To those readers who Googled Yevgenia Krasnova, I am sorry to say that she is (officially) a fictional character.
13
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.
14
What I call “probability distribution” here is the model used to calculate the odds of different events, how they are distributed. When I say that an event is distributed according to the “bell curve”, I mean that the Gaussian bell curve (after C. F. Gauss; more on him later) can help provide probabilities of various occurrences.
15
I am safe since I never wear ties (except at funerals).
16
Since Russell’s original example used a chicken, this is the enhanced North American adaptation.
17
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.
18
The main tragedy of the high impact-low probability event comes from the mismatch between the time taken to compensate someone and the time one needs to be comfortable that he is not making a bet against the rare event. People have an incentive to bet against it, or to game the system since they can be paid a bonus reflecting their yearly performance when in fact all they are doing is producing illusory profits that they will lose back one day. 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.
19
Neither Peirce nor Popper was the first to come up with this asymmetry. The philosopher Victor Brochard mentioned the importance of negative empiricism in 1878, as if it were a matter held by the empiricists to be the sound way to do business – ancients understood it implicitly. Out-of-print books deliver many surprises.
20
This confirmation problem pervades our modern life, since most conflicts have at their root the following mental bias: when Arabs and Israelis watch news reports they see different stories in the same succession of events. Likewise, Democrats and Republicans look at different parts of the same data and never converge to the same opinions. Once your mind is inhabited with a certain view of the world, you will tend to only consider instances proving you to be right. Paradoxically, the more information you have, the more justified you will feel in your views.
21
Clearly, weather-related and geodesic events (such as tornadoes and earthquakes) have not changed much over the past millennium, but what have changed are the socioeconomic consequences of such occurrences. Today, an earthquake or hurricane commands more and more severe economic consequences than it did in the past because of the interlocking relationships between economic entities and the intensification of the “network effects” that we will discuss in Part Three. Matters that used to have mild effects now command a high impact. Tokyo’s 1923 earthquake caused a drop of about a third in Japan’s GNR Extrapolating from the tragedy of Kobe in 1994, we can easily infer that the consequences of another such earthquake in Tokyo would be far costlier than that of its predecessor.
22
The word the is written twice.
23
The Parisian novelist Georges Perec tried to break away from narrative and attempted to write a book as
