Nassim Taleb and his black swans

By Vestnik Kavkaza
Nassim Taleb and his black swans

One of the most famous modern philosophers Nassim Nicholas Taleb will give lectures at the Synergy Global Forum in the Moscow Olympic Stadium on November 27-28, and in the Radisson Blu Iveria Hotel in Tbilisi on March 30 - April 1, 2018.

In his famous book The Black Swan: The Impact of the Highly Improbable, Nassim Taleb asks how to live and act in a world we do not understand, and how to fight against chance and unknown events that includes his black swan theory about unforeseen and rare events. According to Taleb, almost all major events having consequences for markets, global politics and people's lives are completely unpredictable.

"Before the discovery of Australia, people in the old world were convinced that all swans were white, an unassailable belief as it seemed completely confirmed by empirical evidence. The sighting of the first black swan might have been an interesting surprise for a few ornithologists (and others extremely concerned with the coloring of birds), but that is not where the significance of the story lies. It illustrates a severe limitation to our learning from observations or experience and the fragility of our knowledge. One single observation can invalidate a general statement derived from millennia of confirmatory sightings of millions of white swans. All you need is one single (and, I am told, quite ugly) black bird," Taleb writes.

Nassim Taleb was born in Amioun, Lebanon on January 1, 1960. Both sides of his family came from the Greco-Syrian community, the last Byzantine outpost in northern Syria, which included what is now called Lebanon. "We originate from the olive-growing area at the base of Mount Lebanon — we chased the Maronite Christians into the mountains in the famous battle of Amioun, my ancestral village. Since the Arab invasion in the seventh century, we had been living in mercantile peace with the Moslems, with only some occasional harassment by the Lebanese Maronite Christians from the mountains. By some (literally) Byzantine arrangement between the Arab rulers and the Byzantine emperors, we managed to pay taxes to both sides and get protection from both. We thus managed to live in peace for more than a millennium almost devoid of bloodshed: our last true problem was the later troublemaking crusaders, not the Moslem Arabs," Taleb tells.

"By any standard the country called Lebanon, to which we found ourselves suddenly incorporated after the fall of the Ottoman Empire, in the early twentieth century, appeared to be a stable paradise; it was also cut in a way to be predominantly Christian. People were suddenly brainwashed to believe in the nation-state as an entity. The Christians convinced themselves that they were at the origin and center of what is loosely called Western culture yet with a window on the East. In a classical case of static thinking, nobody took into account the differentials in birthrate between communities and it was assumed that a slight Christian majority would remain permanent," Nassim Taleb writes.

From an early age, he was a rebellious idealist and developed an ascetic taste, averse to the ostentatious signaling of wealth, pursuit of luxury and obsession with things monetary.. He attended the French lycée that had one of the highest success rates for the French baccalauréat, even in the subject of the French language. French was spoken there with some purity: as in prerevolutionary Russia, the Levantine Christian and Jewish patrician class (from Istanbul to Alexandria) spoke and wrote formal French as a language of distinction. The most privileged were sent to school in France, as both his grandfathers.

At fifteen, Taleb was put in jail for allegedly attacking a policeman with a slab of concrete during a student riot. An incident with strange ramifications since his grandfather was then the minister of the interior, and the person who signed the order to crush our revolt. One of the rioters was shot dead when a policeman who had been hit on the head with a stone panicked and randomly opened fire. Nassim was at the center of the riot, and felt a huge satisfaction upon his capture while his friends were scared of both prison and their parents. However, they were granted amnesty.

Taleb believes that he showed his ability to act on his opinions, and not compromise an inch to avoid 'offending' or bothering others. It is one thing to be cosmetically defiant of authority by wearing unconventional clothes and another to prove willingness to translate belief into action. Public knowledge of his capture had another major benefit: it allowed him to avoid the usual outward signs of teenage rebellion. Nassim 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.

Before the civil war of 1975-1990, Lebanon was a prosperous state, the financial and banking capital of the Arab world with a predominantly Christian population, it was known as  'Switzerland of the Middle East'. The Lebanese 'paradise' suddenly evaporated, after a few bullets and mortar shells. 

So I left the place called Lebanon as a teenager, but, since a large number of his relatives and friends remained there, he kept coming back to visit, especially during the hostilities, wondering how could one have predicted that people who seemed a model of tolerance could become the purest of barbarians overnight. Later he realized that history and societies do not crawl, they make jumps, yet historians like to believe in the predictable, small incremental progression. Circumstances motivated Nassim to study theoretical and general accounts of wars and conflicts, trying to get into the guts of History, to get into the workings of that big machine that generates events.

During the Lebanese war, Taleb noticed that journalists tend to cluster not necessarily around the same opinions but frequently around the same framework of analyses. They assign the same importance to the same sets of circumstances and cut reality into the same categories. While in the past a distinction had been drawn between Mediterranean and non-Mediterranean (i.e., between the olive oil and the butter), in the 1970s the distinction suddenly became that between Europe and non-Europe. Islam being the wedge between the two, one does not know where to place the indigenous Arabic-speaking Christians (or Jews) in that story. 

It was a few years after the beginning of the Lebanese war, as Taleb was attending the Wharton School, at the age of twenty-two, that he was hit with the idea of efficient markets— an idea that holds that there is no way to derive profits from traded securities since these instruments have automatically incorporated all the available information. Public information can therefore be useless, particularly to a businessman, since prices can already 'include' all such information, and news shared with millions gives you no real advantage. Odds are that one or more of the hundreds of millions of other readers of such information will already have bought the security, thus pushing up the price. Then he completely gave up reading newspapers and watching television, which freed up a considerable amount of time.

It's unclear why someone with plans to become a philosopher or a scientific philosopher of history would wind up in business school, and the Wharton School no less. At the time, he started becoming conscious of his subject - the highly improbable consequential event. During the one or two years after Nassim's arrival at Wharton, he had developed a precise but strange specialty: betting on rare and unexpected events.

On October 19, 1987, Black Monday, when the Dow Jones Industrial Average dropped 22.6%, gave Taleb profit of about $40 million. Four and a half years after his graduation from Wharton, walking home from the investment bank Credit Suisse First Boston in Midtown Manhattan, he saw a traumatic financial event: the largest market drop in modern history. The occurrence of the event lay outside anything one could have imagined on the previous day. It qualified as a Black Swan, but the philosopher did not know the expression then.

People were sobbing, someone committed suicide, jumping from his upper-floor apartment. For Taleb, it felt like Lebanon, with a twist: having seen both, he was struck that financial distress could be more demoralizing than war.

So Taleb organized himself to do minimal but intense and entertaining work, focus only on the most technical aspects, never attend business 'meetings', avoid the company of 'achievers' and people in suits who don’t read books. He wanted to be left alone in order to build an entire system of thought based on his Black Swan idea.

The financial success of Taleb in combination with previous forecasts contributed to his popularity and advancement. The Nobel Laureate Daniel Kahneman proposed the inclusion of Taleb's name among the world's top intellectuals, saying "Taleb has changed the way many people think about uncertainty, particularly in the financial markets. His book, The Black Swan, is an original and audacious analysis of the ways in which humans try to make sense of unexpected events." In the book, he actually predicted the global banking crisis, and, following his prediction, in 2007-2008 he made half a billion dollars on the stock market, after which he has fully committed himself to the philosophy of chance.

"We like to simplify, i.e., to reduce the dimension of matters. We prefer compact stories over raw truths. It severely distorts our mental representation of the world; it is particularly acute when it comes to the rare event.... The combination of low predictability with the force of impact turns the "black swan" into a riddle. Many "black swans" came to the world and shook it just because no one was waiting for them ... Our inability to predict in environments subjected to the Black Swan, coupled with a general lack of the awareness of this state of affairs, means that certain professionals, while believing they are experts, are in fact not.  The problem lies in the structure of our minds: we don’t learn rules, just facts, and only facts. We scorn the abstract. The situation can get a little more tragic - the world is more nonlinear than we think, and than scientists would like to think," Taleb believes.

In his forecasts for the near future, he asserts that for the time being there is no need to fear a third world war, since countries that can afford it prefer to do this by others' hands. The philosopher considers epidemics to be the greatest risk for today. As for politics, Taleb is sympathetic to the Russian president. "Looking at Putin's confrontation with other leaders, I realized that domestic (and sterilized) animals do not stand a chance against a wild predator," he writes, explaining his findings by Russia's interference in the Syrian conflict, a decision that Putin took at his own risk, realizing what it may cause for him. Taleb generally likes Russia. He believes that there are people here who work not for the sake of money, but for some abstract idea that fits perfectly into his philosophical theory.

Taleb has a literary fluency in English, French, and classical Arabic, a conversational fluency in Italian and Spanish, and can read classical texts in Greek, Latin, Aramaic and ancient Hebrew, as well as the Canaanite script. He continues to assert that our world is dominated by the extreme, the unknown, and the very improbable according our current knowledge. "In spite of our progress and the growth in knowledge, or perhaps because of such progress and growth, the future will be increasingly less predictable,"the philosopher stresses.