Saturday, September 23, 2006

GRENDEL’S LAUNDRY LIST: READING FROM NASSIM NICHOLAS TALEB: BLACK SWAN A black swan is an outlier, an event that lies beyond the realm of normal expectations. Most people expect all swans to be white because that's what their experience tells them; a black swan is by definition a surprise. Nevertheless, people tend to concoct explanations for them after the fact, which makes them appear more predictable, and less random, than they are. Our minds are designed to retain, for efficient storage, past information that fits into a compressed narrative. This distortion, called the hindsight bias, prevents us from adequately learning from the past. Black swans can have extreme effects: just a few explain almost everything, from the success of some ideas and religions to events in our personal lives. Moreover, their influence seems to have grown in the 20th century, while ordinary events—the ones we study and discuss and learn about in history or from the news—are becoming increasingly inconsequential.   Much of what happens in history comes from 'Black Swan dynamics', very large, sudden, and totally unpredictable 'outliers', while much of what we usually talk about is almost pure noise. Our track record in predicting those events is dismal; yet by (the) mechanism called the hindsight bias we think that we understand them. We have a bad habit of finding 'laws' in history (by fitting stories to events and detecting false patterns); we are drivers looking through the rear view mirror while convinced we are looking ahead. Consider: How would an understanding of the world on June 27, 1914, have helped anyone guess what was to happen next? The rise of Hitler, the demise of the Soviet bloc, the spread of Islamic fundamentalism, the Internet bubble: not only were these events unpredictable, but anyone who correctly forecast any of them would have been deemed a lunatic (indeed, some were). This accusation of lunacy would have also applied to a correct prediction of the events of 9/11 — a black swan of the vicious variety. A vicious black swan has an additional elusive property: its very unexpectedness helps create the conditions for it to occur. Had a terrorist attack been a conceivable risk on Sept. 10, 2001, it would likely not have happened. Jet fighters would have been on alert to intercept hijacked planes, airplanes would have had locks on their cockpit doors, airports would have carefully checked all passenger luggage. None of that happened, of course, until after 9/11.   Why are we so bad at understanding this type of uncertainty? It is now the scientific consensus that our risk-avoidance mechanism is not mediated by the cognitive modules of our brain, but rather by the emotional ones. Humans' risk-avoidance machinery is antiquated and unfit for the modern world; it is made to counter repeatable attacks and learn from specifics.   This may have made us fit for the Pleistocene era. Our risk machinery is designed to run away from tigers; it is not designed for the information-laden modern world. If someone narrowly escapes being eaten by a tiger in a certain cave, then he learns to avoid that cave. Yet vicious black swans by definition do not repeat themselves. We cannot learn from them easily. The first error (is) excessive and naïve specificity. By focusing on the details of the past event, we may be diverting attention from the question of how to prevent future tragedies, which are still abstract in our mind. To defend ourselves against black swans, general knowledge is a crucial first step. To paraphrase Kirkegaard, history runs forward but is seen backward…The mistake of overestimating cases of possible negligence (is) a chronic flaw of hindsight analyses. Our system of rewards is not adapted to black swans. We can set up rewards for activity that reduces the risk of certain measurable events, like cancer rates. But it is more difficult to reward the prevention (or even reduction) of a chain of bad events (war, for instance). Job-performance assessments in these matters are not just tricky, they may be biased in favor of measurable events. Sometimes, as any good manager knows, avoiding a certain outcome is an achievement. One of the greatest flaws in modern society: it does not understand risk. The focus…should not be on how to avoid any specific black swan, for we don't know where the next one is coming from. The focus should be on what general lessons can be learned from them. And the most important lesson may be that we should reward people, not ridicule them, for thinking the impossible. After a black swan like 9/11, we must look ahead, not in the rear-view mirror. Nassim Nicholas Taleb Note: Dr. Omed has edited the excerpts: To read the texts in full, click the link. Additional Reading: Considering the Effects of Castastrophic Terrorist Attack   11:12:46 AM    comment []