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 penguin.co.uk

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

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Seasons change, Gilmores stay the same

Gilmore Girls is fundamentally about two things: inheritance and community. The four seasons are crucial in exploring those themes.

If you’re out on the road, feeling lonely and so cold / All you have to do is call my name / And I’ll be there. The Gilmore Girls theme, a special version of Carole King’s “Where You Lead” featuring extra vocals from her daughter, plays each episode over images of autumnal New England foliage, and always reminded me of another song on Tapestry, “You’ve Got a Friend”. Winter, spring, summer or fall / All you have to do is call / And I’ll be there.

“Winter”, “Spring”, “Summer” and “Fall” are the episodes that make up Gilmore Girls: A Year in the Life, Netflix’s revival of the Noughties TV series. Fans won’t be at all surprised to see Netflix lean on the four seasons to organise the new show, a fundamental principle of the original series. This integral structure remains even as they dispense with other structures of the previous seven seasons, instead of the original 22-episode year, there are just four episodes used to narrate the Gilmores’ 2016, and each one has ballooned from 45 minutes to 90. And that familiar opening? Gone.

MISS PATTY: And flutter, flutter, flutter, flutter, flutter… and leaves! Where are my leaves? I got pumpkins, I got Pilgrims, I got no leaves.

Until 2016, every episode of Gilmore Girls included the same opening credits, with shots of red and gold leaves, a Connecticut town in the throes of autumn. So, those leafy fall shots would appear at least once an episode, even though the show’s picture-perfect town, Stars Hollow, would spend each series transitioning in and out of each of the four seasons. Of course, Stars Hollow is not a real place under the influence of real changes in the weather: it’s filmed on the perpetually sunny Warner Brothers lot in Los Angeles. And New England is so inextricably associated with autumn splendour, Stars Hollow so relentlessly idyllic, you might have expected the makes of Gilmore Girls to suspend Stars Hollow in a perennial fall, with Rory and Lorelai clutching hot coffees as they tread autumn leaves underfoot all year round. (It might make thematic sense, too: Gilmore Girls’ narrative of a precocious 16-year-old, brimming with brains and potential, slowly failing to achieve her own impossible goals fits both with the season’s connotations of academic beginnings and promise, and with its longer-standing cultural affiliation with maturity, pensive reflection and wistfulness.)

DARREN: Stars Hollow is charming. The last time we drove through there, there was a pumpkin patch.
LORELAI: Sounds like us.
DARREN: In March.
LORELAI: Oh, that would be the year the pumpkins arrived late.

The idea of Stars Hollow in perpetual autumn even comes up in a few episodes. Pumpkins arrive in March, autumnal events continue until the very end of November. Fall decorations are seemingly mandatory for local businesses.  But while every Gilmore Girls viewer can immediately conjure an image of Stars Hollow in fall, so too will they have an equally memorable selection of images of the town in winter, spring, and summer. No season goes unmarked. In fact, in the hyperreal utopia of Stars Hollow, seasons are exaggerated and picturesque: an overabundance of harvest vegetables, fluffy snow, budding blossoms, or falling leaves.

LORELAI: Grass is just not this green — not outside of Pleasantville, it isn’t.
CHRISTOPHER: So, what exactly are you saying?
LORELAI: I’m suggesting they brought in sod.
CHRISTOPHER: You suspect sod.
LORELAI: Yes, or spray paint. Maybe they spray-painted the grass when they spray-painted these trees, ‘cause, I mean, there’s autumnal foliage and then there’s autumnal foliage. It’s over the top, people.

But the seasonal obsession is more than just a way to emphasise the perfection of Stars Hollow. It’s an organising principle for the show’s structure, action and themes.

***

When Kelly Bishop (the actor who plays the most senior Gilmore girl, Emily) received the script for Gilmore Girls, she was stunned by the sheer weight of it. “I kept flicking it over, and looking at the thickness of it,” she told EW. “It was too thick to be a sitcom.” Gilmore Girls, consisting of hour-long episodes that make little sense out of order, but with its emphasis on witty dialogue over dramatic plotlines, hovers in a strange space between sitcom and drama.

Sitcoms are, by definition, situational — they often rely on characters thrown together in a confined space, be it the family living room, friends flatsharing or colleagues in a shitty office space. Comedy is often drawn from the familiarity of the specific surroundings: as a result, fans of The Simpsons or Friends or The Office could accurately draw floor-plans of the shows’ unchanging sets. So, too, could you draw a map of Stars Hollow, if you’ve seen enough episodes (trust me, I’ve done it). The action of a sitcom is often suspended in time and space: episodes end back where they began, the next opening as though nothing of note has happened since. Dramas, though, tend to thrive on progression of both character and plot; casts moving inexorably forward through time and space.

LORELAI: God, the town looks beautiful.
LUKE: Same as always.
LORELAI: No, it’s always different this time of year. It’s magical.
LUKE: If you say so, sure. Oh look, there’s the magical plumbing supply store where I bought a magical float for my toilet last week.
LORELAI: You disappoint me.
LUKE: Oh look. There’s the magical Luke’s Diner, right underneath the apartment that Jess magically lit by leaving every stinkin’ light on.

So, for Gilmore Girls to straddle both these genres, Stars Hollow must hold most of the show’s action and the majority of its ensemble cast, while still allowing the passing year to make its mark on the town. The seasons allow this. Much of this work is done in the background, as the set design changes from episode to episode, but characters are also constantly remarking on the changes in the town with each passing month, as Lorelai does when snow envelops the square.

The result is not just a keen sense of place, but of a place moving through time.

***

TAYLOR: Every other store in town has fall decorations.
LUKE: Hoorah for the mob mentality.
TAYLOR: We’re talking a few streamers and a paper turkey. How’s it gonna hurt to have a paper turkey?
LUKE: No turkey, no squash, no pumpkins. Nothing colored orange.
TAYLOR: OK, you don’t like orange. That’s fine. Autumn has many varied hues to toy with. This is the Autumn Festival. Your shop is right across the street from the Horn of Plenty! You’re smack dab in the middle of everything. You have to decorate.
LUKE: I don’t have to do anything but serve food.
TAYLOR: We’re talking about the spirit of fall!
LUKE: You know where you can stick the spirit of fall?

Gilmore Girls, with its principle cast of family members, and its sprawling ensemble cast of Stars Hollow residents, is fundamentally about two things: inheritance and community. The four seasons similarly become an important device for exploring those themes.

Small rural communities have long organised themselves around the seasons. Stars Hollow is no different — except in the ridiculous extent of its embrace of all things seasonal. Each season of Gilmore Girls is organised around the constant onslaught of annual festivals: the End of Summer Madness Festival that, well, ends summer, the Teen Hayride, the 24-Hour Dance Marathon the Autumn Festival complete with Cornucopia Can Drive and Horn of Plenty, November’s Old Muddy River Bridge Knitathon, the commemorations of the Battle of Stars Hollow, the Winter Carnival, the Snowman-Building Contest, the Christmas Procession, January’s Founders’ Firelight Festival, the Bid-on-a-Basket festival, Groundhog Day, St Patrick’s Day, the Purim festival, a whole host of springtime weddings and engagement parties, the springtime Movie Night in the Square, the annual Easter Egg Hunt, the Hay Bale Maze at the Spring Fling Festival, and the Festival of Living Pictures are just selection of the events honoured in Stars Hollow.

LORELAI: Oh, hey! Turn out the lights.
LUKE: For what? It’s not the real procession, it’s just the rehearsal.
LORELAI: So, it’s pretty.
LUKE: And why do they need to rehearse it? It’s the same thing every year.
LORELAI: Come on Luke, please. It’s hard to imagine living somewhere else isn’t it?

These aren’t just background quirks, lending us an increased sense of familiarity with the town as we’re told over and over that these events unfold in the same, strange way every single year. They’re linchpins which hold key plot events in place. Both Jess and Dean tell Rory they love her, with less than positive consequences, during the supposedly romantic Founder’s Firelight Festivals. Rory’s romantic relationship with Jess speeds up when he bids on her basket at the Bid-on-a-Basket festival, which is also where Sookie and Jackson become engaged. Her relationship with Dean ends (the second time) in spectacular fashion at the Dance Marathon. Luke begins his romantic relationship with Lorelai when dancing with her amidst springtime decorations in the town square at Liz and TJ’s wedding. The list goes on.

The result is that the lives of our main characters, the lives of the smaller Stars Hollow characters, and small-town seasonal events are all inextricably linked to the same calendar. Particularly in the early seasons, every significant relationship, for both Rory and Lorelai, becomes rooted in the community of Stars Hollow. Public acts of citizenship and private expressions of love overlap. To live in Stars Hollow is to live every aspect of your life communally, communing with others, and with nature itself.

LORELAI: Do you know that the best things in my life have happened when it snowed?
RORY: Why, yes, I do.
LORELAI: My best birthday.
RORY: Your first kiss.
LORELAI: Your first steps. They all happened when it snowed.

***

The seasonal structure of the show also brings with it a sense of inevitability, as, in the midst of these reliable annual ceremonies, Gilmore Girls explores ideas of inheritance across the generations. In the grand houses of Emily and Richard’s world (and Lorelai, Christopher and Logan’s youths) inheritance both metaphorical and literal is an encouraged part of family life: but it feels forced and uncomfortable, restricting individuality in favour of decorum and reputation. In Stars Hollow, inheritance functions in a different, but no less crucial, way: more subtle and natural, as constant and eternal as the circles of life. For children who grow up with their parents in Stars Hollow, inheritance seems predestined, even if it didn’t seem so to the characters it affects.  

Many characters are surprised by what they inherit from their parents: Luke never expected to care so much for his father’s old hardware store, Lane is shocked to discover that after years of aching to break out of her mother’s conservative ideals, she’s not comfortable with having sex before marriage. Jess never thought he would pick up a book on intimacy from his uncle Luke, let alone read it sincerely, nor to learn so much valuable advice from him about communication in relationships.

LUKE: You do not want to grow up to be like your mom.
RORY: Sorry, too late.

Of course, that sense of inescapable legacies is taken to extremes in Rory and Lorelai’s relationship: in the very first episode, Lorelai exclaims to her daughter, “After all, you’re me!” While Rory at 16  is, in some ways, a vision of everything Lorelai at 16 was not (responsible, excited by her education, chaste, keeping a constant, serious eye on her future), as the series unfolds, that changes, as Rory becomes more impulsive, reckless and romantic. Viewers are relentlessly confronted by parallels between Rory and Lorelai’s romantic choices: Christopher is to Lorelai as Logan is to Rory, Luke is to Lorelai as Jess is to Rory. Seasons change, Gilmores stay the same.

LORELAI: He kind of looks like Christopher.
LUKE: The grocery kid?
LORELAI: Yeah. He looks like Christopher.
LUKE: And Christopher is Rory’s dad?
LORELAI: The hair, the build, something about the eyes. He reminds me of Christopher.
LUKE: Well that’s not too surprising.
LORELAI: You’re going to quote Freud to me? ’Cause I’ll push you in front of a moving car. This talk was going so well.
LUKE: You and Rory are a lot alike. It’s not surprising you would have similar tastes in men.

It is an inexorable, unavoidable logic, then, that sees Gilmore Girls: A Year in the Life, a show with more interest in the unfolding seasons and the passage of time than ever, that sees Rory finally become her mother. The show’s much-anticipated final four words (“Mom,” “Yeah?” “I’m pregnant”) see Rory at 32, the same age as her mother when the series began, in a similar position to her mother at 16: single, pregnant, unfocused in her career. Some found it frustratingly obvious and pessimistic, others found it optimistic and apt. I’d sum it up in the same way Lorelai comments on her repeating circumstances with her own mother: with a grimly ironic toast “to the circle of life”.

But however you feel about the ending, Gilmore Girls has pulled off one impressive feat. As Lorelai and Rory sit together in the bandstand, and the show cuts to black, it doesn’t feel like the show has ended at all. The fictional landscape of Stars Hollow has a life that extends beyond the screen, as inevitable as the seasons themselves.

Anna Leszkiewicz is a pop culture writer at the New Statesman.