The Black Swan: an Application

15 Dicembre 2020 Ricerca e scienza

Di: Maximilien Girardin

For all Osteopaths and for EVOST Fellows

This paper introduces a set of relatively unknown terms which were recently coined by Nassim Nicholas Taleb. (This workdocument is from 2008)Those terms are Black Swan event, Mediocristan and Extremistan and can be found in his book: “Black Swan. The Impact of the Highly Improbable.”

A recent review of the book stated:

A Black Swan is an event, positive or negative, that is deemed improbable (from the systems view) yet causes massive consequences (in the system and thus to the environment of its subagents). In this groundbreaking and prophetic book, Taleb shows in a playful way that Black Swan events explain almost everything about our world, and yet we—especially the experts—are blind to them.

How does this review relate to you and EVOST? No matter which stage of the EVOST program you are in, Fellow, instructor, graduate, senior student, or just starting the program, it must certainly be evident that EVOST demands that one sees the world as it is, not as we have been taught it to be. (not linear but chaotic, constantly changing by the interactions between environment and system)

Thus become aware of the many GABSE’s[1] or MSABSE in our world, usually maintained by tunnel vision in restrained timeframes, methods used by many expert scientists and mainstream media and education. ( [1] Generally Accepted Bull S… Explanation, or Main Stream accepted Bull S… Explanation)

EVOST philosophy inspires the breaking loose from old (usually limited or fabricated) perceptions and realizing our surroundings as they are –whether that fits OR NOT with current mainstream theories, models, or conventions. Even our scientists, who, over the course of our informative years we have learned to hold in high esteem, oftentimes not only fail to SEE reality but moreover teach, publish, and even more crucial make conclusions-decisions based on misrepresentations. (The Falsehood of this being usually, that they extrapolate on an almost indefinite timeline something, which is measurable in a short timeframe, with as such a distorted frame of reference.)

Not only does this paper offer insights as to how to employ the ideas of Mediocristan and Extremistan in an EVOST setting but in doing so it provides the reader with yet another example of how to how to view events from a dual perspective. This provides an advantageous stereoscopic view of that which is being observed versus a mono-dimensional rut-like view.

Mediocristan, as the root word suggests, refers to the world of ‘mediocre’ situations (mediocrity = normal (part of the norm), daily, usual, apparent order & stability).

Extremistan, asthe root word also suggests, refers to the world of the ‘extreme’ (Catastrophes, crashes and chaos = moments or situations where every form of apparent order or stability is gone, outlying the norm).

The Black Swan event is an example of an ‘extreme’ event. It will be explained here as a segue to the usefulness to EVOST of the terminology Mediocristan and Extremistan.

The term Black Swan Event refers to something which for all time was believed, with absolute certainty, to be an impossibility (or extremely high improbability)— yet a single observation of that impossible something has proven that a certain impossibility is indeed possible. A Black Swan Event thus erases certainty and stability for a while.

A common metaphor used in Europe to express such impossibility is “when hell freezes over.” Although it is agreed that no one has actually observed hell, it is assumed by all theological descriptions of it, that it is extremely hot and fiery. Therefore it is highly unlikely that it will freeze. As a result of this thought process, the expression “when hell freezes over” is utilized to describe the absolute unlikelihood of an event ever becoming real.

Similarly, the English speaking Europeans created the metaphor, “when pigs fly” to also express the absolute unlikelihood of such an event ever becoming a reality. After thousands of years of observation and experience, no one in Europe had ever seen a pig fly.

Likewise, after more than 40,000 years of Europeans inhabiting Europe, and following millions of observations of swans, a similar metaphor was created: “This …will happen when the swans are black”. No European had ever seen or experienced a black swan. To the surprise of all that fact changed in the 1600s.

During the 1600s, Dutchmen arrived in Tasmania (van Diemen’s land) and Australia. There they both observed an experienced for the first time ever—swans with black feathers. They were black swans.

From this actual occurrence, the term Black Swan Event now signifies, that which was once thought of (through millennia of time, and confirmed by millions of observations) as impossible, to be possible. Certainly from the perceptive of the African slaves working on the plantation in the Deep South, the election of President Obama was a Black Swan Event.

The meaning of a Black Swan event: 1000‘s of years of observation, certainty and transmitted knowledge were sent to oblivion within a split second; because the unpredictable, unforeseeable, ever thought impossible, did happen.

Now let us try to put a Black swan event in another more daily fashion:

Turkey example: An American turkey is fed for a 1000 days: meaning from the turkeys’ dimension of observation that a 1000 observations state and confirm the turkeys believe that man is extremely concerned with its well being; by giving it shelter, food and drinks while keeping predators away from him by fencing its environment.

Then on a day comes a man, the butcher (black swan event) and it is Thanksgiving. The turkey becomes the feast dish. As you see the turkey because of its limited (dimensional) possibility in observation experiences, undergoes the black swan event in an extreme form in his dimension of observation, he gets slaughtered in the process.

For the Butcher everything is going as usual, for him it is not a Black swan event, because he is functioning in another dimension awareness; one of many years and the knowledge of a 400 year old tradition (knowledge linked dimension) which is far beyond pure and simple every day observation.

The turkey is the system.

The humans who keep and feed the turkey, form his environment. His environment to which the turkey gets adapted (he draws a conclusion, even certainty from a 1000 similar observations… Habit can be a killer)

Only his vision in dimension is restricted as he does not see the mechanism and what may be lying behind the 1000 observations, a sudden turn in the type of stimuli coming from the environment.

The mechanism though is not changed, the meaning of the fencing and feeding was not only like the turkeys’ interpretation (to protect and keep safe) and conclusion (this is good) but was also to keep it in one place and ready it up for the Black Swan event day. The dimensional awareness and some sound critical attitude could have changed the turkey’s faith, but he was put asleep by his every day one-dimensional observations.

4×4 Driving example: Ridge driving instead of rut driving

When traveling in 4×4‘s through the African bush, one easily tends to follow the tracks that are already formed. This is ecological, because in some terrains these tracks can stay imprinted for more than 60 years; but that is usually not the conscious reason why drivers follow these tracks, the real reason is usually simply habit and trust. A typical human habit, follow the path where the herd is going. (Although it is silly when you think of it, maybe the previous drivers were idiotic tourists?)

Sometimes in spots the ruts have become so deep that the precious under parts of the vehicle will collide hardly with the central elevated ridge between the two ruts. When this happens the consequences can be of importance, like busting the oil reservoir in the middle of the Kalahari Desert or Damaraland…

Thus an aware driver estimates constantly the depth of the ruts in relation to the free height under the car (his load), as well as the consistency of the soil. When the range becomes hazardous, he will get out of the ruts and pass to ridge driving. This simple preventive action prevents serious car damage and eventually life threatening or very precarious situations; it even so gives the driver a better overlook of the environment. Does this exclude Black Swan events? No, they can’t be prevented but you can increase the resilience of your system against such eventualities.

The car and the driver are the system.

The track and the habit of following them is the apparent safe stability or normality.

The Black Swan event is when there is suddenly a spot of very fine sand or mud in which the car sinks away and crashes with its lower parts on the soil or an animal crossing over.

In other words your constant or regular dimensional awareness assessment from what is environment and what is system, stimuli etc divides the world in different provinces or shires….on the Human consciousness level we could thus easily divide the world in two shires: Mediocristan and Extremistan, each with their own laws, basic algorithms etc…

I obtained these words from Nassim Taleb’s book the Black Swan because they describe in a more “living picture” way the description we usually use in the Evost course: Newton’s dimensions and the extremely big and infinitely small. (The dimension changes the rules of the game, other dimension= other laws.)

In Mediocristan statistics make sense, in Extremistan these general statistic truths don’t go up anymore…

Algorithm for Mediocristan: When your sample is large (statistically significant) exceptions can happen but they are not going to be consequential for the whole. This is the domain in which statistics apply and are quite correct. This is called the law of numbers. Mostly quite easily forecastable and mathematics being extremely trustworthy. (relatively linear processes)

For example:

Imagine you take 1000 people randomly from all over the planet and then you weigh them. Than you add the heaviest human of the planet and weigh him, if you add him to the rest, how much would he represent? 0.3 – 0.5 %? Something like that. So he does not represent much in comparison to the total, this is typically the shire or world of Mediocristan.

Second example: Take a random sample of 1000 osteopaths from across the globe and see what they earn per day, if you take the one who is earning most a day how much would he represent of the total? 0.3 – 0.5 % Something like that. So he does not represent much in comparison to the total, this is typically Mediocristan.

In the domains covered by Mediocristan you don’t have to worry about the Black Swan event, because it is not going to be consequential for the whole (the turkey as species).

In other words the history in the domains covered by Mediocristan evolves slowly with no spectacular moves or jumps. In Mediocristan the experts are what they are called: experts in their domains, and their experience makes their forecasts usually credible and accurate. Although Black Swan events can always happen, with extreme consequence for the individual (like in the turkey example).

Algorithm from Extremistan: When your sample is large (statistically significant) exceptions can happen and when, they are going to be extremely consequential for the whole. In fact the exception is going to dominate largely over what is the norm.

This is the domain in which statistics do not apply and are even completely incorrect or erroneous. The law of numbers is faked. Impossibility to forecast is the consequence of being in Extremistan. One event or observation can put all certainty upside down in a split second.

For example:

Imagine you take 1000 people randomly from all over the planet and then you see what they are worth in money (total assets). Than you add the wealthiest human of the planet, if you add him to the rest, how much would he represent? A 100 % something like that. So he does represent as much as the whole in comparison to the total, this is typically the shire of Extremistan.

In the domains covered by Extremistan you have to worry extremely about the Black Swan event, because it is going to be extremely consequential and unpredictable. In other words, the history in the domains covered by Extremistan evolves extremely slowly, in fact nothing seems to be happening and suddenly there is a spectacular move or jump, like falling from a cliff or a cataclysm.

In the domain of Extremistan, one should avoid the experts!

As expertise per definition restricts only to Mediocristan.

What is the biggest difference between these two shires: the shear Complexity and dimension.

Understanding and seeing the Mechanism in relation to the build up in complexity, may be of an advantage, especially when you understand there is no such thing as certainty or control, as soon as you enter the domain of Extremistan.

As the world is a complex adaptive system (Gaia Theory), and almost all of its subsystems (as soon as there is life) too, you should realize that all complex adaptive systems tend towards the edge of chaos naturally, and in time they will evolve towards a point of criticality, the moment where a black swan event can occur, and the whole system dives into Extremistan. This is how everything alive evolves, not slowly and gradually but in jumps, paired with black swan events; usually leading to extinction and or evolution. Hence the importance of History, or developmental Hierarchy and Chronology

“Never in the history of the world have we faced so much complexity combined with so many incompetence, in understanding its properties.” (talking about the global financial system and banks) (Nassim Taleb)

If you want to see or hear more of this applied Evost awareness on domains that we barely touch in the course because they are too far away of Osteopathy; although the Mechanism is also present and working there:

http://www.hypercycle.nl/summary.php

Foratv: http://fora.tv/2008/02/04/Nassim_Nicholas_Taleb_A_Crazier_Future#fullprogram

http://fora.tv/2010/07/28/Niall_Ferguson_Empires_on_the_Edge_of_Chaos

youtube: The End of the World as We Know It, with Mark Steyn

youtube: Overdose: The Next Financial Crisis

Some Wikipedia comments:

The Black Swan Theory or “Theory of Black Swan Events” is a metaphor that encapsulates the concept that The event is a surprise (to the observer) and has a major impact. After the fact, the event is rationalized by hindsight.

The theory was developed by Nassim Nicholas Taleb to explain:

The disproportionate role of high-impact, hard to predict, and rare events that are beyond the realm of normal expectations in history, science, finance and technology
The non-computability of the probability of the consequential rare events using scientific methods (owing to the very nature of small probabilities)
The psychological biases that make people individually and collectively blind to uncertainty and unaware of the massive role of the rare event in historical affairs

Specifically, Taleb asserts[4] in the New York Times:

What we call here a Black Swan (and capitalize it) is an event with the following three attributes. First, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility. Second, it carries an extreme impact. Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable.

I stop and summarize the triplet: rarity, extreme impact, and retrospective (though not prospective) predictability. A small number of Black Swans explains almost everything in our world, from the success of ideas and religions, to the dynamics of historical events, to elements of our own personal lives.

Identifying a black swan event

Based on the author’s criteria:

The event is a surprise (to the observer).
The event has a major impact.
After its first recording, the event is rationalized by hindsight, as if it could have been expected (e.g., the relevant data were available but not accounted for).

Coping with black swan events

The main idea in Taleb’s book is to not attempt to predict Black Swan Events, but to build robustness against negative ones[1] that occur and be able to exploit positive ones. Taleb contends that banks and trading firms are very vulnerable to hazardous Black Swan Events and are exposed to losses beyond that predicted by their defective models.

Taleb states that a Black Swan Event depends on the observer. For example, what may be a Black Swan surprise for a turkey is not a Black Swan surprise to its butcher; hence the objective should be to “avoid being the turkey” by identifying areas of vulnerability in order to “turn the Black Swans white”.

Taleb’s problem is about epistemic limitations in some parts of the areas covered in decision making. These limitations are twofold: philosophical (mathematical) and empirical (human known epistemic biases).

The philosophical problem is about the decrease in knowledge when it comes to rare events as these are not visible in past samples and therefore require a strong a priori, or what one can call an extrapolating theory; accordingly events depend more and more on theories when their probability is small. In the fourth quadrant, knowledge is both uncertain and consequences are large, requiring more robustness.

Before Taleb,[6] those who dealt with the notion of the improbable, such as Hume, Mill, and Popper focused on the problem of induction in logic, specifically, that of drawing general conclusions from specific observations. Taleb’s Black Swan Event has a central and unique attribute, high impact. His claim is that almost all consequential events in history come from the unexpected—yet humans later convince themselves that these events are explainable in hindsight (bias).

One problem, labeled the ludic fallacy by Taleb, is the belief that the unstructured randomness found in life resembles the structured randomness found in games. This stems from the assumption that the unexpected may be predicted by extrapolating from variations in statistics based on past observations, especially when these statistics are presumed to represent samples from a bell-shaped curve. These concerns often are highly relevant in financial markets, where major players use value at risk models, which imply normal distributions, although market returns typically have fat tail distributions.

More generally, decision theory, based on a fixed universe or a model of possible outcomes, ignores and minimizes the effect of events that are “outside model”. For instance, a simple model of daily stock market returns may include extreme moves such as Black Monday (1987), but might not model the breakdown of markets following the September 11 attacks of 2001. A fixed model considers the “known unknowns”, but ignores the “unknown unknowns“.

Taleb notes that other distributions are not usable with precision, but often are more descriptive, such as the fractal, power law, or scalable distributions and that awareness of these might help to temper expectations.[7]

Beyond this, he emphasizes that many events simply are without precedent, undercutting the basis of this type of reasoning altogether.

Taleb also argues for the use of counterfactual reasoning when considering risk.[8][9]

[1] Augmenting redundancy or resilience of the system, increasing its health!!!!