The Power of Random Events: Coping with Black Swans

Awhile back one of my friends dogged me about reading a book, The Black Swan by Nassim Nicholas  Taleb. Nearly every week he would ask “Did you pick it up yet?” and I would inevitably make up some polite excuse for not having done so. The truth is that I don’t like being forced to read a book. Books require commitment and for an easily distracted person like me the expense of deep concentration. So I don’t like having them foisted on me against my will. But I had read or heard positive comments about The Black Swan somewhere else, and had made a mental note to check it out given the opportunity. Shutting my friend up and being able to argue about the book later with him provided enough reason to finally pick up the book from Amazon.

The power of books is well known, and I won’t use the cliche that The Black Swan changed my life because it hasn’t – but it sure has changed the way I look at things. The book’s argument is that extremely unlikely and unpredictable events have the greatest impact on us – whether personally or in the sweep of History. Worse, we struggle to understand what these events are and do a series of intellectual gymnastics in order to make them fit into our personal or world views, changing them and making them appear predictable. We then set about preventing the events from happening again even though we should be guarding against other completely unimagined threats. Former Secretary of Defense Donald Rumsfeld received a lot of heat from the mainstream media for using the term “unknown unknowns”, but what Rumsfeld meant was the challenge of protecting against future black swans.

Consider 9-11. 9-11 was a black swan to everyone except the men who planned it. Imagine the state of our knowledge on September 10, 2001. Terrorist attacks against the USA had almost exclusively occurred in the Middle East, Africa and Europe, and took the form of hijackings or as in the case of the 1993 attack on the World Trade Center, car bombs. While the signals were there that the attack was in the works, student pilots from the Middle East interested in flying planes but not landing them, communications between the hijackers and al Qaeda leadership, these signals were completely obscured by the “noise” of millions of other communications and suspicious activities. It is only in hindsight that we can connect the important meetings, conversations and events and see the whole 9-11 conspiracy. Today it is obvious how four small teams of hijackers armed with box cutters killed 3,000 Americans in the worst single attack on our own soil; on September 10, 2001 it was impossible to imagine it let alone be prepared for it.

We are always preventing the last disaster while ignoring the next one. Consider that before April 20th of last year, all major oil spills at sea occurred on shallow water rigs or from wrecked oil tankers. So we setup rules mandating double hulls for oil tankers and developed clean up methods for shallow water rig blowouts. Our response was tailored to these disasters to the point that when the Deepwater Horizon well blew, we lacked the equipment or expertise to successfully fight it.

Now imagine that on the evening of July 15, 2008, a date picked purely at random, the mind of a rig safety expert for Shell wandered and he imagined a well blowout a mile down on the sea floor. The minutes became hours as he struggled to figure out a way of cutting off the flow of oil from the sea bottom using available methods and tools that he knew were used in shallow water blowouts. Imagine that he was so troubled by what his thought experiment showed him that he raised the issue with his supervisors the next day.

“There has never been a deep water blowout,” one said. Another chimed in, “The blowout preventer would stop the oil flow immediately.” But what if the preventer had itself been damaged by the blowout? “The likelihood of that happening is infinitesimal,” another supervisor said. The rig safety expert then detailed a redesign of the blowout preventer that would make it more robust and allow it to shut off the oil even when damaged. “That would cost millions,” the lead supervisor said, effectively killing the topic.

In hindsight we can appreciate the rig safety expert’s ideas, but imagine for a moment that the rig safety engineer ended up getting a job at BP and convinced them of the wisdom of his argument. BP then spent tens of millions of dollars retrofitting all their blowout preventers including the one below the Deepwater Horizon. Because of the design change the blowout on April 20th, 2010 never occurred and our imaginary rig safety engineer never realizes that he prevented a disaster that killed 11 men, cost billions of dollars to clean up, destroyed the livelihood of men and women along the Gulf Coast, and irreparably damaged the environment of the Gulf of Mexico. Perhaps he ends up getting fired because the management regrets its decision to “waste” the millions of dollars to make the modification “to make the likelihood of an infinitesimal event even more unlikely.” Our imaginary risk safety expert then drowns his sorrows after the loss of his job and ends up wrecking his car, his last moment of consciousness full of regret for having wasted his life.

Yet we know that had our imaginary hero existed he would have been Time’s Person of the Year – if only his heroics could somehow be known.

So not only are Black Swans hard for us to see, they are also impossible for us to fully appreciate. How many catastrophes have been narrowly averted by luck or through intuition? We’ll never know because we cannot see all possible outcomes of an event.

Black swans play important roles in our personal lives as well. The decades spent with my Wife have their origin in a single local newscast in San Diego in 1990. At the time I was in school and lived in a large single family home with four roommates, one of whom grew pot for his own use in his room. Another roommate and I were watching TV when evening when the local news reported a pot bust in the area. We asked our pot-growing roommate how many pot plants he had, and it turned out he had more than in the bust. With visions of a SWAT team busting down our door and arresting us, we decided to get our own place. This seemingly inconsequential event at the time changed my life completely. Finding my best friend in life, travels through Asia, surviving a storm on Lake Tanganyika, the birth of our son, land in the country. All this would have never occurred.

Back in 1989 could I have predicted finding my wife ahead of time? Not at all. It is one of the most important events of my life, and it can be traced to a 30 second local news report.

Review your own history and you will see that that most if not all the important events that happen in one’s life are based on chance and as a result are unpredictable. This unpredictability is so anathema to our nature that we create narratives that mask it and make it appear that we choose our paths in life. An obvious example of this is in the job interview when one must explain one’s job history. You don’t say that you took a job because you heard there was an opening through a friend of a friend and the boss picked your resume to interview because it was the first resume on the pile. You say that you took the position because it provided you with the right challenges and allowed you to put your skills to work, weaving unpredictable events into a story that appears completely predictable in retrospect and makes you look good.

The New Year is a good time to bring this discussion up because I have spent the last several months wrestling with the implications of this book. It is intellectually dense and I am already half-way through my second reading but I know that it will require several more, and even then I’m not sure I have the intellectual capacity to fully appreciate the finer points of Taleb’s arguments. To assist me I have purchased and read both of his other works, and while these have been helpful (especially Fooled by Randomness) I am frustrated on so many different levels.

Black swans are an intellectual blind spot, and Taleb believes they warrant further study. However not much study has been done so far except for a few scattered attempts by Karl Popper and a handful of other philosophers. How have we gone 2000 years without recognizing the importance of random events in our daily lives?

More importantly, as a political commentator and writer I swim in narratives. I tell stories to make sense of the world, but according to Taleb the latter is hampered by the former. Our knowledge of the world is inaccurate because it is based on the fiction that we create in order to make sense of world events. This is one reason why Taleb dislikes journalists; he sees them as fiction writers that aren’t aware that their work is just as imaginary as that of Dean Koontz or JK Rowling.

So why am I starting the New Year off with this essay? To serve as a reminder that we cannot predict what will happen this year even though a year from now everything that happened will seem destined or preordained. Today we might see armed conflict between the Koreas or a civil war in Ivory Coast and $5 a gallon gas at the pumps, but the events that will change us and define the year are completely unknown. That should keep us humble as we watch the events of 2011 unfold.

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7 Comments

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    [...] The Razor – The Power of Random Events: Coping with Black Swans [...]

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    [...] Fourth place with 2/3 vote The Razor The Power of Random Events: Coping with Black Swans [...]

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  5. tony:

    Ah, it works, I’ve made several comments under my blog name ligneus but they don’t appear, so unless for some reason I’ve been banned I can comment again.

  6. Scott Kirwin:

    Tony/Ligneus
    You aren’t banned and are always welcome here. I’m not sure how the comment spammer operates but it seems to be pretty good. I sometimes have to approve comments but overall it keeps the spam comments down a lot.

  7. The Razor » Blog Archive » In the Belly of the Swan:

    [...] In the parlance of financial risk, these are true “black swan” events, a topic reviewed here. One could predict trouble driving under stormy skies. Black swan events are complete “bolts [...]

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