The Black Swan: The Impact of the Highly Improbable

The postcrash years were entertaining for me, intellectually. I attended conferences in finance and mathematics of uncertainty; not once did I find a speaker, Nobel or no Nobel, who understood what he was talking about when it came to probability, so I could freak them out with my questions. They did “deep work in mathematics,” but when you asked them where they got their probabilities, their explanations made it clear that they had fallen for the ludic fallacy—there was a strange cohabitation of technical skills and absence of understanding that you find in idiot savants. Not once did I get an intelligent answer or one that was not ad hominem. Since I was questioning their entire business, it was understandable that I drew all manner of insults: “obsessive,” “commercial,” “philosophical,” “essayist,” “idle man of leisure,” “repetitive,” “practitioner” (this is an insult in academia), “academic” (this is an insult in business). Being on the receiving end of angry insults is not that bad; you can get quickly used to it and focus on what is not said. Pit traders are trained to handle angry rants. If you work in the chaotic pits, someone in a particularly bad mood from losing money might start cursing at you until he injures his vocal cords, then forget about it and, an hour later, invite you to his Christmas party. So you become numb to insults, particularly if you teach yourself to imagine that the person uttering them is a variant of a noisy ape with little personal control. Just keep your composure, smile, focus on analyzing the speaker not the message, and you’ll win the argument. An ad hominem attack against an intellectual, not against an idea, is highly flattering. It indicates that the person does not have anything intelligent to say about your message.

The psychologist Philip Tetlock (the expert buster in Chapter 10), after listening to one of my talks, reported that he was struck by the presence of an acute state of cognitive dissonance in the audience. But how people resolve this cognitive tension, as it strikes at the core of everything they have been taught and at the methods they practice, and realize that they will continue to practice, can vary a lot. It was symptomatic that almost all people who attacked my thinking attacked a deformed version of it, like “it is all random and unpredictable” rather than “it is largely random,” or got mixed up by showing me how the bell curve works in some physical domains. Some even had to change my biography. At a panel in Lugano, Myron Scholes once got in to a state of rage, and went after a transformed version of my ideas. I could see pain in his face. Once, in Paris, a prominent member of the mathematical establishment, who invested part of his life on some minute sub-sub-property of the Gaussian, blew a fuse—right when I showed empirical evidence of the role of Black Swans in markets. He turned red with anger, had difficulty breathing, and started hurling insults at me for having desecrated the institution, lacking pudeur (modesty); he shouted “I am a member of the Academy of Science!” to give more strength to his insults. (The French translation of my book was out of stock the next day.) My best episode was when Steve Ross, an economist perceived to be an intellectual far superior to Scholes and Merton, and deemed a formidable debater, gave a rebuttal to my ideas by signaling small errors or approximations in my presentation, such as “Markowitz was not the first to …” thus certifying that he had no answer to my main point. Others who had invested much of their lives in these ideas resorted to vandalism on the Web. Economists often invoke a strange argument by Milton Friedman that states that models do not have to have realistic assumptions to be acceptable—giving them license to produce severely defective mathematical representations of reality. The problem of course is that these Gaussianizations do not have realistic assumptions and do not produce reliable results. They are neither realistic nor predictive. Also note a mental bias I encounter on the occasion: people mistake an event with a small probability, say, one in twenty years for a periodically occurring one. They think that they are safe if they are only exposed to it for ten years.

I had trouble getting the message about the difference between Medioc-ristan and Extremistan through—many arguments presented to me were about how society has done well with the bell curve—just look at credit bureaus, etc.