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?