According to Nassim Nicholas Taleb, "black swans"—totally unforeseeable events like 9/11—are on the rise. Is it possible to improve our predictions, or should we simply accept what we don't know?by Tom Nuttall / August 1, 2007 / Leave a comment
Published in August 2007 issue of Prospect Magazine
The Black Swan, by Nassim Nicholas Taleb
(Allen Lane, £20)
The Political Punter: How to make money betting on politics, by Mike Smithson
(Harriman House, £12.99)
The black swan was the example used by John Stuart Mill to illustrate the problem of induction in the philosophy of science, which states that no amount of empirical evidence for a proposition can ever prove conclusively that it is true.
For hundreds of years, zoologists assumed that all swans were white, because they had never seen any evidence to the contrary. But then with the discovery of Australia came the sighting of a black swan. Nassim Nicholas Taleb, in his book of the same name, has a more specific definition—for him, a “black swan” is an event that meets three conditions: a) it was unpredictable b) it had a big impact and c) after the event, we tried to explain it and make it appear more predictable than it actually was. The rise of Google is one example; 9/11 is another.
Taleb believes the modern world increasingly resembles a fantasy realm he calls “Extremistan,” where inequality, unexpectedness and improbability rule, and where black swans happen. Extremistan is home to “winner-takes-all” activities—from publishing and academic citations to modern warfare and income. But most statisticians and economists believe that the world is more like “Mediocristan”—an orderly and predictable place where most events follow a bell curve-like distribution on a graph. Taleb’s mission is to demonstrate that many of the models we use to understand the world are based on the mistaken assumption that we live in Mediocristan rather than Extremistan. Corporations produce grand strategies for future growth, forgetting that their most profitable activity arose from a chance phone call made a year earlier. Financial analysts build sophisticated models…