Fat people & billionaires

Before the storm that we neither predicted nor prepared for

I started reading Nicholas Taleb’s The Black Swan in May last year.  I took it to the Delfest music festival where we’d been promised bluegrass and sunshine.  A hurricane tore down the camp and flooded the fields.  The book sank in the swamp, was bravely rescued, and has since dried out.  I started reading it again the other day.

Taleb’s central thesis is that we are much worse at predicting events than we think we are.  In fact we massively overestimate our capacity for prediction.Imagine  a thousand people in a stadium.  If we measured what percentage of the total the heaviest person weighs it would be a tiny percentage, right? Now imagine this time measuring not weight but net worth.  The richest person could be a massive percentage of the total.  In the first scenario, a rare event – a very very fat person – is nevertheless tiny in relation to the total.  In the second scenario, a rare event – a very very rich person – can be huge in relation to the total.

This has implications for our ability to make predictions.  Say you didn’t want to weigh every one of the thousand people but you did want to know their average weight.  You could start weighing people and stop when you’d done one hundred and you’d be able to make a pretty safe prediction about the average.  Even if person 101, or 999, was exceptionally fat your guess wouldn’t be out by much.  But if you wanted to know the average net worth you’d be a fool to stop at person 100, because somewhere amongst the other 900 Bill Gates might be lurking.

Mediocristan vs. Extremistan

Scenario one belongs to a world that Taleb describes as Mediocristan.  Number sets in Mediocristan fall on a bell curve and they include things like weight and height or the income of a baker or a small restaurant owner.  In Mediocristan things are non-scalable; however hard the baker works the difference between the number of buns he makes on a great day versus a bad day will not be dramatic.  One option if he was dissatisfied with that state of affairs would be to create a franchise of his bakery.  And here we enter the territory of the second scenario that Taleb calls Extremistan.  In Extremistan things are scalable.  Extremistan includes things like wealth, book sales or academic citations.  The baker – living in Mediocristan – will make about the same number of buns every day for about the same level of effort.  A musician, by contrast, lives in Extremistan.  He could churn out record after record that nobody listens to and, without a corresponding increase in the effort he expends, one day he could make a hit record that sells ten million copies.

More of the world can be described using the Extremistan label than the Mediocristan label.  Almost all social matters, or anything that is informational as opposed to physical, can be described as scalable and so as belonging to Extremistan.  Not only is the list of things that we can categorize as belonging to Extremistan longer than the Mediocristan list, but today it is longer than it has ever been.   Technology is of course key to this.  When we are more connected we can generate more accentuated winner-takes-all effects.  The less we are constrained by the physical the more we can scale.  Once upon a time musicians weren’t scalable, they had to be in the same room as their audience.  Once upon a time bookstores were limited by how many books they could keep on their shelves.

A more uncertain world

Today we are far more likely to encounter scenarios like the  net worth calculation than the weight calculation (because today we live in Extremistan).  The world is more uncertain and more prone to game changing events than we like to think.

“Measures of uncertainty that are based on the bell curve simply disregard the possibility, and the impact, of sharp jumps of discontinuities and are, therefore, inapplicable in Extremistan.  Using them is like focusing on the grass and missing out on the (gigantic) trees.  Although large deviations are rare, they cannot be dismissed as outliers because, cumulatively, their impact is so dramatic.”

In a previous post I touched on some of these ideas.  I said, pretentiously, that we live in Exponential Times.  I’m attracted to the idea that we live in a world of rapid rises and steep declines: a Long Tail world where, yes, blockbusters still happen, but where the ability of an organization, institution, business or politician to take for granted their position at the top is seriously undermined by uncertainty – by the possibility for churn at the head of that long tail.  It’s more possible than it has been in the past for rivals to spring from nowhere and steal your crown.  Or, more excitingly, to disrupt your entire market by destroying long held assumptions.

Taleb’s advice is that instead of investing in trying to predict the next problem we should invest in preparedness.

Which I think is going to be the topic of my next post.  Any thoughts?

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4 thoughts on “Fat people & billionaires”

  1. Really great write up dude. I have seen this book popping up on my radar and I’m totally going to order it on Amazon now.

    I feel like my craft has bottlenecked me into the Mediocristan category. What I do is largely service-based and very boutique. I need to make the jump to an Extremistan-based self-economy. Now it’s on.

    1. Thanks Cesar. Yeah, that’s the challenge for a lot of freelancers, right? But also consultancies like mine. It’s of course not necessarily a bad thing as long as you recognize it’s the case.

  2. A word on predictions:
    Making predictions isn’t as hard as you suggest. It is simply about selecting what to predict. Take your stadium of a thousand people, I could quite easily and almost certainly correctly predict that most of the people in the stadium don’t posess 7 figure finances.

    Of course some may do, and you may ask me to predict whom. This is clearly a little harder. Nevertheless, not impossible, the mega rich would almost certainly be male. Anyone who has ever looked at a rich list couldn’t help but notice the predominance of men. In addition, stadiums are hierarchical. Just like the people that occupy them, the seats are not all equal. And thirdly if it is Bill Gates you need only look at him! A seemingly impossible challenge can therefore become very achievable by observing rather than simply looking. Oh and if you were wondering whether I have been reading about Sir Arthur Conan-Doyles most famous character recently, the answer is yes.

    An extremistan world:
    “I’m attracted to the idea that we live in a world of rapid rises and steep declines”. Although I to am attracted to this World (anyone who can dream should be), I also fear it. I don’t fear for companies but for individuals. Companies are artificial creations, they don’t have thoughts, they don’t have a concept of their own identity. Marketing and promotions departments impose an identity upon the company, this identity can be shaped, resahped the shaped again. And this is fine, a flexible company can survive in rapidly changing environments.

    However, people are very different, we are real, our identities cannot so easily be reshaped without losing ourselves. Stability by its very nature isn’t exciting but that doesn’t mean it isn’t important. Our World of rapid rises and steep declines, is also a world of increasing mental illness. An unstable world breeds unstable people, by creating a bi-polar world, we inevitably create bi-polar people. For some change is fantastic and exciting but to others is is disconcerting, they require, order, routine and predictability.
    Whilst our new World may have greater pottential and opportunity for some it also has greater uncertainty and anxiety for others.

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