The Deception of Swans
Note: I wrote most of this post in October of 2019, and did not intend to publish. In light of the current COVID-19 outbreak, it suddenly seemed appropriate. We are in the midst of a black swan event; no one was predicting it a few months ago. Also: I really wanted to use “Stop [Messing With] Me, Swan!” as the title, but decided against it. I chickened (swanned?) out. -Aaron
As much as I despised writing papers in high school, college, grad school, etc., there is something to be said for engaging with and/or responding to another’s work. And as much as I enjoy reading, most of what I read doesn’t stick.
Check out this Farnam Street post on how to remember what you read. I don’t do everything outlined in the post - not even close - but since part of the purpose of my reading and writing is to learn, I thought it would be useful to summarize and make connections to Nassim Nicholas Taleb’s book “The Black Swan.”
The book is particularly interesting now, as we are living through an actual Black Swan - COVID-19 a.k.a. the Coronavirus. Some of what I wrote below is relevant to the current scare, some is not. Either way, “The Black Swan” is a great read on human behavior, and we’re seeing so much of it play out in real time.
“The Black Swan” is one of many notable books on how our brains can mislead us. “Thinking, Fast and Slow” by Daniel Kahneman is probably the most popular and comprehensive book on biases. “The Black Swan” dives deep into a few (such as confirmation bias) and focuses on highly improbable events and their impact on our thinking and behavior.
A Black Swan is a highly improbable event. It can occur over time or in an instant. It can be positive or negative. Taleb ascribes three attributes to the Black Swan:
First, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility. Second, it carries an extreme impact (unlike the bird). Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable [but only in retrospect].
A small number of Black Swans explain much of why the world is the way it is today, says Taleb. The world is dominated by Black Swans (the unknown/unknowable), yet we as humans spend so much of our time focusing on the known (or what we think we know).
Some of the ideas from the book I found most interesting:
-Few reward acts of prevention. Martyrs are remembered precisely because they are “successful,” while some who prevent disasters, but do not die in the effort, are less well-remembered. If a politician introduced successful legislation for airplane cockpit doors to be bullet-proof or somehow inaccessible before 9/11, preventing that tragedy, no one would be praising that politician today. (In fact, you can imagine the complaints about more regulation.)
-Taleb received advice early in his career to do something “scalable.” Some professions cannot be scaled (dentists, consultants, therapists): “[T]here is a cap on the number of patients or clients you can see in a given period of time.” These are not Black Swan driven professions, and they are largely predictable.
However, “Other professions allow you to add zeroes to your output (and your income), if you do well, at little or no extra effort. … J.K. Rowling...does not have to write each book again every time someone wants to read it. But this is not so for the baker: he needs to bake every single piece of bread in order to satisfy each additional customer.”
“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.” The Black Swan is behind the formation of the giants in a scalable profession. A brilliant author or musician may never strike it rich and reap the rewards of a Black Swan windfall. Luck is a major factor.
-The real world operates in “Extremistan,” where Black Swans occur. But “In the utopian province of Mediocristan, particular events don’t contribute much individually - only collectively.” The supreme law of Mediocristan: “When your sample is large, no single instance will significantly change the aggregate or the total.” The heaviest person in a group of 100, while an outlier, will “rarely represent more than a very small fraction of the weight of the entire population.” In Mediocristan, the extremes/outliers make almost no difference to the whole (non-scalable).
In Extremistan, “inequalities are such that one single observation can disproportionately impact the aggregate, or the total.” Wealth is an example (as are book sales, academic citations, media references, income, company size, etc.). “Almost all social matters are from Extremistan...social quantities are informational, not physical.” The extremes/outliers here make an enormous impact. “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.”
-How to Learn from the Turkey, or, the Problem of Induction. “The history of a process over a thousand days tells you nothing about what is to happen next. This naive projection of the future from the past can be applied to anything.” A turkey who is well fed and happy over 1,000 days may think life is great, until day 1,001 when his head is chopped off and he becomes a Thanksgiving meal. “How can we logically go from specific instances to reach general conclusions? How do we know what we know?” (i.e., the field of epistemology).
Consider that the turkey’s experience may have, rather than no value, a negative value...It learned from observation, ... [i]ts confidence increased as the number of friendly feedings grew, and it felt increasingly safe even though the slaughter was more and more imminent...the feeling of safety reached its maximum when the risk was at the highest! …
Mistaking a naive 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. … Those who believe in the unconditional benefits of past experience should consider this pearl of wisdom allegedly voiced by a ship’s captain:
“But in all my experience, I have never been in any accident … of any sort worth speaking about. I have seen but one vessel in distress in all my years at sea. I never saw a wreck and never have been wrecked nor was I ever in any predicament that threatened to end in disaster of any sort.” -E.J. Smit, 1907, RMS Titanic
-Negative instances and evidence are more helpful in establishing truth than positive (falsification). Consider the following statements:
Statement 1: “There is no evidence of the possibility of large events, i.e., Black Swans.”
Statement 2: “[T]here is evidence of no possible Black Swans.”
These statements are entirely different. Statement 1 is a negative argument - there is no evidence. Statement 2 is a positive argument - there is evidence of no Black Swans. These statements point to our tendency toward confirmation bias, where we look for positive evidence for ideas we hold. However:
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.
Negative empiricism, like seeing a black swan to certify that “not all swans are white” is immensely helpful. It helps us know something with certainty. The positive confirmatory evidence can mislead us into a false sense of the state of the world.
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 … 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.
“The Black Swan” is a dense book, and it took me a few months to read, but the ideas are fascinating.
Humans have a need to explain things, to construct narratives, to make the world simple and easy to understand.
Indeed, narratives and mantras that simplify things in our mind can be enormously helpful in preventing anxiety. It’s not just a human tendency, it’s a need. When so much is out of our control, we cling to whatever control we can manage, real or manufactured. It can help, and it can hurt.
So it is with Black Swans. We can’t prevent them, we can’t predict them, but they happen. They can help, and they can hurt. Learning about the ways in which they affect our thinking and behavior is helpful.
I enjoyed this book. The tone of this particular post seems a bit bleak to me, but the book itself is not. If you’re interested in philosophy, epistemology, and/or psychology, Taleb is among the best modern thinkers and “The Black Swan” is a fascinating look at the world.
Postscript: A few tips given the current Coronavirus Black Swan:
-Avoid looking at retirement/investment accounts to see how much the balance has dropped. The more you look at the account, the more likely you’ll make detrimental changes. (A couple of clever ways to say this here and here.) Stay the course. If you want to buy more, sin a little, but don’t go overboard.
-Similarly, don’t sell investment assets. If you use a financial planner/advisor, your financial plan should prepare for a large market decline in advance. While specific Black Swans are by definition unpredictable, the general unpredictable will happen, and if you trust your financial planner, he or she isn’t surprised about or scared of the current volatility.
-See if you can refinance if you own a home. Interest rates have dropped significantly, and you might be able to save quite a bit in mortgage interest with a lower rate.
-Make decisions using a time framework rather than a money framework. Ask yourself: “How do I want to spend my time?” rather than questions like “Should I sell off the stocks in my investment accounts?” Use judgment, of course, and don’t just bury your head in the sand regarding your money, but asking how you want to spend your time can help you make more meaningful decisions amidst the global chaos that is out of your control.
-Read this if the market implications of this are scary. If you’re not thinking about markets as is, great!
-As everyone else is saying: Wash your hands, and stay home if you don’t feel well (aren’t these true all the time?).
-Most importantly, walk, play ball with, give treats to, and pet your dog. (Image below of my Editor-in-Leash, asking to add this sentence. You got it, Buddy.)
