Black Swans Or Black Albinos? Why Bell Curves Still Rule
financial markets suddenly crashing, the timeliest book of
2008 has turned out to be published in 2007: The Black Swan: The Impact of the Highly Improbable, an
exuberant attack on the very concept of forecasting the
future by a
Wall Street trader-turned-philosopher named Nassim
Taleb`s book is proving highly influential. His popular but
confusing buzz phrase,
“black swan", is seemingly already ensconced permanently
in our jargon.
For example, Joe Nocera`s article in Saturday`s
New York Times
Mismanagement," [January 2, 2009] does a fine job of
applying Taleb`s insights to how Wall Street
catastrophically underestimated the riskiness of
securitized junk mortgages during the Housing Bubble.
The financial industry
assumed that the performance of financial instruments is
distributed according to a
bell curve, with few outliers. They assumed that
mortgage defaults happen randomly due to miscellaneous human
tragedies (illness, death, divorce, and job loss), so
bundling a lot of mortgages together would virtually
eliminate the risk of the entire package.
Taleb argues that bell curve-based forecasts fail frequently
swans"—have dramatic impact. If the bell curve actually
applied to wealth, for instance,
Bill Gates couldn`t exist.
Or consider history. Taleb, who is from the affluent
Christian upper class of
Lebanon (his grandfather was
deputy prime minister), saw his homeland devastated when
a 15-year-long civil war broke out while he was a teenager.
For anyone who remembers the post World War II era, when
Lebanon was universally viewed as the Switzerland of the
Middle East, that was a black swan indeed.
Similarly, who, say, could have predicted in 1924 that a
failed artist then moldering in jail would
go on to such a cataclysmic career that even 85 years
later in 2009 the world remained structured around the
geopolitical and intellectual arrangements forged in his
defeat? A Hitler couldn`t exist in a world wholly framed by
the bell curve.
Taleb`s conclusion: human beings think too much in terms of
normal probability distributions—of means and standard
deviations—and not enough about the Hitlers and Bill Gates
of the world.
Oh yeah? Obviously, Taleb has spent much of his life hanging
around with a rather unrepresentative slice of humanity—Wall
Do we really not
think about Hitler enough? For instance, there were at least
five (5) Hollywood movies released in the last couple of
months to qualify for the
set in Nazi-controlled Europe (Valkyrie,
Defiance, Good, and
The Boy in the Striped
Moreover, in recent years we`ve heard various Middle Eastern
politicians compared to Hitler, such as
Hassan Nasrallah of Hezbollah in Taleb`s Lebanon,
of Iran, and, most disastrously,
Of course, as it turned out, Saddam didn`t
particularly want to conquer the world. And even if he did,
he didn`t have the human capital do it: he was ruling Iraqis
(average IQ of 87), not Germans.
Unfortunately, as its correct but limited lessons get
overgeneralized in the elite mind,
The Black Swan is likely to wind up doing similar damage
to intellectual life over the next few years. After all,
there`s always a big market for
attacks on bell curves. And Taleb`s ideas will
inevitably get misapplied outside of Wall Street to public
policy, where they will be used to buttress the conventional
example, in the new bestseller Outliers: The Story of Success,
reviewed in VDARE.com last month, the always-trendy
Malcolm Gladwell attempts to apply Talebian-style anti-bell
curve thinking to the perennial question of why ethnic
groups perform so differently on average. (Here`s Gladwell`s
2002 article on Taleb`s money management business,
Taleb isn`t to blame for Gladwell getting befuddled. But his
inability to fully understand why he`s right about the
things he`s right about doesn`t help matters.
Still, if you can put up with Taleb`s egomania and
free-floating hostility, which I find amusing but you might
not, The Black Swan
is almost as easy to read as Gladwell`s book, and far more
Taleb`s term for rare but important events,
(which, in a display of his sometimes-excessive erudition,
he borrowed from
John Stuart Mill paraphrasing
Hume) is disastrously mischosen.
swans aren`t rare at all, much less particularly
important. In Australia, all wild swans are black, and there
are as many as a half million of them. Even in the rest of
the world, they have become a bit of a cliché of ornamental
water gardens—there are a pair of black swans paddling about
in a fake stream outside a dowdy restaurant a mile from my
Instead of calling his book
"The Black Swan,"
Taleb, had he wanted to stay with his the white-black theme,
could have used as a title a more self-explanatory term such
White-skinned blacks are indeed rare, yet rather more
common than you might assume.
Of course, nobody (except
maybe the VDARE Foundation) would have published it with
that title. Still, an all-around better title for his book
would have been Outliers—which would have had the auxiliary benefit of preventing
Gladwell from misusing it.
Needless to say, Taleb is right than making an accurate
forecast is difficult, especially about the future.
But here are many phenomena in life where the glass is both
half-full and half-empty. The secret is knowing when it`s
one or the other.
Taleb is smart enough to admit on about 5 percent of his
pages that making predictions using bell curves is a
half-full glass. But he`s cocksure enough in the other 95
percent in denouncing its half-emptiness that careless
readers likely will take away the lesson that it`s
In fact, there`s a general pattern here that Taleb misses.
The things we are most likely to argue the longest over,
such as whether bell curves are useful or not or over
nurture, are those where the evidence is most abundant
for both sides.
For example, Taleb draws a helpful distinction between
probability distributions in
where datapoints tend to be distributed roughly according to
bell curves (he lists 11 examples including height, weight,
car accidents, and IQ) and in
where a small number of rare items greatly influence the
average (he lists 21 examples, such as wealth, income, and
book sales per author).
Taleb then asserts:
"The Extremistan list is much longer than the [Mediocristan
list].” Of course, he
up the lists …
Is he right about which list is actually longer? Personally,
I have no idea i.e. I have no more idea than Taleb does.
All I know for sure is that I have less self-confidence than
Taleb. His experience as a Wall Streeter skews his view
toward Extremistan. My experience as a marketing researcher
showed me the pervasiveness of Mediocristan.
Consider the recent election. You will all recall how the
countless election polls, with their bell curve-based
"margins of error",
were humiliated on Election Day when the ultimate Black Swan
was elected President—John McCain!
Oh, wait! That only happened in Talebstan. In the world in
which you and I live, the pre-election polls proved to be
Another only thing I know for
sure: events in Extremistan are much more
events in Mediocristan. Enron is much more interesting than
Procter & Gamble. WWI and WWII are far more exciting than
America and Canada
having a war.
We`ve all seen the
Truman" picture a million times. But the reason
we`ve seen it is because it`s unusual.
human beings love rarities.
But that doesn`t mean
rarities are, as Taleb claims, more important.
We are most interested in things that are hard to predict,
not necessarily those things that are most important.
Science is in the business of making predictions, but the
better it gets at predicting anything, the more boring those
predictions become for us.
Indeed, much of what interests us has been carefully
contrived by experts to seize our attention. It`s very hard
to predict the winner of the
Super Bowl because the NFL carefully rigs the system to
make each team`s chances as equal as possible.
In contrast, if something becomes a sure thing, we get
Thus, from 1934-1976, there was a prestigious summer
exhibition football game at
Field in Chicago pitting the previous year`s
College All-Stars versus the reigning
NFL champion team. Initially, as the famous rookies held
their own against the champs, winning nine of the first 30
games, it was wildly popular. It drew over 100,000 people
three times in the 1940s. After 1963, however, as
professional teams got more professional, the college boys
never won again. Attendance drooped as the outcome became
more predictable. In 1976, a thunderstorm stopped the game
in the third quarter with the Pittsburgh Steelers up 24-0.
Nobody saw any point in resuming the series.
By the same token, rare events and people are
interesting because they are rare.
For example, every few years
Hollywood makes a movie Based on a True Story about some
Black Swan teacher who goes into a
gritty slum school and
unleashes the brilliant scholars within the minority
students. But they don`t make movies about the countless
White Swan teachers who try
equally hard and
don`t succeed. Guess why not.
In fact, it`s actually easy to make accurate predictions
about important phenomena. For example, I predict that
public schools in gritty Compton CA will have lower average
test scores than public schools in lovely San Marino, CA in
2009. And in 2010, and in 2011 and…
Well? Anybody care to bet against me?
I can make a 100 such predictions about significant topics
with a 99 percent accuracy rate. But nobody would even
bother reading all the way through the list. It would just
get so boring and depressing, as I kept reiterating things
that we all know but don`t want to talk about.
Let me, therefore, make some fun predictions.
I foresee that Oklahoma will win the college football
national title game 35-31 when Florida quarterback
having heroically driven his team 91 yards, throws a
heartbreaking interception in the end zone on the last play.
How do I know these things?
Well, obviously, I don`t. I just made them up. Indeed, to be
frank, I chose Florida to lose because I couldn`t remember
the name of the Oklahoma quarterback.
But aren`t these predictions more
me yammering on about how
school test scores won`t change?
How can we tell whether we are in Mediocristan or
Bell curves work best when individuals are of fairly equal
importance. That`s definitely not true on Wall Street. But
it is somewhat true in voting, public life, and, for many
A quarter of a century ago, I was running a test market in
Eau Claire, Wisconsin for a Procter & Gamble deodorant
brand. I was
comparing two samples of 1250 households who were being
shown different TV commercials over their cable television
systems. I noticed a screwy pattern in our results. I
eventually figured out that
one household was
buying 30 to 40 sticks of deodorant per month, affecting the
market share for its entire sample. That`s Taleb`s
definition of a Black Swan.
But did P&G pay us a bonus for discovering the Black Swan of
the Deodorant Market—the Bill Gates of Perspiration
Did P&G suddenly wake up to the fallacy of the bell curve
and stop doing marketing research?
Nah. We all just agreed to drop that &%#$* outlier from the
Surely, though, the world is dominated by outliers as Taleb
says—not by boring stuff like deodorant?
Well, what about cars, which are in the news a lot these
days, what with
GM and Chrysler demanding a bailout? Is the world market
for cars driven by a small number of
Jay Lenos who buy hundreds of cars?
How about mortgages? Now we`re playing on Taleb`s own
financial turf. Do houses tend more toward Bill Gates`s
Extremistan or Joe Average`s Mediocristan?
Well, let`s look at Bill Gates`s house. He famously built
one of the
largest houses in America,
66,000 square feet. It`s almost 40 times larger than my
house. And yet his
net worth is, I would imagine, considerably more than 40
times my own.
(I can`t make a precise calculation because I haven`t been
masochistic enough to open any letters from my
funds since last summer.)
And that turns out to be hugely important in understanding
the mortgage meltdown, which has come straight out of
Mediocristan. It wasn`t caused by a few giant defaults by
Bill Gates, or even by Ed McMahon. It was caused by a huge
number of defaults among people of average or below average
wealth, typically working class folks in the second quartile
up from the bottom.
And that followed, unsurprisingly, a decade and a half of
government policy pushing easier credit for home buyers,
especially for minorities. Both the Clinton and Bush
Administrations wanted to boost the home ownership rate,
which had been stuck at about 64 percent since the 1970s.
Bush explicitly demanded the raising of black and Hispanic
homeownership rates from about 50 percent to the white rate
of 75 percent by such obviously risky ploys as
zero down payments.
In other words, the marginal homeowners would primarily come
from the financially marginal portions of the population.
subprime fiasco wasn`t an impossible-to-predict Black
Swan. It was the result of average humans following
straightforward incentives to the best of their
And they turned out to be distributed on bell curves.
Despite the Black Swan flap, bell curves still rule. We
ignore them at our peril.
In fact, we just did.
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