The Black Swan

“The strategy for the discoverers and entrepreneurs is to rely less on top-down planning and focus on maximum tinkering and recognizing opportunities when they present themselves. So I disagree with the followers of Marx and those of Adam Smith: the reason free markets work is because they allow people to be lucky, thanks to aggressive trial and error, not by giving rewards or “incentives” for skill. The strategy is, then, to tinker as much as possible and try to collect as many Black Swan opportunities as you can.”

We will see how they dress up the intellectual fraud. Location 322

Note: Articulate

Note that I am not relying in this book on the beastly method of collecting selective “corroborating evidence.” For reasons I explain in Chapter 5, I call this overload of examples naïve empiricism—successions of anecdotes selected to fit a story do not constitute evidence. Anyone looking for confirmation will find enough of it to deceive himself—and no doubt his peers. Location 481

Note: Father God – Very important. Fundamental fallacy in most arguments made by everyone. Foundational understanding of how to attack argument. Naive empiricism. You’re likely to find any “evidence” you need you fit the narrative you already have. 

I discovered that it is much more effective to act like a nice guy and be “reasonable” if you prove willing to go beyond just verbiage. You can afford to be compassionate, lax, and courteous if, once in a while, when it is least expected of you, but completely justified, you sue someone, or savage an enemy, just to show that you can walk the walk. Location 624

You can afford to be compassionate, lax, and courteous if, once in a while, when it is least expected of you, but completely justified, you sue someone, or savage an enemy, just to show that you can walk the walk. Location 625

Note: great passage. how to be nice

If you are dealing with quantities from Extremistan, you will have trouble figuring out the average from any sample since it can depend so much on one single observation. The idea is not more difficult than that. In Extremistan, one unit can easily affect the total in a disproportionate way. In this world, you should always be suspicious of the knowledge you derive from data. This is a very simple test of uncertainty that allows you to distinguish between the two kinds of randomness. Capish? What you can know from data in Mediocristan augments very rapidly with the supply of information. But knowledge in Extremistan grows slowly and erratically with the addition of data, some of it extreme, possibly at an unknown rate. Location 1125

Note: Good way to distinguish between the two types of system. Capitalism is an extremistan system. You can’t derive much from any number of samples because one could throw the whole thing off. Inequality Edit

Matters that seem to belong to Mediocristan (subjected to what we call type 1 randomness): height, weight, calorie consumption, income for a baker, a small restaurant owner, a prostitute, or an orthodontist; gambling profits (in the very special case, assuming the person goes to a casino and maintains a constant betting size), car accidents, mortality rates, “IQ” (as measured). Matters that seem to belong to Extremistan (subjected to what we call type 2 randomness): wealth, income, book sales per author, book citations per author, name recognition as a “celebrity,” number of references on Google, populations of cities, uses of words in a vocabulary, numbers of speakers per language, damage caused by earthquakes, deaths in war, deaths from terrorist incidents, sizes of planets, sizes of companies, stock ownership, height between species (consider elephants and mice), financial markets (but your investment manager does not know it), commodity prices, inflation rates, economic data. The Extremistan list is much longer than the prior one. Location 1132

Note: Differences in normalized vs highly variable events and their significance. Wealth is subject to a great deal of luck. You might consider owning a lot of stock and two planes plunging into buildings, wiping put all your wealth. Or enron going down. Many implications follow Edit

Another way to rephrase the general distinction is as follows: Mediocristan is where we must endure the tyranny of the collective, the routine, the obvious, and the predicted; Extremistan is where we are subjected to the tyranny of the singular, the accidental, the unseen, and the unpredicted. As hard as you try, you will never lose a lot of weight in a single day; you need the collective effect of many days, weeks, even months. Likewise, if you work as a dentist, you will never get rich in a single day—but you can do very well over thirty years of motivated, diligent, disciplined, and regular attendance to teeth-drilling sessions. If you are subject to Extremistan-based speculation, however, you can gain or lose your fortune in a single minute. Location 1141
Note: Great distinction between the two. Implications for all sorts of forms of use. Underlies the two different values as well. Security vs Risk taking, and so on. Edit

I emphasize possible because the chance of these occurrences is typically in the order of one in several trillion trillion, as close to impossible as it gets. Location 1190

Note: Articulate – Use as a qualifier for possible or impossible. It’s impossible for you to beat Federer at tennis. Nothing is I’m possible. Odds against chance of orders of trillions. About as close as it gets. Edit

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. Location 1223

Note: A way of thinking about thinking. Like most great points that change things and stop people dead in their tracks, it’s something new and counterintuitive that’s most effective. Argument, art, money, idea, anything. Edit

Problem of Induction or Problem of Inductive Knowledge (capitalized for its seriousness)— Location 1231

Note: Do this 🙂 Edit

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. Location 1232

Note: A trap to use on people. Though observation is how we know anything, point out when you see it, that they can’t infer from the specific to the general. Or ask them how. It will be hard to explain. Edit

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. Location 1237

Mistaking a naïve 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. Location 1263

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. Location 1285

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. Location 1287

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.) Location 1307

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. Location 1312

Note: Turkey problem in terms that you can look it up Edit

Now, there are other themes arising from our blindness to the Black Swan: We focus on preselected segments of the seen and generalize from it to the unseen: the error of confirmation. We fool ourselves with stories that cater to our Platonic thirst for distinct patterns: the narrative fallacy. We behave as if the Black Swan does not exist: human nature is not programmed for Black Swans. What we see is not necessarily all that is there. History hides Black Swans from us and gives us a mistaken idea about the odds of these events: this is the distortion of silent evidence. We “tunnel”: that is, we focus on a few well-defined sources of uncertainty, on too specific a list of Black Swans (at the expense of the others that do not easily come to mind). Location 1401

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. Location 1411

Note: This is just good and funny Edit

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. Location 1422

Many people confuse the statement “almost all terrorists are Moslems” with “almost all Moslems are terrorists.” Assume that the first statement is true, that 99 percent of terrorists are Moslems. This would mean that only about .001 percent of Moslems are terrorists, since there are more than one billion Moslems and only, say, ten thousand terrorists, one in a hundred thousand. So the logical mistake makes you (unconsciously) overestimate the odds of a randomly drawn individual Moslem person (between the age of, say, fifteen and fifty) being a terrorist by close to fifty thousand times! Location 1446

Note: Good way to explain the difference between what we think is modus tollens and modus ponuns. In clear terms, you can explain how these two sentences, a common error, are not interchangeable. Edit

Our inferential machinery, that which we use in daily life, is not made for a complicated environment in which a statement changes markedly when its wording is slightly modified. Consider that in a primitive environment there is no consequential difference between the statements most killers are wild animals and most wild animals are killers. There is an error here, but it is almost inconsequential. Our statistical intuitions have not evolved for a habitat in which these subtleties can make a big difference. Location 1455

Note: While this example would be hard to recall, the principle is a good one and was seen in Mystery. We may behave today in a way that seems illogical by today’s standards, but perfectly logical against the background of the distant past. Technology and social norms proceed at a faster pace than evolution in this sense. Edit

All zoogles are boogles. You saw a boogle. Is it a zoogle? Not necessarily, since not all boogles are zoogles; adolescents who make a mistake in answering this kind of question on their SAT test might not make it to college. Yet another person can get very high scores on the SATs and still feel a chill of fear when someone from the wrong side of town steps into the elevator. This inability to automatically transfer knowledge and sophistication from one situation to another, or from theory to practice, is a quite disturbing attribute of human nature. Location 1460

Note: Liked this. Edit

Let us call it the domain specificity of our reactions. By domain-specific I mean that our reactions, our mode of thinking, our intuitions, depend on the context in which the matter is presented, what evolutionary psychologists call the “domain” of the object or the event. The classroom is a domain; real life is another. We react to a piece of information not on its logical merit, but on the basis of which framework surrounds it, and how it registers with our social-emotional system. Logical problems approached one way in the classroom might be treated differently in daily life. Indeed they are treated differently in daily life. Location 1464

Note: Perfect description of Framing. He means the same thing, but used different names. Edit

Knowledge, even when it is exact, does not often lead to appropriate actions because we tend to forget what we know, or forget how to process it properly if we do not pay attention, even when we are experts. Statisticians, it has been shown, tend to leave their brains in the classroom and engage in the most trivial inferential errors once they are let out on the streets. In 1971, the psychologists Danny Kahneman and Amos Tversky plied professors of statistics with statistical questions not phrased as statistical questions. One was similar to the following (changing the example for clarity): Assume that you live in a town with two hospitals—one large, the other small. On a given day 60 percent of those born in one of the two hospitals are boys. Which hospital is it likely to be? Many statisticians made the equivalent of the mistake (during a casual conversation) of choosing the larger hospital, when in fact the very basis of statistics is that large samples are more stable and should fluctuate less from the long-term average—here, 50 percent for each of the sexes—than smaller samples. These statisticians would have flunked their own exams. Location 1469

Note: Good for many things, but we got this right. Good. Edit

For another illustration of the way we can be ludicrously domain-specific in daily life, go to the luxury Reebok Sports Club in New York City, and look at the number of people who, after riding the escalator for a couple of floors, head directly to the StairMasters. This domain specificity of our inferences and reactions works both ways: some problems we can understand in their applications but not in textbooks; others we are better at capturing in the textbook than in the practical application. People can manage to effortlessly solve a problem in a social situation but struggle when it is presented as an abstract logical problem. We tend to use different mental machinery—so-called modules—in different situations: our brain lacks a central all-purpose computer that starts with logical rules and applies them equally to all possible situations. Location 1478

Note: The main reason logical argument doesn’t work very well at cocktail parties and bars. Edit

By a mental mechanism I call naïve empiricism, we have a natural tendency to look for instances that confirm our story and our vision of the world—these instances are always easy to find. Alas, with tools, and fools, anything can be easy to find. You take past instances that corroborate your theories and you treat them as evidence. For instance, a diplomat will show you his “accomplishments,” not what he failed to do. Mathematicians will try to convince you that their science is useful to society by pointing out instances where it proved helpful, not those where it was a waste of time, or, worse, those numerous mathematical applications that inflicted a severe cost on society owing to the highly unempirical nature of elegant mathematical theories. Location 1510

Note: Best description in the book so far of niave empiricicm, that the unknown is as important as the known, the missing as important as the present. What does what we don’t know, contribute to the conclusion? Edit

Even in testing a hypothesis, we tend to look for instances where the hypothesis proved true. Of course we can easily find confirmation; all we have to do is look, or have a researcher do it for us. I can find confirmation for just about anything, the way a skilled London cabbie can find traffic to increase the fare, even on a holiday. Location 1516

Note: Debate – Useful in all areas of confirmation bias or instances when we are presented with “examples” that “prove” the case with no information about how many examples DONT work. Inflation might be a good one. Look at these countries that experienced inflation. Okay. So what. Did we hear about the ones that didn’t? Edit

I am saying that a series of corroborative facts is not necessarily evidence. Seeing white swans does not confirm the nonexistence of black swans. There is an exception, however: I know what statement is wrong, but not necessarily what statement is correct. If I see a black swan I can certify that all swans are not white! If I see someone kill, then I can be practically certain that he is a criminal. If I don’t see him kill, I cannot be certain that he is innocent. Location 1523

Note: More good framing Edit

You can test a given rule either directly, by looking at instances where it works, or indirectly, by focusing on where it does not work. As we saw earlier, disconfirming instances are far more powerful in establishing truth. Yet we tend to not be aware of this property. Location 1561

Note: An important way to think about argumentation. Edit

But there are exceptions. Among them figure chess grand masters, who, it has been shown, actually do focus on where a speculative move might be weak; rookies, by comparison, look for confirmatory instances instead of falsifying ones. But don’t play chess to practice skepticism. Scientists believe that it is the search for their own weaknesses that makes them good chess players, not the practice of chess that turns them into skeptics. Similarly, the speculator George Soros, when making a financial bet, keeps looking for instances that would prove his initial theory wrong. This, perhaps, is true self-confidence: the ability to look at the world without the need to find signs that stroke one’s ego.* Location 1575

Note: Important points concerning argumentation, decision making, and even chess. Look to falsify. Look for the weaknesses, not the strengths. Ought to get chess back out. Edit

We are not naïve enough to believe that someone will be immortal because we have never seen him die, or that someone is innocent of murder because we have never seen him kill. Location 1594

Note: Interesting articulation Edit
it was shown from studies of infant behavior that we come equipped with mental machinery that causes us to selectively generalize from experiences (i.e., to selectively acquire inductive learning in some domains but remain skeptical in others). By doing so, we are not learning from a mere thousand days, but benefiting, thanks to evolution, from the learning of our ancestors—which found its way into our biology. Location 1605

Note: A good way to explain evolutionary traits present today. We learned from our ancestors Edit

To help the reader locate himself: in studying the problem of induction in the previous chapter, we examined what could be inferred about the unseen, what lies outside our information set. Here, we look at the seen, what lies within the information set, and we examine the distortions in the act of processing it. There is plenty to say on this topic, but the angle I take concerns narrativity’s simplification of the world around us and its effects on our perception of the Black Swan and wild uncertainty. Location 1677

Note: Summary Edit

Indeed, the idea that the left brain controls language may not be so accurate: the left brain seems more precisely to be where pattern interpretation resides, and it may control language only insofar as language has a pattern-interpretation attribute. Location 1714

Note: Good way to articulate beliefs commonly held but not known for certain. Seems more precisely is good. Edit

“The chairman of [insert here your company name] is a lucky fellow who happened to be in the right place at the right time and claims credit for the company’s success, without making a single allowance for luck,” Location 1765

Note: Something just worth considering and asking. Is there any possibility of luck in a system? Edit

Beyond our perceptional distortions, there is a problem with logic itself. How can someone have no clue yet be able to hold a set of perfectly sound and coherent viewpoints that match the observations and abide by every single possible rule of logic? Consider that two people can hold incompatible beliefs based on the exact same data. Does this mean that there are possible families of explanations and that each of these can be equally perfect and sound? Location 1826

This nationality business helps you make a great story and satisfies your hunger for ascription of causes. It seems to be the dump site where all explanations go until one can ferret out a more obvious one (such as, say, some evolutionary argument that “makes sense”). Location 1872

Note: Articulate – good way to frame an odd the shelf argument. Obama welfare is the cause of debt. Welfare is always the dump site until they can find something better. (They dont) Edit

Nobody would pay one dollar to buy a series of abstract statistics reminiscent of a boring college lecture. We want to be told stories, and there is nothing wrong with that—except that we should check more thoroughly whether the story provides consequential distortions of reality. Location 1881

Note: Keep in mind. Endless pages of graphs and stats are less convincing than a good story Edit

Take the following experiment conducted by Kahneman and Tversky, the pair introduced in the previous chapter: the subjects were forecasting professionals who were asked to imagine the following scenarios and estimate their odds. A massive flood somewhere in America in which more than a thousand people die. An earthquake in California, causing massive flooding, in which more than a thousand people die. Respondents estimated the first event to be less likely than the second. An earthquake in California, however, is a readily imaginable cause, which greatly increases the mental availability—hence the assessed probability—of the flood scenario. Location 1898

Note: Interesting insight into the way people think, and how a dramatic cause can cause bias or detract from the obvious. Edit

Likewise, if I asked you how many cases of lung cancer are likely to take place in the country, you would supply some number, say half a million. Now, if instead I asked you many cases of lung cancer are likely to take place because of smoking, odds are that you would give me a much higher number (I would guess more than twice as high). Adding the because makes these matters far more plausible, and far more likely. Cancer from smoking seems more likely than cancer without a cause attached to it—an unspecified cause means no cause at all. Location 1904

Note: Useful for pursuasion and negotiation. Because makes things far more plausible, and able to be visualized.

The economist Hyman Minsky sees the cycles of risk taking in the economy as following a pattern: stability and absence of crises encourage risk taking, complacency, and lowered awareness of the possibility of problems. Then a crisis occurs, resulting in people being shell-shocked and scared of investing their resources. Location 1946

Note: Good summary of the Minskey Business Cycle and its effects on market forces.

As Stalin, who knew something about the business of mortality, supposedly said, “One death is a tragedy; a million is a statistic.” Statistics stay silent in us. Location 1970

Well, you are likely to avoid Central Park during your stay. You know you can get crime statistics from the Web or from any brochure, rather than anecdotal information from a verbally incontinent salesman. But you can’t help it. For a while, the name Central Park will conjure up the image of that that poor, undeserving man lying on the polluted grass. It will take a lot of statistical information to override your hesitation. Location 1980

I’ll conclude by saying that our misunderstanding of the Black Swan can be largely attributed to our using System 1, i.e., narratives, and the sensational—as well as the emotional—which imposes on us a wrong map of the likelihood of events. On a day-to-day basis, we are not introspective enough to realize that we understand what is going on a little less than warranted from a dispassionate observation of our experiences. We also tend to forget about the notion of Black Swans immediately after one occurs—since they are too abstract for us—focusing, rather, on the precise and vivid events that easily come to our minds. We do worry about Black Swans, just the wrong ones. Location 2039

Note: Summary of chapter Edit

The way to avoid the ills of the narrative fallacy is to favor experimentation over storytelling, experience over history, and clinical knowledge over theories. Location 2049

So far we have discussed two internal mechanisms behind our blindness to Black Swans, the confirmation bias and the narrative fallacy. The next chapters will look into an external mechanism: a defect in the way we receive and interpret recorded events, and a defect in the way we act on them. Location 2056

Note: Final summary of chapter Edit

Holidays can be terrible. You run into your brother-in-law at family reunions and, invariably, detect unmistakable signs of frustration on the part of your wife, who, briefly, fears that she married a loser, before remembering the logic of your profession. But she has to fight her first impulse. Her sister will not stop talking about their renovations, their new wallpaper. Your wife will be a little more silent than usual on the drive home. This sulking will be made slightly worse because the car you are driving is rented, since you cannot afford to garage a car in Manhattan. Location 2085

Note: Just good writing Edit

Making $1 million in one year, but nothing in the preceding nine, does not bring the same pleasure as having the total evenly distributed over the same period, that is, $100,000 every year for ten years in a row. The same applies to the inverse order—making a bundle the first year, then nothing for the remaining period. Somehow, your pleasure system will be saturated rather quickly, and it will not carry forward the hedonic balance like a sum on a tax return. As a matter of fact, your happiness depends far more on the number of instances of positive feelings, what psychologists call “positive affect,” than on their intensity when they hit. In other words, good news is good news first; how good matters rather little. So to have a pleasant life you should spread these small “affects” across time as evenly as possible. Plenty of mildly good news is preferable to one single lump of great news. Location 2171

Note: Important for decision making in life. Normalized the good things in life consistently. Vacation in California with Cristal was amazing. And it always does make the life better. But it still burns each day in 2013 with no bang. Live for consistent rewards.

The same property in reverse applies to our unhappiness. It is better to lump all your pain into a brief period rather than have it spread out over a longer one. Location 2186

Note: Just get a tooth pulled and be done with it. Pay the credit card off and end it. Get the vehicle fixed so it doesn’t draw out forever. Get the bad things over so they don’t draw out indefinitely. 

Montaigne was asked “why” he and the writer Etienne de la Boétie were friends—the kind of question people ask you at a cocktail party as if you knew the answer, or as if there were an answer to know. Location 2192

Humans will believe anything you say provided you do not exhibit the smallest shadow of diffidence; like animals, they can detect the smallest crack in your confidence before you express it. The trick is to be as smooth as possible in personal manners. It is much easier to signal self-confidence if you are exceedingly polite and friendly; you can control people without having to offend their sensitivity. The problem with business people, Nero realized, is that if you act like a loser they will treat you as a loser—you set the yardstick yourself. There is no absolute measure of good or bad. It is not what you are telling people, it is how you are saying it. But you need to remain understated and maintain an Olympian calm in front of others. Location 2313

Note: Mystery, Tony Robbins, Jeremy, Chris, everyone. Congruence. Say with confidence and congruence and you can say anything. 

Consider the number of actors who have never passed an audition but would have done very well had they had that lucky break in life. Location 2401

Note: Just worth considering the next time someone points out how talented, good, how much better, or that he “produces” so much more just because of where they are in terms of wealth or fame.

Numerous studies of millionaires aimed at figuring out the skills required for hotshotness follow the following methodology. They take a population of hotshots, those with big titles and big jobs, and study their attributes. They look at what those big guns have in common: courage, risk taking, optimism, and so on, and infer that these traits, most notably risk taking, help you to become successful. You would also probably get the same impression if you read CEOs’ ghostwritten autobiographies or attended their presentations to fawning MBA students. Now take a look at the cemetery. It is quite difficult to do so because people who fail do not seem to write memoirs, and, if they did, those business publishers I know would not even consider giving them the courtesy of a returned phone call (as to returned e-mail, fuhgedit). Readers would not pay $26.95 for a story of failure, even if you convinced them that it had more useful tricks than a story of success.* The entire notion of biography is grounded in the arbitrary ascription of a causal relation between specified traits and subsequent events. Now consider the cemetery. The graveyard of failed persons will be full of people who shared the following traits: courage, risk taking, optimism, et cetera. Just like the population of millionaires. There may be some differences in skills, but what truly separates the two is for the most part a single factor: luck. Plain luck. Location 2426

Note: A good way to calling into question the idea that one was born in a log cabin he built himself, the heroic tale of the self made man. The very same millionaire may very well have been a middle class businessman if the interviewer who happened to like him had missed his cap and another, less receptive, person met him that day that did NOT hire him for the job that launched his career. 

Recall the distinction between Mediocristan and Extremistan in Chapter 3. I said that taking a “scalable” profession is not a good idea, simply because there are far too few winners in these professions. Well, these professions produce a large cemetery: the pool of starving actors is larger than the one of starving accountants, even if you assume that, on average, they earn the same income. Location 2448

Note: A case for the safe and secure, for Mediocristan.

Does crime pay? Newspapers report on the criminals who get caught. There is no section in The New York Times recording the stories of those who committed crimes but have not been caught. So it is with cases of tax evasion, government bribes, prostitution rings, poisoning of wealthy spouses (with substances that do not have a name and cannot be detected), and drug trafficking. In addition, our representation of the standard criminal might be based on the properties of those less intelligent ones who were caught. Once we seep ourselves into the notion of silent evidence, so many things around us that were previously hidden start manifesting themselves. Having spent a couple of decades in this mind-set, I am convinced (but cannot prove) that training and education can help us avoid its pitfalls. Location 2492

Note: Good example of silent evidence, and the idea that what you don’t know is equally as important as what you do. One might be tempted to proclaim that crime doesn’t pay; look at all the criminals who get caught! There are no articles or stories about the criminal nobody knew existed. Nobody is right or wrong in this article. You simply can’t access it. We just don’t have this information. But doubtless, many did succeed in their criminal acts. The same is useful in all areas. Countless stories of welfare “abuse.” People using the system properly aren’t dramatic enough for stories. You saw a person on food stamps with an iPhone. You derive a general rule, ignorant of countless counterexamples you did NOT see. Confirmation bias and corrupt Union bosses. Indeed it is difficult to know all sorts of things people otherwise take for granted.

What do the popular expressions “a swimmer’s body” and “beginner’s luck” have in common? What do they seem to share with the concept of history? There is a belief among gamblers that beginners are almost always lucky. “It gets worse later, but gamblers are always lucky when they start out,” you hear. This statement is actually empirically true: researchers confirm that gamblers have lucky beginnings (the same applies to stock market speculators). Does this mean that each one of us should become a gambler for a while, take advantage of lady luck’s friendliness to beginners, then stop? The answer is no. The same optical illusion prevails: those who start gambling will be either lucky or unlucky (given that the casino has the advantage, a slightly greater number will be unlucky). The lucky ones, with the feeling of having been selected by destiny, will continue gambling; the others, discouraged, will stop and will not show up in the sample. They will probably take up, depending on their temperaments, bird-watching, Scrabble, piracy, or other pastimes. Those who continue gambling will remember having been lucky as beginners. The dropouts, by definition, will no longer be part of the surviving gamblers’ community. This explains beginner’s luck. Location 2499

Note: Tautilogical nature of evolutionary things, and a wonderful explaination worth examining again and again

Let us apply this reasoning to September 11, 2001. Around twenty-five hundred people were directly killed by bin Laden’s group in the Twin Towers of the World Trade Center. Their families benefited from the support of all manner of agencies and charities, as they should. But, according to researchers, during the remaining three months of the year, close to one thousand people died as silent victims of the terrorists. How? Those who were afraid of flying and switched to driving ran an increased risk of death. There was evidence of an increase of casualties on the road during that period; the road is considerably more lethal than the skies. These families got no support—they did not even know that their loved ones were also the victims of bin Laden. Location 2544

Note: Another interesting way of looking at the world. Unseen causes. Often used to denigrate government, a framework and methodology useful in any circumstance. By asserting the positive, one ignores the negative, which may have had a greater impact.

Recall from the Prologue the story of the hypothetical legislator whose actions might have avoided the attack of September 11. How many such people are walking the street without the upright gait of the phony hero? Location 2553

A life saved is a statistic; a person hurt is an anecdote. Statistics are invisible; anecdotes are salient. Likewise, the risk of a Black Swan is invisible.* Location 2559

Note: Ignoring all the good 

This bias causes the survivor to be an unqualified witness of the process. Unsettling? The fact that you survived is a condition that may weaken your interpretation of the properties of the survival, including the shallow notion of “cause.” Location 2598

Note: Great summary of the idea and well articulated 

Consider our own fates. Some people reason that the odds of any of us being in existence are so low that our being here cannot be attributed to an accident of fate. Think of the odds of the parameters being exactly where they need to be to induce our existence (any deviation from the optimal calibration would have made our world explode, collapse, or simply not come into existence). It is often said that the world seems to have been built to the specifications that would make our existence possible. According to such an argument, it could not come from luck. Location 2646

Note: The razors edge argument, the argument from fine tuning, Goldilocks, or probability argument often seen for the existence of God. The following addresses it. 

However, our presence in the sample completely vitiates the computation of the odds. Again, the story of Casanova can make the point quite simple—much simpler than in its usual formulation. Think again of all the possible worlds as little Casanovas following their own fates. The one who is still kicking (by accident) will feel that, given that he cannot be so lucky, there had to be some transcendental force guiding him and supervising his destiny: “Hey, otherwise the odds would be too low to get here just by luck.” For someone who observes all adventurers, the odds of finding a Casanova are not low at all: there are so many adventurers, and someone is bound to win the lottery ticket. Location 2650

So we can no longer naïvely compute odds without considering that the condition that we are in existence imposes restrictions on the process that led us here. Location 2657

The reference point argument is as follows: do not compute odds from the vantage point of the winning gambler (or the lucky Casanova, or the endlessly bouncing back New York City, or the invincible Carthage), but from all those who started in the cohort. Consider once again the example of the gambler. If you look at the population of beginning gamblers taken as a whole, you can be close to certain that one of them (but you do not know in advance which one) will show stellar results just by luck. So, from the reference point of the beginning cohort, this is not a big deal. But from the reference point of the winner (and, who does not, and this is key, take the losers into account), a long string of wins will appear to be too extraordinary an occurrence to be explained by luck. Note that a “history” is just a series of numbers through time. The numbers can represent degrees of wealth, fitness, weight, anything. Location 2674

Note: Good summary of whole idea, looking at probability through the eyes of the winner gives you a biased idea of reality because you didn’t take into account all the people who didn’t win. 

Whenever your survival is in play, don’t immediately look for causes and effects. The main identifiable reason for our survival of such diseases might simply be inaccessible to us: we are here since, Casanova-style, the “rosy” scenario played out, and if it seems too hard to understand it is because we are too brainwashed by notions of causality and we think that it is smarter to say because than to accept randomness. Location 2692

Silent evidence can actually bias matters to look less stable and riskier than they actually are. Take cancer. We are in the habit of counting survival rates from diagnosed cancer cases—which should overestimate the danger from cancer. Many people develop cancer that remains undiagnosed, and go on to live a long and comfortable life, then die of something else, either because their cancer was not lethal or because it went into spontaneous remission. Not counting these cases biases the risks upward. Location 2721

First, they lost around $100 million when an irreplaceable performer in their main show was maimed by a tiger (the show, Siegfried and Roy, had been a major Las Vegas attraction). The tiger had been reared by the performer and even slept in his bedroom; until then, nobody suspected that the powerful animal would turn against its master. In scenario analyses, the casino had even conceived of the animal jumping into the crowd, but nobody came near to the idea of insuring against what happened. Location 2870

Note: Perfect example of the shit you just can’t see coming

Conclusion: A back-of-the-envelope calculation shows that the dollar value of these Black Swans, the off-model hits and potential hits I’ve just outlined, swamp the on-model risks by a factor of close to 1,000 to 1. The casino spent hundreds of millions of dollars on gambling theory and high-tech surveillance while the bulk of their risks came from outside their models. All this, and yet the rest of the world still learns about uncertainty and probability from gambling examples. Location 2884

Note: It’s what you don’t see coming that’s makes all the difference 

Many of the opera-bound people looked like they worked for the local office of J. P. Morgan, or some other financial institution where employees experience differential wealth from the rest of the local population, with concomitant pressures on them to live by a sophisticated script (wine and opera). Location 2981

Note: Conformity

True, someone warned about the nature of the test can play it safe and set the range between zero and infinity; but this would no longer be “calibrating”—that person would not be conveying any information, and could not produce an informed decision in such a manner. In this case it is more honorable to just say, “I don’t want to play the game; I have no clue.” Location 3033

Epistemic arrogance bears a double effect: we overestimate what we know, and underestimate uncertainty, by compressing the range of possible uncertain states (i.e., by reducing the space of the unknown). Location 3041

I remind the reader that I am not testing how much people know, but assessing the difference between what people actually know and how much they think they know Location 3048

This miscalculation problem is a little more subtle. In truth, outliers are not as sensitive to underestimation since they are fragile to estimation errors, which can go in both directions. As we saw in Chapter 6, there are conditions under which people overestimate the unusual or some specific unusual event (say when sensational images come to their minds)—which, we have seen, is how insurance companies thrive. So my general point is that these events are very fragile to miscalculation, with a general severe underestimation mixed with an occasional severe overestimation. Location 3057

I recall visiting a friend at a New York investment bank and seeing a frenetic hotshot “master of the universe” type walking around with a set of wireless headphones wrapped around his ears and a microphone jutting out of the right side that prevented me from focusing on his lips during my twenty-second conversation with him. Location 3082

Note: Haha 

We can already see the difference between “know-how” and “know-what.” The Greeks made a distinction between technē and epistēmē. The empirical school of medicine of Menodotus of Nicomedia and Heraclites of Tarentum wanted its practitioners to stay closest to technē (i.e., “craft”), and away from epistēmē (i.e., “knowledge,” “science”). Location 3147

Also consider the number of families who tunnel on their future, locking themselves into hard-to-flip real estate thinking they are going to live there permanently, not realizing that the general track record for sedentary living is dire. Don’t they see those well-dressed real-estate agents driving around in fancy two-door German cars? Location 3277

Note: Funny way to point out some people are rich for a reason, they ate making a lot of money off you. 

Contrary to what people might expect, I am not recommending that anyone become a hedgehog—rather, be a fox with an open mind. I know that history is going to be dominated by an improbable event, I just don’t know what that event will be. Location 3296

Let’s look at the source of the biographer’s underestimation of the time for completion. He projected his own schedule, but he tunneled, as he did not forecast that some “external” events would emerge to slow him down. Among these external events were the disasters on September 11, 2001, which set him back several months; trips to Minnesota to assist his ailing mother (who eventually recovered); and many more, like a broken engagement (though not with Rushdie’s ex-girlfriend). “Other than that,” it was all within his plan; his own work did not stray the least from schedule. Location 3344

As I said earlier, we are too narrow-minded a species to consider the possibility of events straying from our mental projections, but furthermore, we are too focused on matters internal to the project to take into account external uncertainty, the “unknown unknown,” so to speak, the contents of the unread books. Location 3361

We cannot truly plan, because we do not understand the future—but this is not necessarily bad news. We could plan while bearing in mind such limitations. It just takes guts. Location 3368

Note: The summary of several passages of which the main theme is that almost without exception, everything takes longer and is more expensive than they plan for it to be, because they plan how long they think the project will take, not all of the externalities like weather, relationships, broken down vehicles, and countless other things they can’t possibly know are coming 

This anchoring mechanism was discovered by the fathers of the psychology of uncertainty, Danny Kahneman and Amos Tversky, early in their heuristics and biases project. It operates as follows. Kahneman and Tversky had their subjects spin a wheel of fortune. The subjects first looked at the number on the wheel, which they knew was random, then they were asked to estimate the number of African countries in the United Nations. Those who had a low number on the wheel estimated a low number of African nations; those with a high number produced a higher estimate. Similarly, ask someone to provide you with the last four digits of his social security number. Then ask him to estimate the number of dentists in Manhattan. You will find that by making him aware of the four-digit number, you elicit an estimate that is correlated with it. Location 3383

Note: Good description of anchoring Edit

It is not scalable, since the older we get, the less likely we are to live. Location 3396

Note: One sentence rebuttle to the entire argument on whether it is better to be older or younger. I debated this over pages, with paragraphs, when this pretty much puts this to rest Edit

This illustrates the major property of random variables related to the bell curve. The conditional expectation of additional life drops as a person gets older. Location 3400

One anonymous person (he is employed by a governmental agency) explained to me privately after the talk that in January 2004 his department was forecasting the price of oil for twenty-five years later at $27 a barrel, slightly higher than what it was at the time. Six months later, around June 2004, after oil doubled in price, they had to revise their estimate to $54 (the price of oil is currently, as I am writing these lines, close to $79 a barrel). It did not dawn on them that it was ludicrous to forecast a second time given that their forecast was off so early and so markedly, that this business of forecasting had to be somehow questioned. And they were looking twenty-five years ahead! Nor did it hit them that there was something called an error rate to take into account. Location 3426

The policies we need to make decisions on should depend far more on the range of possible outcomes than on the expected final number. I have seen, while working for a bank, how people project cash flows for companies without wrapping them in the thinnest layer of uncertainty. Go to the stockbroker and check on what method they use to forecast sales ten years ahead to “calibrate” their valuation models. Go find out how analysts forecast government deficits. Go to a bank or security-analysis training program and see how they teach trainees to make assumptions; they do not teach you to build an error rate around those assumptions—but their error rate is so large that it is far more significant than the projection itself! Location 3438

Note: The fallacy of certainty, and the omission of any idea of a range of error. Important when people try to make certain projections, SS being a good example

The second fallacy lies in failing to take into account forecast degradation as the projected period lengthens. We do not realize the full extent of the difference between near and far futures. Yet the degradation in such forecasting through time becomes evident through simple introspective examination—without even recourse to scientific papers, which on this topic are suspiciously rare. Consider forecasts, whether economic or technological, made in 1905 for the following quarter of a century. How close to the projections did 1925 turn out to be? For a convincing experience, go read George Orwell’s 1984. Or look at more recent forecasts made in 1975 about the prospects for the new millennium. Many events have taken place and new technologies have appeared that lay outside the forecasters’ imaginations; many more that were expected to take place or appear did not do so. Our forecast errors have traditionally been enormous, and there may be no reasons for us to believe that we are suddenly in a more privileged position to see into the future compared to our blind predecessors. Forecasting by bureaucrats tends to be used for anxiety relief rather than for adequate policy making. Location 3443

Note: Good point in forecasting and it’s flawed examples, as well as a good way to explain why the flaw exists. The possible future simply lies outside your imagination. Would be good against Casey in the C programming debate. He wasn’t allowing the possibility of a change or advance outside of his imagination, the change seen the most Edit

The third fallacy, and perhaps the gravest, concerns a misunderstanding of the random character of the variables being forecast. Owing to the Black Swan, these variables can accommodate far more optimistic—or far more pessimistic—scenarios than are currently expected. Location 3452

What is the implication here? Even if you agree with a given forecast, you have to worry about the real possibility of significant divergence from it. These divergences may be welcomed by a speculator who does not depend on steady income; a retiree, however, with set risk attributes cannot afford such gyrations. I would go even further and, using the argument about the depth of the river, state that it is the lower bound of estimates (i.e., the worst case) that matters when engaging in a policy—the worst case is far more consequential than the forecast itself. This is particularly true if the bad scenario is not acceptable. Yet the current phraseology makes no allowance for that. None. Location 3455

Note: Good Summary of the flaws of forecast. Worst case scenario matters, and is of high consequence, not just a rounding error. 

It is often said that “is wise he who can see things coming.” Perhaps the wise one is the one who knows that he cannot see things far away. Location 3460

Note: Another good Summary Edit

have never had an outlook and have never made professional predictions—but at least I know that I cannot forecast and a small number of people (those I care about) take that as an asset. Location 3468

I have said that the Black Swan has three attributes: unpredictability, consequences, and retrospective explainability. Let us examine this unpredictability business.* Location 3486

While forecast errors have always been entertaining, commodity prices have been a great trap for suckers. Consider this 1970 forecast by U.S. officials (signed by the U.S. Secretaries of the Treasury, State, Interior, and Defense): “the standard price of foreign crude oil by 1980 may well decline and will in any event not experience a substantial increase.” Oil prices went up tenfold by 1980. I just wonder if current forecasters lack in intellectual curiosity or if they are intentionally ignoring forecast errors. Also note this additional aberration: since high oil prices are marking up their inventories, oil companies are making record bucks and oil executives are getting huge bonuses because “they did a good job”—as if they brought profits by causing the rise of oil prices. Location 3491

Note: Usable. Oil CEOs and a counter to the idea that they “do a good job” Edit

A five-year plan? To a fellow deeply skeptical of the central planner, the notion was ludicrous; growth within the firm had been organic and unpredictable, bottom-up not top-down. It was well known that the firm’s most lucrative department was the product of a chance call from a customer asking for a specific but strange financial transaction. The firm accidentally realized that they could build a unit just to handle these transactions, since they were profitable, and it rapidly grew to dominate their activities. Location 3511

Note: Good example of your success coming not from planning Edit

The managers flew across the world in order to meet: Barcelona, Hong Kong, et cetera. A lot of miles for a lot of verbiage. Needless to say they were usually sleep-deprived. Being an executive does not require very developed frontal lobes, but rather a combination of charisma, a capacity to sustain boredom, and the ability to shallowly perform on harrying schedules. Add to these tasks the “duty” of attending opera performances. Location 3515

Note: More good narrative and writing Edit

The managers sat down to brainstorm during these meetings, about, of course, the medium-term future—they wanted to have “vision.” But then an event occurred that was not in the previous five-year plan: the Black Swan of the Russian financial default of 1998 and the accompanying meltdown of the values of Latin American debt markets. It had such an effect on the firm that, although the institution had a sticky employment policy of retaining managers, none of the five was still employed there a month after the sketch of the 1998 five-year plan. Yet I am confident that today their replacements are still meeting to work on the next “five-year plan.” We never learn. Location 3518

Note: More good. The flaw of predictability and the futility of suits making “forecasts” Edit

If you think that the inventions we see around us came from someone sitting in a cubicle and concocting them according to a timetable, think again: almost everything of the moment is the product of serendipity. Location 3527

In other words, you find something you are not looking for and it changes the world, while wondering after its discovery why it “took so long” to arrive at something so obvious. No journalist was present when the wheel was invented, but I am ready to bet that people did not just embark on the project of inventing the wheel (that main engine of growth) and then complete it according to a timetable. Likewise with most inventions. Location 3530

It describes discoverers as sleepwalkers stumbling upon results and not realizing what they have in their hands. We think that the import of Copernicus’s discoveries concerning planetary motions was obvious to him and to others in his day; he had been dead seventy-five years before the authorities started getting offended. Likewise we think that Galileo was a victim in the name of science; in fact, the church didn’t take him too seriously. It seems, rather, that Galileo caused the uproar himself by ruffling a few feathers. At the end of the year in which Darwin and Wallace presented their papers on evolution by natural selection that changed the way we view the world, the president of the Linnean society, where the papers were presented, announced that the society saw “no striking discovery,” nothing in particular that could revolutionize science. Location 3536

Note: Notes on Copernicus and the accident of discovery Edit

Take this dramatic example of a serendipitous discovery. Alexander Fleming was cleaning up his laboratory when he found that penicillium mold had contaminated one of his old experiments. He thus happened upon the antibacterial properties of penicillin, the reason many of us are alive today (including, as I said in Chapter 8, myself, for typhoid fever is often fatal when untreated). Location 3544

Note: Butterfly effect Edit

Fleming was looking for “something,” but the actual discovery was simply serendipitous. Furthermore, while in hindsight the discovery appears momentous, it took a very long time for health officials to realize the importance of what they had on their hands. Even Fleming lost faith in the idea before it was subsequently revived. Location 3547

Thomas Watson, the founder of IBM, once predicted that there would be no need for more than just a handful of computers. Location 3566

Note: But C will be around forever Edit

The laser is a prime illustration of a tool made for a given purpose (actually no real purpose) that then found applications that were not even dreamed of at the time. It was a typical “solution looking for a problem.” Among the early applications was the surgical stitching of detached retinas. Half a century later, The Economist asked Charles Townes, the alleged inventor of the laser, if he had had retinas on his mind. He had not. He was satisfying his desire to split light beams, and that was that. In fact, Townes’s colleagues teased him quite a bit about the irrelevance of his discovery. Yet just consider the effects of the laser in the world around you: compact disks, eyesight corrections, microsurgery, data storage and retrieval—all unforeseen applications of the technology.* We build toys. Some of those toys change the world. Location 3582

Note: Perfect Example, the Laser This idea also holds in social settings, such as women or debate. You rarely used the debate tools you train for what you plan them for; life is too amorphous and unpredictable for that. The idea is to aquire a good library and technique, good broad principles and try to apply them generally. This is why studying a single chess opening never seemed to help. Planning for particular events, or building tools, whether physical or verbal for surgical use in debate, seems to fail. The situation never arises, but the ones you didn’t see always do. Plan for the general, ready for the specific, but don’t rely on the particular 

The biotech company seemed to follow implicitly, though not explicitly, Louis Pasteur’s adage about creating luck by sheer exposure. “Luck favors the prepared,” Pasteur said, and, like all great discoverers, he knew something about accidental discoveries. The best way to get maximal exposure is to keep researching. Collect opportunities—on that, later. Location 3598

Note: This is how we get women. Not by planning, but exposing ourselves to oppurtunity. 

To predict the spread of a technology implies predicting a large element of fads and social contagion, which lie outside the objective utility of the technology itself (assuming there is such an animal as objective utility). How many wonderfully useful ideas have ended up in the cemetery, such as the Segway, an electric scooter that, it was prophesized, would change the morphology of cities, and many others. As I was mentally writing these lines I saw a Time magazine cover at an airport stand announcing the “meaningful inventions” of the year. These inventions seemed to be meaningful as of the issue date, or perhaps for a couple of weeks after. Journalists can teach us how to not learn. Location 3601

This point can be generalized to all forms of knowledge. There is actually a law in statistics called the law of iterated expectations, which I outline here in its strong form: if I expect to expect something at some date in the future, then I already expect that something at present. Consider the wheel again. If you are a Stone Age historical thinker called on to predict the future in a comprehensive report for your chief tribal planner, you must project the invention of the wheel or you will miss pretty much all of the action. Now, if you can prophesy the invention of the wheel, you already know what a wheel looks like, and thus you already know how to build a wheel, so you are already on your way. The Black Swan needs to be predicted! Location 3623

But there is a weaker form of this law of iterated knowledge. It can be phrased as follows: to understand the future to the point of being able to predict it, you need to incorporate elements from this future itself. If you know about the discovery you are about to make in the future, then you have almost made it. Assume that you are a special scholar in Medieval University’s Forecasting Department specializing in the projection of future history (for our purposes, the remote twentieth century). You would need to hit upon the inventions of the steam machine, electricity, the atomic bomb, and the Internet, as well as the institution of the airplane onboard massage and that strange activity called the business meeting, in which well-fed, but sedentary, men voluntarily restrict their blood circulation with an expensive device called a necktie. Location 3628

Note: Not only is it hard to predict any certain technology, but any such technology or fad or form of knowledge itself relies on an unknown number of OTHER black swans, technologies, inventions, and yet to be seen elements of the future. C programming, Social Security, and Debt are all good examples. We must be prudent, but we can’t know what other factors will come into being outside of our imagination 

By the same logic, we are not easily able to conceive of future inventions (if we were, they would have already been invented). On the day when we are able to foresee inventions we will be living in a state where everything conceivable has been invented. Location 3638

Note: More or less a pretty cut and dried evisceration of any and all ideas that you can predict future technologies 

We are not even good at understanding the unknowable. Consider the statements we make about things that we will never come to know—we confidently underestimate what knowledge we may acquire in the future. Location 3646

Note: More Good on the nature of future knowledge

Auguste Comte, the founder of the school of positivism, which is (unfairly) accused of aiming at the scientization of everything in sight, declared that mankind would forever remain ignorant of the chemical composition of the fixed stars. But, as Charles Sanders Peirce reported, “The ink was scarcely dry upon the printed page before the spectroscope was discovered and that which he had deemed absolutely unknowable was well on the way of getting ascertained.” Location 3647

Note: It wasn’t that they failed to aquire the knowledge by means he already knew of, they were able to acquire the knowledge by means of a technology he had not even conceived of. A good example of the foolishness of negative prediction. 

I’ll summarize my argument here: Prediction requires knowing about technologies that will be discovered in the future. But that very knowledge would almost automatically allow us to start developing those technologies right away. Ergo, we do not know what we will know. Location 3652

Note: Important – Summary of Chapter, in concise and strong form.

Some might say that the argument, as phrased, seems obvious, that we always think that we have reached definitive knowledge but don’t notice that those past societies we laugh at also thought the same way. My argument is trivial, so why don’t we take it into account? The answer lies in a pathology of human nature. Remember the psychological discussions on asymmetries in the perception of skills in the previous chapter? We see flaws in others and not in ourselves. Once again we seem to be wonderful at self-deceit machines. Location 3654

Note: Useful to point out how everyone you will come across, foe or ally, all think they are immune to the fallacies everyone else is. Everyone is in the top 50%, everyone else is different, and you’re special. Self -deceit in natural in anyone. 

Poincaré became a prolific essayist in his thirties. He seemed in a hurry and died prematurely, at fifty-eight; he was in such a rush that he did not bother correcting typos and grammatical errors in his text, even after spotting them, since he found doing so a gross misuse of his time. They no longer make geniuses like that—or they no longer let them write in their own way. Location 3669

Note: More good 

When mathematicians say “hand-waving,” disparagingly, about someone’s work, it means that the person has: a) insight, b) realism, c) something to say, and it means that d) he is right because that’s what critics say when they can’t find anything more negative. Location 3689

Note: Good way to dismiss ad hominums and attacks on that which is not the argument, as an implicit failure to refute the argument.

One of the readers of a draft of this book, David Cowan, gracefully drew this picture of scattering, which shows how, at the second bounce, variations in the initial conditions can lead to extremely divergent results. As the initial imprecision in the angle is multiplied, every additional bounce will be further magnified. This causes a severe multiplicative effect where the error grows out disproportionately. Location 3718

Note: Nice example of compounding error in prediction and complexity of the future 

Think of the difficulty in forecasting in terms of branches growing out of a tree; at every fork we have a multiplication of new branches. To see how our intuitions about these nonlinear multiplicative effects are rather weak, consider this story about the chessboard. The inventor of the chessboard requested the following compensation: one grain of rice for the first square, two for the second, four for the third, eight, then sixteen, and so on, doubling every time, sixty-four times. The king granted this request, thinking that the inventor was asking for a pittance—but he soon realized that he was outsmarted. The amount of rice exceeded all possible grain reserves! Location 3724

Note that this billiard-ball story assumes a plain and simple world; it does not even take into account these crazy social matters possibly endowed with free will. Billiard balls do not have a mind of their own. Nor does our example take into account relativity and quantum effects. Nor did we use the notion (often invoked by phonies) called the “uncertainty principle.” We are not concerned with the limitations of the precision in measurements done at the subatomic level. We are just dealing with billiard balls! Location 3740

Lorenz subsequently realized that the consequential divergence in his results arose not from error, but from a small rounding in the input parameters. This became known as the butterfly effect, since a butterfly moving its wings in India could cause a hurricane in New York, two years later. Lorenz’s findings generated interest in the field of chaos theory. Location 3753

Except, of course, if there is a trick, and that trick is the cord on which neoclassical economics is suspended. You simply assume that individuals will be rational in the future and thus act predictably. Location 3842

Note: Probably the best first rebuttle to Market Fundamentalism I can think of. Based on the assumption that people behave rationally. They don’t always, and so we really have no idea what the outcome of the system will be. They can’t say Free Markets will result in good outcomes. We can’t say they will have bad outcomes nessesarily either. We don’t know. We know this, but we at least don’t try to claim the religion of Market Fundamentalism. 

Alas, it turns out that it was Samuelson and most of his followers who did not know much math, or did not know how to use what math they knew, how to apply it to reality. They only knew enough math to be blinded by it. Location 3861

Note: Good, and could be useful. 

Also, as we have seen with the anchoring example, subjects’ estimates of the number of dentists in Manhattan are influenced by which random number they have just been presented with—the anchor. Given the randomness of the anchor, we will have randomness in the estimates. So if people make inconsistent choices and decisions, the central core of economic optimization fails. You can no longer produce a “general theory,” and without one you cannot predict. Location 3871

Most of the debate between creationists and evolutionary theorists (of which I do not partake) lies in the following: creationists believe that the world comes from some form of design while evolutionary theorists see the world as a result of random changes by an aimless process. But it is hard to look at a computer or a car and consider them the result of aimless process. Yet they are. Location 3931

While looking at the past it would be a good idea to resist naïve analogies. Many people have compared the United States today to Ancient Rome, both from a military standpoint (the destruction of Carthage was often invoked as an incentive for the destruction of enemy regimes) and from a social one (the endless platitudinous warnings of the upcoming decline and fall). Alas, we need to be extremely careful in transposing knowledge from a simple environment that is closer to type 1, like the one we had in antiquity, to today’s type 2, complex system, with its intricate webs of casual links. Another error is to draw casual conclusions from the absence of nuclear war, since, invoking the Casanova argument of Chapter 8, I would repeat that we would not be here had a nuclear war taken place, and it is not a good idea for us to derive a “cause” when our survival is conditioned on that cause. Location 4131

Note: We read this, oddly enough, at literally almost the same moment that we were thinking of a similar political problem in our head. The very day I read this, President Obama signed through executive order, a few modest gun laws like an assult rifle ban, background checks, and a limit on magazine size. The Republitards went batshit nuts on Facebook. Naturally, Hitler was evoked. A women telling a story about how Austria was first disarmed, then one of how he was surrounded by Children when proclaiming his gun laws would save everyone. They wanted you to think the same thing of Obama. Here, we point out this as an exceedingly naive analogy. The way he puts it here is good. They are in effect, trying to transpose knoledge from a far different environment to a new one. One event tells you nothing about the next. First it’s of course laughable on its surface, but this would be how to debate against it if nessesary. 

It is not a good habit to stuff one’s text with quotations from prominent thinkers, except to make fun of them or provide a historical reference. They “make sense,” but well-sounding maxims force themselves on our gullibility and do not always stand up to empirical tests. Location 4143

We cannot teach people to withhold judgment; judgments are embedded in the way we view objects. I do not see a “tree;” I see a pleasant or an ugly tree. It is not possible without great, paralyzing effort to strip these small values we attach to matters. Likewise, it is not possible to hold a situation in one’s head without some element of bias. Something in our dear human nature makes us want to believe; so what? Location 4156

What you should avoid is unnecessary dependence on large-scale harmful predictions—those and only those. Avoid the big subjects that may hurt your future: be fooled in small matters, not in the large. Do not listen to economic forecasters or to predictors in social science (they are mere entertainers), but do make your own forecast for the picnic. By all means, demand certainty for the next picnic; but avoid government social-security forecasts for the year 2040. Location 4171

Recall the empirics, those members of the Greek school of empirical medicine. They considered that you should be open-minded in your medical diagnoses to let luck play a role. By luck, a patient might be cured, say, by eating some food that accidentally turns out to be the cure for his disease, so that the treatment can then be used on subsequent patients. The positive accident (like hypertension medicine producing side benefits that led to Viagra) was the empirics’ central method of medical discovery. This same point can be generalized to life: maximize the serendipity around you. Sextus Empiricus retold the story of Apelles the Painter, who, while doing a portrait of a horse, was attempting to depict the foam from the horse’s mouth. After trying very hard and making a mess, he gave up and, in irritation, took the sponge he used for cleaning his brush and threw it at the picture. Where the sponge hit, it left a perfect representation of the foam. Location 4181

Barbell Strategy I am trying here to generalize to real life the notion of the “barbell” strategy I used as a trader, which is as follows. If you know that you are vulnerable to prediction errors, and if you accept that most “risk measures” are flawed, because of the Black Swan, then your strategy is to be as hyperconservative and hyperaggressive as you can be instead of being mildly aggressive or conservative. Instead of putting your money in “medium risk” investments (how do you know it is medium risk? by listening to tenure-seeking “experts”?), you need to put a portion, say 85 to 90 percent, in extremely safe instruments, like Treasury bills—as safe a class of instruments as you can manage to find on this planet. The remaining 10 to 15 percent you put in extremely speculative bets, as leveraged as possible (like options), preferably venture capital–style portfolios.* That way you do not depend on errors of risk management; no Black Swan can hurt you at all, beyond your “floor,” the nest egg that you have in maximally safe investments. Or, equivalently, you can have a speculative portfolio and insure it (if possible) against losses of more than, say, 15 percent. You are “clipping” your incomputable risk, the one that is harmful to you. Instead of having medium risk, you have high risk on one side and no risk on the other. The average will be medium risk but constitutes a positive exposure to the Black Swan. More technically, this can be called a “convex” combination. Let us see how this can be implemented in all aspects of life. Location 4207

Note: Not bad at all. You can’t lose. You are safe for the broad strokes, but part of you is risking mightily. If you lose, you lose, but not big. If you win, you win huge, and come out entirely ahead. The barbell strategy is a good way at looking at the world in fact.

He knew that he could not predict individual events, but he was well aware that the unpredictable, namely a movie turning into a blockbuster, would benefit him immensely. Location 4223

Andy Marshall and Andy Mays asked me if the private sector could do better in predicting. Alas, no. Once again, recall the story of banks hiding explosive risks in their portfolios. It is not a good idea to trust corporations with matters such as rare events because the performance of these executives is not observable on a short-term basis, and they will game the system by showing good performance so they can get their yearly bonus. Location 4275

The Great Asymmetry All these recommendations have one point in common: asymmetry. Put yourself in situations where favorable consequences are much larger than unfavorable ones. Location 4287

Indeed, the notion of asymmetric outcomes is the central idea of this book: I will never get to know the unknown since, by definition, it is unknown. However, I can always guess how it might affect me, and I should base my decisions around that. Location 4289

We can have a clear idea of the consequences of an event, even if we do not know how likely it is to occur. I don’t know the odds of an earthquake, but I can imagine how San Francisco might be affected by one. This idea that in order to make a decision you need to focus on the consequences (which you can know) rather than the probability (which you can’t know) is the central idea of uncertainty. Much of my life is based on it. Location 4300

I’ll sum up this long section on prediction by stating that we can easily narrow down the reasons we can’t figure out what’s going on. There are: a) epistemic arrogance and our corresponding future blindness; b) the Platonic notion of categories, or how people are fooled by reductions, particularly if they have an academic degree in an expert-free discipline; and, finally c) flawed tools of inference, particularly the Black Swan–free tools from Mediocristan. Location 4312

Note: Summary 

But the role of luck is missing in Rosen’s beautiful argument. The problem here is the notion of “better,” this focus on skills as leading to success. Random outcomes, or an arbitrary situation, can also explain success, and provide the initial push that leads to a winner-take-all result. A person can get slightly ahead for entirely random reasons; because we like to imitate one another, we will flock to him. The world of contagion is so underestimated! Location 4372

Let’s say someone writes an academic paper quoting fifty people who have worked on the subject and provided background materials for his study; assume, for the sake of simplicity, that all fifty are of equal merit. Another researcher working on the exact same subject will randomly cite three of those fifty in his bibliography. Merton showed that many academics cite references without having read the original work; rather, they’ll read a paper and draw their own citations from among its sources. So a third researcher reading the second article selects three of the previously referenced authors for his citations. These three authors will receive cumulatively more and more attention as their names become associated more tightly with the subject at hand. The difference between the winning three and the other members of the original cohort is mostly luck: they were initially chosen not for their greater skill, but simply for the way their names appeared in the prior bibliography. Thanks to their reputations, these successful academics will go on writing papers and their work will be easily accepted for publication. Academic success is partly (but significantly) a lottery. Location 4381

In sociology, Matthew effects bear the less literary name “cumulative advantage.” This theory can easily apply to companies, businessmen, actors, writers, and anyone else who benefits from past success. If you get published in The New Yorker because the color of your letterhead attracted the attention of the editor, who was daydreaming of daisies, the resultant reward can follow you for life. More significantly, it will follow others for life. Failure is also cumulative; losers are likely to also lose in the future, even if we don’t take into account the mechanism of demoralization that might exacerbate it and cause additional failure. Location 4397

Note: Compounding effects based off of initial luck and labeled as “skill” for which they are commended 

In other words, if you leave companies alone, they tend to get eaten up. Those in favor of economic freedom claim that beastly and greedy corporations pose no threat because competition keeps them in check. What I saw at the Wharton School convinced me that the real reason includes a large share of something else: chance. Location 4471

I said earlier that randomness is bad, but it is not always so. Luck is far more egalitarian than even intelligence. If people were rewarded strictly according to their abilities, things would still be unfair—people don’t choose their abilities. Randomness has the beneficial effect of reshuffling society’s cards, knocking down the big guy. Location 4478

Note: Good, but a very important political and ethical point. We are told everyone deserves what tgey get, their choices determine their fate, and any wealth or destitution is their own fault. But a simple point is we really don’t choose our abilities. We can train them to some extent but some people are better at others at things that happen to make money. It’s mostly a matter of luck 

We have moved from a diversified ecology of small banks, with varied lending policies, to a more homogeneous framework of firms that all resemble one another. True, we now have fewer failures, but when they occur … I shiver at the thought. I rephrase here: we will have fewer but more severe crises. The rarer the event, the less we know about its odds. It means that we know less and less about the possibility of a crisis. Location 4542

There is a branch of research called “network theory” that studies the organization of such networks and the links between their nodes, with such researchers as Duncan Watts, Steven Strogatz, Albert-Laszlo Barabasi, and many more. They all understand Extremistan mathematics and the inadequacy of the Gaussian bell curve. They have uncovered the following property of networks: there is a concentration among a few nodes that serve as central connections. Networks have a natural tendency to organize themselves around an extremely concentrated architecture: a few nodes are extremely connected; others barely so. The Location 4547

Note: Very relevant to what we studied in 2010 

It has even been shown, by Michael Marmot of the Whitehall Studies, that those at the top of the pecking order live longer, even when adjusting for disease. Marmot’s impressive project shows how social rank alone can affect longevity. It was calculated that actors who win an Oscar tend to live on average about five years longer than their peers who don’t. People live longer in societies that have flatter social gradients. Winners kill their peers as those in a steep social gradient live shorter lives, regardless of their economic condition. Location 4577

Note: While hard to pilot in am argument, it could be good fuel for a budding argument against inequality on the grounds of positional externalities. Such inequality inflicts pain on everyone at the bottom. You’d have to prove that it wasn’t merely the top pulling away, which would only be them improving, but the bottom losing. Something to think about 

I’ll summarize here and repeat the arguments previously made throughout the book. Measures of uncertainty that are based on the bell curve simply disregard the possibility, and the impact, of sharp jumps or discontinuities and are, therefore, inapplicable in Extremistan. Using them is like focusing on the grass and missing out on the (gigantic) trees. Although unpredictable large deviations are rare, they cannot be dismissed as outliers because, cumulatively, their impact is so dramatic. Location 4722
Note: Summary of the black Swan in general and the fallacy of the bell curve Edit
In Mediocristan, as your sample size increases, the observed average will present itself with less and less dispersion—as you can see, the distribution will be narrower and narrower. This, in a nutshell, is how everything in statistical theory works (or is supposed to work). Uncertainty in Mediocristan vanishes under averaging. This illustrates the hackneyed “law of large numbers.” Location 4760

The safety of my coffee cup illustrates how the randomness of the Gaussian is tamable by averaging. If my cup were one large particle, or acted as one, then its jumping would be a problem. But my cup is the sum of trillions of very small particles. Location 4763

Let me state here that, except for the grocery-store mentality, I truly believe in the value of middleness and mediocrity—what humanist does not want to minimize the discrepancy between humans? Nothing is more repugnant than the inconsiderate ideal of the Übermensch! My true problem is epistemological. Reality is not Mediocristan, so we should learn to live with it. Location 4861

Note: A good point to think of. Who WANTS such discrepancy among people. Why is such inequality, such wealth mixed with such suffering a good thing? Again, they will appeal to the religion of market fundamentalism. Tear that down and your on your way. 

Let me discuss here the extent of the damage. If you’re dealing with qualitative inference, such as in psychology or medicine, looking for yes/no answers to which magnitudes don’t apply, then you can assume you’re in Mediocristan without serious problems. The impact of the improbable cannot be too large. You have cancer or you don’t, you are pregnant or you are not, et cetera. Degrees of deadness or pregnancy are not relevant (unless you are dealing with epidemics). But if you are dealing with aggregates, where magnitudes do matter, such as income, your wealth, return on a portfolio, or book sales, then you will have a problem and get the wrong distribution if you use the Gaussian, as it does not belong there. One single number can disrupt all your averages; one single loss can eradicate a century of profits. You can no longer say “this is an exception.” The statement “Well, I can lose money” is not informational unless you can attach a quantity to that loss. You can lose all your net worth or you can lose a fraction of your daily income; there is a difference. Location 4878

Note: Largely the summary of the objection to the bell curve 

Sixty degrees corresponds to pleasant weather; ten below is not something to look forward to. You don’t necessarily care about the actual speed of the collisions among particles that more technically explains temperature. Degrees are, in a way, a means for your mind to translate some external phenomena into a number. Location 4958

Note: An interesting point on abstract ideas that are based on existing relationships. Useful when thinking about the debate on time. The point is time is supposed to be superfluous, a means for the mind to translate some external phenomena into a number. We would have to demonstrate that isn’t the case 

As the reader can see, the main point of the Gaussian bell curve is, as I have been saying, that most observations hover around the mediocre, the mean, while the odds of a deviation decline faster and faster (exponentially) as you move away from the mean. If you need to retain one single piece of information, just remember this dramatic speed of decrease in the odds as you move away from the average. Outliers are increasingly unlikely. You can safely ignore them. Location 4967

Note: Gausion Bell in good summary 

First central assumption: the flips are independent of one another. The coin has no memory. The fact that you got heads or tails on the previous flip does not change the odds of your getting heads or tails on the next one. You do not become a “better” coin flipper over time. Location 4976

Note: Best refutation of the gamblers fallacy, and induction based on individual events, we’ve seen. The coin has no memory. We could have taken a paragraph to describe 5 words. Try to find succinct, slicing answers and rebuttals in otherwise complex ideas. That is a hallmark of communication 

In games, of course, past winnings are not supposed to translate into an increased probability of future gains—but not so in real life, which is why I worry about teaching probability from games. But when winning leads to more winning, you are far more likely to see forty wins in a row than with a proto-Gaussian. Location 4981

exponent. A gray swan concerns modelable extreme events, a black swan is about unknown unknowns. Location 5378

Let us return to the story of my business life. Look at the graph in Figure 14. In the last fifty years, the ten most extreme days in the financial markets represent half the returns. Ten days in fifty years. Meanwhile, we are mired in chitchat. Location 5416

Being on the receiving end of angry insults is not that bad; you can get quickly used to it and focus on what is not said. Location 5492

Note: Good response to insults Edit

So you become numb to insults, particularly if you teach yourself to imagine that the person uttering them is a variant of a noisy ape with little personal control. Location 5495

Note: Another good one Edit

An ad hominem attack against an intellectual, not against an idea, is highly flattering. It indicates that the person does not have anything intelligent to say about your message. Location 5497

Note: One of the best rebuttles to an ad hominum ever seen Edit

Along the way I saw enough of the confirmation error to make Karl Popper stand up with rage. People would find data in which there were no jumps or extreme events, and show me a “proof” that one could use the Gaussian. This was exactly like my example of the “proof” that O. J. Simpson is not a killer in Chapter 5. The entire statistical business confused absence of proof with proof of absence. Furthermore, people did not understand the elementary asymmetry involved: you need one single observation to reject the Gaussian, but millions of observations will not fully confirm the validity of its application. Why? Because the Gaussian bell curve disallows large deviations, but tools of Extremistan, the alternative, do not disallow long quiet stretches. Location 5523

Note: Good summary of some main points in whole book 

A scholar who applies such methodology resembles Locke’s definition of a madman: someone “reasoning correctly from erroneous premises.” Location 5551

Note: Very good, and use. An argument can be valid, but unsound. 

Having plenty of data will not provide confirmation, but a single instance can disconfirm. Location 5740

Note: If you take away a few things from the book, take away this, one of the main ideas. All the “examples” people provide to support a narrative point doesn’t confirm it. But a single example can disconfirm. People dealing in absolutes have all their work ahead of them.

Snub your destiny. I have taught myself to resist running to keep on schedule. This may seem a very small piece of advice, but it registered. In refusing to run to catch trains, I have felt the true value of elegance and aesthetics in behavior, a sense of being in control of my time, my schedule, and my life. Missing a train is only painful if you run after it! Likewise, not matching the idea of success others expect from you is only painful if that’s what you are seeking. You stand above the rat race and the pecking order, not outside of it, if you do so by choice. Location 5768

Note: One of the top 10 things in the book, and again useful in all areas from Politics to women to framing. Reframe everything as a control frame, you don’t run after the train, you are in control of your time. You’re not late, you do things on your own schedule. You have control. The last two sentances are excellent. Espeically geat as a reframe to someone telling you how to live your life. Dating younger women. Girls and them wrestling or modeling. Something only bothers you if you are trying for it. If you’re not trying to seek approval from others, you won’t be sad when you don’t get it. 

Reverse-engineering problem: It is easier to predict how an ice cube would melt into a puddle than, looking at a puddle, to guess the shape of the ice cube that may have caused it. This “inverse problem” makes narrative disciplines and accounts (such as histories) suspicious. Location 5873

Round-trip fallacy: the confusion of absence of evidence of Black Swans (or something else) for evidence of absence of Black Swans (or something else). It affects statisticians and other people who have lost part of their reasoning by solving too many equations. Location 5875

Note: The fact that there have been no Black Swans is no evidence that their are none, that’s why they are Black Swans. They are rare, but when they occur, they change everything.

would urge us to have several years of income in cash before taking any personal risk—exactly my barbell idea of Chapter 11, in which one keeps high cash reserves while taking more aggressive risks but with a small portion of the portfolio. Had banks done that, there would have been no bank crises in history. Location 6008

Note: A rational behind laws for fractional reserve. The laws are meant to keep the whole world from going bust. 

By the same argument we can lower 90 percent of Black Swan risks in economic life … by just eliminating speculative debt. Location 6277

Let me start again. The Black Swan is about consequential epistemic limitations, both psychological (hubris and biases) and philosophical (mathematical) limits to knowledge, both individual and collective. I say “consequential” because the focus is on impactful rare events, as our knowledge, both empirical and theoretical, breaks down with those—the more remote the events, the less we can forecast them, yet they are the most impactful. Location 6318

One frequent confusion: people believe that I am suggesting that agents should bet on Black Swans taking place, when I am saying that they should avoid blowing up should a Black Swan take place. Location 6466

So I was wondering why so many otherwise intelligent people have casually questioned whether certain events, say the Great War, or the September 11, 2001, attack on the World Trade Center, were Black Swans, on the grounds that some predicted them. Of course the September 11 attack was a Black Swan to those victims who died in it; otherwise, they would not have exposed themselves to the risk. But it was certainly not a Black Swan to the terrorists who planned and carried out the attack. I have spent considerable time away from the weight-lifting room repeating that a Black Swan for the turkey is not a Black Swan for the butcher. Location 6494

It does not take a lot of introspection to figure out that big events don’t have big parents: the Great War did not have a predecessor; the crash of 1987, in which the market went down close to 23 percent in a single day, could not have been guessed from its worst predecessor, a one-day loss of around 10 percent—and this applies to almost all such events, of course. My results were that regular events can predict regular events, but that extreme events, perhaps because they are more acute when people are unprepared, are almost never predicted from narrow reliance on the past. Location 6546

Note: It makes sense, that everything has to happen a first time to happen, but that doesn’t mean it’s not predictable Edit

The fact that this notion is not obvious to people is shocking to me. It is particularly shocking that people do what are called “stress tests” by taking the worst possible past deviation as an anchor event to project the worst possible future deviation, not thinking that they would have failed to account for that past deviation had they used the same method on the day before the occurrence of that past anchor event. Location 6550

This assumes that something is computable, when really everything is more or less incomputable (and rare events more so). One has to have a mental problem to think that probabilities of future events are “measurable” in the same sense that the temperature is measurable by a thermometer. We will see in the following section that small probabilities are less computable, and that this matters when the associated payoffs are consequential. Location 6603

It is indeed the absence of higher order representation—the inability to accept statements like “Is my method for assessing what is right or wrong right or wrong?”— Location 6636

Note: Good for Politics and Libertarianism, they claim they are right. Is there method for assessing it right. 

So, you know that he’s getting his small probabilities from a theory. The more remote the event, the less we can get empirical data (assuming generously that the future will resemble the past) and the more we need to rely on theory. Location 6697

Consider that the frequency of rare events cannot be estimated from empirical observation for the very reason that they are rare. We thus need a prior model representation for that; the rarer the event, the higher the error in estimation from standard inductive methods (say, frequency sampling from counting past occurrences), hence the higher the dependence on an a priori representation that extrapolates into the space of low-probability events (which necessarily are not seen often). Location 6699

Further, we in real life do not care about simple, raw probability (whether an event happens or does not happen); we worry about consequences (the size of the event; how much total destruction of lives or wealth, or other losses, will come from it; how much benefit a beneficial event will bring). Location 6723

I showed that this error is more severe in Extremistan, where rare events are more consequential, because of a lack of scale, or a lack of asymptotic ceiling for the random variable. In Mediocristan, by comparison, the collective effect of regular events dominates and the exceptions are rather inconsequential—we know their effect, and it is very mild because one can diversify thanks to the “law of large numbers.” Let me provide once again an illustration of Extremistan. Less than 0.25 percent of all the companies listed in the world represent around half the market capitalization, a less than minuscule percentage of novels on the planet accounts for approximately half of fiction sales, less than 0.1 percent of drugs generate a little more than half the pharmaceutical industry’s sales—and less than 0.1 percent of risky events will cause at least half the damages and losses. Location 6732

But the problem gets more interesting in some domains. Recall the Casanova problem in Chapter 8. For environments that tend to produce negative Black Swans, but no positive Black Swans (these environments are called negatively skewed), the problem of small probabilities is worse. Why? Clearly, catastrophic events will be necessarily absent from the data, since the survivorship of the variable itself will depend on such effect. Thus such distributions will let the observer become prone to overestimation of stability and underestimation of potential volatility and risk. Location 6757

One illustration of this point is playing out just now. At the time of writing, the stock market has proved much, much riskier than innocent retirees were led to believe from historical discourses showing a hundred years of data. It is down close to 23 percent for the decade ending in 2010, while the retirees were told by finance charlatans that it was expected to rise by around 75 percent over that time span. This has bankrupted many pension plans (and the largest car company in the world), for they truly bought into that “empirical” story—and of course it has caused many disappointed people to delay their retirement. Consider that we are suckers and will gravitate toward those variables that are unstable but that appear stable. Location 6765

FALLACY OF THE SINGLE EVENT PROBABILITY Recall from Chapter 10, with the example of the behavior of life expectancy, that the conditional expectation of additional life drops as one advances in age (as you get older you are expected to live a smaller number of years; this comes from the fact that there is an asymptotic “soft” ceiling to how old a human can get). Location 6792

Note: As a side note, one might say we can’t say how old someone can be, and it may be possible they may live to be 300, but we might say this is a small probability, and small probabilities by their nature can’t be calculated. 

Consider that, in a winner-take-all environment, such as the arts, the odds of success are low, since there are fewer successful people, but the payoff is disproportionately high. So, in a fat-tailed environment, rare events can be less frequent (their probability is lower), but they are so powerful that their contribution to the total pie is more substantial. Location 6819

The problem of the unknown distribution resembles, in a way, Bertrand Russell’s central difficulty in logic with the “this sentence is true” issue—a sentence cannot contain its own truth predicate. Location 6894

Note: Perfect circular argument Edit

Numerous experiments provide evidence that professionals are significantly influenced by numbers that they know to be irrelevant to their decision, like writing down the last four digits of one’s social security number before making a numerical estimate of potential market moves. Location 7011

Note: One of hundreds of examples of the importance of psychology Edit

German judges, very respectable people, who rolled dice before sentencing issued sentences 50 percent longer when the dice showed a high number, without being conscious of it. Location 7013

As perfect of an example as possible to demonstrate the importance of critical thinking, philosophy, and psychology as possible. Things aren’t always measured in money. Understanding of psychology and cognitive biases can literally make the difference between life and death. 

(a dollar not lost is a dollar earned), Location 7017

Note: Response to Cristal that I am cheap. Edit

I had been railing that compensation for bank executives, who are squarely in the Fourth Quadrant, is done on a short-term window, say yearly, for things that blow up every five, ten, or fifteen years, causing a mismatch between observation window and window of a sufficient length to reveal the properties. Bankers get rich in spite of long-term negative returns. Location 7072

Remember that the burden of proof lies on someone disturbing a complex system, not on the person protecting the status quo. Location 7077

Note: Good way to explain burden of proof Edit

6. Do not give children dynamite sticks, even if they come with a warning label. Complex financial products need to be banned because nobody understands them, and few are rational enough to know it. We need to protect citizens from themselves, from bankers selling them “hedging” products, and from gullible regulators who listen to economic theorists. Location 7143

Note: Level 10 – The reality is the aggregate of people in a large, complex society simply do not understand how to use some forms of “freedom” without blowing themselves, and the rest of us, up. Allowing total Economic freedom is at it’s core, not a system where people in a closed private system are simply doing whatever they want in the privacy of their own bedrooms. They are playing with dynomite, and could blow the rest of us up. Then I become an unwilling, unconsenting party to the harm they have done to the economy for everyone. It’s not conceptually different than someone pissing in a publi water supply. You’re free to piss in your own water and drink it. You can’t piss in everyone’s. For those that would argue Government doesn’t understand the financial instraments, that is true. But it’s because no one does. We know enough, that it can destroy us. Edit

(by claiming restitution of the funds paid to, say, Robert Rubin or banksters whose wealth has been subsidized by taxpaying schoolteachers), Location 7162

Note: Just a nice way to articulate the craziness that is Capitalism at times. How someone like a Chris will complain that a school teacher makes too much, but they are paying the salary of a subsidized Corperate CEO who got bailed out, only to raise his own salary through bonuses and keep driving the bus he crashes to begin with. This is “rewarding hard work” and “good Capitalism.” Edit