The Black Swan: The Impact of the Highly Improbable

Matters that seem to belong to Mediocristan (subjected to what we call type 1 randomness): height, weight, calorie consumption, income for a baker, a small restaurant owner, a prostitute, or an orthodontist; gambling profits (in the very special case, assuming the person goes to a casino and maintains a constant betting size), car accidents, mortality rates, “IQ” (as measured).

Matters that seem to belong to Extremistan (subjected to what we call type 2 randomness): wealth, income, book sales per author, book citations per author, name recognition as a “celebrity,” number of references on Google, populations of cities, uses of words in a vocabulary, numbers of speakers per language, damage caused by earthquakes, deaths in war, deaths from terrorist incidents, sizes of planets, sizes of companies, stock ownership, height between species (consider elephants and mice), financial markets (but your investment manager does not know it), commodity prices, inflation rates, economic data. The Extremistan list is much longer than the prior one.

The Tyranny of the Accident

Another way to rephrase the general distinction is as follows: Mediocristan is where we must endure the tyranny of the collective, the routine, the obvious, and the predicted; Extremistan is where we are subjected to the tyranny of the singular, the accidental, the unseen, and the unpredicted. As hard as you try, you will never lose a lot of weight in a single day; you need the collective effect of many days, weeks, even months. Likewise, if you work as a dentist, you will never get rich in a single day—but you can do very well over thirty years of motivated, diligent, disciplined, and regular attendance to teeth-drilling sessions. If you are subject to Extremistan-based speculation, however, you can gain or lose your fortune in a single minute.

Table 1 summarizes the differences between the two dynamics, to which I will refer in the rest of the book; confusing the left column with the right one can lead to dire (or extremely lucky) consequences.

TABLE 1
Mediocristan	Extremistan
Nonscalable	Scalable
Mild or type 1 randomness	Wild (even superwild) or type 2 randomness
The most typical member is mediocre	The most “typical” is either giant or dwarf, i.e., there is no typical member
Winners get a small segment of the total pie	Winner-take-almost-all effects
Example: audience of an opera singer before the gramophone	Today’s audience for an artist
More likely to be found in our ancestral environment	More likely to be found in our modern environment
Impervious to the Black Swan	Vulnerable to the Black Swan
Subject to gravity	There are no physical constraints on what a number can be
Corresponds (generally) to physical quantities, i.e., height	Corresponds to numbers, say, wealth
As close to Utopian equality as reality can spontaneously deliver	Dominated by extreme winner-take-all inequality
Total is not determined by a single instance or observation	Total will be determined by a small number of extreme events
When you observe for a while you can get to know what’s going on	It takes a long time to know what’s going on
Tyranny of the collective	Tyranny of the accidental
Easy to predict from what you see and extend to what you do not see	Hard to predict from past information
History crawls	History makes jumps
Events are distributed[14] according to the “bell curve” (the GIF) or its variations	The distribution is either Mandelbrotian “gray” Swans (tractable scientifically) or totally intractable Black Swans