your peers, whom you despise, heading to Stockholm for his Nobel reception.

Most people engaged in the 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 too 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 feeling 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 watercooler.

It is my great hope someday to see science and decision makers rediscover what the ancients have always known, namely that our highest currency is respect.

Even economically, the individual Black Swan hunters are not the ones who make the bucks. The researcher Thomas Astebro has shown that returns on independent inventions (you take the cemetery into account) are far lower than those on venture capital. Some blindness to the odds or an obsession with their own positive Black Swan is necessary for entrepreneurs to function. The venture capitalist is the one who gets the shekels. The economist William Baumol calls this “a touch of madness”. This may indeed apply to all concentrated businesses: 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 percent 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.

Let me distill the main idea behind what researchers call hedonic happiness.

Making $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, $100,000 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 saturated rather quickly, and it will not carry forward the hedonic balance like a sum on a tax return. As a matter of fact, your happiness depends far more on the number of instances of positive feelings, what psychologists call “positive affect”, than on their intensity when they hit. In other words, good news is good news first; how good matters rather little. So to have a pleasant life you should spread these small “affects” across time as evenly as possible. Plenty of mildly good news is preferable to one single lump of great news.

Sadly, it may be even worse for you to make $10 million, then lose back nine, than to 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. Mother Nature 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.

The problem, of course, is that we do not live in an environment where results are delivered in a steady manner – Black Swans dominate much of human history. It is unfortunate that the right strategy for our current environment may not offer internal rewards and positive feedback.

The same property in reverse applies to our unhappiness. It is better to lump all your pain into a brief period rather than have it spread out over a longer one.

But some people find it possible to transcend the asymmetry of pains and joys, escape the hedonic deficit, set themselves outside that game – and live with hope. There is some good news, as we see next.

For Yevgenia 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 collect acquaintances can be superficial in their friendships. A novel you like resembles a friend. You read it and reread it, getting to know it better. Like 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 Boétie were friends – the kind of question people ask you at a cocktail party as if you knew the answer, or as if there were an answer 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). Likewise, Yevgenia claims that she likes that one book “because it is it and because I am me”. Yevgenia once even walked out on a schoolteacher because he analyzed that book and thus violated her rule. One does not sit idle listening as people wax analytical about your friends. A very stubborn schoolchild she was.

This book she has as a friend is Il deserto del tartari, by Dino Buzzati, a novel that was well known in Italy and France during her childhood, but that, strangely, nobody she knows in America had heard of. Its English title is mistranslated as The Tartar Steppe instead of The Desert of the Tartars.

Yevgenia encountered II deserto when she was thirteen, in her parents’ weekend country house in a small village two hundred kilometers outside Paris, where their Russian and French books multiplied without the constraints of the overfed Parisian apartment. She was so bored in the country that she could not even read. Then, one afternoon, she opened the book and was sucked into it.

Giovanni Drogo is a man of promise. He has just graduated from the military academy with the rank of junior officer, and active life is just starting. But things do not turn out as planned: his initial four-year assignment is a remote outpost, the Bastiani fortress, protecting the nation from the Tartars likely to invade from the border desert – not too desirable a position. The fortress is located a few days by horseback from the town; there is nothing 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 outpost is temporary, a way for him to pay his dues before 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 and decides to extend his stay. Something in the walls of the fort and the silent landscape ensnares him. The appeal of the fort and waiting for the attackers, the big battle with the ferocious Tartars, 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. They are so focused that, on rare occasions, they can detect the most insignificant stray animal that appears at the edge of the desert and mistake it for an enemy attack.

Sure enough, Drogo spends the rest of his life extending his stay, delaying the beginning of his life in the city – thirty-five years of pure hope, 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 to the occasion.

At the end of the novel we see Drogo dying in a roadside inn as the event for which he has waited all his life takes place. He has missed it.

Yevgenia read II deserto numerous times; she even learned Italian (and perhaps married an Italian) so she could read it in the original. Yet she never had the heart to reread the painful ending.

I presented the Black Swan as the outlier, the important event that is not expected to happen. But consider the opposite: the unexpected event that you very badly want to happen. Drogo is obsessed and blinded by the possibility of an unlikely event; that rare occurrence is his raison d’être. At thirteen, when she encountered the book, little did Yevgenia know that she would spend an entire life playing Giovanni Drogo in the antechamber of hope, waiting for the big event, sacrificing for it, and refusing intermediate steps, the consolation prizes.

She did not mind the sweet trap of anticipation: to her it was a life worth living; it was worth living in the cathartic simplicity of a single purpose. Indeed, “be careful what you wish for”: she may have been happier before the Black Swan of her success than after.

One of the attributes of a Black Swan is an asymmetry in consequences – either positive or negative. For Drogo the consequences were thirty-five years spent waiting in the antechamber of hope for just a few randomly distributed hours of glory – which he ended up missing.

Note that there was no brother-in-law around 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 horizon. Drogo had the advantage of an association with peers and the avoidance of social contact with others outside the community. We are local animals, interested 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 elevators or make eye contact with them. Our shallowness can sometimes work for us.

It may be a banality that we need others for many things, but we need them far more than we 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 choose our peers. If we look at the history of ideas, we see schools of thought occasionally forming, producing unusual work unpopular outside the school. You hear about the Stoics, the Academic Skeptics, the Cynics, the Pyrrhonian Skeptics, the Essenes, the Surrealists, the Dadaists, the anarchists, the hippies, the fundamentalists. A school allows someone with unusual ideas with the remote possibility of a payoff to find company and create a microcosm insulated from others. The members of the group can be ostracized together – which is better than being ostracized alone.

If you engage in a Black Swan-dependent activity, it is better to be part of a group.

EL DESIERTO DE LOS TÁRTAROS

Yevgenia met Nero Tulip in the lobby of the Hotel Danieli in Venice. He was a trader who lived between London and New York. At the time, traders from London went to Venice on Friday noon during the low season, just to talk to other traders (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 of Nero.

They met again in New York, 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 him, called her lawyer who was by then expecting to hear from her, and saw more of Nero openly.

Nero had a stiff gait 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 television, teasing the nurses, and waiting for his bones to heal. He can draw 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 drank, so Yevgenia gave him a copy of Il deserto. Nero 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 dawn, working on her manuscripts at night. Nero rose at dawn, like most traders, even on weekends. He then worked for an hour on his opus, Treatise on Probability, and never touched it again after that. He had been writing it for a decade and felt rushed to finish it only when his life was threatened. Yevgenia smoked; Nero was mindful of his health, spending at least an hour a day at the gym or in the pool. Yevgenia hung around intellectuals and bohemians; Nero often felt comfortable with street-smart traders and businessmen who had never been to college and spoke with cripplingly severe Brooklyn accents. Yevgenia never understood how a classicist and a polyglot like Nero could socialize with people like that. What was worse, she had this French Fifth Republic overt disdain for money, unless disguised by an intellectual or cultural façade, and she could hardly bear these Brooklyn fellows with thick hairy fingers and gigantic bank accounts. Nero’s post-Brooklyn friends, in turn, 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.)

Nero was also elitist, unbearably so, but in a different way. He separated those who could connect the dots, Brooklyn-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 Il deserto and was sucked into it. Yevgenia had the prescience that, like her, Nero would identify with Giovanni Drogo, the main character of Il deserto. He did.

Nero, in turn, bought cases of the English (bad) translation of the book and handed copies to anyone who said a polite hello to him, including his New York doorman 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 tártaros.

Let us separate the world into two categories. Some people are like the turkey, exposed to a major blowup without being aware of it, while others play reverse turkey, prepared for big events that might surprise others. In some strategies and life situations, you gamble dollars to win a succession of pennies while appearing to be winning all the time. In others, you risk a succession of pennies to win dollars. In other words, you bet either that the Black Swan will happen or that it will never happen, two strategies that require completely different mind-sets.

We have seen that we (humans) have a marked preference for making a little bit of income at a time. Recall from Chapter 4 that in the summer of 1982, large American banks lost close to everything they had ever earned, and more.

So some matters that belong to Extremistan are extremely dangerous but do not appear to be so beforehand, since they hide and delay their risks – so suckers think they are “safe”. It is indeed a property of Extremistan to look less risky, in the short run, than it really is.

Nero called the businesses exposed to such blowups dubious businesses, particularly since he distrusted whatever method was being used to compute the odds of a blowup. Recall from Chapter 4 that the accounting period upon which companies’ performances are evaluated is too short to reveal whether or not they are doing a great job. And, owing to the shallowness of our intuitions, we formulate our risk assessments too quickly.

I will rapidly present Nero’s idea. His premise was the following trivial point: 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. But 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 financial 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 psychological reasons, however, people have difficulty carrying out such a strategy, simply because it requires a combination of belief, a capacity for delayed gratification, and the willingness to be spat upon by clients without blinking. And those who lose money for any reason start looking like guilty dogs, eliciting more scorn on the part of their entourage.

Against that background of potential blowup disguised as skills, Nero 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 disproportionately well. No single event can make you blow up, on the other hand – some changes in the world can produce extraordinarily large profits that pay back such bleed for years, sometimes decades, sometimes even centuries.

Of 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 problem, which accumulated physical fatigue from the neurobiological effect of exposure 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 hippocampus and weakening his memory. The hippocampus is the structure where memory is supposedly controlled. It is the most plastic part of the brain; it is also the part that is assumed to absorb all the damage from repeated insults like the chronic stress we experience daily from small doses of negative feelings – as opposed to the invigorating “good stress” of the tiger popping up occasionally in your living room. You can rationalize all you want; the hippocampus takes the insult of chronic stress seriously, incurring irreversible atrophy. Contrary to popular belief, these small, seemingly harmless stressors do not strengthen you; they can amputate part of your self.

It was the exposure to a high level of information that poisoned Nero’s life. He could sustain the pain if he saw only weekly performance numbers, instead of updates every minute. He did better emotionally with his own portfolio than with those of clients, since he was not obligated to monitor it continuously.

If his neurobiological system was a victim of the confirmation bias, reacting to the short term and the visible, he could trick his brain to escape its vicious 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 came of age, intellectually speaking, with the stock market crash of 1987, in which he derived monstrous returns on what small equity he controlled. This episode would forever make his track record valuable, taken as a whole. In close to twenty years of trading, Nero had only four good years. For him, 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 insurance and 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 part. This 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 became more supportive that way. Humans will believe anything you say provided you do not exhibit the smallest shadow of diffidence; like animals, they can detect the smallest crack in your confidence before you express 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. The problem with business people, Nero realized, is that if you act like a loser they will treat you as a loser – you set the yardstick yourself. There is no absolute measure of good or bad. It is not what you are telling people, it is how you are saying it.

But you need to remain understated and maintain an Olympian calm in front of others.

When he worked as a trader for an investment bank, Nero had to face the typical employee-evaluation form. The form was supposed to keep track of “performance”, supposedly as a check against employees slacking off. Nero found the evaluation absurd because it did not so much judge the quality of a trader’s performance as encourage him to game the system by working for short-term profits at the expense of possible blowups – like banks that give foolish loans that have a small probability of blowing up, because the loan officer is shooting for his next quarterly evaluation. So one day early in his career, Nero sat down and listened very calmly to the evaluation of his “supervisor”. When Nero was handed the evaluation form he tore it into small pieces in front of him. He did this very slowly, accentuating the contrast between the nature of the act and the tranquillity with which he tore the paper. The boss watched him blank with fear, eyes popping out of his head. Nero focused on his undramatic, slow-motion act, elated by both the feeling of standing up for his beliefs and the aesthetics of its execution. The combination of elegance and dignity was exhilarating. He knew that he would either be fired or left alone. He was left alone.

Another fallacy in the way we understand events is that of silent evidence. History hides both Black Swans and its Black Swan-generating ability from us.

THE STORY OF THE DROWNED WORSHIPPERS

More than two thousand years ago, the Roman orator, belletrist, thinker, Stoic, manipulator-politician, and (usually) virtuous gentleman, Marcus Tullius Cicero, presented the following story. One Diagoras, a nonbeliever in the gods, was shown painted tablets bearing the portraits of some worshippers who prayed, then survived a subsequent shipwreck. The implication was that praying protects you from drowning. Diagoras asked, “Where were the pictures of those who prayed, then drowned?”

The drowned worshippers, being dead, would have a lot of trouble advertising their experiences from the bottom of the sea. This can fool the casual observer into believing in miracles.

We call this the problem of silent evidence. The idea is simple, yet potent and universal. While most thinkers try to put to shame those who came before them, Cicero puts to shame almost all empirical thinkers who came after him, until very recently.

Later on, both my hero of heroes, the essayist Michel de Montaigne and the empirical Francis Bacon, mentioned the point in their works, applying it to the formation of false beliefs. “And such is the way of all superstition, whether in astrology, dreams, omens, divine judgments, or the like”, wrote Bacon in his Novum Organum. The 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 don’t just mean those learned-but-dull books in the history section (with Renaissance paintings on their cover to attract buyers). History, I will repeat, is any succession of events seen with the effect of posteriority.

This bias extends to the ascription of factors in the success of ideas and religions, to the illusion of skill in many professions, to success in artistic occupations, to the nature versus nurture debate, to mistakes in using evidence in the court of law, to illusions about the “logic” of history – and of course, most severely, in our perception of the nature of extreme events.

You are in a classroom listening to someone self-important, dignified, and ponderous (but dull), wearing a tweed jacket (white shirt, polka-dot tie), pontificating for two hours on the theories of history. You are too paralyzed by boredom to understand what on earth he is talking about, but you hear the names of big guns: Hegel, Fichte, Marx, Proudhon, Plato, Herodotus, Ibn Khaldoun, Toynbee, Spengler, Michelet, Carr, Bloch, Fukuyama, Schmukuyama, Trukuyama. He seems deep and knowledgeable, making sure that no attention lapse will make you forget that his approach is “post-Marxist”, “postdialectical”, or post-something, whatever that means. Then you realize that a large part of what he is saying reposes on a simple optical illusion! But this will not make a difference: he is so invested 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 historical theories. 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. We shall call this distortion a bias, i.e., the difference between what you see and what is there. By bias I mean a systematic error consistently showing a more positive, or negative, effect from the phenomenon, like a scale that unfailingly shows you a few pounds heavier or lighter than your true weight, 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. Remarkably, historians and other scholars in the humanities who need to understand silent evidence the most do not seem to have a name for it (and I looked hard). As for journalists, fuhgedaboudit! They are industrial producers of the distortion.

The term bias also indicates the condition’s potentially quantifiable nature: 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 living.

Silent evidence is what events use to conceal their own randomness, particularly the Black Swan type of randomness.

Sir Francis Bacon is an interesting and endearing fellow in many respects.

He harbored a deep-seated, skeptical, nonacademic, antidogmatic, and obsessively empirical nature, which, to someone skeptical, nonacademic, antidogmatic, and obsessively empirical, like this author, is a quality almost impossible to find in the thinking business. (Anyone can be skeptical; any scientist can be overly empirical – it is the rigor coming from the combination of skepticism and empiricism that’s hard to come by.) The problem is that his empiricism wanted us to confirm, not disconfirm; thus he introduced the problem of confirmation, that beastly corroboration that generates the Black Swan.

THE CEMETERY OF LETTERS

The Phoenicians, 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 race or culture, they were more interested in commerce than in the arts. Accordingly, the Phoenician invention of the alphabet served the lower purpose of commercial record keeping rather than the more noble purpose of literary production. (I remember finding on the shelves of a country house I once rented a mildewed history book by Will and Ariel Durant describing the Phoenicians as the “merchant race”. I was tempted to throw it in the fireplace.) Well, it now seems that the Phoenicians wrote quite a bit, but using a perishable brand of papyrus that did not stand the biodegradative assaults of time. Manuscripts had a high rate of extinction before copyists and authors switched to parchment in the second or third century. Those not copied during that period simply disappeared.

The neglect of silent evidence is endemic to the way we study comparative talent, 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.

Recall the winner-take-all effect from Chapter 3: notice the large number of people who call themselves writers but are (only “temporarily”) operating the shiny cappuccino machines at Starbucks. The inequity in this field is larger than, say, medicine, since we rarely see medical doctors serving hamburgers. I can thus infer that I can largely gauge the performance of the latter profession’s entire population from what sample is visible to me. Likewise with plumbers, taxi drivers, prostitutes, and those in professions devoid of superstar effects. Let us go beyond the discussion on Extremistan and Mediocristan in Chapter 3. The consequence of the superstar dynamic is that what we call “literary heritage” or “literary treasures” is a minute proportion of what has been produced cumulatively. This 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 Balzac to 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 to superior performance if, and only if, those who lack what we call talent also lack these qualities. But what if there are dozens of comparable literary masterpieces that happened to perish? And, following my logic, if there are indeed many perished manuscripts with similar attributes, then, I regret to say, your idol Balzac was just the beneficiary of disproportionate luck compared to his peers. Furthermore, you may be committing an injustice to others by favoring him.

My point, I will repeat, is not that Balzac is untalented, but that he is less uniquely talented than we think. Just consider the thousands of writers now completely vanished from consciousness: their record does not enter into analyses. We do not see the tons of rejected manuscripts because these writers have never been published. The New Yorker alone rejects close to a hundred manuscripts 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 first-time 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.

The next time you visit a Frenchman of comfortable means, you will likely spot the stern books from the collection Bibliothèque de la Pléiade, which their owner will never, almost never, read, mostly on account of their uncomfortable size and weight. Membership in the Pléiade means membership in the literary canon. The tomes are expensive; they have the distinctive smell of ultrathin India paper, compressing the equivalent of fifteen hundred 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 collection – only a few authors, such as the aesthete and adventurer André Malraux, have made it in while still alive. Dickens, Dostoyevsky, Hugo, and Stendhal are in, along with Mallarmé, Sartre, Camus, and … Balzac. Yet if you follow Balzac’s own ideas, which I will examine next, you would accept that there is no ultimate justification for such an official corpus.

Balzac outlined the entire business of silent evidence in his novel Lost Illusions. Lucien 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 Balzac seems to wonder, if it has much to do with anything. Success is presented cynically, as the product of wile and 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 Balzac calls “nightingales”.

Lucien was told that this designation “nightingale” was given by bookstores to those works residing on the shelves in the solitary depths of their shops.

Balzac presents to us the sorry state of contemporary literature when Lucien’s manuscript is rejected by a publisher who has never read it; later on, when Lucien’s reputation has developed, the very same manuscript is accepted by another publisher who did not read it either! The work itself was a secondary consideration.

In another example of silent evidence, the book’s characters keep bemoaning that things are no longer as they were before, implying that literary fairness prevailed in more ancient times – as if there was no cemetery before. They fail to take into account the nightingales among the ancients’ work! Notice that close to two centuries ago people had an idealized opinion of their own past, just as we have an idealized opinion of today’s past.

I mentioned earlier that to understand successes and analyze what caused them, we need to study the traits present in failures. It is to a more general version of this point that I turn next.

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 that these 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 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.[25] The entire notion of biography is grounded in the arbitrary ascription of a causal relation 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 truly separates the two is for the most part a single factor: luck. Plain luck.

You do not need a lot of empiricism to figure this out: a simple thought experiment suffices. The fund-management industry claims that some people are extremely skilled, since year after year they have outperformed the market. They will identify these “geniuses” and convince you of their abilities. My approach has been to manufacture cohorts of purely random investors and, by simple computer simulation, show how it would be impossible 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. Since you do not observe the cemetery of failed investors, you will think that it is a good business, and that some operators are considerably better than others. Of course an explanation will be readily provided for the success of the lucky survivors: “He eats tofu”, “She works late; just the other day I called her office at eight P.M. …” Or of course, “She is naturally lazy. People with that type of laziness can see things clearly”. By the mechanism of retrospective determinism we will find the “cause” – actually, we need to see the cause. I call these simulations of hypothetical cohorts, often done by computer, an engine of computational epistemology. Your thought experiments can be run on a computer. You just simulate an alternative world, plain random, and verify that it looks similar to the one in which we live. Not getting lucky billionaires in these experiments would be the exception.[26]

Recall the distinction between Mediocristan and Extremistan in Chapter 3. I said that taking a “scalable” profession is not a good idea, simply because there are far too few winners in these professions. Well, these professions produce a large cemetery: the pool of starving actors is larger than the one of starving accountants, even if you assume that, on average, they earn the same income.

A HEALTH CLUB FOR RATS

The second, 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 me, I came across an article discussing the mounting threat of the Russian Mafia in the United States and its displacement of the traditional Louie and Tony in some neighborhoods of Brooklyn. The article explained their toughness and brutality as a result of their being hardened by their Gulag experiences. The 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? The sentence jumped out at me as both profoundly 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 following thought experiment will give the intuition. Assume that you’re able to find a large, assorted population of rats: fat, thin, sickly, strong, well-proportioned, et cetera. (You can easily get them from the kitchens of fancy New York restaurants.) With these thousands of rats, you build a heterogeneous cohort, one that is well representative of the general New York rat population. You bring them to my laboratory on East Fifty-ninth Street in New York City and we put the entire collection in a large vat. We subject the rats to increasingly higher levels of radiation (since this is supposed to be a thought experiment, I am told that there is no cruelty in the process). At every level of radiation, those that are naturally stronger (and this is the key) will survive; the dead will drop out of your sample. We will progressively have a stronger and stronger collection of rats. Note the following central fact: every single rat, including the strong ones, will be weaker after the radiation than before.

An observer endowed with analytical abilities, who probably got excellent grades in college, would be led to believe that treatment in my laboratory is an excellent health-club replacement, and one that could be generalized to all mammals (think of the potential commercial success). His logic would run as follows: Hey, these rats are stronger than the rest of the rat population. What do they seem to have in common? They all came from that Black Swan guy Taleb’s workshop. Not many people will have the temptation to go look at the dead rats.

Next we pull the following trick on The New York Times: we let these surviving rats loose in New York City and inform the chief rodent correspondent of the newsworthy disruption in the pecking order in the New York rat population. He will write a lengthy (and analytical) article on the social dynamics of New York rats that includes the following passage: “Those rats 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. Taleb, they …”

There 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. One of the two following ingredients is necessary for this difference between the true effect (weakening) and the observed one (strengthening): a) a degree of inequality in strength, or 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.

We can keep going with this argument; it has such universality that once we get the bug it is hard to look at reality with the same eyes again. Clearly it robs 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. Take the number of species that we now consider extinct. For a long time scientists took the number of such species as that implied from an analysis of the extant fossils. But this number ignores the silent cemetery of species that came and left without leaving traces in the form of fossils; the fossils that we have managed to find correspond to a smaller proportion of all species that came and disappeared. This implies that our biodiversity was far greater than it seemed at first examination. A more worrisome consequence is that the rate of extinction of species may be far greater than we think – close to 99.5 percent of species that transited through earth are now extinct, a number of scientists have kept raising through time. Life is a great deal more fragile than we have allowed for. But this does not mean we (humans) should feel guilty for extinctions around us; nor does it mean that we should act to stop them – species were coming and going before we started messing up the environment. There is no need to feel moral responsibility for every endangered species.

Does crime pay? Newspapers report on the criminals who get caught. There is no section in The New York Times recording the stories of those who committed crimes but have not been caught. So it is with cases of tax evasion, government bribes, prostitution rings, poisoning of wealthy spouses (with substances that do not have a name and cannot be detected), and drug trafficking.

In addition, our representation of the standard criminal might be based on the properties of those less intelligent ones who were caught.

Once we seep ourselves into the notion of silent evidence, so many things around us that were previously hidden start manifesting themselves. Having spent a couple of decades in this mind-set, I am convinced (but cannot prove) that training and education can help us avoid its pitfalls.

What do the popular expressions “a swimmer’s body” and “beginner’s luck” have in common? What do they seem to share with the concept of history?

There is a belief among 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 that gamblers have lucky beginnings (the same applies to stock market speculators). Does this mean that each one of us should become a gambler for a while, take advantage of lady luck’s friendliness to beginners, then stop?

The answer is no. The same optical illusion prevails: those who start gambling will be either lucky or unlucky (given that the casino has the advantage, 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 probably take up, depending on their temperaments, bird-watching, scrabble, piracy, or other pastimes. Those who continue gambling will remember having been lucky as beginners. The dropouts, by definition, will no longer be part of the surviving gamblers’ community. This explains beginner’s luck.

There is an analogy with what is called in common parlance a “swimmer’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). When asking around about the comparative physical elegance of athletes, I was often told that runners looked anorexic, cyclists bottom-heavy, and weight lifters insecure and a little primitive. I inferred that I should spend some time inhaling chlorine, in the New York University pool to get those “elongated muscles”. Now suspend the causality. Assume that a person’s genetic variance allows for a certain type of body shape. Those born with a natural tendency to develop a swimmer’s body become better swimmers. These are the ones you see in your sample splashing up and down at the pools. But 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.

WHAT YOU SEE AND WHAT YOU DON’T SEE

Katrina, the devastating hurricane that hit New Orleans in 2005, got plenty of politicizing politicians on television. These legislators, moved by the images of devastation and the pictures of angry victims made homeless, made promises of “rebuilding”. It was so noble on their part to do something humanitarian, to rise above our abject selfishness.

Did they promise to do so with their own money? No. It was with public money. Consider that such funds will be taken away from somewhere else, as in the saying “You take from Peter to give to Paul”. That somewhere else will be less mediatized. It may be privately funded cancer research, or 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 only do these cancer patients not vote (they will be dead by the next ballot), but they do not manifest themselves to our emotional system. More of them die every day than were 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, perhaps even directly. Money (public or private) taken away from research might be responsible for killing them – in a crime that may remain silent.

A ramification of the idea concerns our decision making under a cloud of possibilities. We see the obvious and visible consequences, not the invisible and less obvious ones. Yet those unseen consequences can be – nay, generally are – more meaningful.

Frédéric Bastiat was a nineteenth-century humanist of a strange variety, one of those rare independent thinkers – independent to the point of being unknown in his own country, France, since his ideas ran counter to French political orthodoxy (he joins another of my favorite thinkers, Pierre Bayle, in being unknown at 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.

Recall the confirmation fallacy: governments are great at telling you what they did, but not what they did not do. In fact, they engage in what could be labeled as phony “philanthropy”, the activity of helping people in a visible and sensational way without taking into account the unseen cemetery of invisible consequences. Bastiat inspired libertarians by attacking the usual arguments that showed the benefits of governments. But his ideas can be generalized to apply to both the Right and the Left.

Bastiat goes a bit deeper. If both the positive and the negative consequences of an action fell on 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 others, with a net cost to society. Consider job-protection measures: you notice those whose jobs are made safe and ascribe social benefits to such protections. You do not notice the effect on 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 consequences of 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 directing charitable contributions toward those who may need them the least.

Let us apply this reasoning to September 11, 2001. Around twenty-five hundred people were directly killed by bin Laden’s group in the Twin Towers of the World Trade Center. Their families benefited from the support of all manner of agencies and charities, as they should. But, according to researchers, during the remaining three months of the year, close to one 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 that period; the road is considerably more lethal than the skies. These families got no support – they did not even know that their loved ones were also the victims of bin Laden.

In addition 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 trumpet the tens of thousands of lives saved by his seat belt laws. It is much easier to sell “Look what I did for you” than “Look what I avoided for you”.

Recall from the Prologue the story of the hypothetical legislator whose actions might have avoided the attack of September 11. How many such people are walking the street without the upright gait of the phony hero?

Have the guts to consider the silent consequences when standing in front of the next snake-oil humanitarian.

Our neglect of silent evidence kills people daily. Assume that a drug saves many people from a potentially dangerous ailment, but runs the risk of killing 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 hurt by the side effects will go after the doctor like attack dogs, while the lives saved by the drug might not be accounted for anywhere.

A life saved is a statistic; a person hurt is an anecdote. Statistics are invisible; anecdotes are salient. Likewise, the risk of a Black Swan is invisible.

THE TEFLON-STYLE PROTECTION OF GIACOMO CASANOVA

This brings us to gravest of all manifestations of silent evidence, the illusion 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 came under a serious threat but, having survived it, you retrospectively underestimate how risky the situation actually was.

The adventurer Giacomo Casanova, later self-styled Jacques, Chevalier de Seingalt, the wannabe intellectual and legendary seducer of women, seems to have had a Teflon-style trait that would cause envy on the part of the most resilient of Mafia dons: misfortune did not stick to him. Casanova, while known for his seductions, viewed himself 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 engrossing account of a succession of reversals of fortune. Casanova felt that every time he got into difficulties, his lucky star, his étoile, would 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 running every time into a new opportunity. 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 someone generous enough and with a weak enough memory to forget past betrayals. Could Casanova have been selected by destiny to bounce back 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 believe that they are indestructible; they will have a long and interesting enough experience to write books about it. Until, of course …

Actually, adventurers who feel singled out by destiny abound, simply because there are plenty of adventurers, and we do not hear the stories of those down on their luck. As I started writing this chapter, I recalled a conversation with a woman about her flamboyant fiancé, the son of a civil servant, who managed through a few financial transactions to catapult himself into the life of a character in a novel, with handmade shoes, Cuban cigars, collectible cars, and so on. The French have a word for this, flambeur, which means a mixture of extravagant bon vivant, wild speculator, and risk taker, all the while bearing considerable personal charm; a word that does not seem to be available in Anglo-Saxon cultures. The fiancé was spending his money very quickly, and as we were having the conversation about his fate (she was going to marry him, after all), she explained to me that he was undergoing slightly difficult times, but that there was no need to worry since he always came back with a vengeance. That was 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 of fortune. He also dropped out of the scene and is no longer to be found among other flambeurs.

How does this relate to the dynamics of history? Consider what is generally called the resilience of New York City. For seemingly transcendental 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 York City. The following quote is from a New York Times article:

Now run the idea in reverse: think of cities as little Giacomo Casanovas, or as rats in my laboratory. As we put the thousands of rats through a very dangerous process, let’s put a collection of cities in a simulator of history: Rome, Athens, Carthage, Byzantium, Tyre, Catal Hyuk (located in modern-day Turkey, it is one of the first known human settlements), Jericho, Peoria, and, of course, New York City. Some cities will survive the harsh conditions of the simulator. As to others, we know that history might not be too kind. I am sure that Carthage, Tyre, and Jericho had their local, no less eloquent, Samuel M. E., saying, “Our enemies have tried to destroy us many times; but we always came back more resilient than before. We are now invincible”.

This bias causes the survivor to be an unqualified witness of the process. Unsettling? The fact that you survived is a condition that may weaken your interpretation of the properties of the survival, including the shallow notion of “cause”.

You can do a lot with the above statement. Replace the retired economist Samuel E. with a CEO discussing his corporation’s ability to recover from past problems. How about the taunted “resilience of the financial system”? How about a general who has had a good run?

The reader can now see why I use Casanova’s unfailing luck as a generalized framework for the analysis of history, all histories. I generate artificial 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 observer of the result would obtain. From that perspective, it is not a good idea to be a Casanova.

Consider the restaurant business in a competitive place like New York City. One 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, not counting the finicky fashion-minded clients. The cemetery of failed restaurants is very silent: walk around Midtown Manhattan and you will see these warm patron-filled restaurants with limos waiting outside for the diners to come out with their second, trophy, spouses. The owner is overworked but happy to have all these important people patronize 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.

Clearly there 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, economic growth comes from such risk taking. But some fool might argue the following: if someone followed reasoning such as mine, we would not have had the spectacular growth we experienced in the past. This is exactly like someone playing Russian roulette and finding it a good idea because he survived and pocketed the money.

We are often told that we humans have an optimistic bent, and that it is supposed to be good for us. This argument appears to justify general risk taking 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).

We have enough evidence to confirm that, indeed, we humans are an extremely lucky species, and that we got the genes of the risk takers. The foolish risk takers, that is. In fact, the Casanovas who survived.

Once again, I am not dismissing the idea of risk taking, having been involved in it myself. I am only critical of the encouragement of uninformed risk taking. The überpsychologist 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 how 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. We are mature enough a race to realize this point, enjoy our blessings, and try to preserve, by becoming more conservative, what we got by luck. We have been playing Russian roulette; now let’s stop and get a real job.

I have two further points to make on this subject. First, justification of overoptimism on grounds that “it brought us here” arises from a far more serious mistake about human nature: the belief that we are built to understand nature and our own nature and that our decisions are, and have been, the result of our own choices. I beg to disagree. So many instincts drive us.

Second, a little more worrisome than the first point: evolutionary fitness is something that is continuously touted and aggrandized by the crowd who takes it as gospel. The more unfamiliar someone is with the wild Black Swan-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 the good. But, in the short term, it is not obvious which traits are really good for you, particularly if you are in the Black Swan-generating environment 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 because gambling makes you rich! Risk taking made many species head for extinction!

This 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. The fools, the Casanovas, and the blind risk takers are often the ones who win in the short term. Worse, in a Black Swan environment, 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 Extremistan worsens the silent-evidence effect.

But there is another manifestation that merits a mention.

I AM A BLACK SWAN: THE ANTHROPIC BIAS

I want to stay closer to earth and avoid bringing higher-up metaphysical or cosmological arguments into this discussion – there are so many significant dangers to worry about down 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 cosmological argument, as it points out the gravity of our misunderstanding of historical stability.

A recent wave of philosophers and physicists (and people combining the two categories) has been examining the self-sampling assumption, which is a generalization of the principle of the Casanova bias to our own existence.

Consider our own fates. Some people reason that the odds of 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 of the parameters being exactly where they need to be to induce our existence (any deviation from the optimal calibration would have made our world explode, collapse, or simply not come into existence). It is often said that the world seems to have been built to the specifications that would make our existence possible. According to such an argument, it could not come from luck.

However, our presence in the sample completely vitiates the computation of the odds. Again, the story of Casanova can make the point quite simple – much simpler than in its usual formulation. Think again of all the possible worlds as little Casanovas following their own fates. The one who is still kicking (by accident) will feel that, given that he cannot be so lucky, there had to be some transcendental force guiding him and supervising his destiny: “Hey, otherwise the odds would be too low to get here just by luck”. For someone who observes all adventurers, the odds of finding a Casanova are not low at all: there so many adventurers, and someone is bound to win the lottery ticket.

The problem here with the universe and the human race is that we are the surviving Casanovas. When you start with many adventurous Casanovas, 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 “condition”: you survived to talk about it). So we can no longer naïvely compute odds without 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., unfavorable) or “rosy” (i.e., favorable) scenarios. The bleak scenarios lead to extinction. Clearly, if I am now writing these lines, it is certainly because history delivered 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 collisions, nuclear 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 biography I am alarmed at how tenuous my life has been so far. Once when I returned to Lebanon during the war, at the age of eighteen, I felt episodes of extraordinary 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 another severe disease that would have left me for dead, thanks to a treatment that depends on 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 human race, itself an accidental event.

My being here is a consequential low-probability occurrence, and I tend to forget it.

Let us return to 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 seven times in a row will explain to you that the odds against such a streak are one in several million, so you either have to believe some transcendental 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.

The reference point argument is as follows: do not compute odds from the vantage point of the winning gambler (or the lucky Casanova, or the endlessly bouncing back New York City, or the invincible Carthage), but from all those who started in the cohort. Consider once again the example of the gambler. If you look at the population of beginning gamblers taken as a whole, you can be close to 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 of the beginning cohort, this is not a big deal. But from the reference point of the winner (and, who does not, and this is key, take 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 “history” is just a series of numbers through time. The numbers can represent degrees of wealth, fitness, weight, anything.

This in itself greatly weakens the notion of “because” that is often propounded 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 of causality). I repeat that we are explanation-seeking animals who tend to think that everything has an identifiable cause and grab the most apparent one as the explanation. Yet there may not be a visible because; to the contrary, frequently there is nothing, not even a spectrum of possible explanations. But silent evidence masks this fact. Whenever 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 weakness for imparting explanations.

Apply this reasoning to the following question: Why didn’t the bubonic plague kill more people? People will supply quantities of cosmetic explanations involving theories about the intensity of the plague and “scientific models” of 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 necessarily be the property of diseases to spare us humans. Whenever your survival is in play, don’t immediately look for causes and effects. The main identifiable reason for our survival of such diseases might simply be inaccessible to us: we are here since, Casanova-style, the “rosy” scenario played out, and if it seems too hard to understand it is because we are too brainwashed by notions of causality and we think that it is smarter to say because than to accept randomness.

My biggest problem with the educational system lies precisely in that it forces students to squeeze explanations out of subject matters and shames them for withholding judgment, for uttering the “I don’t know”. Why did the Cold War end? Why did the Persians lose the battle of Salamis? Why 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, one cannot read that much into the process, and should learn instead to invoke some measure of randomness (randomness is what we don’t know; to invoke randomness is to plead ignorance). It is not just your college professor who gives you bad habits. I showed in Chapter 6 how newspapers need to stuff their texts with causal links to make you enjoy the narratives. But have the integrity 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 argument 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.

We have seen several varieties of the silent evidence that cause deformations in our perception of empirical reality, making it appear more explainable (and more stable) than it actually is. In addition to the confirmation error and the narrative fallacy, the manifestations of silent evidence further distort the role and importance of Black Swans. In fact, they cause a gross overestimation at times (say, with literary success), and underestimation at others (the stability of history; the stability of our human 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 evidence. The unconscious part of 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 natural, even physical, scorn of the abstract.

This will be further illustrated in the next chapter.

FAT TONY

“Fat Tony” is one of Nero’s friends who irritates Yevgenia Krasnova beyond measure. We should perhaps more thoughtfully style him “Horizontally-challenged Tony”, 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 Rome, but they look as if he bought them from a Web catalog. He has thick hands, 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 Tony”, 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.

Tony is a successful nonnerd with a happy disposition. He leads a gregarious existence. His sole visible problem seems to be his weight and the corresponding nagging by his family, remote cousins, and friends, who keep warning him about that premature heart attack. Nothing seems to work; Tony often goes to a fat farm in Arizona to not eat, lose a few pounds, then gain almost all of them back in his first-class seat on the flight back. 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 of a New York bank in the early 1980s, in the letter-of-credit department. He pushed papers and did some grunt work. 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 employee, he started acquiring property in bankruptcy proceedings, buying 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 owners; Tony knew very rapidly how to talk to them and maneuver. Later, he also learned to buy and sell gas stations with money borrowed from small neighborhood bankers.

Tony has this remarkable habit of trying to make a buck effortlessly, just for entertainment, without straining, without office work, without meeting, just by melding his deals into his private life. Tony’s motto is “Finding who the sucker is”. Obviously, they are often the banks: “The clerks don’t care about nothing”. Finding these suckers is second nature to him. If you took walks around the block with Tony you would feel considerably more informed about the texture of the world just “tawking” to him.

Tony 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 officially full, either through connections or his forceful charm.

I found the perfect non-Brooklyn in someone I will call Dr. John. He is a former engineer currently working as an actuary for an insurance company. He is thin, wiry, and wears glasses and a dark suit. He lives in New Jersey not far from Fat Tony but certainly they rarely run into each other. Tony never takes the train, and, actually, never commutes (he drives a Cadillac, 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 clock. He quietly and efficiently reads the newspaper on the train to Manhattan, then neatly folds it for the lunchtime continuation. While Tony makes restaurant owners rich (they beam when they see him coming and exchange noisy hugs with him), John meticulously packs his sandwich every morning, fruit salad in a plastic container. As for his clothing, he also wears a suit that looks like it came from a Web catalog, except that it is quite likely that it actually did.

Dr. John 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 electrical engineering from the University of Texas at Austin. Since he knows both computers and statistics, he was hired by an insurance company to do computer simulations; he enjoys the business. Much of what he does consists of running computer programs for “risk management”.

I know that it is rare for Fat Tony and Dr. John to breathe the same air, let alone find themselves at the same bar, so consider this a pure thought exercise. I will ask each of them a question and compare their answers.

NNT (that is, me): Assume that a coin is fair, i.e., has an equal probability of coming up heads or tails when flipped. I flip it ninety-nine times and get heads each time. What are the odds of my getting tails on my next throw?

Dr. John: Trivial question. One half, of course, since you are assuming 50 percent odds for each and independence between draws.

NNT: What do you say, Tony?

Fat Tony: I’d say no more than 1 percent, of course.

NNT: Why so? I gave you the initial assumption of a fair coin, meaning that it was 50 percent either way.

Fat Tony: You are either full of crap or a pure sucker to buy that “50 pehcent” business. The coin gotta be loaded. It can’t be a fair game. (Translation: It is far more likely that your assumptions about the fairness are wrong than the coin delivering ninety-nine heads in ninety-nine throws.)

NNT: But Dr. John said 50 percent.

Fat Tony (whispering in my ear): I know these guys with the nerd examples 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 York City (or Ulan Bator, Mongolia)? Dr. John thinks entirely within the box, the box that was given to him; Fat Tony, almost entirely outside the box.

To set the terminology straight, what I call “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 someone who thinks exceedingly inside the box.

Have you ever wondered why so many of these 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. In an IQ test, as well as in any academic setting (including sports), Dr. John would vastly outperform Fat Tony. But Fat Tony would outperform 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 than Dr. John.

We will get deep, very deep, into the difference between the answers of Fat Tony and Dr. John; this is probably the most vexing problem I know about the connections between two varieties of knowledge, what we dub Platonic and a-Platonic. Simply, people like Dr. John can cause Black Swans outside Mediocristan – their minds are closed. While the problem is very general, one of its nastiest illusions is what I call the ludic fallacy – the attributes of the uncertainty we face in real life have little connection to the sterilized ones we encounter in exams and games.

So I close Part One with the following story.

LUNCH AT LAKE COMO

One spring day a few years ago, I was surprised to receive an invitation from a think tank sponsored by the United States Defense Department to a brainstorming session on risk that was to take place in Las Vegas the following fall. The person who invited me announced on the phone, “We’ll have lunch on a terrace overlooking Lake Como”, which put me in a state of severe distress. Las Vegas (along with its sibling the emirate of Dubai) is perhaps one place I’d never wish to visit before I die. Lunch at “fake Como” would be torture. But I’m glad I went.

The think tank had gathered a nonpolitical collection of people they called doers and scholars (and practitioners like me who do not accept the distinction) involved in uncertainty in a variety of disciplines. And they symbolically picked a major casino as a venue.

The symposium was a closed-doors, synod-style assembly of people who would never have mixed otherwise. My first surprise was to discover that 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 box, like traders, except much better and without fear of introspection. An assistant secretary of defense was among us, but had I not known his profession I would have thought he was a practitioner of skeptical empiricism. Even an engineering investigator who had examined the cause of a space shuttle 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 corporate executives using other people’s money. This does not show in war movies, where 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 Russians through the escalation in defense spending. When I expressed my amazement to Laurence, another finance person who was sitting next to me, 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 the group was a gentleman who ran a group of professional gamblers and 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 science, 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 down his back, putting him 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 face, gambling situations 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. Consequently, the casino had a high-tech surveillance system tracking cheaters, card counters, and other people who try to derive an advantage over them. Each of the participants gave his presentation and listened to those of the others. I came to discuss Black Swans, 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 understand such things, and the idea became recently prevalent in military circles with 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 fallacy. I intended to tell them that I should not be speaking at a casino because it had nothing to do with uncertainty.

What is the ludic fallacy? Ludic comes from ludus, Latin 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 to pick for such a discussion, since the class of risks casinos encounter are very insignificant outside of the building, and their study not readily transferable. My idea is that gambling was sterilized and domesticated uncertainty. In the casino you know the rules, you can calculate the odds, and the type of uncertainty we encounter there, we will see later, is mild, belonging to Mediocristan. My prepared statement was this: “The casino is the only human venture I know where the probabilities are known, Gaussian (i.e., bell-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 the game – there are never days in which “36 black” is designed to pop up 95 percent of the time.[27]

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 consider what was discovered by noneconomists worthwhile, draw an artificial distinction between Knightian risks (which you can compute) and Knightian uncertainty (which you cannot compute), after one Frank Knight, who rediscovered the notion of unkown uncertainty and did a lot of thinking but perhaps never took risks, or perhaps lived in the vicinity of a casino. Had he taken economic or financial risks he would have realized that these “computable” risks are largely absent from real life! They are laboratory contraptions!

Yet we automatically, spontaneously associate chance with these Platonified games. I find it infuriating to listen to people who, upon being informed 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 below 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 didn’t know”.

Those who 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 probability and probabilistic thinking; you will be showered with names of alleged “probability thinkers” who all base their ideas on these sterilized constructs. I recently looked at what college students are taught under the subject of chance and came out horrified; they were brainwashed with this ludic fallacy and the outlandish bell curve. The same is true of people doing PhD’s in the field of probability theory. I’m reminded of a recent book by a thoughtful mathematician, Amir Aczel, called Chance. Excellent book perhaps, but like all other modern books it is grounded in the ludic fallacy. Furthermore, assuming chance has anything to do with mathematics, what 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 practical to say about the subject of chance, such as Cicero, and you find something different: a notion of probability that remains fuzzy throughout, as it needs to be, since such fuzziness is the very nature of uncertainty. Probability is a liberal art; it is a child of skepticism, not a tool for people with calculators on their belts to satisfy their desire to produce fancy calculations and certainties. Before Western thinking drowned in its “scientific” 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, published in 1673, the polemist Simon Foucher exposed our psychological predilection for certainties. He teaches us the art of doubting, how to position ourselves between doubting and believing. He writes: “One needs to exit doubt 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 doubt without 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 of games, which probability theory was successful at tracking, and claim that this is a general case. Furthermore, just as we tend to underestimate the role of luck in life in general, we tend to overestimate it in games of chance.

“This building is inside the Platonic fold; life stands outside of it”, I wanted to shout.

I was in for quite a surprise when I learned that the building too was outside the Platonic fold.

The casino’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 understand that the casino was sufficiently diversified across the different tables to not have to worry about taking a hit from an extremely lucky gambler (the diversification argument 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 dollars in a gambling bout. Absent cheating, the performance of most individual gamblers would be the equivalent of a drop in the bucket, making the aggregate very stable.

I promised 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 James Bond movie – I wondered if the casino was an imitation of the movies or if it was the other way around. Yet, in spite of such sophistication, their risks had nothing to do with what can be anticipated knowing that the business is a casino. For it turned out that the four largest losses incurred or narrowly avoided by the casino fell completely outside their sophisticated models.

First, they lost around $100 million when an irreplaceable performer in their main show was maimed by a tiger (the show, Siegfried and Roy, had 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 turn against its master. In scenario analyses, the casino had even conceived of the animal jumping into the crowd, but nobody came near to the idea of insuring against what happened.

Second, a disgruntled contractor was hurt during the 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, to use the arguments in Chapter 8, we would not have been there), but I shivered at the thought of possibly sitting above a pile of dynamite.

Third, casinos must file a special form with the Internal Revenue Service documenting a gambler’s profit if it exceeds a given amount. The employee who was supposed to mail the forms hid them, instead, for completely unexplainable reasons, in boxes under his desk. This went on for years without anyone noticing that something was wrong. The employee’s refraining from sending the documents was truly impossible to predict. Tax violations (and negligence) being serious offences, the casino faced the near loss of a gambling license or the onerous financial costs of a suspension. Clearly they ended up paying a monstrous fine (an undisclosed amount), 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, which caused him, in order to secure cash for the ransom, to violate gambling laws by dipping into the casino coffers.

Conclusion: A back-of-the-envelope calculation shows that the dollar value of these Black Swans, the off-model hits and potential hits I’ve just outlined, swamp the on-model risks by a factor of close to 1,000 to 1. The casino spent hundreds of millions of dollars on gambling theory and high-tech surveillance while the bulk of their risks came from outside their models.

All this, and yet the rest of the world still learns about uncertainty and probability from gambling examples.

WRAPPING UP PART ONE

All of the topics in Part One are actually only one. You can think about a subject 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 down that all these are the same idea. Meanwhile, what Nietzsche calls bildungsphilisters,[28] or 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 better because you do not identify with them, and thus you no longer need to be amputated to fit into the Procrustean bed of the disciplines. Finally, a little push and you see that it was all one single problem.

One evening I found myself at a cocktail party in Munich at the apartment of a former art historian who had more art books in its library than I thought 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. One of the most insightful thinkers I know, the computer entrepreneur Yossi Vardi, 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 perfumed Riesling, so I failed in my improvisation. The next day I experienced staircase wit. I jumped out of bed with the following idea: the cosmetic and the Platonic rise naturally to the surface. This is a simple extension of the problem of knowledge. It is simply that one side of Eco’s library, 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 Black Swans: we worry about those that happened, not those that may happen but did not. It is why we Platonify, liking known schemas and well-organized knowledge – to the point of blindness to reality. It is why we fall for the problem of induction, why we confirm. It is why those who “study” and fare well in school have a tendency to be suckers for the ludic fallacy.

And it is why we have Black Swans and never learn from their occurrence, because the ones that did not happen were too abstract. Thanks to Vardi, I now belonged to the club of single-idea people.

We love the tangible, the confirmation, the palpable, the real, the visible, the concrete, the known, the seen, the vivid, the visual, the social, the embedded, the emotionally laden, the salient, the stereotypical, the moving, the theatrical, the romanced, the cosmetic, the official, the scholarly-sounding verbiage (b******t), the pompous Gaussian economist, the mathematicized crap, the pomp, the Académie Française, Harvard Business School, the Nobel Prize, dark business suits with white shirts and Ferragamo ties, the moving discourse, and the lurid. Most of all we favor the narrated.

Alas, we are not manufactured, in our current edition of the human race, to understand abstract matters – we need context. Randomness and uncertainty are abstractions. We respect what has happened, ignoring what could have happened. In other words, we are naturally shallow and superficial – and we do not know it. This is not a psychological problem; it comes 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 effort.

There have been in history many distinctions between higher and lower forms of humans. For the Greeks, there were the Greeks and the barbarians, those 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 was the gentleman’s – contrary to today’s definition, a gentleman’s life was practiced through idleness and a code of behavior that included, along with a set of manners, the avoidance of work beyond the necessities of comfortable subsistence. For New Yorkers, there are those with a Manhattan zip code and those with such a thing as a Brooklyn or, worse, Queens address. For the earlier Nietzsche, there was the Apollonian compared 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 results from efforts. All of these distinctions aim at lengthening the distance 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 cousins is far shorter than we think.)

I propose that if you want a simple step to a higher form of life, as distant from the animal as you can get, then you may have to denarrate, that is, shut down the 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 ones. Train yourself to spot the difference between the sensational and the empirical. This insulation from the toxicity of the world will have an additional benefit: it will improve your well-being. Also, bear in mind how shallow we are with probability, the mother of all abstract notions. You do not have to do much more in order to gain a deeper understanding of 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 great 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 to “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 understanding of the world.