A SOCIETY ROBUST TO ERROR
I will only very briefly discuss the crisis of 2008 (which took place after the publication of the book, and which was a lot of things, but not a Black Swan, only the result of fragility in systems built upon ignorance—and denial—of the notion of Black Swan events. You know with near certainty that a plane flown by an incompetent pilot will eventually crash).
Why briefly? Primo, this is not an economics book, but a book on the incompleteness of knowledge and the effects of high-impact uncertainty—it just so happens that economists are the most Black-Swan-blind species on the planet. Secundo, I prefer to talk about events before they take place, not after. But the general public confuses the prospective with the retrospective. The very same journalists, economists, and political experts who did not see the crisis coming provided abundant ex-post analyses about its inevitability. The other reason, the real one, is that the crisis of 2008 was not intellectually interesting enough to me—there is nothing in the developments that had not happened before, at a smaller scale (for example, banks losing in 1982 every penny they ever made). It was merely a financial opportunity for me, as I will discuss further down. Really, I reread my book and saw nothing to add to the text, nothing we had not already encountered at some point in history, like the earlier debacles, nothing I had learned from. Alas, nothing.
The corollary is obvious: since there is nothing new about the crisis of 2008, we will not learn from it and we will make the same mistake in the future. And the evidence is there at the time of writing: the IMF continues to issue forecasts (not realizing that previous ones did not work and that the poor suckers relying on them are—once again—going to get in trouble); economics professors still use the Gaussian; the current administration is populated with those who are bringing model error into industrial proportion, making us rely on models even more than ever before.*
But the crisis provides an illustration for the need for robustness, worth discussing here.
Over the past twenty-five hundred years of recorded ideas, only fools and Platonists (or, worse, the species called central bankers) have believed in engineered utopias. We will see in the section on the Fourth Quadrant that the idea is not to correct mistakes and eliminate randomness from social and economic life through monetary policy, subsidies, and so on. The idea is simply to let human mistakes and miscalculations remain confined, and to prevent their spreading through the system, as Mother Nature does. Reducing volatility and ordinary randomness increases exposure to Black Swans—it creates an artificial quiet.
My dream is to have a true Epistemocracy—that is, a society robust to expert errors, forecasting errors, and hubris, one that can be resistant to the incompetence of politicians, regulators, economists, central bankers, bankers, policy wonks, and epidemiologists. We cannot make economists more scientific; we cannot make humans more rational (whatever that means); we cannot make fads disappear. The solution is somewhat simple, once we isolate harmful errors, as we will see with the Fourth Quadrant.
So I am currently torn between (a) my desire to spend time mulling my ideas in European cafés and in the tranquility of my study, or looking for someone who can have a conversation while walking slowly in a nice urban setting, and (b) the feeling of obligation to engage in activism to robustify society, by talking to uninteresting people and being immersed in the cacophony of the unaesthetic journalistic and media world, going to Washington to watch phonies in suits walking around the streets, having to defend my ideas while making an effort to be smooth and hide my disrespect. This proved to be very disruptive to my intellectual life. But there are tricks. One useful trick, I discovered, is to avoid listening to the question of the interviewer, and answer with whatever I have been thinking about recently. Remarkably, neither the interviewers nor the public notices the absence of correlation between question and answer.
I was once selected to be one of a group of a hundred who went to Washington to spend two days discussing how to solve the problems of the crisis that started in 2008. Almost all the biggies were included. After an hour of meeting, and during a speech by the prime minister of Australia, I walked out of the room because my pain became intolerable. My back would start hurting upon looking at the faces of these people. The center of the problem is that none of them knew the center of the problem.
This makes me convinced that there is a unique solution for the world, to be designed along very simple lines of robustness to Black Swans—it will explode otherwise.
So now I am disengaged. I am back in my library. I am not even experiencing any frustration, I don’t even care about how forecasters can blow up society, and I am not even capable of being annoyed by fools of randomness (to the contrary), perhaps thanks to another discovery linked to a particular application of the study of complex systems, Extremistan, and that science of long walks.
* Lehman Brothers was a financial institution with great-looking offices that abruptly went bust during the crisis of 2008.
* Empiricism is not about not having theories, beliefs, and causes and effects: it is about avoiding being a sucker, having a decided and preset bias about where you want your error to be—where the default is. An empiricist facing series of facts or data defaults to suspension of belief (hence the link between empiricism and the older skeptical Pyrrhonian tradition), while others prefer to default to a characterization or a theory. The entire idea is to avoid the confirmation bias (empiricists prefer to err on the side of the disconfirmation/falsification bias, which they discovered more than fifteen hundred years before Karl Popper).
* Clearly the entire economics establishment, with about a million people on the planet involved in some aspect of economic analysis, planning, risk management, and forecasting, turned out to be turkeys owing to the simple mistake of not understanding the structure of Extremistan, complex systems, and hidden risks, while relying on idiotic risk measures and forecasts—all this in spite of past experience, as these things have never worked before.
II
WHY I DO ALL THIS WALKING, OR HOW SYSTEMS BECOME FRAGILE
Relearn to walk—Temperance, he knew not—Will I catch Bob Rubin? Extremistan and Air France travel
ANOTHER FEW BARBELLS
Again, thanks to the exposure the book has received, I was alerted to a new aspect of robustness in complex systems … by the most unlikely of sources. The idea came from two fitness authors and practitioners who integrated the notions of randomness and Extremistan (though of the Gray Swan variety) into our understanding of human diet and exercise. Curiously, the first person, Art De Vany, is the same one who studied Extremistan in the movies (in Chapter 3). The second, Doug McGuff, is a physician. And both can talk about fitness, particularly Art, who, at seventy-two, looks like what a Greek god would like to look like at forty-two. Both were referring to the ideas of The Black Swan in their works and connecting to it; and I had no clue.
I then discovered to my great shame the following. I had spent my life thinking about randomness; I had written three books on dealing with randomness (one technical); I was prancing about as the expert in the subject of randomness from mathematics to psychology. And I had missed something central: living organisms (whether the human body or the economy) need variability and randomness. What’s more, they need the Extremistan type of variability, certain extreme stressors. Otherwise they become fragile. That, I completely missed.*
Organisms need, to use the metaphor of Marcus Aurelius, to turn obstacles into fuel—just as fire does.
Brainwashed by the cultural environment and by my education, I was under the illusion that steady exercise and steady nutrition were a good thing for one’s health. I did not realize that I was falling into evil rationalistic arguments, the Platonic projection of wishes into the world. Worse, I had been brainwashed though I had all the facts in my head.
From predator-prey models (the so-called Lotka-Volterra type of population dynamics), I knew that populations will experience Extremistan-style variabilit
y, hence predators will necessarily go through periods of feast and famine. That’s us, humans—we had to have been designed to experience extreme hunger and extreme abundance. So our food intake had to have been fractal. Not a single one of those promoting the “three meals a day,” “eat in moderation” idea has tested it empirically to see whether it is healthier than intermittent fasts followed by large feasts.†
But Near Eastern religions (Judaism, Islam, and Orthodox Christianity) knew it, of course—just as they knew the need for debt avoidance—and so they had fast days.
I also knew that the size of stones and trees was, up to a point, fractal (I even wrote about that in Chapter 16). Our ancestors mostly had to face very light stones to lift, mild stressors; once or twice a decade, they encountered the need to lift a huge stone. So where on earth does this idea of “steady” exercise come from? Nobody in the Pleistocene jogged for forty-two minutes three days a week, lifted weights every Tuesday and Friday with a bullying (but otherwise nice) personal trainer, and played tennis at eleven on Saturday mornings. Not hunters. We swung between extremes: we sprinted when chased or when chasing (once in a while in an extremely exerting way), and walked about aimlessly the rest of the time. Marathon running is a modern abomination (particularly when done without emotional stimuli).
This is another application of the barbell strategy: plenty of idleness, some high intensity. The data shows that long, very long walks, combined with high-intensity exercise outperform just running.
I am not talking about “brisk walks” of the type you read about in the Health section of The New York Times. I mean walking without making any effort.
What’s more, consider the negative correlation between caloric expenditure and intake: we hunted in response to hunger; we did not eat breakfast to hunt, hunting accentuated our energy deficits.
If you deprive an organism of stressors, you affect its epigenetics and gene expression—some genes are up-regulated (or down-regulated) by contact with the environment. A person who does not face stressors will not survive should he encounter them. Just consider what happens to someone’s strength after he spends a year in bed, or someone who grows up in a sterile environment and then one day takes the Tokyo subway, where riders are squeezed like sardines.
Why am I using evolutionary arguments? Not because of the optimality of evolution, but entirely for epistemological reasons, how we should deal with a complex system with opaque causal links and complicated interactions. Mother Nature is not perfect, but has so far proven smarter than humans, certainly much smarter than biologists. So my approach is to combine evidence-based research (stripped of biological theory), with an a priori that Mother Nature has more authority than anyone.
After my “Aha!” flash, I embarked on an Extremistan barbell lifestyle under the guidance of Art De Vany: long, very long, slow, meditative (or conversational) walks in a stimulating urban setting, but with occasional (and random) very short sprints, during which I made myself angry imagining I was chasing the bankster Robert Rubin with a big stick, trying to catch him and bring him to human justice. I went to weight-lifting facilities in a random way for a completely stochastic workout—typically in hotels, when I was on the road. Like Gray Swan events, these were very, very rare, but highly consequential weight-lifting periods, after a day of semistarvation, leaving me completely exhausted. Then I would be totally sedentary for weeks and hang around cafés. Even the duration of the workouts remained random—but most often very short, less than fifteen minutes. I followed the path that minimized boredom, and remained very polite with gym employees who described my workouts as “erratic.” I put myself through thermal variability as well, exposed, on occasion, to extreme cold without a coat. Thanks to transcontinental travel and jet lag, I underwent periods of sleep deprivation followed by excessive rest. When I went to places with good restaurants, for instance Italy, I ate in quantities that would have impressed Fat Tony himself, then skipped meals for a while without suffering. Then, after two and a half years of this apparently “unhealthy” regimen, I saw significant changes in my own physique on every possible criterion—the absence of unnecessary adipose tissue, the blood pressure of a twenty-one-year-old, and so on. I also have a clearer, much more acute mind.
So the main idea is to trade duration for intensity—for a hedonic gain. Recall the reasoning I presented in Chapter 6 about hedonic effects. Just as people prefer large but sudden losses to small but regular ones, just as one becomes dulled to pain beyond a certain threshold, so unpleasant experiences, like working out without external stimuli (say in a gym), or spending time in New Jersey, need to be as concentrated and as intense as possible.
Another way to view the connection to the Black Swan idea is as follows. Classical thermodynamics produces Gaussian variations, while informational variations are from Extremistan. Let me explain. If you consider your diet and exercise as simple energy deficits and excesses, with a straight calorie-in, calorie-burned equation, you will fall into the trap of misspecifying the system into simple causal and mechanical links. Your food intake becomes the equivalent of filling up the tank of your new BMW. If, on the other hand, you look at food and exercise as activating metabolic signals, with potential metabolic cascades and nonlinearities from network effects, and with recursive links, then welcome to complexity, hence Extremistan. Both food and workouts provide your body with information about stressors in the environment. As I have been saying throughout, informational randomness is from Extremistan. Medicine fell into the trap of using simple thermodynamics, with the same physics envy, and the same mentality, and the same tools as economists did when they looked at the economy as a web of simple links.* And both humans and societies are complex systems.
But these lifestyle ideas do not come from mere self-experimentation or some quack theory. All the results were completely expected from the evidence-based, peer-reviewed research that is available. Hunger (or episodic energy deficit) strengthens the body and the immune system and helps rejuvenate brain cells, weaken cancer cells, and prevent diabetes. It was just that the current thinking—in a way similar to economics—was out of sync with the empirical research. I was able to re-create 90 percent of the benefits of the hunter-gatherer lifestyle with minimal effort, without compromising a modern lifestyle, in the aesthetics of an urban setting (I get extremely bored in nature and prefer walking around the Jewish quarter of Venice to spending time in Bora Bora).*
By the same argument we can lower 90 percent of Black Swan risks in economic life … by just eliminating speculative debt.
The only thing currently missing from my life is panic, from, say, finding a gigantic snake in my library, or watching the economist Myron Scholes, armed to the teeth, walk into my bedroom in the middle of the night. I lack what the biologist Robert Sapolsky calls the beneficial aspect of acute stress, compared to the deleterious one of dull stress—another barbell, for no stress plus a little bit of extreme stress is vastly better than a little bit of stress (like mortgage worries) all the time.
Some have argued that my health benefits come from long walks, about ten to fifteen hours a week (though nobody has explained to me why they would count as workouts since I walk slowly), while others claim that they come from my few minutes of sprinting; I’ve had the same problem explaining the inseparability of the two extremes as I did explaining economic deviations. If you have acute stressors, then periods of rest, how can you separate the stressors from the recovery? Extremistan is characterized by both polar extremes, a high share of low impact, a low share of high impact. Consider that the presence of concentration, here energy expenditure, necessitates that a high number of observations do not contribute to anything except to the dilution. Just as the condition that makes market volatility explained by bursts (say one day in five years represents half the variance) requires that most other days remain exceedingly quiet. If one in a million authors makes half the sales, you need a lot of authors to sell no books.
This is the turkey tra
p I will discuss later: philistines (and Federal Reserve chairpersons) mistake periods of low volatility (caused by stabilization policies) for periods of low risk, not for switches into Extremistan.
Welcome to Gray Extremistan. Do not tamper too much with the complex system Mother Nature gave you: your body.
Beware Manufactured Stability
By a variant of the same reasoning we can see how the fear of volatility I mentioned earlier, leading to interference with nature so as to impose “regularity,” makes us more fragile across so many domains. Preventing small forest fires sets the stage for more extreme ones; giving out antibiotics when it is not very necessary makes us more vulnerable to severe epidemics—and perhaps to that big one, the grand infection that will be resistant to known antibiotics and will travel on Air France.
Which brings me to another organism: economic life. Our aversion to variability and desire for order, and our acting on those feelings, have helped precipitate severe crises. Making something artificially bigger (instead of letting it die early if it cannot survive stressors) makes it more and more vulnerable to a very severe collapse—as I showed with the Black Swan vulnerability associated with an increase in size. Another thing we saw in the 2008 debacle: the U.S. government (or, rather, the Federal Reserve) had been trying for years to iron out the business cycle, leaving us exposed to a severe disintegration. This is my argument against “stabilization” policies and the manufacturing of a nonvolatile environment. More on that, later. Next, I will discuss a few things about the Black Swan idea that do not appear to easily penetrate consciousness. Predictably.
The Black Swan Page 41
