Tuesday, August 11, 2009

The Black Swan: The Impact of the Highly Improbable

Back in high school, before I found out that it was fashionable to categorize my reading style as Marxist, feminist, reader-response etc., I only had one way of reading—and it was a good one. Each book was treated as a potential vehicle that might illuminate the ecstatic secrets of the universe. This was an exciting way to approach texts. Potentially, the pages of each Goodwill paperback held the unknown clue that might finally help me to make sense of my moody adolescent reality. Of course, this meant that just about every book was a major letdown, and the ones that weren’t were filled with superstition and lies. But no matter. This unfounded faith in books was a helpful delusion, because it pushed me to explore beyond the dogmas of my formal Bible-belt education.

I should know better by now, but I sometimes still get sucked in by high hopes. My only excuse is the blurbs on the back covers of books. When I picked up the book The Black Swan: The Impact of the Highly Improbable at the library, the back cover screamed its greatness. “A masterpiece,” said Chris Anderson, the editor in chief of Wired magazine. “There’s more about the ways of the real world between the covers of The Black Swan than in the contents of a dozen libraries,” said Tom Peters, an author I’ve never heard of. Immediately, my high school hope returned. Maybe this book is finally the one! Finally, I’ll be able to understand the world!

I had some further justification for checking out this book; it’s the latest stand-in for my recent interest in Wall Street dynamics. (Really, who isn’t interested in those evildoers these days?) The author, Nassim Nicholas Taleb, was an active trader for many years, and in a recent interview he mentioned that during our current recession he made seven-figure annual gains. Interesting guy, I thought. He might be able to help me understand how the economic hit-men actually think. Additionally, I hoped to learn something about the economic theories themselves by reading his criticisms of them.

Just like always, the book was a slight disappointment. But that’s only because I expected to learn about modern economics (along with the ecstatic secrets of the universe). If I would have walked in expecting a guidebook on How To Be a N. N. Taleb, then I probably would have left more than satisfied.

The prologue and the first chapter should have showed me that this wasn’t the book I had signed on for. The prologue succinctly explains the book’s central metaphor. “Before the discovery of Australia,” writes Taleb in the book’s first words, “people in the Old World were convinced that all swans were white, an unassailable belief as it seemed completely confirmed by empirical evidence. The sighting of the first black swan might have been an interesting surprise for a few ornithologists […] but that is not where the significance of our story lies. It illustrates 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.” (p. xvii)

Which gives you the book in a nutshell. Taleb’s main argument is that the really important events, the game-changers both for economics and for history in general, are those that are necessarily outside of current predictions—otherwise, they wouldn’t come as a shock. The central philosophical notion here is that the outlier is the central fact of human history, a thing to be pondered and not ignored. The book beats this idea into the reader’s head over and over and over and over and over. ‘Black Swans’ are the unpredictable (“epistemically unknowable”) events that constantly pop up in contradiction to ‘Platonic’ theories of the world, and by the end of the book so many things have been categorized as Black Swans that I began to wonder if this term is meaningful enough to be used by anyone other than Taleb himself.

But the whole book isn’t spent in pondering Black Swans. Just as much space is spent enumerating reasons why people can’t seem to understand that uncertainty is something that must be lived with. The main reason, it seems, is that most economists, sad to say, are nerds. That’s right: nerds. So in the first chapter, “The Apprenticeship of an Empirical Skeptic,” Taleb presents the intellectual biography—autobiography, in fact—of an exemplary non-nerd: N. N. Taleb. He discusses the unexpected downfall of Lebanon, where he grew up, labels it as a Black Swan (go figure), and uses it to illuminate his theory of history—which, as far as I can make it out, is that no one really understands root causes; justifications are only added afterwards, when people use narratives to reduce the amount of information they need to remember. In this chapter, we get our first glimpse of Taleb the rebel, who eventually will be the self-styled hero of the book.

The first of these ideas—that a single ‘Black Swan’ can knock out any number of White Swan theories—is a good one, but I had a hard time getting very excited about it. It’s not Taleb’s idea, after all. Not that he claims it as his own; Karl Popper is given credit where credit is due. (Then again, as a physics student, I might come upon this way of thinking more often than most people. It would probably be interesting to the business-minded target audience that hasn’t read much academic philosophy.) The book also nicely catalogues a lot the standard issues that rigorous data interpreters need to face: silent evidence, infinite possible curves that fit a finite number of data points, even some basic chaos theory. But when Taleb moves on to his rhetorical tack of attacking all others who do not act as he does, I found it less convincing.

Here, I need to be careful; philosophers are quick to spot an ad hominem attack. However, Taleb so thoroughly makes himself a part of the book that it is difficult to separate him from the ideas themselves. A basic template: 1. Taleb, our hero, goes to a group of philosophers and tries to tell them how fucked their predictions are, due to Black Swans (see, “Lunch at Lake Como,” p. 125); 2. The traders and military folk—those who deal in the ‘real world’—listen receptively to his message, while the academics wistfully continue to scratch themselves (see, “How Many Wittgensteins Can Dance on the Head of a Pin?”, p. 289); 3. Taleb makes fools out of all those silly mathematicians, who suffer from too much nerdiness (see, “To Be Wrong with Infinite Precision”, p. 74).

I suppose that most of this is true; certainly, most professors cannot play the market like a Taleb. And, undoubtedly, he’s a very smart dude—e.g., before reading this, I’d never thought of Pascal’s Wager as a good paradigm for stock risk management, but, then, look at Taleb’s seven-figure returns. But the thing that keeps nagging me as I think about this book is my excited, high school self, hoping that the next page will bring some ecstatic wisdom. This book doesn’t do that. It just gave me more evidence that no one knows what’s really going on, anywhere. With my utter lack of economic knowledge going in, my default belief was that it was all bull, making the book less revealing for me than it might be for others. As a follow-up, I’m reading a book on investing entitled Taking Stock. It gives advice on how the markets work in brief, pithy quotations. The introduction is called, “Why You Need This Book.” Even while I know that it’s probably filled with superstition and lies, it’ll probably be a little more comforting than continuing to stare at that grand old abyss of human ignorance.

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