The Black Swan: The Impact of the Highly Improbable

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 distribution of these connections has a scalable structure of the kind we will discuss in Chapters 15 and 16. Concentration of this kind is not limited to the Internet; it appears in social life (a small number of people are connected to others), in electricity grids, in communications networks. This seems to make networks more robust: random insults to most parts of the network will not be consequential since they are likely to hit a poorly connected spot. But it also makes networks more vulnerable to Black Swans. Just consider what would happen if there is a problem with a major node. The electricity blackout experienced in the northeastern United States during August 2003, with its consequential mayhem, is a perfect example of what could take place if one of the big banks went under today.

But banks are in a far worse situation than the Internet. The financial industry has no significant long tail! We would be far better off if there were a different ecology, in which financial institutions went bust on occasion and were rapidly replaced by new ones, thus mirroring the diversity of Internet businesses and the resilience of the Internet economy. Or if there were a long tail of government officials and civil servants coming to reinvigorate bureaucracies.

REVERSALS AWAY FROM EXTREMISTAN

There is, inevitably, a mounting tension between our society, full of concentration, and our classical idea of aurea mediocritas, the golden mean, so it is conceivable that efforts may be made to reverse such concentration. We live in a society of one person, one vote, where progressive taxes have been enacted precisely to weaken the winners. Indeed, the rules of society can be easily rewritten by those at the bottom of the pyramid to prevent concentration from hurting them. But it does not require voting to do so – religion could soften the problem. Consider that before Christianity, in many societies the powerful had many wives, thus preventing those at the bottom from accessing wombs, a condition that is not too different from the reproductive exclusivity of alpha males in many species. But Christianity reversed this, thanks to the one man-one woman rule. Later, Islam came to limit the number of wives to four. Judaism, which had been polygenic, became monogamous in the Middle Ages. One can say that such a strategy has been successful – the institution of tightly monogamous marriage (with no official concubine, as in the Greco-Roman days), even when practiced the “French way”, provides social stability since there is no pool of angry, sexually deprived men at the bottom fomenting a revolution just so they can have the chance to mate.

But I find the emphasis on economic inequality, at the expense of other types of inequality, extremely bothersome. Fairness is not exclusively an economic matter; it becomes less and less so when we are satisfying our basic material needs. It is pecking order that matters! The superstars will always be there. The Soviets may have flattened the economic structure, but they encouraged their own brand of ubermensch. What is poorly understood, or denied (owing to its unsettling implications), is the absence of a role for the average in intellectual production. The disproportionate share of the very few in intellectual influence is even more unsettling than the unequal distribution of wealth – unsettling because, unlike the income gap, no social policy can eliminate it. Communism could conceal or compress income discrepancies, but it could not eliminate the superstar system in intellectual life.

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.

I do not know how to remedy this (except through religious beliefs). Is insurance against your peers’ demoralizing success possible? Should the Nobel Prize be banned? Granted the Nobel medal in economics has not been good for society or knowledge, but even those rewarded for real contributions in medicine and physics too rapidly displace others from our consciousness, and steal longevity away from them. Extremistan is here to stay, so we have to live with it, and find the tricks that make it more palatable.

Chapter Fifteen: THE BELL CURVE, THAT GREAT INTELLECTUAL FRAUD [49]

Not worth a pastis – Quetelet’s error – The average man is a monster – Let’s deify it – Yes or no – Not so literary an experiment

Forget everything you heard in college statistics or probability theory. If you never took such a class, even better. Let us start from the very beginning.

THE GAUSSIAN AND THE MANDELBROTIAN

I was transiting through the Frankfurt airport in December 2001, on my way from Oslo to Zurich.

I had time to kill at the airport and it was a great opportunity for me to buy dark European chocolate, especially since I have managed to successfully convince myself that airport calories don’t count. The cashier handed me, among other things, a ten deutschmark bill, an (illegal) scan of which can be seen on the next page. The deutschmark banknotes were going to be put out of circulation in a matter of days, since Europe was switching to the euro. I kept it as a valedictory. Before the arrival of the euro, Europe had plenty of national currencies, which was good for printers, money changers, and of course currency traders like this (more or less) humble author. As I was eating my dark European chocolate and wistfully looking at the bill, I almost choked, I suddenly noticed, for the first time, that there was something curious about it. The bill bore the portrait of Carl Friedrich Gauss and a picture of his Gaussian bell curve.

The last ten deutschmark bill, representing Gauss and, to his right, the bell curve of Mediocristan.

The striking irony here is that the last possible object that can be linked to the German currency is precisely such a curve: the reichsmark (as the currency was previously called) went from four per dollar to four trillion per dollar in the space of a few years during the 1920s, an outcome that tells you that the bell curve is meaningless as a description of the randomness in currency fluctuations. All you need to reject the bell curve is for such a movement to occur once, and only once – just consider the consequences. Yet there was the bell curve, and next to it Herr Professor Doktor Gauss, unprepossessing, a little stern, certainly not someone I’d want to spend time with lounging on a terrace, drinking pastis, and holding a conversation without a subject.

Shockingly, the bell curve is used as a risk-measurement tool by those regulators and central bankers who wear dark suits and talk in a boring way about currencies.

The Increase in the Decrease