The Black Swan

by Nassim Nicholas Taleb

  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 clingier he got, the more stifled Yevgenia felt, which made him even clingier. 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.

  Bleed or Blowup

  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 c
ontrived: 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.

  Chapter Eight

  GIACOMO CASANOVA’S UNFAILING LUCK: THE PROBLEM OF SILENT EVIDENCE

  The Diagoras problem—How Black Swans make their way out of history books—Methods to help you avoid drowning—The drowned do not usually vote—We should all be stockbrokers—Do silent witnesses count?—Casanova’s étoile—New York is “so invincible”

  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 rente
d 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.