Beware those Black Swans

The bestselling economist Nassim Nicholas Taleb argues that we can’t make the world financial system

After completing my book The Black Swan, I spent some time meditating on the fragility of systems with the illusion of stability. This convinced me that the banking system was the mother of all accidents waiting to happen. I explained in the book that the best teachers of wisdom are the eldest, because they may have picked up invisible tricks that are absent from our epistemic routines and which help them survive in a world more complex than the one we think we understand. So being old implies a higher degree of resistance to "Black Swans" (events with the following three attributes: they lie outside the realm of regular expectations; they carry an extreme impact; and human nature makes us concoct explanations for their occurrence after the fact).

Take Mother Nature, which is clearly a complex system, with webs of interdependence, non-linearities and a robust ecology (otherwise it would have blown up a long time ago). It is a very old person with an impeccable memory. Mother Nature does not develop Alz­heimer's - and there is evidence that even humans would not easily lose brain functions with age if they took long walks, avoided sugar, bread, white rice and stock-market investments, and refrained from taking economics classes or reading the New York Times.

Let me summarise my ideas of how Mother Nature deals with the Black Swan. First, she likes redundancies. Look at the human body. We have two eyes, two lungs, two kidneys, even two brains (with the possible exception of company executives) - and each has more capacity than is needed ordinarily. So redundan­cy equals insurance, and the apparent inefficiencies are associated with the costs of maintain­ing these spare parts and the energy needed to keep them around in spite of their idleness.

The exact opposite of redundancy is naive optimisation. The reason I tell people to avoid attending an (orthodox) economics class and argue that economics will fail us is the following: economics is largely based on notions of naive optimisation, mathematised (poorly) by Paul Samuelson - and these mathematics have contributed massively to the construction of an error-prone society. An economist would find it inefficient to carry two lungs and two kidneys - consider the costs involved in transporting these heavy items across the savannah. Such optimisation would, eventually, kill you, after the first accident, the first "outlier". Also, consider that if we gave Mother Nature to economists, it would dispense with individual kidneys - since we do not need them all the time, it would be more "efficient" if we sold ours and used a central kidney on a time-share basis. You could also lend your eyes at night, since you do not need them to dream.

Almost every major idea in conventional economics fails under the modification of some assumption, or what is called "perturbation", where you change one parameter or take a parameter henceforth assumed to be fixed and stable by the theory, and make it random. Take the notion of comparative advantage, supposedly discovered by David Ricardo, and which has oiled the wheels of globalisation. The idea is that countries should focus on "what they do best". So one country should specialise in wine, another in clothes, even though one of them might be better at both. But consider what would happen to the country if the price of wine fluctuated. A simple perturbation around this assumption leads one to reach the opposite conclusion to Ricardo. Mother Nature does not like overspecialisation, as it limits evolution and weakens the animals.

This explains why I found the current ideas on globalisation (such as those promoted by the journalist Thomas Friedman) too naive, and too dangerous for society - unless one takes into account the side effects. Globalisation might give the appearance of efficiency, but the operating leverage and the degrees of interaction between parts will cause small cracks in one spot to percolate through the entire system.

The debt taboo

The same idea applies to debt: it makes you very fragile under perturbations. We currently learn in business schools to engage in borrowing, against all historical traditions (all Mediterranean cultures developed over time a dogma against debt). "Felix qui nihil debet", goes the Roman proverb: "Happy is he who owes nothing." Grandmothers who survived the Great Depression would have advised doing the exact opposite of getting into debt: have several years of income in cash before any personal risk-taking. Had the banks done the same, and kept high cash reserves while taking more aggressive risks with a smaller portion of their port­folios, there would have been no crisis.

Documents dating back to the Babylonians show the ills of debt, and Near Eastern religions banned it. This tells me that one of the purposes of religious traditions has been to enforce prohibitions to protect people against their own epistemic arrogance. Why? Debt implies a strong statement about the future, and a high degree of reliance on forecasts. If you borrow $100 and invest in a project, you still owe $100 even if you fail in the project (but you do a lot better in case you succeed). So debt is dangerous if you are overconfident about the future and are Black Swan-blind - which we all tend to be. And forecasting is harmful since people (especially governments) borrow in response to a forecast (or use the forecast as a cognitive excuse to borrow). My "Scandal of Prediction" (bogus predictions that seem to be there to satisfy psychological needs) is compounded by the "Scandal of Debt": borrowing makes you more vulnerable to forecast error.

Just as Mother Nature likes redundancies, so she abhors anything that is too big. The largest land animal is the elephant, and there is a reason for that. If I went on a rampage and shot an elephant, I might be put in jail and get yelled at by my mother, but I would hardly disturb the ecology of Mother Nature. On the other hand, my point about banks in my book - that if you shot a large bank, I would "shiver at the consequences" and that "if one falls, they all fall" - was subsequently illustrated by events: one bank failure, Lehman Brothers, in September 2008, brought down the entire edifice.

The crisis of 2008 provides an illustration of the need for robustness. Over the past 2,500 years of recorded ideas, only fools and Platonists have believed in engineered utopias. We shouldn't think that we can correct mistakes and eliminate randomness from social and economic life. The challenge, rather, is to ensure that human mistakes and miscalculations remain confined, and to avoid them spreading through the system - just the way Mother Nature does it. Reducing randomness increases exposure to Black Swans.

My dream is to have a true "epistemocracy"; that is, a society robust against expert errors, forecasting errors and hubris, one that can be resistant to the incompetence of politicians, regulators, economists, central bankers, bank­ers, policy wonks and epidemiologists.Here are ten principles for a Black Swan-robust society.

What is fragile should break early while it's still small: Nothing should ever become too big to fail. Evolution in economic life helps those with the maximum amount of hidden risks become the biggest.

No socialisation of losses and privatisation of gains: Whatever may need to be bailed out should be nationalised; whatever does not need a bailout should be free, small and risk-bearing. We got ourselves into the worst of capitalism and socialism. In France, in the 1980s, the Socialists took over the banks. In the US in the 2000s, the banks took over the government. This is surreal.

People who drove a school bus blindfolded (and crashed it) should never be given a new bus: The economics establishment lost its legitimacy with the failure of the system in 2008. Find the smart people whose hands are clean to get us out of this mess.

Don't let someone making an "incentive" bonus manage a nuclear plant - or your financial risks: Odds are he would cut every corner on safety to show "profits" from these savings while claiming to be "conservative". Bonuses don't accommodate the hidden risks of blow-ups. It is the asymmetry of the bonus system that got us here. No incentives without disincentives.

Time to definancialise

Compensate complexity with simplicity: Complexity from globalisation and highly networked economic life needs to be countered by simplicity in financial products. Complex systems survive thanks to slack and redundancy, not debt and optimisation.

Do not give children sticks of dynamite, even if they come with a warning label: Complex financial products need to be banned because nobody understands them, and few are rational enough to know it. We need to protect citizens from themselves, from bankers selling them "hedging" products, and from gullible regulators who listen to economic theorists.

Only Ponzi schemes should depend on confidence: Governments should never need to "restore confidence". Cascading rumours are a product of complex systems. Governments cannot stop the rumours. We just need to be able to shrug off rumours, to be robust to them. Do not give an addict more drugs if he has withdrawal pains: Using leverage to cure the problems of too much leverage is not homoeopathy, it's denial. The debt crisis is not a temporary problem, it's a structural one. We need rehab.

Citizens should not depend on financial assets as a repository of value and rely on fallible "expert" advice for their retirement: Economic life should be definancialised. We should learn not to use markets as warehouses of value.

Make an omelette with the broken eggs: The crisis of 2008 was not a problem to fix with makeshift repairs. We will have to remake the system before it does so itself. Let us move voluntarily into a robust economy by helping what needs to be broken break on its own, converting debt into equity, marginalising the economics and business school establishments, banning leveraged buyouts, putting bankers where they belong, clawing back the bonuses of those who got us here and teaching people to navigate a world with fewer certainties. Then we will see an economic life closer to our biological environment: smaller firms and no leverage - a world in which entrepreneurs, not bankers, take the risks, and in which companies are born and die every day without making the news.

Extracted from the postscript to "The Black Swan: the Impact of the Highly Improbable" by Nassim Nicholas Taleb (Penguin, £9.99)
© Nassim Nicholas Taleb 2008

This article first appeared in the 05 July 2010 issue of the New Statesman, The cult of the generals

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The love affairs of Stan Laurel: "If I had to do it over again things would be different"

A romantic who craved stability, the English comedian Stan Laurel led a Hollywood love life as chaotic as his films’ plots

The comedian Stan Laurel was, even by the standards of his time, a prodigious correspondent. The Stan Laurel Correspondence Archive Project contains more than 1,500 artefacts, and these are only the documents that have so far been traced, as many of his early missives appear to have been lost. He was, quite literally, a man of letters.

His punctiliousness about correspondence can be ascribed, at least in part, to his natural good manners, but letters were also a means of filling his long retirement. He outlived his screen partner Oliver Hardy – “Babe” to his friends – by almost eight years but refused all offers of work during that time. Instead, heartbreakingly, he wrote sketches and routines for the duo that would never be performed. It was, perhaps, a way for Laurel to speak with Babe again, if only in his head, until he followed him into the dark on 23 February 1965.

Though Laurel and Hardy have never been forgotten, they are currently undergoing an energetic revival. Stan and Ollie, a film dramatisation of their later years, starring Steve Coogan as Stan Laurel and John C Reilly as Oliver Hardy, is scheduled for release in 2018. Talking Pictures TV is to start showing the duo’s long features from September. Sixty years since Oliver Hardy’s death on 7 August 1957, the duo will soon be rediscovered by a new generation.

They were such different men and such unlikely partners. Laurel was born Arthur Stanley Jefferson in 1890, in Ulverston, then part of Lancashire, the son of AJ, a theatre manager, and Margaret, an actress. He made his stage debut at the age of 16 and never again considered an alternative profession, eventually leaving for the United States to act on the vaudeville circuit before finally ending up in the nascent Hollywood. Norvell Hardy, meanwhile, came from Harlem, Georgia, the son of a slave overseer who died in the year of his son’s birth, 1892, and whose first name, Oliver, Norvell took as his own.

Hardy, who had worked as a singer and as a projectionist, became a jobbing actor, often being cast as the “heavy”because of his bulk. Laurel, by contrast, was groomed for stardom, but it repeatedly slipped through his fingers. Unlike Chaplin’s Tramp, or the boater-and-glasses-wearing Harold Lloyd, he had no persona. Only when Hal Roach paired him with Hardy did he finally find a mask that fitted, and thus a professional marriage slowly grew into a friendship that would endure until Babe’s death.

Laurel was the creative engine of the partnership, creating storylines and gags, intimately involving himself in the directing and editing of each film, but Hardy was the better, subtler actor. Laurel was a creature of the stage, trained to act for the back rows; Hardy, by contrast, had watched countless films from his projectionist’s perch and knew that the smallest of gestures – the raising of an eyebrow, a glance flicked in the audience’s direction – would be writ large on the screen. Laurel recognised this and tailored his scripts to his partner’s strengths.

Thus – and unusually for such partnerships – they never argued with each other about either screen time or money, despite the notorious parsimony of their producer Hal Roach, who paid them what he could get away with and would not let them negotiate their contracts together in order to weaken their bargaining position. Indeed, apart from one contretemps about the degree of dishevelment permitted to Babe’s hair, it seems that Laurel and Hardy never argued very much at all.

And then Babe died, leaving his partner bereft. What was a man to do but remember and write? So Laurel, always a prodigious correspondent, spent much of his retirement communicating with friends and fans by post. It helped that he had a curious and abiding affection for stationery. During one of the many interviews he conducted with John McCabe, his first serious biographer, Laurel revealed a wish to own a stationery store. Even he didn’t seem sure exactly why, but he admitted that he was quite content to while away entire afternoons in examining grades of paper.

Since letters were Laurel’s primary source of contact with the world, much of his writing is quite mundane. He deals with repeated inquiries about the state of his health – “I’m now feeling pretty good,” he informs a Scottish fan called Peter Elrick on 8 June 1960. “I suffered a slight stroke in ’55, fortunately I made a good recovery & am able to get around quite well again, of course I shall never be in a condition to work any more.” He notes the passing of actors he has known (to Jimmy Wiseman on 29 January 1959: “That was a terrible thing about [Carl] ‘Alfalfa’ Switzer wasn’t it? All over a few dollars’ debt he had to lose his life. I knew him very well as a kid in Our Gang films…”), answers queries about his films and his late partner (to Richard Handova on 21 March 1964: “Regarding the tattoo on Mr Hardy’s right arm – yes, that was an actual marking made when he was a kid – he always regretted having this done”) and often writes simply for the pleasure of having written, thus using up some stationery and enabling him to shop for more (“Just a few more stamps – hope you’re feeling well – nothing much to tell you, everything is as usual here,” represents the entirety of a letter to Irene Heffernan on 10 March 1964).

In researching my novel about Stan Laurel, I read a lot of his correspondence. I had to stop after a while, because the archive can overwhelm one with detail. For example, I might have found a way to include Oliver Hardy’s tattoo, which I didn’t know about until I read the letter just now. But of all the Laurel letters that I have read, one in particular stands out. It was written to his second wife, Ruth, on 1 July 1937, as their relationship was disintegrating. It is so striking that I quote it here in its entirety:

Dear Ruth,

When Lois divorced me it unbalanced me mentally & I made up my mind that I couldn’t be happy any more. I met & married you in that frame of mind, & the longer it went on, the stronger it became. That’s why I left you with the insane idea Lois would take me back.

After I left you, I found out definitely that she wouldn’t. I then realised the terrible mistake I had made & was too proud to admit it, so then I tried to find a new interest to forget it all, & truthfully Ruth I never have. I have drank just to keep up my spirits & I know I can’t last doing that, & am straining every effort to get back to normal.

You’ve been swell through it all, except the few rash things you did. I don’t blame you for not being in love with me, but my state of mind overrules my true feeling. If I had to do it over again things would be a lot different, but not in this town or this business. My marital happiness means more than all the millions.

Why has this letter stayed with me? I think it’s because of the penultimate sentence: “If I had to do it over again things would be a lot different, but not in this town or this business.” Hollywood brought Laurel a career, acclaim and a personal and professional relationship by which he came to be defined, but all at a price.

Stan Laurel was a complicated man, and complicated men lead complicated lives. In Laurel’s case, many of these complexities related to women. His comic performances and lack of vanity on screen often disguise his handsomeness, and monochrome film cannot communicate the blueness of his eyes. Women fell for him, and fell hard. He amassed more ex-wives than is wise for any gentleman (three in total, one of whom, Ruth, he married twice), to which number may be added a common-law wife and at least one long-standing mistress.

Had Laurel remained in Britain, serving an apprenticeship to his father before assuming control of one of the family’s theatres, women might not have been such a temptation for him. At the very least, he would have been constrained by a combination of finances and anonymity. Instead, he left for the United States and changed his name. In 1917, he met Mae Dahlberg, an older Australian actress who claimed to be a widow, despite the existence elsewhere of a husband who was very much alive and well. Laurel and Mae worked the vaudeville circuit together and shared a bed, but Mae – who lacked the talent to match her ambition – was eventually paid to disappear, as much to facilitate Laurel’s wedding to a younger, prettier actress named Lois Neilson as to ensure the furtherance of his career.

Yet it wasn’t long into this marriage before Laurel commenced an affair with the French actress Alyce Ardell, one that would persist for two decades, spanning three further nuptials. Ardell was Laurel’s pressure valve: as marriage after marriage fell apart, he would turn to her, although he seemed unwilling, or unable, to connect this adultery with the disintegration of his formal relationships.

The end of his first marriage was not the result of Laurel’s unfaithfulness alone. His second child with Lois, whom they named Stanley, died in May 1930 after just nine days of life. For a relationship that was already in trouble, it may have represented the final, fatal blow. Nevertheless, he always regretted leaving Lois. “I don’t think I could ever love again like I loved Lois,” he writes to Ruth on Christmas Eve in 1936. “I tried to get over it, but I can’t. I’m unhappy even after all you’ve done to try to make me happy, so why chase rainbows?”

But chasing rainbows was Stan Laurel’s default mode. He admitted advertising his intention to marry Ruth in the hope that Lois might take him back. Even after he and Ruth wed for the first time, he wrote letters to Lois seeking reconciliation. It set a pattern for the years to come: dissatisfaction in marriage; a retreat to Alyce Ardell’s bed; divorce; another marriage, including a year-long involvement with a notorious Russian gold-digger named Vera Ivanova Shuvalova, known by her stage name of Illiana (in the course of which Laurel, under the influence of alcohol, dug a hole in his garden with the stated intention of burying her in it), and finally contentment with another Russian, a widow named Ida Kitaeva Raphael, that lasted until his death.

These marital tribulations unfolded in full view of the media, with humiliating details laid bare. In 1946, he was forced to reveal in open court that alimony and child support payments left him with just $200 at the end of every month, and he had only $2,000 left in his bank account. In the course of divorce proceedings involving Illiana, his two previous wives were also briefly in attendance, leading the press to dub Lois, Ruth and Illiana “triple-threat husband hazards”. It might have been more accurate to term Stan Laurel a wife hazard, but despite all his failings, Lois and Ruth, at least, remained hugely fond of him.

“When he has something, he doesn’t want it,” Ruth told a Californian court in 1946, during their second set of divorce proceedings, “but when he hasn’t got it, he wants it. But he’s still a swell fellow.”

Laurel’s weakness was women, but he was not promiscuous. I think it is possible that he was always looking for a structure to his existence and believed that contentment in marriage might provide it, but his comedy was predicated on a conviction that all things tended towards chaos, in art as in life.

Thanks to the perfect complement of Oliver Hardy, Laurel was perhaps the greatest screen comedian of his generation – greater even than Chaplin, I would argue, because there is a purity to Laurel’s work that is lacking in Chaplin’s. Chaplin – to whom Laurel once acted as an understudy and with whom he stayed in contact over the years – wanted to be recognised as a great artist and succeeded, but at the cost of becoming less and less funny, of leaving the comedian behind. Stan Laurel sought only to make his audience laugh, and out of that ambition he created his art.

“he: A Novel” by John Connolly is published by Hodder & Stoughton on 24 August

This article first appeared in the 05 July 2010 issue of the New Statesman, The cult of the generals