curve," I mean that the Gaussian bell curve (after C. F. Gauss; more on him later) can help provide
probabilities of various occurrences.
THE S P E C U L A T O R AND T H E P R O S T I T U T E 37
This framework, showing that Extremistan is where most of the Black
Swan action is, is only a rough approximation—please do not Platonify it;
don't simplify it beyond what's necessary.
Extremistan does not always imply Black Swans. Some events can be
rare and consequential, but somewhat predictable, particularly to those
who are prepared for them and have the tools to understand them (instead
of listening to statisticians, economists, and charlatans of the bell-curve
variety). They are near-Black Swans. They are somewhat tractable
scientifically—knowing about their incidence should lower your surprise;
these events are rare but expected. I call this special case of "gray" swans
Mandelbrotian randomness. This category encompasses the randomness
that produces phenomena commonly known by terms such as scalable,
scale-invariant, power laws, Pareto-Zipf laws, Yule's law, Paretian-stable
processes, Levy-stable, and fractal laws, and we will leave them aside for
now since they will be covered in some depth in Part Three. They are scalable,
according to the logic of this chapter, but you can know a little more
about how they scale since they share much with the laws of nature.
You can still experience severe Black Swans in Mediocristan, though
not easily. How? You may forget that something is random, think that
it is deterministic, then have a surprise. Or you can tunnel and miss
on a source of uncertainty, whether mild or wild, owing to lack of
imagination—most Black Swans result from this "tunneling" disease,
which I will discuss in Chapter 9.
This has been a "literary" overview of the central distinction of this book,
offering a trick to distinguish between what can belong in Mediocristan
and what belongs in Extremistan. I said that I will get into a more thorough
examination in Part Three, so let us focus on epistemology for now
and see how the distinction affects our knowledge.
Chapter Four
ONE THOUSAND AND ONE DAYS,
OR HOW NOT TO BE A SUCKER
Surprise, surprise—Sophisticated methods for learning from the future—Sextus
was always ahead—The main idea is not to be a sucker—Let us move to
Mediocristan, if we can find it
Which brings us to the Black Swan Problem in its original form.
Imagine someone of authority and rank, operating in a place where
rank matters—say, a government agency or a large corporation. He could
be a verbose political commentator on Fox News stuck in front of you at
the health club (impossible to avoid looking at the screen), the chairman
of a company discussing the "bright future ahead," a Platonic medical
doctor who has categorically ruled out the utility of mother's milk (because
he did not see anything special in it), or a Harvard Business School
professor who does not laugh at your jokes. He takes what he knows a little
too seriously.
Say that a prankster surprises him one day by surreptitiously sliding a
thin feather up his nose during a moment of relaxation. How would his
dignified pompousness fare after the surprise? Contrast his authoritative
demeanor with the shock of being hit by something totally unexpected
that he does not understand. For a brief moment, before he regains his
bearings, you will see disarray in his face.
I confess having developed an incorrigible taste for this kind of prank
ONE THOUSAND AND ONE DAYS, OR H OW NOT T O BE A S U C K E R 39
during my first sleepaway summer camp. Introduced into the nostril of a
sleeping camper, a feather would induce sudden panic. I spent part of my
childhood practicing variations on the prank: in place of a thin feather
you can roll the corner of a tissue to make it long and narrow. I got some
practice on my younger brother. An equally effective prank would be to
drop an ice cube down someone's collar when he expects it least, say during
an official dinner. I had to stop these pranks as I got deeper into adulthood,
of course, but I am often involuntarily hit with such an image when
bored out of my wits in meetings with serious-looking businesspersons
(dark suits and standardized minds) theorizing, explaining things, or talking
about random events with plenty of "because" in their conversation. I
zoom in on one of them and imagine the ice cube sliding down his back—
it would be less fashionable, though certainly more spectacular, if you put
a living mouse there, particularly if the person is ticklish and is wearing a
tie, which would block the rodent's normal route of exit.*
Pranks can be compassionate. I remember in my early trading days, at
age twenty-five or so, when money was starting to become easy. I would
take taxis, and if the driver spoke skeletal English and looked particularly
depressed, I'd give him a $100 bill as a tip, just to give him a little jolt and
get a kick out of his surprise. I'd watch him unfold the bill and look at it
with some degree of consternation ($1 million certainly would have been
better but it was not within my means). It was also a simple hedonic experiment:
it felt elevating to make someone's day with the trifle of $100.1
eventually stopped; we all become stingy and calculating when our wealth
grows and we start taking money seriously.
I don't need much help from fate to get larger-scale entertainment: reality
provides such forced revisions of beliefs at quite a high frequency.
Many are quite spectacular. In fact, the entire knowledge-seeking enterprise
is based on taking conventional wisdom and accepted scientific beliefs
and shattering them into pieces with new counterintuitive evidence,
whether at a micro scale (every scientific discovery is an attempt to produce
a micro-Black Swan) or at a larger one (as with Poincaré's and Einstein's
relativity). Scientists may be in the business of laughing at their
predecessors, but owing to an array of human mental dispositions, few realize
that someone will laugh at their beliefs in the (disappointingly near)
future. In this case, my readers and I are laughing at the present state of
social knowledge. These big guns do not see the inevitable overhaul of
* I am safe since I never wear ties (except at funerals).
40 UMBERTO E C O ' S A N T I U B R A RY
their work coming, which means that you can usually count on them to be
in for a surprise.
HOW TO LEARN FROM THE TURKEY
The ùberphilosopher Bertrand Russell presents a particularly toxic variant
of my surprise jolt in his illustration of what people in his line of business
call the Problem of Induction or Problem of Inductive Knowledge (capitalized
for its seriousness)—certainly the mother of all problems in life. How
can we logically go from specific instances to reach general conclusions?
How do we know what we know? How do we know that what we have
observed from given objects and events suffices to enable us to figure out
their other properties? There are traps built into any kind of knowledge
gained from observation.
Consider a turkey that is fed every day. Every single feeding will firm
up the bird's belief that it is the general rule of life to be fed every day by
friendly members of the human race "looking out for its best interests," as
a politician would say. On the afternoon of the Wednesday before
Thanksgiving, something unexpected will happen to the turkey. It will
incur a revision of belief.*
The rest of this chapter will outline the Black Swan problem in its original
form: How can we know the future, given knowledge of the past; or,
more generally, how can we figure out properties of the (infinite) unknown
based on the (finite) known? Think of the feeding again: What can a
turkey learn about what is in store for it tomorrow from the events of yesterday?
A lot, perhaps, but certainly a little less than it thinks, and it is just
that "little less" that may make all the difference.
The turkey problem can be generalized to any situation where the
same hand that feeds you can be the one that wrings your neck. Consider
the case of the increasingly integrated German Jews in the 1930s—or my
description in Chapter 1 of how the population of Lebanon got lulled
into a false sense of security by the appearance of mutual friendliness and
tolerance.
Let us go one step further and consider induction's most worrisome aspect:
learning backward. Consider that the turkey's experience may have,
rather than no value, a negative value. It learned from observation, as we
* Since Russell's original example used a chicken, this is the enhanced North American
adaptation.
ONE THOUSAND AND ONE DAYS, OR H OW NOT TO BE A S U C K E R 41
FIGURE 1: ONE THOUSAND AND ONE DAYS OF HISTORY
A turkey before and after Thanksgiving. The history of a process over a thousand
days tells you nothing about what is to happen next. This na?ve projection of the future
from the past can be applied to anything.
are all advised to do (hey, after all, this is what is believed to be the scientific
method). Its confidence increased as the number of friendly feedings
grew, and it felt increasingly safe even though the slaughter was more and
more imminent. Consider that the feeling of safety reached its maximum
when the risk was at the highest! But the problem is even more general
than that; it strikes at the nature of empirical knowledge itself. Something
has worked in the past, until—well, it unexpectedly no longer does, and
what we have learned from the past turns out to be at best irrelevant or
false, at worst viciously misleading.
Figure 1 provides the prototypical case of the problem of induction as
encountered in real life. You observe a hypothetical variable for one thousand
days. It could be anything (with a few mild transformations): book
sales, blood pressure, crimes, your personal income, a given stock, the interest
on a loan, or Sunday attendance at a specific Greek Orthodox
church. You subsequently derive solely from past data a few conclusions
concerning the properties of the pattern with projections for the next thousand,
even five thousand, days. On the one thousand and first day—boom!
A big change takes place that is completely unprepared for by the past.
Consider the surprise of the Great War. After the Napoleonic conflicts,
the world had experienced a period of peace that would lead any observer
to believe in the disappearance of severely destructive conflicts. Yet, sur42
UMBERTO E C O ' S A N T I L I B R A RY
prise! It turned out to be the deadliest conflict, up until then, in the history
of mankind.
Note that after the event you start predicting the possibility of other
outliers happening locally, that is, in the process you were just surprised
by, but not elsewhere. After the stock market crash of 1987 half of America's
traders braced for another one every October—not taking into account
that there was no antecedent for the first one. We worry too
late—ex post. Mistaking a naive observation of the past as something definitive
or representative of the future is the one and only cause of our inability
to understand the Black Swan.
It would appear to a quoting dilettante—i.e., one of those writers and
scholars who fill up their texts with phrases from some dead authority—
that, as phrased by Hobbes, "from like antecedents flow like consequents."
Those who believe in the unconditional benefits of past
experience should consider this pearl of wisdom allegedly voiced by a famous
ship's captain:
But in all my experience, I have never been in any accident. . . of any
sort worth speaking about. I have seen but one vessel in distress in all
my years at sea. I never saw a wreck and never have been wrecked nor
was I ever in any predicament that threatened to end in disaster of any
sort.
E. J . Smith, 1907, Captain, RMS Titanic
Captain Smith's ship sank in 1912 in what became the most talkedabout
shipwreck in history. *
* Statements like those of Captain Smith are so common that it is not even funny. In
September 2006, a fund called Amaranth, ironically named after a flower that
"never dies," had to shut down after it lost close to $7 billion in a few days, the
most impressive loss in trading history (another irony: I shared office space with
the traders). A few days prior to the event, the company made a statement to the
effect that investors should not worry because they had twelve risk managers—
people who use models of the past to produce risk measures on the odds of such
an event. Even if they had one hundred and twelve risk managers, there would be
no meaningful difference; they still would have blown up. Clearly you cannot
manufacture more information than the past can deliver; if you buy one hundred
copies of The New York Times, I am not too certain that it would help you gain incremental
knowledge of the future. We just don't know how much information
there is in the past.
ONE THOUSAND AND ONE DAYS, OR H OW NOT TO BE A S U C K E R 43
Trained to Be Dull
Similarly, think of a bank chairman whose institution makes steady profits
over a long time, only to lose everything in a single reversal of fortune.
Traditionally, bankers of the lending variety have been pear-shaped, cleanshaven,
and dress in possibly the most comforting and boring manner, in
dark suits, white shirts, and red ties. Indeed, for their lending business,
banks hire dull people and train them to be even more dull. But this is for
show. If they look conservative, it is because their loans only go bust on
rare, very rare, occasions. There is no way to gauge the effectiveness of
their lending activity by observing it over a day, a week, a month, or . . .
even a century! In the summer of 1982, large American banks lost close to
all their past earnings (cumulatively), about everything they ever made in
the history of American banking—everything. They had been lending to
South and Central American countries that all defaulted at the same
