Photo credit: Geoff Oliver Bugbee / www.geoffbugbee.com
For Nicholas Nassim Taleb, a "Black Swan" carries "massive consequences" and cannot be predicted.
The computer is a true Black Swan, for example. This tool used to decrypt WW II messages, no one believed it had a future. But one unintended use, for word processing, moved it into the mainstream.
Emerging from defense research, the Internet is another Black Swan.
One cannot predict history beyond a short time horizon. It might be useful to be able to predict war. But tension does not necessarily lead to war, but often to peace and to denouement.
"Overcausation" is one reason, he believes, that we get the future wrong. We forget all the times when anomalies didn't lead to a remarkable event and remember the one unusual event that did.
In contrast Wall Street Bankers, "peasants know they can't predict the future." Retrospectives on banking collapses are analyzed in theory. Theory gets it wrong.
"Mediocristan" and "Extremistan" are two world domains. In the former, extremes exist but are inconsequential, in the latter, extremes are not expected, but play a massive role. In the former, the ordinary plays a massive role. In the latter, one's wealth can change massively in a second.
In book sales, the exception dominates. A handful of titles will represent half of all sales. "It's winner take almost-all." Music is one industry that has moved from Mediocristan to Extremistan thanks to technology. "Pavarotti can sing even though he's dead."
In sports, top athletes make 40 times what the average pro athlete makes.
Another example: a turkey's view being of fed every day doesn't correspond with reality. The butcher is not acting in his best interests. For the Turkey, Thanksgiving is a Black Swan. For the butcher, it's a predictable event.
Now for Wall Street. All of us will pay for the losses, we will finance the losses because of a huge misunderstanding of our home: Extremistan. The tools we have to understand what's happening on Wall St. were developed over the last couple of centuries.
We need new tools.
Ben Bernanke wrote a paper called "The Great Moderation" that suggested we understood risk and could manage it, even as the Street was accumulated great, great risk.
The Problem of Experts
Knowing who the fake experts will make us better off. How: by comparing "expert" predictions to those a cab driver. And in fact, he says, the predictions of financial experts collectively do worse than cab drivers.
"We have a problem with forecasting." Anything related to Extremistan will be problematic." He adds that we should ban spreadsheets in Washington because they oversimplify things.
Using the illustration of dice roller, who throw harder when he wants a high number, "we have illusions of control."
- Never take a forecast from anyone wearing a tie.
- Short time forecasts work. A five year forecast is one million times more likely to be wrong than a one month forecast. Resist long term forecasts.
- Age confers experience rather than theories. Listen to age.