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Branko Milanovic explores the impact and importance of Nassim Nicholas
Taleb's work.
Several weeks ago on Twitter I wrote (in an obviously very short form) why I
thought that Taleb was one of the most important thinkers today. Let me explain
in greater detail. Taleb went from (a) technical observations about
non-Gaussian distributions of some phenomena to (b) generalization of what this
means for our perception of reality and the way we comprehend things
(epistemology) to (c) methodology of knowledge and the role of inductive
thinking to finally (d) a statement on ethics. To convey this he created a new
type of writing. I will leave this last part undiscussed, but whoever has read
Taleb knows that his writing style is absolutely original and like Borges’
can be imitated but never fully mastered. Let me now explain each of the four
points. My original acquaintance with Taleb’s writings (and this may be
true for many other people) came from his Black Swan and the sudden celebrity
status of somebody who has seen the Great Recession coming. But while this may
or may not be true, I think that it is of quite secondary, or altogether minor,
importance. What Taleb has done with his Fooled by Randomness and Black Swan is
to have directed our attention to a class of phenomena that exhibit very skewed
distributions to the right and fat tails. It is important to point out that
there are two facts here: high-end values and their relatively great frequency
(as compared to Gaussian distributions). Following researchers like Benoit
Mandelbrot (who worked a lot on Paretian distributions) Taleb argued that the
number of phenomena with such asymmetric distributions is much greater than was
commonly thought and that lots of our thinking errs by tacitly assuming normal
distributors. Like Moliere’s Mr. Jourdain we have become Gaussian without
thinking or knowing that we are. This can have nefarious consequences. Take an
example that Taleb mentions. The distribution of personal weight is Gaussian;
thus when we build elevators that carry people we can at most assume that there
may be, at any given time, (say) eight persons weighting 250 pounds each in the
elevator. Let us add another 1000 pounds for safety and we can be pretty
confident that an elevator that can handle 3000 pounds will be safe. But then
suppose we are constructing a flood dyke. Flood levels are not normally
distributed. Moreover even the last highest flood value does not guarantee that
the following flood cannot be worse. Building safeguard for floods is much
harder: we can imagine that the worst future flood may be five times worse than
any that we know, but it could turn out to be ten times worse: “the odds
of rare events are simply not computable” (Antifragile, p. 7). The number
of such phenomena like flood is huge: income and wealth distributions, size of
cities (with all that it implies for urban planning), number of victims in wars
etc. These are the phenomena where the averages carry very little informational
content, and even variances do not necessarily mean much (variance is often
undefined in Pareto distributions). “Variance…is epistemologically, a
measure of lack of knowledge about the average; hence the variance of variance
is, epistemologically, a measure of lack of knowledge about the lack of
knowledge of the mean” (Black Swan, p. 353). We are dealing here with what
Taleb calls the “fourth quadrant”, the unknown unknowns. From that
series of observations that represent the core of Black Swan, Taleb moves to
the question of how we comprehend things and learn about them. An
empirically-based observational approach leads him to prefer inductive,
“tinkering” approach to deductive one. Moreover, the tinkering
approach was linked in Antifragile to not only robustness (that is, not being
negatively affected by volatility) but to a newly defined characteristic of
“anti-fragility”, that is of being positively affected (thriving) in
conditions of volatility. His view is that only systems that have been created
by a long process of tinkering (i.e., evolution) have sufficient resilience to
withstand Black Swan events. This has also led him to conservative political
philosophy, similar to Edmund Burke’s (whom he does not mention):
institutions should not be changed based on deductive reasoning; they should be
left as they are not because they are rational and efficient in an ideal sense
but because the very fact that they have survived a long time shows that they
are resilient. Taleb’s approach there has a lot in common not only with
Burke but also with Tocqueville, Chateaubriand and Popper (whom he quotes quite
a lot). One may notice how a technical/statistical point made by Taleb such as
“my field is error avoidance” leads to agreeing with Hayek’s
critique of the “conceit of reason”. (I do not agree with this
approach but my point here is to explain how I see the logic of Taleb’s
system developing). And to round off his system, Taleb moves to ethics (Skin in
the Game), a topic introduced already at the end of Antifragile. Here
Taleb’s view is that to be credible one must show by his behavior that he
believes in what he preaches. To put it in Rawlsian terms one must affirm in
daily life the principles in which he claims to believe. This is also a
controversial topic: should we reject Rousseau’s view on how to raise
children because he abandoned his own? Should we believe in that (unnamed)
economist’s findings that happiness does not increase after $50,000
despite the fact that he avidly pursues high-paying gigs? One might wish to
separate scientist’s views from his private behavior, but there is no
doubt that an alternative (Taleb’s) view can be also defended and that we
tend to find the correspondence of one’s life with professed beliefs to be
a strong reinforcement of correctness of such beliefs. Taleb has succeeded, as
I mentioned in the beginning, in creating a full system that goes from empirics
to ethics, a thing which is exceedingly rare in modern world. Whether because
we are tired of grand systems or because our knowledge has been parceled due to
the way knowledge is created and disseminated in modern academia, but very few
people are able to create systems of thought that go across multiple
disciplines and display internal coherence. This the uniqueness and importance
of Nassim Taleb.
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