"The Black Swan"

[fiefoe]

Despite what Nassim Nicholas Taleb says about the stupidity of assigning categories, his Lebanese heritage does add an interesting dimension to this book dedicated to unpredictability.

• a severe limitation to our learning from observations or experience and the fragility of our knowledge. One single observation can invalidate a general statement derived from millennia of confirmatory sightings of millions of white swans.
• What we call here a Black Swan: summarize the triplet: rarity, extreme impact, and retrospective (though not prospective) predictability... Fads, epidemics, fashion, ideas, the emergence of art genres and schools. All follow these Black Swan dynamics. Literally, just about everything of significance around you might qualify.
• The same applies to scientific theories—nobody has interest in listening to trivialities. The payoff of a human venture is, in general, inversely proportional to what it is expected to be... The inability to predict outliers implies the inability to predict the course of history
• the reason free markets work is because they allow people to be lucky, thanks to aggressive trial and error, not by giving rewards or “incentives” for skill.
• Another related human impediment comes from excessive focus on what we do know: we tend to learn the precise, not the general... We do not spontaneously learn that we don’t learn that we don’t learn. The problem lies in the structure of our minds: we don’t learn rules, just facts, and only facts. Metarules (such as the rule that we have a tendency to not learn rules) we don’t seem to be good at getting.
• there are even more mistreated heroes—the very sad category of those who we do not know were heroes, who saved our lives, who helped us avoid disasters. They left no traces... the television that, we will see, is the carrier of unfairness and a major cause of Black Swan blindness... We humans are not just a superficial race (this may be curable to some extent); we are a very unfair one.
• What I call Platonicity..., is our tendency to mistake the map for the territory, to focus on pure and well-defined “forms,” whether objects, like triangles, or social notions, like utopias... even nationalities. When these ideas and crisp constructs inhabit our minds, we privilege them over other less elegant objects, those with messier and less tractable structures... The Platonic fold is the explosive boundary where the Platonic mind-set enters in contact with messy reality, where the gap between what you know and what you think you know becomes dangerously wide. It is here that the Black Swan is produced.
• There is a contradiction; this book is a story, and I prefer to use stories and vignettes to illustrate our gullibility about stories and our preference for the dangerous compression of narratives.* <> You need a story to displace a story. Metaphors and stories are far more potent (alas) than ideas;
• Note that I am not relying in this book on the beastly method of collecting selective “corroborating evidence.” For reasons I explain in Chapter 5, I call this overload of examples naïve empiricism—successions of anecdotes selected to fit a story do not constitute evidence.
• a very small minority—who get the point that a private library is not an ego-boosting appendage but a research tool. Read books are far less valuable than unread ones. The library should contain as much of what you do not know as... allow you to put there.

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• the eastern Mediterranean seaboard called Syria Libanensis, or Mount Lebanon: 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 fighting. Things appeared to be in a state of stable equilibrium,... 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.
• 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... 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... And, after Hellenism declined, they took up Arabic.
• 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... 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... 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... This retrospective plausibility causes a discounting of the rarity and conceivability of the event.
• 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.
• The historian Niall Ferguson showed that, despite all the standard accounts of the buildup to the Great War, which describe “mounting tensions” and “escalating crises,” the conflict came as a surprise... Ferguson used a clever empirical argument to make his point: he looked at the prices of imperial bonds... But bond prices did not reflect the anticipation of war.
• 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... 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.
• If you want to see what I mean by the arbitrariness of categories, check the situation of polarized politics... Why do those who prefer sexual freedom need to be against individual economic liberty?
• I felt in my spine the weight of the epistemic arrogance of the human race. I then realized that the great strength of the free-market system is the fact that company executives don’t need to know what’s going on.
• 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.
• So the distinction between writer and baker... 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... 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,
• 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.
• Art De Vany: The movie makes the actor, he claims—and a large dose of nonlinear luck makes the movie.
• 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
• 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... 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...  Another way to say it is that social quantities are informational, not physical:.. In this world, you should always be suspicious of the knowledge you derive from data.
• 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...
• the Problem of Induction or Problem of Inductive Knowledge: 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... induction’s most worrisome aspect: learning backward. Consider that the turkey’s experience may have, rather than no value, a negative value... Consider that the feeling of safety reached its maximum when the risk was at the highest!
• The third major thinker who dealt with the problem was the eleventh-century Arabic-language skeptic Al-Ghazali, known in Latin as Algazel...  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—though apparently this took place a few centuries later.
• 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,
• a powerful Catholic bishop who was an august member of the French Academy. Pierre-Daniel 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.
• round-trip fallacy: “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.
• 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.
• 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.
• Even in testing a hypothesis, we tend to look for instances where the hypothesis proved true. Of course we can easily find confirmation;... We can get closer to the truth by negative instances, not by verification!
• The person who is credited with the promotion of this idea of one-sided semiskepticism is Sir Doktor Professor Karl Raimund Popper,
• 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...  (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... 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.
• the central problem of knowledge (and the point of this chapter) is that there is no such animal as corroborative evidence.
• Just consider that the statement “all swans are white” is equivalent to “all nonwhite objects are not swans.”...  the sighting of a nonwhite object that is not a swan should bring such confirmation. This argument, known as Hempel’s raven paradox,
• 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
• 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.
• all I’m trying to show is the biological basis of this tendency toward causality... Indeed, the idea that the left brain controls language may not be so accurate: the left brain seems more precisely to be where pattern interpretation resides, and it may control language only insofar as language has a pattern-interpretation attribute. Another difference between the hemispheres is that the right brain deals with novelty. It tends to see the gestalt (the general, or the forest), in a parallel mode, while the left brain is concerned with the trees, in a serial mode.
• A higher concentration of dopamine appears to lower skepticism and result in greater vulnerability to pattern detection;...  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.
• 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,... The first problem is that information is costly to obtain. The second problem is that information is also costly to store... Finally, information is costly to manipulate and retrieve... 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.
• 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.
• 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... (In a remarkable insight, the nineteenth-century Parisian poet Charles Baudelaire compared our memory to a palimpsest.
• 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:
• 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.
• 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—
• 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!
• 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.
• 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.
• 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... 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.
• 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... spend an entire life playing Giovanni Drogo in the antechamber of hope, waiting for the big event, sacrificing for it,.. 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.
• she had this French Fifth Republic overt disdain for money, unless disguised by an intellectual or cultural façade,
• 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,
• 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.
• Silent evidence pervades everything connected to the notion of history... 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... 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,... 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.
• mildewed history book by Will and Ariel Durant describing the Phoenicians as the “merchant race.” I was tempted to throw it in the fireplace.)
• 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... 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.
• 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.
• 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... 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... The reference point argument is as follows: do not compute odds from the vantage point of the winning gambler
• it does makes us queasy to remove the analgesic illusion of causality
• 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,
• 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.
• 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... the military people there thought, behaved, and acted like philosophers... They thought out of the box, like traders, except much better and without fear of introspection... the idea became recently prevalent in military circles with the expression unknown unknown
• 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... 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.
• 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,
• I experienced staircase wit. I jumped out of bed with the following idea: the cosmetic and the Platonic rise naturally to the surface... 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.

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• inventing stories that convince us that we understand the past. For many people, knowledge has the remarkable power of producing confidence instead of measurable aptitude.
• The members of the group that saw fewer intermediate steps are likely to recognize the hydrant much faster. Moral? The more information you give someone, the more hypotheses they will formulate along the way, and the worse off they will be. They see more random noise and mistake it for information. <> The problem is that our ideas are sticky: once we produce a theory, we are not likely to change our mind
• Here again, you see the narrative fallacy at work, except that in place of journalistic stories you have the more dire situation of the “scientists” with a Russian accent looking in the rearview mirror... The econometrician Robert Engel... invented a very complicated statistical method called GARCH and got a Nobel for it. No one tested it to see if it has any validity in real life.
• On day 600, if the project is not done, you will be expected to need an extra 1,590 days. As you see, the longer you wait, the longer you will be expected to wait.
• The policies we need to make decisions on should depend far more on the range of possible outcomes than on the expected final number.
• But there is a weaker form of this law of iterated knowledge. It can be phrased as follows: to understand the future to the point of being able to predict it, you need to incorporate elements from this future itself... Prediction requires knowing about technologies that will be discovered in the future. But that very knowledge would almost automatically allow us to start developing those technologies right away. Ergo, we do not know what we will know.
• I cannot help thinking of Poincaré—Einstein is worthy of our reverence, but he has displaced many others. There is so little room in our consciousness; it is winner-take-all up there... The grand master wrote these wonders as serialized articles and composed them like extemporaneous speeches. As in every masterpiece, you see a mixture of repetitions, digressions, everything a “me too” editor with a prepackaged mind would condemn—but these make his text even more readable owing to an iron consistency of thought...  he angrily disparages the use of the bell curve...  He introduced nonlinearities, small effects that can lead to severe consequences,
• billiard ball movement : The problem is that to correctly compute the ninth impact, you need to take into account the gravitational pull of someone standing next to the table... And to compute the fifty-sixth impact, every single elementary particle of the universe needs to be present in your assumptions!
• we New Yorkers are all benefiting from the quixotic overconfidence of corporations and restaurant entrepreneurs. This is the benefit of capitalism that people discuss the least.
• To clarify, Platonic is top-down, formulaic, closed-minded, self-serving, and commoditized; a-Platonic is bottom-up, open-minded, skeptical, and empirical. <> The reason for my singling out the great Plato becomes apparent with the following example of the master’s thinking: Plato believed that we should use both hands with equal dexterity. It would not “make sense” otherwise. He considered favoring one limb over the other a deformation caused by the “folly of mothers and nurses.” Asymmetry bothered him, and he projected his ideas of elegance onto reality. We had to wait until Louis Pasteur to figure out that chemical molecules were either left- or right-handed and that this mattered considerably.
• For instance, what is the “optimal” quantity you should allocate to stocks? It involves complicated mathematics and thus raises a barrier to entry by non-mathematically trained scholars. I would not be the first to say that this optimization set back social science by reducing it from the intellectual and reflective discipline that it was becoming to an attempt at an “exact science.” By “exact science,” I mean a second-rate engineering problem for those who want to pretend that they are in the physics department
• One of the advantages of doing so is that we can let our conjectures die in our stead. Used correctly and in place of more visceral reactions, the ability to project effectively frees us from immediate, first-order natural selection—as opposed to more primitive organisms that were vulnerable to death and only grew by the improvement in the gene pool through the selection of the best... This ability to mentally play with conjectures, even if it frees us from the laws of evolution, is itself supposed to be the product of evolution—it is as if evolution has put us on a long leash whereas other animals live on the very short leash of immediate dependence on their environment.
• To me utopia is an epistemocracy, a society in which anyone of rank is an epistemocrat, and where epistemocrats manage to be elected. It would be a society governed from the basis of the awareness of ignorance, not knowledge. <> Alas, one cannot assert authority by accepting one’s own fallibility. Simply, people need to be blinded by knowledge... It has been more profitable for us to bind together in the wrong direction than to be alone in the right one.
• they cannot perform such simple mental operations as “he knows that I don’t know that I know,” and it is this inability that impedes their social skills. (Interestingly, autistic subjects, regardless of their “intelligence,” also exhibit an inability to comprehend uncertainty.)
• A true random system is in fact random and does not have predictable properties. A chaotic system has entirely predictable properties, but they are hard to know... In practice, randomness is fundamentally incomplete information... b) The mere fact that a person is talking about the difference implies that he has never made a meaningful decision under uncertainty—which is why he does not realize that they are indistinguishable in practice. <> Randomness, in the end, is just unknowledge.
• What you should avoid is unnecessary dependence on large-scale harmful predictions—those and only those. Avoid the big subjects that may hurt your future: be fooled in small matters, not in the large.
• I felt immediately at home in America is precisely because American culture encourages the process of failure, unlike the cultures of Europe and Asia where failure is met with stigma and embarrassment. America’s specialty is to take these small risks for the rest of the world,
• you need to put a portion, say 85 to 90 percent, in extremely safe instruments, like Treasury bills—as safe a class of instruments as you can manage to find on this planet. The remaining 10 to 15 percent you put in extremely speculative bets, as leveraged as possible (like options), preferably venture capital–style portfolios
• Indeed, the notion of asymmetric outcomes is the central idea of this book: I will never get to know the unknown since, by definition, it is unknown. However, I can always guess how it might affect me, and I should base my decisions around that... All you have to do is mitigate the consequences.
• The more I think about my subject, the more I see evidence that the world we have in our minds is different from the one playing outside. Every morning the world appears to me more random than it did the day before, and humans seem to be even more fooled by it than they were the previous day. It is becoming unbearable. I find writing these lines painful; I find the world revolting.
• Those who got a good push in the beginning of their scholarly careers will keep getting persistent cumulative advantages throughout life. It is easier for the rich to get richer, for the famous to become more famous. <> In sociology, Matthew effects bear the less literary name “cumulative advantage.”
• I have said that nobody is safe in Extremistan. This has a converse: nobody is threatened with complete extinction either. Our current environment allows the little guy to bide his time in the antechamber of success—as long as there is life, there is hope.
• Networks have a natural tendency to organize themselves around an extremely concentrated architecture: ... in electricity grids, in communications networks. This seems to make networks more robust: random insults to most parts of the network will not be consequential since they are likely to hit a poorly connected spot. But it also makes networks more vulnerable to Black Swans. Just consider what would happen if there is a problem with a major node.
• But I find the emphasis on economic inequality, at the expense of other types of inequality, extremely bothersome. Fairness is not exclusively an economic matter; it becomes less and less so when we are satisfying our basic material needs. It is pecking order that matters! The superstars will always be there. The Soviets may have flattened the economic structure, but they encouraged their own brand of übermensch. What is poorly understood, or denied (owing to its unsettling implications), is the absence of a role for the average in intellectual production.
• Just knowing that we are in a power-law environment does not tell us much. Why? Because we have to measure the coefficients in real life, which is much harder than with a Gaussian framework. Only the Gaussian yields its properties rather rapidly. The method I propose is a general way of viewing the world rather than a precise solution. <> Remember this: the Gaussian–bell curve variations face a headwind that makes probabilities drop at a faster and faster rate as you move away from the mean, while “scalables,” or Mandelbrotian variations, do not have such a restriction.
• Therefore, probabilities are dependent on history, and the first central assumption leading to the Gaussian bell curve fails in reality. In games, of course, past winnings are not supposed to translate into an increased probability of future gains—but not so in real life, which is why I worry about teaching probability from games... Second central assumption: no “wild” jump. The step size in the building block of the basic random walk is always known, namely one step. There is no uncertainty as to the size of the step. We did not encounter situations in which the move varied wildly.
• I could not find anyone with depth and scientific technique who looked at the world of randomness and understood its nature, who looked at calculations as an aid, not a principal aim. It took me close to a decade and a half to find that thinker, the man who made many swans gray: Mandelbrot—the great Benoît Mandelbrot.
• One person he often mentions is Baron Pierre Jean de Menasce, whom he met at Princeton in the 1950s, where de Menasce was the roommate of the physicist Oppenheimer. De Menasce was exactly the kind of person I am interested in, the embodiment of a Black Swan. He came from an opulent Alexandrian Jewish merchant family, French and Italian–speaking like all sophisticated Levantines. His forebears had taken a Venetian spelling for their Arabic name, added a Hungarian noble title along the way, and socialized with royalty. De Menasce not only converted to Christianity, but became a Dominican priest and a great scholar of Semitic and Persian languages.
• Now, why am I calling this business Mandelbrotian, or fractal, randomness? Every single bit and piece of the puzzle has been previously mentioned by someone else, such as Pareto, Yule, and Zipf, but it was Mandelbrot who a) connected the dots, b) linked randomness to geometry (and a special brand at that), and c) took the subject to its natural conclusion. Indeed many mathematicians are famous today partly because he dug out their works to back up his claims—the strategy I am following here in this book. “I had to invent my predecessors, so people take me seriously,” he once told me, and he used the credibility of big guns as a rhetorical device. One can almost always ferret out predecessors for any thought.
• We are either blind, or illiterate, or both. That nature’s geometry is not Euclid’s was so obvious, and nobody, almost nobody, saw it. <> This (physical) blindness is identical to the ludic fallacy that makes us think casinos represent randomness.
• Poetry: Emily Dickinson’s poetry, for instance, is fractal: the large resembles the small. It has, according to a commentator, “a consciously made assemblage of dictions, metres, rhetorics, gestures, and tones.” <> Fractals initially made Benoît M. a pariah in the mathematical establishment. French mathematicians were horrified. What? Images? Mon dieu!
• MBA programs, and producing close to a hundred thousand students a year in the United States alone, all brainwashed by a phony portfolio theory. No empirical observation could halt the epidemic. It seemed better to teach students a theory based on the Gaussian than to teach them no theory at all.
• Granted, the Gaussian has been tinkered with, using such methods as complementary “jumps,” stress testing, regime switching, or the elaborate methods known as GARCH, but while these methods represent a good effort, they fail to address the bell curve’s fundamental flaws. Such methods are not scale-invariant.
• Not only does an option on a very long shot benefit from Black Swans, but it benefits disproportionately from them—something Scholes and Merton’s “formula” misses. The option payoff is so powerful that you do not have to be right on the odds: you can be wrong on the probability, but get a monstrously large payoff. I’ve called this the “double bubble”: the mispricing of the probability and that of the payoff.
• Merton the younger: Looking at his methodology, I see the following pattern. He starts with rigidly Platonic assumptions, completely unrealistic—such as the Gaussian probabilities, along with many more equally disturbing ones. Then he generates “theorems” and “proofs” from these. The math is tight and elegant. The theorems are compatible with other theorems from Modern Portfolio Theory,... He seemed to be under the impression that traders rely on “rigorous” economic theory—as if birds had to study (bad) engineering in order to fly.
• Paul Samuelson, Merton’s tutor, and, in the United Kingdom, John Hicks. These two wrecked the ideas of John Maynard Keynes, which they tried to formalize (Keynes was interested in uncertainty, and complained about the mind-closing certainties induced by models).
• Medieval medicine was also based on equilibrium ideas when it was top-down and similar to theology. Luckily its practitioners went out of business, as they could not compete with the bottom-up surgeons, ecologically driven former barbers who gained clinical experience
• Coming from a practitioner background in which the principal asset is being able to work with messy, but empirically acceptable, mathematics, I cannot accept a pretense of science. I much prefer a sophisticated craft, focused on tricks, to a failed science looking for certainties... I want to be broadly right rather than precisely wrong. Elegance in the theories is often indicative of Platonicity and weakness—it invites you to seek elegance for elegance’s sake. A theory is like medicine (or government): often useless, sometimes necessary, always self-serving, and on occasion lethal. So it needs to be used with care, moderation, and close adult supervision.
• Werner Heisenberg in 1927. I find it ludicrous to present the uncertainty principle as having anything to do with uncertainty. Why? First, this uncertainty is Gaussian. On average, it will disappear—recall that no one person’s weight will significantly change the total weight of a thousand people. We may always remain uncertain about the future positions of small particles, but these uncertainties are very small and very numerous, and they average out—for Pluto’s sake, they average out! They obey the law of large numbers we discussed in Chapter 15. Most other types of randomness do not average out! If there is one thing on this planet that is not so uncertain, it is the behavior of a collection of subatomic particles!
• I am very aggressive when an error in a model can benefit me, and paranoid when the error can hurt. This may not be too interesting except that it is exactly what other people do not do. In finance, for instance, people use flimsy theories to manage their risks and put wild ideas under “rational” scrutiny... Half the time I am shallow, the other half I want to avoid shallowness. I am shallow when it comes to aesthetics; I avoid shallowness in the context of risks and returns. My aestheticism makes me put poetry before prose, Greeks before Romans, dignity before elegance, elegance before culture, culture before erudition, erudition before knowledge, knowledge before intellect, and intellect before truth. But only for matters that are Black Swan free. Our tendency is to be very rational, except when it comes to the Black Swan.