The Graying of Swan Lake

Five years into The Black Swan: Second Edition: The Impact of the Highly Improbable: With a new section: "On Robustness and Fragility."

Seldom have I been more impressed with the subtle accuracy of a generalization than in the case of Nassim Nicholas Taleb’s dictum, “you never win an argument until they attack your person.” As an essayist and statistician, this Lebanese American teaching currently at NYU Polytechnic has developed some of the most original critical thinking on risk analysis and risk engineering. It reaches far beyond mathematical finance and has game-changing consequences for decision-making overall. Not many quants have their writings called to be among the dozen most influential books since WWII. No stranger to controversy, Taleb made his assertion first in 2007 that statistics is inherently incomplete as a tool set because it cannot predict the risk of rare events (which he calls Black Swans). But despite their rarity, and despite being incapable of prediction by extrapolation of existing data, they have disproportionally vast effects.

Since I can remember, I have heard people acknowledge, with a snicker, the ‘theoretical’ possibility of systemic risk, of a meltdown of basic operating infrastructure and assumptions. Like the presumption of innocence, it had become one of those exercises in lip service everyone made a ritual of mentioning while appealing to a near-universal consensus (end-time theorists of all stripes excepted) that systemic risk was just a theoretical hypothesis. Prior to 2008, who except few eye witnesses of 1929 et seq. would have given serious consideration to “major banks not lending to their peers,” bringing the money market to a virtual standstill? Who would have expected that banks would, in essence, depart the lending business altogether – at least to the extent it could not be pushed off their balance sheet? Or that there would not be significant demand for major-ticket securities blessed by all three major rating agencies with their highest medals of honor? Or have perceived the Swiss National Bank as a source of global instability?

If we are to capture by intellect and to deal meaningfully with the effects of entirely random and unpredictable events in life, we require different tools than conventional wisdom traditionally uses – and that includes transcending conventional statistics.

I don’t consider most book reviews highly useful because they are typically read in lieu of the book. So I will not write one in this case because Taleb’s writing is not particularly fraught with ballast, deserves to be read cover-to-cover, and is capable of some degree of visualization. His analysis of “our blindness with respect to randomness, particularly large deviations” is sharp and very different from conventional academic thinking about risk, not readily reviewable but hugely consequential. Its  value lay in permeating and uprooting one’s entire thinking about how to deal with risk – in legal and financial engineering, but also in terms of mature and fully rational methods of decision-making that take into account ‘highly improbable’ yet not all that infrequent events. For, overall, they may be that, but if we look at their impact, they are anything but rare or ephemeral.  And Taleb’s theory is capable of scaling and expansion – there are a lot more gray than black swans, that is, unlikely events capable of anticipation whose nature and extent of risk and damage nonetheless pose extraordinary difficulties for any predictive calculation. Yet the survival of the enterprise or its operating environment at large requires nothing less. Swan Lake contains a lot more than just fifty shades of gray birds.

Excesses of the author’s colorful personality and style entirely and consciously aside, my mathematical as well as legal world-view stands to be influenced by Taleb’s brilliant and mind-altering writing, as a growing number of readers empirically skeptical of experts and critical of commonly accepted standards of knowledge, cognition and behavior seems to concur. Taleb says we focus too much on what we know and by far too little on the vast universe of what we do not know. Having studied a range of phenomena of ignorance since 2011, I find no surprise in the fact that it has spawned further research that heralds not just “the end of probability” but also looks past representational knowledge altogether and seeks to operate with “blank” swans, critical of the entire framework of thought underlying probability theory.