Dispatches from Extremistan

Written by The Financial Express | Updated: Mar 30 2008, 03:44am hrs
A black swan, Nassim Taleb explains, is an event which is 1) Hard to predict; 2) Highly consequential; 3) Wrongly retro-predicted. We pretend we know why the big event happened, and so entrench our inability to deal with the next world-changing improbable event. Examples: Viagra, 9/11, Harry Potter, World War I, Beatles, the PC, Google, and the rise of any successful religion. History is dominated by sudden, lasting changes wrought by deeply unexpected events.

Part of the problem is that we ignore the silent evidence of the nonobserved and nonobservable. Another problem is that we revise our own predictions and intentions unconsciously to match what actually happens. We disguise having been wrong by pretending we were right. This is confirmation bias.

There are two kinds of randomness, two realms....

Mediocristan is dominated by the averageone new observation wont change much. If youre measuring the weight of a large sample of humans, adding the heaviest person in the world wont change the result, whereas measuring the average wealth of a large sample of humans would be transformed by adding the wealthiest person. Mediocristan is the realm of the Law of Large Numbers and of the Gaussian Bell Curve.

Extremistan is dominated by extremes. Every year 16,000 novels are published in English. But a handful of bestsellers dominate. This is the realm of the power-law curve and the Long Tail. Extremistan defies prediction. Benoit Mandelbrot convinced Taleb that the main dynamic of Mediocristan is energy, and the main dynamic of Extremistan is information. Thus, there are real experts and pseudo-experts. Never take advice from someone wearing a tie.

Dont focus on probability. Focus on consequences. Black Swans will come. Prepare against the negative ones; be ready to soar with the positive ones.

The Long Now Foundation