Friday, August 13, 2010

Survival of the Luckiest

Well, I finished The Black Swan: The Impact of the Highly Improbable. Although it started off fresh and compelling, it flamed out about two thirds of the way through, which is often the case. Writers usually just submit their first chapter to a potential publisher. Not only does it contain the essence of the book, but it is always the most polished, because the author is trying to make a powerful impression. But rarely do I read a book that is good from beginning to end and leaves you wanting more.

In fact, this guy leaves you wanting a little less. He's such an unpleasant personality -- something noted by many amazon reviewers -- that you wish he'd just get to the point and leave out the personal details. He comes across as pompous, self-important, juvenile, and probably clinically narcissistic. But his worst offense is that he violates Godwin's Law throughout the book: that those who aren't funny shouldn't try to be. He's aggressively and repetitively unfunny.

As to the theory itself -- well, it's not so much a theory as an observation: that we are constantly surprised by events because of limitations of our knowledge. The title of the book comes from the idea that it takes the sighting of only a single black swan to disprove the theory that all swans are white, regardless of the millions of white swans that have been observed.

And this speaks to the problem of induction, which we use to guide our lives. We're always generalizing from what happened, and what happens is what usually happens. Thus, we're always surprised by what doesn't usually happen.

Hmm. When you put it that way, it sounds pretty banal, doesn't it? A number of reviewers said that the book could have been condensed into a magazine article, and perhaps they're right.

But as is often the case, I found that I can use a lot of his ideas for my own purposes, in a more encompassing theory of which the author would no doubt disapprove. Again, he gives no indication of being a believer, and indeed, in my experience, most believers would have difficulty accepting his thesis of randomness.

But I would turn this around and say that if not for randomness, evolution, progress, free will, and ultimately spiritual growth would be quite impossible. In other words, if we were wholly constrained by physical law in a deterministic manner, there would be no possibility of the emergence of true novelty. In my view, randomness and uncertainty are where the final causation -- or destiny -- gets in. We do not create our destiny. Rather, it draws us toward it, ultimately into the Great Attractor.

For Taleb, a Black Swan is defined by three properties: rarity, high impact, and retrospective predictability. He uses the example of World War I, and "how little of your understanding of the world on the eve of the events of 1914 would have helped you guess what was to happen next."

Or, one might cite the collapse of the Soviet Union, or the British Invasion of 1964, or the rise of self-publishing from one's home computer. No one saw these things coming. They are only explained in hindsight. But even then, the explanations tend to be arbitrary or ideological, with this or that scholar "connecting the dots" in a way that comports with their own world view.

But again, thank God for the possibility of Black Swans, for as Taleb points out, "Literally, just about everything of significance around you might qualify." Indeed, all you have to do is examine your own life for the chance encounters that "changed everything."

But this also applies to science, which is hardly the linear and continuous enterprise it's made out to be. To the contrary, more often than not, the researcher "discovers" something he wasn't even looking for, anything from penicillin to the background radiation that proves the big bang.

This was something discussed by Michael Polanyi, one of our foundational Raccoon thinkers. He observed that science could never be controlled from the top down, but could only emerge from the bottom up, as a spontaneous order. He noticed that leftist governments didn't allow the freedom and spontaneity for true science to emerge.

The left wing abuse of science continues today with everything from "climate change" to "green energy" to their self-defeating economic theories. Most recently, we saw a judge in California using left-wing activists pseudo-science to prove that gender is irrelevant to marriage.

Taleb affirms a principle with which the psychoanalyst would certainly agree, that "what you don't know" is "more relevant than what you do know."

First of all, what we know is just a tiny fraction of what there is to know. But more problematically, so much of what we know just isn't so, which is why Taleb makes the wise crack that reading the New York Times actually decreases one's knowledge of the world. As he points out, what we know can become inconsequential just by virtue of knowing it, especially if competitors and enemies know you know it.

For example, consider those con-men on TV who sell their secret to getting rich. The secret only works because it is one, not because of its intrinsic merits. In a way, this is what caused the recent real estate bubble. Once everyone takes advantage of the "secret" that houses are appreciating, the bubble collapses. The whole thing was generated by people not seeing the illusion at the basis of it.

Since Black Swans are inevitable, how do we take advantage of them? For me, this was the most interesting part, because my whole life has been just one Black Swan after another. Why? Because I've never had a plan. I never know what I'm going to do today, let alone tomorrow, which permits randomness to enter one's life. For some reason, I've always been this way. But if I had consciously set out to invent my life, I'm quite sure I would have blown it. You might say that the Higher Power takes advantage of chaos.

Taleb says that "you can set yourself up to collect serendipitous Black Swans (of the positive kind) by maximizing your exposure to them.... [C]ontrary to social-science wisdom, almost no discovery, no technologies of note, came from design and planning -- they were just Black Swans."

This leads to the important corollary that one of the reasons the free market is so superior to its alternatives is not that it rewards merit, but that it rewards luck. Only in hindsight do we invent stories of how the successful deserved their success, but more often than not, it's just a matter of luck.

While this might seem unfair -- which it is, but that's life -- the left's misguided attempt to force the system to have outcomes it considers "fair" drains it of the very luck that facilitates so much success and prosperity for all. The reason why the United States is the wealthiest nation is because it is the freest. The more government, the less luck, and with it, the less prosperity.

To be continued....

36 Comments:

Blogger JP said...

Taleb is a one-trick pony.

I seem to recall that he is next predicting the corporate bonds will crash and burn.

And he is probably right. It's not even a true "black swan". It's more like an invisible white swan. Invisible to the general investing public, that is.

The great thing about your book club services, Bob, is that you read books and let us know in advance which parts are garbage.

There's nothing more annoying than reading parts of a book that have no real business exsiting. You end up feeling worse after reading them that you did before you started.

8/13/2010 09:10:00 AM  
Blogger Gagdad Bob said...

So true. 99% of books have no right to exist. If you're going to add another to the pile, you' better have a good alibi.

8/13/2010 09:19:00 AM  
Blogger JP said...

Bob says:

"For example, consider those con-men on TV who sell their secret to getting rich. The secret only works because it is one, not because of its intrinsic merits. In a way, this is what caused the recent real estate bubble. Once everyone takes advantage of the "secret" that houses are appreciating, the bubble collapses. The whole thing was generated by people not seeing the illusion at the basis of it.

Since Black Swans are inevitable, how do we take advantage of them?"

In the case of bubbles, it's pretty easy, although getting outsized profits are hard.

First, notice that the bubble is being created. With stocks and housing, it's pretty easy. When you are way outside the bounds of what normally happens, you are in bubbleland and you will eventually return to the mean.

Then short sell the sucker and hold on for a scary and bumpy ride.

Note: The bubble will ALWAYS run longer than you think it will. So, the most important thing to do is wait until sentiment gets to extremes. And then wait some more.

You can read Jeremy Grantham's reports at www.gmo.com if you want more details about bubbles and their aftermaths.

2008 was a good year for me. 2009? Not so good.

8/13/2010 09:20:00 AM  
Blogger ge said...

More black Swans....less B. holes!

8/13/2010 09:23:00 AM  
Blogger Gagdad Bob said...

I think once you see that your economically illiterate neighbor is making a killing flipping houses, something's out of whack. Taleb recommends a strategy of 85% safe investments and 15% exposure to Black Swans, but that strikes me as arbitrary.

8/13/2010 09:23:00 AM  
Blogger JP said...

Bob says:

"I think once you see that your economically illiterate neighbor is making a killing flipping houses, something's out of whack."

To me, that means that the fuse to bubble destruction has been lit.

You can generally join your economically illiterate neighbor in the flipping game for about 12 to 24 months after you notice it. Some of the best money is made in specuating on the long side in the last period of a bubble.

Just don't get caught without a seat when the music ends.

If there's going to be a new stock bubble, it's probably going to form in the so-called "emerging markets".

I don't see that happening yet.

8/13/2010 09:32:00 AM  
Blogger Verdiales said...

Electric cars were supposed to be an 'emerging market,' but that seems to have run out of juice. Windmill farms too are complete disasters in the UK.

That said, I'm in a position to know a few stray but trustworthy things about nanotechnologies and materials science. Extremely cool things are still happening there, and are in the tech transfer pipeline.

Speaking of books, E. Gilbert's _Eat, Pray, Love_ is coming out as a movie soon. I've read it and her other books ... and prefer her other books simply because they are much more willing to be happily lost in their subjects. The autobio turn for her is enjoyable because she is winsome herself -- otherwise, the form feels a bit contrived. I've met her. In person, she was more lit up and friendly than you could possibly wish.

Hooray for her success.

8/13/2010 10:36:00 AM  
Blogger Gagdad Bob said...

Coincidentally, I'm now reading The Rational Optimist: How Prosperity Evolves, which demonstrates quite forcefully that there is plenty more good luck to come our way, so long as we are able to overcome the left's effort to expand the state and eliminate personal freedom.

8/13/2010 10:45:00 AM  
Blogger Magnus Itland said...

A young friend of mine here in Norway also read Taleb's book a while ago and it made a profound impression on him. But already then, my impression was that the book itself was less important than his own revelations once he started to look in that direction. So I have been wary of buying the book, and it would seem rightly so.

8/13/2010 11:14:00 AM  
Blogger Northern Bandit said...

When it comes to the massive economic shifts a small percentage of people generally do see them coming. An acquaintance of mine unloaded his Toronto CRM software firm to Siebel Inc. for $1.8B about 4 months before the dotcom bubble burst.

I myself remember sitting in a pub in London the day that the San Mateo-based firm for which I worked was acquired for $3.2B, giving the parent firm a market cap of nearly $11B. This parent firm was a smallish software company that specialized in "net-enabled" financial analytics products. I remember looking in the paper that day and realizing that this firm had a bigger cap than General Dynamics (the fine people who build a good chunk of the hardware the Pentagon buys). I knew something was severely out of whack. I absolutely knew the bubble had to burst, and soon. I dumped everything I could (which wasn't nearly as much as it could have been, given the 4-year cliff vesting formulae which were common on options packages in 1997-2001) and waited. Sure enough, the company in question went from $244 on NASDAQ in late 2000 to about $5 4 months later. It was far from the only such implosion. Meanwhile the founders had already cashed out in the mid 9 figure range (each).

Similarly David P. Goldman (Spengler) predicted the current situation with uncanny accuracy in mid 2008. Yet the number of people who heed people like Goldman is infinitesimal compared to those who heed the likes of Krugman.

In other aspects of my life I definitely see (in hindsight) a series of black swans without which I'd be... who the hell knows? Far worse off spiritually in any case.

8/13/2010 12:00:00 PM  
Blogger Gagdad Bob said...

Luck favors the free

8/13/2010 12:08:00 PM  
Blogger JP said...

In many cases, it's not "luck" as much as it is knowledge that is very specific to a certain place and time where a specific individual in such a place and time has both an incentive to act and the freedom to act on such quite local information.

8/13/2010 12:53:00 PM  
Blogger Gagdad Bob said...

Yes, one doesn't want to minimize knowledge and skill, but it reminds me of how much easier it was for musical skill to translate to success in the US, what with all the independent record labels, in contrast to the socialist UK, where there were only four major labels. But the presence of so many US labels also favored the lucky. One had a much better chance to get lucky in the US than in the UK.

8/13/2010 01:32:00 PM  
Blogger Gagdad Bob said...

Memo to ge: Badfinger remasters coming in October, w/bonus material.

8/13/2010 01:34:00 PM  
Blogger ge said...

thanks for headzup!

here is story & of an Iveys [great pop-psych pre-badfinger] pseudononymous track!

8/13/2010 02:18:00 PM  
Blogger Tigtog said...

To Gagdad re: bad books

I don't know how you do it. I have a rule, if an author cannot gain my attention within 50 to 100 pages, I stop reading. Being a writer is a craft. The author is supposed to entertain, not bedevil the reader. I have a lot of books that I never finished for this simple reason. I refuse to slog through a book. Its not worth the effort.

8/13/2010 03:19:00 PM  
Blogger Gagdad Bob said...

And yet he recommends that the Fed cut the very rate that helped fuel the bubble. Dope.

8/13/2010 03:26:00 PM  
Blogger Tigtog said...

To anon re:

"Krugman was calling attention to the housing bubble as early as 2002."

Could you inform me if Krugman supported reining in Fannie and Freddie in 2002-2006 when Republicans sought a "bi-partisan" fix to the Clinton/Greenspan induced feeding frenzy? As I recall, no one touches the dem plantation - not even Krugman. If you don't believe me, read the Financial Bill passed by Pelosi and Reid. Fannie and Freddie are still in business, doing their damnedest to undermine investments in real estate. Add Section 8 vouchers and a new disaster awaits; McMansion slums.

8/13/2010 03:30:00 PM  
Blogger Gagdad Bob said...

Krugman is such a hack. When Bush was president, he railed about deficits. Now they're not a problem, and government should go into even more debt. Even leaving aside his emotional instability, his innumerable contradictory statements permanently discredit him except among the loony left.

8/13/2010 03:34:00 PM  
Blogger Gagdad Bob said...

Taranto had a funny takedown of Krugman the other day. He's a target-rich environment.

8/13/2010 03:39:00 PM  
Blogger Gagdad Bob said...

Link.

8/13/2010 03:42:00 PM  
Blogger cliff said...

About Taleb, Bob said:

"As to the theory itself -- well, it's not so much a theory as an observation: that we are constantly surprised by events because of limitations of our knowledge."

Bob,

I think Taleb's argument was directed to a more technical observation than "stuff happens randomly". In the financial world that Taleb discusses, the mathematics that is widely used is based on Gaussian statistics (i.e., Bell curves and all that). The problem that Taleb sees is that the financial world is NOT a Gaussian phenomena. Its statistics belong to the realm described by Power Laws (e.g., the mathematics used to describe earthquake intensities). So the reason so many folks are surprised by events is that they are using a fundamentally incorrect approach to model the statistics of the world they are looking at. And they continue to do so, failure after failure (note: the Gaussian approach gives the illusion of predictability, while the Power Law approach does not predict any particular event but instead only DESCRIBES the range and frequency of intensities that can be expected in a complex system. Guess which approach management is going to go for).

While I agree with you Bob that the book was overlong, self-important, etc., I think that there are some nuggets of wisdom to be had in Taleb's Gaussian/Power Law dichotomy applied to general epistemological issues. Gauss developed his statistics to deal with errors in measurement. The operating assumption was that an empirical measurement on a system would contain larger or smaller errors compared to the TRUE-Value-of-the-measurement. For a true-value-of-measurement to exist, there has to be a nice deterministic model of the system lurking in the background. The (necessarily) inaccurate empirical measurements more or less reflect this background system. This approach works great for many things, but it fails for complex systems such as seismic faults or financial systems. In these systems, there apparently cannot be a background model and so measurements made on the system cannot have any meaning in terms of a model. Only the ENTIRE system can determine how its going to evolve, not a truncated model. All this seems to speak to the various reductionist/holism conundrums. If a system can be described in a reductionist mode, look for Gaussian statistics. If you are dealing with some kind of holon, look for Power Laws.

PMan

8/13/2010 03:58:00 PM  
Blogger Gagdad Bob said...

Cliff--

Yes, I agree entirely. I've only just begun the discussion, so I should emphasize that there were a lot of parts I found provocative and compelling.

8/13/2010 04:19:00 PM  
Blogger Gagdad Bob said...

Along the lines of your comment, I read a very useful book in the course of writing my own, called Formal, Transcendental, and Dialectical Thinking: Logic and Reality, by Errol Harris. It really shows how limiting scientism is as a result of applying the wrong logic to reality. In particular, complex holistic systems with interior relations cannot be understood through logical atomism.

8/13/2010 04:26:00 PM  
Blogger Tigtog said...

To anon re:

"And in such a way that deficit spending might have been a bad idea then and a necessary thing to do now?"

Dear anon, would you like to compare who has run the greater deficit? Mr. Skittles has been at it for only 20 months. Granted Pelosi and Reid get credit for 2007 and on as well. This discussion becomes mute come November. Or I should say January.

8/13/2010 04:46:00 PM  
Blogger Van said...

"But I would turn this around and say that if not for randomness, evolution, progress, free will, and ultimately spiritual growth would be quite impossible. In other words, if we were wholly constrained by physical law in a deterministic manner, there would be no possibility of the emergence of true novelty. In my view, randomness and uncertainty are where the final causation -- or destiny -- gets in. We do not create our destiny. Rather, it draws us toward it, ultimately into the Great Attractor."

But aren't we also a cause of it? We, when we are open, aware, 'willing' (in the passive and active sense) enable the randomness to 'fit' back into the pattern of how things are, often creating a change in the pattern, but enabling it to continue and evolve nonetheless.

8/13/2010 05:00:00 PM  
Blogger Van said...

"Taleb says that "you can set yourself up to collect serendipitous Black Swans (of the positive kind) by maximizing your exposure to them.... [C]ontrary to social-science wisdom, almost no discovery, no technologies of note, came from design and planning -- they were just Black Swans.""

Hmm. Those who pay attention to what's real, and have an interest in it, and abide by it... without clinging to or spinning too much of their wishful expectations of how things 'should' be, seem able to find themselves able to be fitting carriers of the luckiest of situations.

"This leads to the important corollary that one of the reasons the free market is so superior to its alternatives is not that it rewards merit, but that it rewards luck."

That strikes me as being a mixed reading. Those with the merit to recognize the chance event, experience luck - depending upon their merit, they may, or may not remain lucky. Merit here not meaning 'fine upstanding, sober minded', but capable to the circumstances that present themselves. The free market enables those chance events to be fashioned to the needs of the pattern.

8/13/2010 05:12:00 PM  
Blogger Van said...

"I think once you see that your economically illiterate neighbor is making a killing flipping houses, something's out of whack. Taleb recommends a strategy of 85% safe investments and 15% exposure to Black Swans, but that strikes me as arbitrary."

Strikes me that trying to estimate and bank on the bubble, you can't avoid buying into it.

Bubbles are caused by misinformation, undetected, and taken as information. Like a bank that only has 75% of it's depositors cash on hand, and no good investments... it can still seem to 'work' until people begin to realize the truth... then they discover that the little that was on hand to supply a few needs, isn't enough to supply even the basic needs of all - poof! - the 'bubble' pops.

Those who did the basics, spread their own wealth around into basic, solid investments, aren't imperilled by chance... those who don't attempt to rely upon luck, have the best of it.

And to try my hnd at extended prognostiction, as I said about two years ago, no point in looking for the bubble in todays market - the entire market is the bubble.

8/13/2010 05:16:00 PM  
Blogger Van said...

aninnymouse said "And in such a way that deficit spending might have been a bad idea then and a necessary thing to do now?"

I didn't think you could top the idiocy of your comment on the constitution at the end of yesterday's post... but once again I've been proven wrong.

8/13/2010 05:18:00 PM  
Blogger Gagdad Bob said...

It's not just the contradictory advice (don't forget that Bush entered the presidency in a recession, and that it was exacerbated by 9-11), but back then Krugman shrieked that deficits were inflationary, whereas now he claims that worries about future inflation are just fear-mongering. He's a true kook.

8/13/2010 05:24:00 PM  
Blogger Van said...

b.h. said "What is it good for? What can money buy in terms of power and influence?"

Hmmm.... what would I do with power & influence & lucre. Well, I wouldn't want to change my family situation, or kids neighborhoods & such, so that'd stay the same. Oh, well, I suppose I'd like to do something like what this guy Ben is talking about on NRO, that whole Block Captain thing, helping to pass something like a statewide proposition against Obamaocare like Prop C... maybe help teach people about the meaning of the constitution, even do some door to door type stuff...

Oh! Wait a minute! Ben is one of young lawyer's I was talking with the other night... and wait a minute... I am one of the Block Captain's he's talking about in the article... and I did help to get a statewide proposition passed to challenge Obamaocare... and I am helping to teach classes about the meaning of the constitution, and I am going door to door in neighborhoods talking with people... gosh... other than I suppose it would probably be swell to not have to worry about a few bills... I guess I'm already doing exactly what I'd like to be doing already... gosh... sorry b.h... I guess I'm already pretty much living the life I'd like to be living.

Darn. Sorry about that.

8/13/2010 10:50:00 PM  
Blogger Magnus Itland said...

That a disaster is predictable does not mean it will be averted. It may be mentally inconvenient to do so.

8/14/2010 02:16:00 AM  
Blogger ge said...

fruitful correspondencers: 'Miracles' in MOT*
also see the creme de G. Bataille: GUILTY ...INNER EXPERIENCE ...ON NIETZSCHE re his god 'chance'

*pdf at
http://tarothermeneutics.com/tarotliterature/MOTT/Meditations-on-the-Tarot.pdf

8/14/2010 04:32:00 AM  
Blogger ge said...

ps was Gary Lewis mentioned here some weeks ago? see http://www.redtelephone66.com/

8/14/2010 04:35:00 AM  
Blogger Northern Bandit said...

b-hole said:

What to do when one has an enourmouos pile of lucre?

Personally I plan to hit the 9 figure club by age 50, then spend 95% of that on a concentrated offensive designed specifically to bring angry Marxist lesbians to Jesus.

8/14/2010 07:34:00 AM  
Blogger Van said...

I didn't say I don't need money, I'm just not foolish enough to mistake it for being anything other than money.

8/16/2010 06:39:00 AM  

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