Nassim Nicholas Taleb: The "Fragility" Crisis is Just Begun

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Nassim Nicholas Taleb is one of the great wiseguys or wisemen of the moment. Quite possibly both.

For a world that wants better than the fatuous “perfect storm” account of the economic meltdown — or of BP’s gusher in the Gulf, or of 9.11 for that matter — Taleb has revised and extended his cult classic, The Black Swan. His anomalous “black swan” (since swans are by definition white) has three properties: it’s (1) any one of those unforeseen developments that comes (2) with big consequences and (3) a concocted cause-and-effect after-story. In conversation, Taleb is trying to get us to let go of “causes” and fix on the word “fragility.” He is explaining — sometimes elliptically, aphoristically, through metaphors, jokes and old folk wisdom — why “the economic crisis has barely begun,” why indeed we seem to have entered the Age of the Black Swan.

In a Letterman List, our conversation might be reduced to this:

10. Mother Nature is robust. Large modern corporations are fragile.

9. When the big bridge collapses, the “news” interest will be in the last truck that made it over, when the real story should be about the fragility of the bridge.

8. Somewhere in every Black Swan story there’s a turkey. The turkey has a clear understanding of history, and of growth. The nice farmer feeds him every day, and the turkey keeps getting fatter. Then comes Thanksgiving. It’s a Black Swan for the turkey. But not for the butcher.

7. We can say safely that the Black Swan started entering society with agriculture, with the fact that we started settling. Complexification started then… In my tableau of what’s fragile and what’s robust, the nation-state is a fragile entity, whereas city-states are more robust. So the creation of the nation-state created this big unpredictable event, that First War. Even those who saw it coming didn’t see the damage it was about to cause. So the First War probably is the most consequential one, and it came in two volumes…

6. I think that today we are entering a different world of Black Swans because of the Internet.

5. Newspapers make us stupid. They overexplain with “causes” of things that can’t be checked. And because they are driven by the sensational, they misrepresent risk. I prefer the social filter of news, over dinner or lunch. Anything that draws me away from face-to-face contact is harmful to my health.

4. Grandmothers had a rule of thumb after the Great Depression: work and save for a few years before you get into risk… Unpredictability and debt are not friends.

3. On bailouts: My analogy is to the gambler who is now gambling with the trust fund of his unborn great-great-granchildren… Prudence should be the first thing on the agenda of governments, not speculation. Stimulus packages are speculation… We are gambling on a massive recovery. It’s too big a gamble, and besides it’s immoral.

2. In the economic crisis, and in the Gulf of Mexico, what we should be discovering is not who made what mistake, but the fact of fragility. Alas, what we don’t learn is… that we don’t learn.

1. No government can fortify something that’s inherently fragile.

Quotes and paraphrases from Nassim Nicholas Taleb with Chris Lydon in Providence, June 2, 2010.

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  • A philosopher for our times. NNT is brilliant. In this world you have to think of the worst because if you think it, it can happen.

  • nother

    “It must be acknowledged that history in general is a collection of crimes, follies, and misfortunes, among which we have now and then met with a few virtues, and some happy times; as we sometimes see a few scattered huts in a barren desert.”

    -Francois-Marie Arouet De Voltaire “In Defense of Modernity”

    Voltaire understood ‘fragility,” as did most of those wise guys from our past. But the best wise guys, guys like Kant and Montesquieu were not just Statler and Waldorf, the two old guys in the balcony on the Muppets, critiquing the show,

    http://www.youtube.com/watch?v=PGfx3QAV64M

    The best guys devoted their energy to finding a new way.

    Mr. Taleb writes that the third and most important criteria for an event to be a “Black Swan” is:

    “After the fact, the event is rationalized by hindsight, as if it had been expected.”

    I find this fascinating because it seems to me that Mr. Talib has made his living is by simply changing one word in that sentence.

    After the fact, the event is EXPLAINED by hindsight, as if it had been expected.

    Yes, Mr. Taleb takes a different approach, he explains and reproves he does not rationalize and downplay. And I do find his analysis entertaining, but I’m not sure where it takes us. Expect the unexpected? Ok.

    I’m crazy for saying this but kind of reminds me of Barry Melrose, the great hockey commentator for ESPN. Mr. Melrose was a so so player and a somewhat better coach but he a marvelous commentator. He is the go to guy for everything hockey, and he can break down a game after the fact like nobodies business. But breaking down the highlights and lowlights with his charismatic manly demeanor, his sharp candor, and mild and endearing accent is a much different animal then proactively leading a team to a Stanley Cup.

    One of Mr. Taleb’s main points is “with time, the economic and social consequences of physical catastrophes (such as the Japan earthquake) have increased, and are increasing.” Part of the reason he says is that either the corporations are larger or it’s that we have “more interaction.” And he says “we are suffering a greater impact from Black Swan today.”

    Can’t we play this hindsight game all night? I would counter that the “more interaction” of today saved countless lives in Haiti. Within hours, millions of dollars were donated by the click of a button on a cell phone and within days, Chinese rescue workers were storming the beach with their funny helmets. What do we call that, White Swan or White Dove or was that an anomaly like a Pink Elephant. Mr. Taleb uses the case of the same apple in hotels rooms across the world as a metaphor for the new potato famine; whereas I’m more interested in the case of the Apple that Steve Jobs has placed in the hands of millions of people throughout the world; with it’s connectivity of knowledge.

    I would contend that the “consequences of physical catastrophes” were far worse before; it’s just that we never heard about them. A couple of hundred years ago, 230, 000 people killed in a tsunami would have barely registered. It did register now, and America mobilized, along with a “big” Red Cross and two presidents; and many lives were saved.

    Finally, Mr. Taleb says that debt is a morality issue and “I’d rather pay the price now than have to pay it later.” Well for one thing, I have a feeling that Mr. Taleb will not be the one paying the price if we make sharp cuts, and I would like to know where those cuts are going to come from, because that also is a mortality issue.

    “One man thinks justice consists in paying debts, and has no measure in his abhorrence of another who is very remiss in this duty, and makes the creditor wait tediously. But that second man has his own way of looking at things; asks himself which debt must I pay first, the debt to the rich, or the debt to the poor? the debt of money, or the debt of thought to mankind, of genius to nature? For you, O broker! there is no other principle but arithmetic.” – RW Emerson

    I’m sorry if I’m being too contrarian, ultimately, it means I was entertained and inspired to respond. Thank you for the show.

    The last thing I will say is that “fragile” is not all that bad. My grandmother’s crystal is fragile, and true love is fragile. True love, long lasting love, the love of my grandparents that lasted so many years with them still holding hands, was I would contend, “to big to fail.” But guess what, death happened. No predictions could have changed that.

  • nother: It seems that you do not understand what a Black Swan is exactly: the criteria merely to describe it: “rarity, extreme impact, and retrospective (though not prospective) predictability…” from Taleb’s “The Black Swan” prologue (pg 2); and the Black Swan is highly important on the fourth quadrant, which is a map of where the consequences of the Black Swan are located.

    Now the problem of the Black Swan is an epistemological problem; it is a problem of information, we can’t predict Black Swans, we can only robustify society against the negative side effects of rare events. We can prepare, be prudent and invest in redundancy; expect the unexpected. But in the fourth quadrant (which, alas, is most of economic life and the world is moving farther into this quadrant) we will be hit by both positive and negative Black Swans.

    Further, Taleb tells us why we do not understand the Black Swan: it is psychological, our minds are not made to understand this abstraction. We have the confirmation bias, the narrative fallacy, silent evidence (what we do not see) and the Ludic fallacy.

    Nother: you talk about hockey games and commentators, you sir, are committing the lucid fallacy: talking about abstractions in terms of games in which the odds can be discerned and rulers known, not about real life situations. Game terms and probabilities from games cannot be analogies to Volcanoes, Earthquakes, and Nature. Games are not nature.

    Now the networks, that is, the internet, globalization, is making us more prone to positive AND negative Black Swan events. Nother, you said: “I would counter that the “more interaction” of today saved countless lives in Haiti.” The interactions led to a positive Black Swan; they are not all negative.

    “In general, positive Black Swans take time to show their effect while negative ones happen very quickly. It is much easier and much faster to destroy than to build.” Taleb’s The Black Swan, pg 45.

    So I urge you please to read Taleb’s “The Black Swan” and get the concept and the problems right and not just superficially talk about it without having read or understood the books. And this issues: the fragility of the system, debt, bailing out shoddy banks with taxpayers’ money, are very very important because they affect us all.

    Polonius:

    Neither a borrower nor a lender be,

    For loan oft loses both itself and friend,

    And borrowing dulls the edge of husbandry.

    Hamlet Act 1, scene 3, 75–77

  • Wilson McDuff

    I enjoyed the conversation. I like almost all of the conversations on this site because of attitude of the host, Christopher Lydon. I live by one of the beautiful bays of America’s Gulf Coast. As an educator and father, having a positive and open attitude is essential. My faith in the power of the human spirit to overcome mighty obstacles has been a little shaken this year. I was glad to see some conversation on this show related to this problem (the oil spill being an example of a black swan). Unlike current event talk shows that typically shed little wisdom on an issue, by the time a topic comes up on this show, there is usually something constructive or insightful said. So after any significant historical event (ie..an election, a stock market crash), I always look forward to hearing it discussed on this show. This oil spill and the unfolding implications have challenged my comfortable assumptions about the things that I value and live for. My kids and I played in the surf all day yesterday. We didn’t see any signs of the oil. As we swam a massive slick was only a few miles away. Finished reading Cormac McCarthy’s The Road ( a real downer) today; and after listening to Taleb, I’m wondering, ‘what other oil slicks loom a few miles offshore’ metaphorically speaking. Will the stock market crash? Will the local economy suffer enough to endanger the well-being of my wife and children? I feel like I will be caught sleeping at the wheel. Despite the intelligence that I believe I possess, it seems like there are so many black swans beyond our vision. Maybe all great civilizations become so incredibly interdependent and fragile because of something inherent to our human condition. Maybe we prefer precarious (and seemingly humane) short-term solutions for our present problems to the harsh discipline of rational collectivism. I look forward to hearing more shows that address our crucial questions with reason and humanity.

  • nother

    David, it’s not the first “lucid fallacy” I’ve committed and it won’t be the last; in fact I’ve been committing them since I was young, only my mom called them something different back then.

    “As of someone gently rapping, rapping at my chamber door.”

    Thank you, for responding and I accept your criticism, I have not read the book. I will however respond to what Mr. Taleb said on the program and what you wrote here. I figure your right, I “do not understand what a Black Swan is exactly,” just as I still don’t understand what a “Fourth Quadrant” is, and for that matter what the Matrix is. I do however understand that Mr. Taleb is warning us all that big bad things are going to happen and we should be very prepared…very very prepared, and I appreciate the heads up on that; only I gotta tell ya, David, after all these recent painful years of fear mongering from the right, I have enough fear stored up for the lot of us…I am not at loss for dread; In fact, I see red! As in the “red terror alert level” that Mr. Cheney painted this whole damn town with.

    “And so faintly you came tapping, tapping at my chamber door,

    That I scarce was sure I heard you.” Here I opened wide the door;—Darkness there, and nothing more.”

    David, you criticize my hockey talk, you say it’s “games in which the odds can be discerned and rulers known, not about real life situations. Game terms and probabilities from games cannot be analogies to Volcanoes, Earthquakes, and Nature. Games are not nature.” Well I ask you, why all the stock market talk then? This man has made his money and fame in the financial game; and well, David, I’ll see your “games are not nature” and I’ll raise you – stock market is not nature. In fact, it’s a game.

    “Then this ebony bird beguiling my sad fancy into smiling,

    By the grave and stern decorum of the countenance it wore,

    “Though thy crest be shorn and shaven thou,” I said, “art sure no craven,

    Ghastly, grim, and ancient raven, wandering from the nightly shore.

    Tell me what the lordly name is on the Night’s Plutonian shore.”

    Quoth the raven, “Nevermore.”

    Mr. Taleb adds up many deep and clever points such as “Do not give an addict more drugs if he has withdrawal pains” and “Counter-balance complexity with simplicity” (# 5 and #8 from his 10 principles) and together they add up to an insightful generalization…but a generalization it be.

    “But the raven, sitting lonely on that placid bust, spoke only

    That one word, as if his soul in that one word he did outpour.”

    How David, may ask you, have you even in the smallest way, altered your life with this theory? Have you done anything to prepare for a “Black Swan;” I ask you, is this book anything more than a good read…anything more than the Matrix?

    “Be that word our sign of parting, bird or fiend!” I shrieked, upstarting–

    “Get thee back into the tempest and the Night’s Plutonian shore!

    Leave no black plume as a token of that lie thy soul hath spoken!

    Leave my loneliness unbroken! — quit the bust above my door!

    Maybe we’ll agree to disagree, thank you for the conversation though, David, I checked out your blog, nice stuff!

  • Ryan S

    Nother, you really ought to read the books and think a bit more critically about the ideas because you’re not absorbing the point.

    Taleb’s idea is mainly about probability and rare events. He argues that as the world becomes increasingly complex, in the sense that there are more and more variables influencing and being influenced by a particular event/market/outcome, the ability for humans to quantify the probability of a given occurence and the magnitude of the impact of that occurence is greatly diminished. People simply exhibit certain cognitive biases that are well documented in the work of Kahnemen and Tversky. I think you’re getting hung up on the discussion of the implications of the idea on real world events, rather than understanding the underlying principles that lead Taleb to his current views. He would be the first to say that he does not know definitevely what’s going to happen.

    Taleb is a scholar of the first order. Ignore his ideas at your own peril.

  • Nother, thank you for catching my typo, I meant Ludic fallacy and I noticed it after submitting the comment, but I thought the reader will discern the meaning from the context. Also led my correct you on principal # 5: ” Compensate complexity with simplicity.” There is a difference between counter and compensate, as we can’t counter the complex system only compensate by adding redundancy measures and reducing leverage,debt. The ten principals were written by Taleb after the economic crisis to help us cope with the whirlwind we find ourselves drifting on for quite some time now, which I thank him for that.

    The reason Taleb talks about the stock market is because that is where he found the data to prove the theory of the Black Swan—where he was vindicated. An abundance of numbers and forecasts by economist provided him with the empirical evidence to not only prove the massive consequences of Black Swans, but to invalidate economist, stock analyzes, investment bankers that ask for bail-outs, as monstrous charlatans! And no better than your local crystal ball pseudo-predictor that steals your money by giving you explanations (using game talk, Walt Street speak, etc,. just narrating backwards) after the facts. So, again, I urge to read the whole book as find the prose magnificent and ideas life changing.

    It is difficult to alter one’s human nature, as I’m as fallible as the next guy, indeed, I commit some of the psychological fallacies now and then; however, Taleb has provided me with the awareness that I’m a very error prone human and I’m susceptible to both positive and negative Black Swans. Moreover, the ideas he elucidates has giving me the intuition that we don’t know much and are ignorant—especially in the Black Swan domain as it is a problem of information.

    Further, Taleb talks about being prudent, about investing in making society more robust against negative Black Swans not in forecasting. We can’t predict Black swans, (outliers), and the consequences of these rare events are massive. Thus, we got to be more careful with our decision making at the general level, i.e., Central banks, the Fed, States, and such, which, unfortunately, they haven’t done yet. I also find very interesting his description of how Nature deals with Black Swans: providing redundancy, not making animals too big to be consequential when one falters, and so on.

    And, Nother, I know what you mean about fear mongering, and talking about dangerous events we can’t control. However, Taleb’s ideas tells us where the errors are consequential and to rely on prudence rather than forecast deficit spending and haul so much debt that either the States start to print money or we cripple posterity with debt—which, I agree with Taleb, it is highly immoral. Thank you for the discussion and radio show.

    Perhaps apocryphal but a sound saying nonetheless by the Iroquois Confederacy:

    “In our every deliberation, we must consider the impact of our decisions on the next seven generations.”

  • nother

    Ryan, let’s discuss my peril. You write, “Ignore his ideas at your own peril.” I take that to mean if I take your advice, and I don’t ignore his ideas, then I can put off my peril to some extent. So I ask you, what can I do specifically, Ryan? What do you do? Just tell me one thing.

    I just don’t buy this notion that we are in more danger now because things are more complex. And he says are brains are not wired to understand the “Black Swan,” he says things are too complex now, so he comes out with a complex theory about how complex things are?

    And are we talking nature (earthquake) or man induced (stock market)? Because it seems to me those two sources keep getting conflated in this discussion. You may respond that it doesn’t matter; it’s about making ourselves robust enough for either.

    Well I contend that there is robustness galore. People like Bill Gates and Paul Farmer and Bob Dylan, and many more heroes make sure of that. Where you guys see complex variables, I simply see human nature.

    David Hume wrote in 1748 Enquiry Concerning Human Understanding “The same motives always produce the same actions: The same events follow from the same causes. Ambition, avarice, self-love, vanity, friendship, generosity, public spirit: these passions, mixed in various degrees, and distributed through society, have been, from the beginning of the world, and still are, the source of all actions and enterprises, which have ever been observed among mankind.”

    Tonight I was watching Ken Burns “The War” (written by Geoffrey C. Ward) and it begins with this: “The greatest cataclysm in history, grew out of ancient and ordinary human emotions, anger and arrogance and bigotry, victimhood, and the lust for power; and it ended because other human qualities, courage and perseverance and selflessness, faith, leadership, and the hunger for freedom, combined with unimaginable brutality, to change the course of human events.”

    Thanks for the discussion. Sorry I discussed so much with out reading the book! Had fun though.

  • Potter

    I often say “this demands another listen”- and so again. A lot of what he says hits me as enlightened. Other things he says, I am not so sure. But I know I have been brainwashed somewhat ( maybe by Paul Krugman?). I totally agree about how we know history- and it occurs to me that the remedy is in every new telling, new investigation adding to the mix- more facts emerge, and the telling from a unique and present-day perspectives.

    I am the last one here in my little world to know of Taleb turns out ( I asked my loved ones who are too hip it seem!) . As always & ever grateful, Chris.

  • Joe Kerchen

    Nature Magazine book review of “Bursts:The Hidden Pattern Behind Everything We Do” by Albert-Laszlo Barabasi

    “In Bursts, physicist Albert-László Barabási explains how this notion of randomness has been undermined by recent research, including his own. We conduct our affairs in bursts, he says: for example, sending out several e-mails in a short space of time and then none for hours, or pottering around our neighbourhood and then travelling 1,000 miles. Barabási explains that we organize tasks in bursts because we prioritize them, attending to each on a timescale that is appropriate to its urgency.”

    Wonder if Nassim Taleb has read this – might be interesting to apply “bursts” to financial randomness.

  • nother

    “I dreamed that I floated at will in the great ether, and I saw this world floating also not far off, but diminished to the size of an apple. Then an angle took it in his hand and brought it to me and said, ‘this must thou eat.’ And I ate the world.” -RW Emerson, from his journal

  • Potter

    Wonderful quote Nother!

  • nother

    Thanks, Potter!!

  • I really appreciated Nassim N Taleb’s expounding on his best seller, but his explanation of the causality of some of the ecological crisis that humanity has faced falls a bit short.

    To state that the Irish faced a crisis, in the form of the Irish potato famine, because THEY opted for potato mono-cropping is disingeneous. The Irish were forced into intensive cultivation of potatos on small housephold plots because their British overlords expropriated the “commons”, field on which villagers could previously graze their small stock and rare cows and some crops, in order to raise sheep for the wool industry back in Great Britain.

    The Irish didn’t choose to mono-crop, just as today’s farmers aren’t “choosing” to grow the same apple or Monsanto Round-up Ready maize or soya everywhere because they “like it”. These crops are imposed by the large corps Taleb says are more prone to uncertainty and black swand events. It all boils down from the top of the system, rather than percolate from the bottom.

  • Risk-taking is “anti-fragility”, which is why in our churches we often hear the prayer of “God make us daring!” Risk taking, a lot of it and of many different kinds, is not only the oxygen of growth it also provides our financial system with the Lebensraum it needs to grow sturdy. Our current problem is that our nanny bank regulators in the Basel Committee completely forgot all about it… or perhaps they never knew. http://bit.ly/ItgzwN