Expect the Unimaginable


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Nassim Nicholas Taleb's new book offers some erudite advice on living with deep unpredictability

People tend to agree too readily with the suave and persuasive Nassim Nicholas Taleb. In his 2001 best-selling book, Fooled by Randomness, and later on the lecture circuit, the former "mathematical trader" argued that life is more unpredictable than we know. What passes for foresight, he said, is mostly just luck. History is a series of highly improbable yet earthshaking events that seem plausible only in retrospect. (Think of the September 11 attacks, which occurred after his book was written.) "We underestimate the share of randomness," he wrote. "Lucky fools do not know that they may be lucky fools."

Readers and listeners roundly congratulated Taleb for his brilliance, but he seems to be miffed that people didn't take his message to heart, because they appear to have kept on acting just the way they always had. "Their minds are domain-dependent," Taleb writes in The Black Swan, "so they can exercise critical thinking at a conference while not doing so in the office." In economists, who should know better, he finds "a strange co-habitation of technical skills and absence of understanding that you find in idiot savants."

This disconnect may in fact have motivated him to write The Black Swan, which is essentially Fooled by Randomness all over again, except bigger, better grounded, and with more advice about how to live one's life in the presence of deep unpredictability. In a nutshell, his advice is to assume that really crazy things can happen and to set yourself up so that you can benefit from good crazy things without being hurt by bad crazy things.

Turkey Trauma

Too many people, he says, assume that a black swan—i.e., some particular extreme event—cannot happen because they have never seen it happen. But as the philosopher of science Karl Popper observed, no evidence of existence does not equal evidence of nonexistence. For example: Don't sell insurance, because your upside (earning premiums) is limited and your downside (losses from an out-of-the-blue disaster) is huge. Produce movies, where one blockbuster makes up for many flops.

"Maximize the serendipity around you," Taleb advises. Go to parties. Live in the city. Seize opportunities. Don't be ashamed of making mistakes as long as you learn from them. Accept that you will sometimes be fooled, but "be fooled in small matters, not in the large."

Do not, admonishes Taleb, be like the turkey, a bird that extrapolates from a wealth of daily experience that it will always be well cared for—until one dark day in November. Many investors gobble up the daily rewards in high-yielding investments while ignoring the risk that one day they could lose everything.

A Tale of Two Cities

Taleb advises the opposite, a "barbell" strategy in which most of your money is in safe but low-yielding Treasury bills and a bit—maybe just 10%—is in something that could pay off big in the right circumstances, like deep out-of-the-money put or call options.

This précis of Taleb's recommendations makes The Black Swan sound stuffy. In fact, the Lebanese-born Taleb is a world-class raconteur. Although he made good money in trading, he prefers to be known as an Old World intellectual who knows Bacon and Montaigne backwards and forwards, but cracks jokes like the wiseguy in the back row of a college lecture hall.

The core of Taleb's case is that economists, journalists, and corporate planners behave as if they're living in predictable "Mediocristan" when they're really in "Extremistan." Take the stock market crash of Oct. 19, 1987. It was so huge that according to standard statistical models it shouldn't have happened even once in the lifetime of the universe.

Rumsfeld's Ramble

Yet two decades later, people are still using refinements of those statistics for standbys like the capital asset pricing model, modern portfolio theory, and options pricing. That irks Taleb. "If you hear a 'prominent' economist using the word equilibrium, or normal distribution, do not argue with him; just ignore him, or try to put a rat down his shirt," he writes in one characteristic passage.

The Black Swan is not as unprecedented as Taleb claims. You may have encountered pieces of his arguments in recent popular books by the likes of Chris Anderson, James Gleick, Paul Ormerod, Duncan Watts, Steven Strogatz, Aaron Brown, and one of Taleb's few living heroes, Benoit Mandelbrot.

Moreover, despite Taleb's best efforts to make The Black Swan a useful guide to life, we human beings aren't wired to cope well with radical uncertainty. Donald Rumsfeld, the former Defense Secretary, famously cogitated in front of the microphones about "unknown unknowns," which is precisely Taleb's concept—and look where the philosophizing got him. Still, The Black Swan is a richly enjoyable read with an important message.

Coy is BusinessWeek's Economics Editor.

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