time—"an event of an exceptional nature." So it took just one summer to
figure out that this was a sucker's business and that all their earnings came
from a very risky game. All that while the bankers led everyone, especially
themselves, into believing that they were "conservative." They are not
conservative; just phenomenally skilled at self-deception by burying the
possibility of a large, devastating loss under the rug. In fact, the travesty
repeated itself a decade later, with the "risk-conscious" large banks once
again under financial strain, many of them near-bankrupt, after the realestate
collapse of the early 1990s in which the now defunct savings and
loan industry required a taxpayer-funded bailout of more than half a trillion
dollars. The Federal Reserve bank protected them at our expense:
when "conservative" bankers make profits, they get the benefits; when
they are hurt, we pay the costs.
After graduating from Wharton, I initially went to work for Bankers
Trust (now defunct). There, the chairman's office, rapidly forgetting about
the story of 1982, broadcast the results of every quarter with an announcement
explaining how smart, profitable, conservative (and good
looking) they were. It was obvious that their profits were simply cash borrowed
from destiny with some random payback time. I have no problem
with risk taking, just please, please, do not call yourself conservative and
act superior to other businesses who are not as vulnerable to Black Swans.
Another recent event is the almost-instant bankruptcy, in 1998, of a financial
investment company (hedge fund) called Long-Term Capital Man44
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agement (LTCM), which used the methods and risk expertise of two
"Nobel economists," who were called "geniuses" but were in fact using
phony, bell curve-style mathematics while managing to convince themselves
that it was great science and thus turning the entire financial establishment
into suckers. One of the largest trading losses ever in history took
place in almost the blink of an eye, with no warning signal (more, much
more on that in Chapter 17).*
A Black Swan Is Relative to Knowledge
From the standpoint of the turkey, the nonfeeding of the one thousand
and first day is a Black Swan. For the butcher, it is not, since its occurrence
is not unexpected. So you can see here that the Black Swan is a sucker's
problem. In other words, it occurs relative to your expectation. You realize
that you can eliminate a Black Swan by science (if you're able), or by
keeping an open mind. Of course, like the LTCM people, you can create
Black Swans with science, by giving people confidence that the Black Swan
cannot happen—this is when science turns normal citizens into suckers.
Note that these events do not have to be instantaneous surprises. Some
of the historical fractures I mention in Chapter 1 have lasted a few
decades, like, say, the computer that brought consequential effects on society
without its invasion of our lives being noticeable from day to day.
Some Black Swans can come from the slow building up of incremental
changes in the same direction, as with books that sell large amounts over
years, never showing up on the bestseller lists, or from technologies that
creep up on us slowly, but surely. Likewise, the growth of Nasdaq stocks
in the late 1990s took a few years—but the growth would seem sharper if
you were to plot it on a long historical line. Matters should be seen on
some relative, not absolute, timescale: earthquakes last minutes, 9/11
lasted hours, but historical changes and technological implementations
* The main tragedy of the high impact-low probability event comes from the mismatch
between the time taken to compensate someone and the time one needs to
be comfortable that he is not making a bet against the rare event. People have an
incentive to bet against it, or to game the system since they can be paid a bonus reflecting
their yearly performance when in fact all they are doing is producing illusory
profits that they will lose back one day. Indeed, the tragedy of capitalism is
that since the quality of the returns is not observable from past data, owners of
companies, namely shareholders, can be taken for a ride by the managers who
show returns and cosmetic profitability but in fact might be taking hidden risks.
ONE THOUSAND AND ONE DAYS, OR H OW NOT TO BE A S U C K E R 45
are Black Swans that can take decades. In general, positive Black Swans
take time to show their effect while negative ones happen very quickly—
it is much easier and much faster to destroy than to build. (During the
Lebanese war, my parents' house in Amioun and my grandfather's house
in a nearby village were destroyed in just a few hours, dynamited by my
grandfather's enemies who controlled the area. It took seven thousand
times longer—two years—to rebuild them. This asymmetry in timescales
explains the difficulty in reversing time.)
A BRIEF HISTORY OF THE BLACK SWAN PROBLEM
This turkey problem (a.k.a. the problem of induction) is a very old one,
but for some reason it is likely to be called "Hume's problem" by your
local philosophy professor.
People imagine us skeptics and empiricists to be morose, paranoid, and
tortured in our private lives, which may be the exact opposite of what history
(and my private experience) reports. Like many of the skeptics I hang
around with, Hume was jovial and a bon vivant, eager for literary fame,
salon company, and pleasant conversation. His life was not devoid of
anecdotes. He once fell into a swamp near the house he was building in
Edinburgh. Owing to his reputation among the locals as an atheist, a
woman refused to pull him out of it until he recited the Lord's Prayer and
the Belief, which, being practical-minded, he did. But not before he argued
with her about whether Christians were obligated to help their enemies.
Hume looked unprepossessing. "He exhibited that preoccupied stare of
the thoughtful scholar that so commonly impresses the undiscerning as
imbecile," writes a biographer.
Strangely, Hume during his day was not mainly known for the works
that generated his current reputation—he became rich and famous through
writing a bestselling history of England. Ironically, when Hume was alive,
his philosophical works, to which we now attach his fame, "fell deadborn
off the presses," while the works for which he was famous at the time are
now harder to find. Hume wrote with such clarity that he puts to shame
almost all current thinkers, and certainly the entire German graduate curriculum.
Unlike Kant, Fichte, Schopenhauer, and Hegel, Hume is the kind
of thinker who is sometimes read by the person mentioning his work.
I often hear "Hume's problem" mentioned in connection with the
problem of induction, but the problem is old, older than the interesting
46 UMBERTO E C O ' S A N T I L I B R A RY
Scotsman, perhaps as old as philosophy itself, maybe as old as olive-grove
conversations. Let us go back into the past, as it was formulated with no
less precision by the ancients.
Sextus the (Alas) Empirical
The violently antiacademic writer, and antidogma activist, Sextus Empiricus
operated close to a millennium and a half before Hume, and formulated
the turkey problem with great precision. We know very little about
him; we do not know whether he was a philosopher or more of a copyist
of philosophical texts by authors obscure to us today. We surmise that he
lived in Alexandria in the second century of our era. He belonged to a
school of medicine called "empirical," since its practitioners doubted theories
and causality and relied on past experience as guidance in their treatment,
though not putting much trust in it. Furthermore, they did not trust
that anatomy revealed function too obviously. The most famous proponent
of the empirical school, Menodotus of Nicomedia, who merged empiricism
and philosophical skepticism, was said to keep medicine an art,
not a "science," and insulate its practice from the problems of dogmatic
science. The practice of medicine explains the addition of empiricus ("the
empirical") to Sextus's name.
Sextus represented and jotted down the ideas of the school of the
Pyrrhonian skeptics who were after some form of intellectual therapy resulting
from the suspension of belief. Do you face the possibility of an adverse
event? Don't worry. Who knows, it may turn out to be good for you.
Doubting the consequences of an outcome will allow you to remain imperturbable.
The Pyrrhonian skeptics were docile citizens who followed
customs and traditions whenever possible, but taught themselves to systematically
doubt everything, and thus attain a level of serenity. But while
conservative in their habits, they were rabid in their fight against dogma.
Among the surviving works of Sextus's is a diatribe with the beautiful
title Adversos Mathematicos, sometimes translated as Against the Professors.
Much of it could have been written last Wednesday night!
Where Sextus is mostly interesting for my ideas is in his rare mixing of
philosophy and decision making in his practice. He was a doer, hence classical
scholars don't say nice things about him. The methods of empirical
medicine, relying on seemingly purposeless trial and error, will be central
to my ideas on planning and prediction, on how to benefit from the Black
Swan.
ONE THOUSAND AND ONE DAYS, OR H OW NOT TO BE A S U C K E R 47
In 1998, when I went out on my own, I called my research laboratory
and trading firm Empirica, not for the same antidogmatist reasons, but on
account of the far more depressing reminder that it took at least another
fourteen centuries after the works of the school of empirical medicine before
medicine changed and finally became adogmatic, suspicious of theorizing,
profoundly skeptical, and evidence-based! Lesson? That awareness
of a problem does not mean much—particularly when you have special interests
and self-serving institutions in play.
Algazel
The third major thinker who dealt with the problem was the eleventhcentury
Arabic-language skeptic Al-Ghazali, known in Latin as Algazel.
His name for a class of dogmatic scholars was ghabi, literally "the imbeciles,"
an Arabic form that is funnier than "moron" and more expressive
than "obscurantist." Algazel wrote his own Against the Professors, a diatribe
called Tahafut al falasifa, which I translate as "The Incompetence of
Philosophy." It was directed at the school called falasifah—the Arabic intellectual
establishment was the direct heir of the classical philosophy of
the academy, and they managed to reconcile it with Islam through rational
argument.
Algazel's attack on "scientific" knowledge started a debate with Averro?s,
the medieval philosopher who ended up having the most profound
influence of any medieval thinker (on Jews and Christians, though not on
Moslems). The debate between Algazel and Averro?s was finally, but
sadly, won by both. In its aftermath, many Arab religious thinkers integrated
and exaggerated Algazel's skepticism of the scientific method, preferring
to leave causal considerations to God (in fact it was a stretch of his
idea). The West embraced Averro?s's rationalism, built upon Aristotle's,
which survived through Aquinas and the Jewish philosophers who called
themselves Averroan for a long time. Many thinkers blame the Arabs'
later abandonment of scientific method on Algazel's huge influence. He
ended up fueling Sufi mysticism, in which the worshipper attempts to
enter into communion with God, severing all connections with earthly
matters. All of this came from the Black Swan problem.
48 UMBERTO E C O ' S A N T I L I B R A RY
The Skeptic, Friend of Religion
While the ancient skeptics advocated learned ignorance as the first step in
honest inquiries toward truth, later medieval skeptics, both Moslems and
Christians, used skepticism as a tool to avoid accepting what today we call
science. Belief in the importance of the Black Swan problem, worries
about induction, and skepticism can make some religious arguments more
appealing, though in stripped-down, anticlerical, theistic form. This idea
of relying on faith, not reason, was known as fideism. So there is a tradition
of Black Swan skeptics who found solace in religion, best represented
by Pierre Bayle, a French-speaking Protestant erudite, philosopher, and
theologian, who, exiled in Holland, built an extensive philosophical architecture
related to the Pyrrhonian skeptics. Bayle's writings exerted some
considerable influence on Hume, introducing him to ancient skepticism—
to the point where Hume took ideas wholesale from Bayle. Bayle's Dictionnaire
historique et critique was the most read piece of scholarship of the
eighteenth century, but like many of my French heroes (such as Frédéric
Bastiat), Bayle does not seem to be part of the French curriculum and is
nearly impossible to find in the original French language. Nor is the
fourteenth-century Algazelist Nicolas of Autrecourt.
Indeed, it is not a well-known fact that the most complete exposition
of the ideas of skepticism, until recently, remains the work of a powerful
Catholic bishop who was an august member of the French Academy.
Pierre-Daniel Huet wrote his Philosophical Treatise on the Weaknesses of
the Human Mind in 1690, a remarkable book that tears through dogmas
and questions human perception. Huet presents arguments against causality
that are quite potent—he states, for instance, that any event can have
an infinity of possible causes.
Both Huet and Bayle were erudites and spent their lives reading. Huet,
who lived into his nineties, had a servant follow him with a book to read
aloud to him during meals and breaks and thus avoid lost time. He was
deemed the most read person in his day. Let me insist that erudition is important
to me. It signals genuine intellectual curiosity. It accompanies an
