Risk

Why the events that matter most are the ones nobody foresaw

Why is it always the thing nobody saw coming that changes everything? A walk through the ideas in Nassim Nicholas Taleb's The Black Swan – Mediocristan and Extremistan, the turkey problem, the narrative fallacy – and what to actually do about it.

Back to the episode Arrow keys or swipe

What this covers

  1. What a black swan is, and what it is not
  2. Mediocristan and Extremistan – two kinds of randomness
  3. The turkey problem and the limits of induction
  4. The narrative fallacy – inventing causes after the fact
  5. Silent evidence, and why we only ever see the winners
  6. The ludic fallacy – why dice are a poor model for the world
  7. What to do in practice when you cannot forecast

What this covers (cont.)

  1. What the criticism amounts to

Two kinds of randomness

Taleb's most useful distinction. In Mediocristan, things follow the normal distribution: height, weight, calorie intake. Add the tallest human alive to a sample of a thousand and the average barely moves.

Two kinds of randomness

Mediocristan

Normally distributed

  • Height, weight, calorie intake
  • No single value shifts the average appreciably
  • The tallest human alive, in a sample of a thousand, changes almost nothing
  • Standard deviation and risk models work

Extremistan

A few decide everything

  • Wealth, book sales, returns, epidemics
  • One value can dominate the whole sample
  • Add Bezos to the same sample and the average is useless
  • The same tools give false confidence
The mistake is not using models. It is using Mediocristan's models on something that belongs in Extremistan – and then believing the numbers mean something.

The turkey problem

A turkey is fed every day for a thousand days. With each day it has more statistical evidence that humans are benevolent. Its confidence peaks the day before Thanksgiving.

Why we think we could have seen it

What to do in practice

Taleb is clear that the answer is not to become a better forecaster. It is to arrange things so you can survive the unforeseen – and ideally profit from it:

The criticism

The book is polemical, repetitive and generous with contempt for economists, forecasters and other authors. That makes it tiring, and makes it easy to dismiss a point that is actually good.

Key points

  • A black swan is rare, has enormous consequences, and looks obvious in hindsight.
  • Some domains follow the normal distribution. Others do not, and there the average is meaningless.
  • The turkey has a thousand days of evidence that humans are kind. Then Thanksgiving arrives.
  • We construct explanations afterwards and believe we could have seen it coming. We could not.

Key points (cont.)

  • The aim is not to forecast better, but to arrange things so you can survive being wrong.

Questions this answers

  • What is a black swan?
  • What is the difference between Mediocristan and Extremistan?
  • What is the turkey problem?
  • Why are forecasts so unreliable?
  • What is the narrative fallacy?
  • How do you prepare for something you cannot foresee?

Questions this answers (cont.)

  • What is the criticism of The Black Swan?

Sources

  • Nassim Nicholas Taleb – The Black Swan (2007, expanded 2010)

Spørretimen

Read the whole thing at

www.sporretimen.no/en/episodes/black-swan/