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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Why Isis seeks a battle with Western nations - and why it can't be ignored

Islamic State believes it must eventually confront and then defeat the West. To get there, it seeks to polarise Muslim and non-Muslim communities alike.

It was precisely the type of attack that had long been feared: a co-ordinated and brutal act of urban warfare that brought Paris to a standstill for more than three hours on an otherwise typical Friday night. Six of the nine attackers had spent time fighting for Islamic State in Syria. Indeed, it was the third act of international terrorism perpetrated by IS in a fortnight, a campaign that started with the bombing of a Russian Metrojet flight over Sinai in Egypt, followed by a double suicide bombing in Beirut that killed 41 people – the deadliest attack in the Lebanese capital since the civil war there ended in 1990.

There are several significant operational observations to be made about what transpired in Paris. The attackers wore suicide belts in which the active ingredient was TATP, a highly unstable explosive based on acetone and hydrogen peroxide. TATP was also used in July 2005 when the London transport network was attacked. Known as the “mother of Satan” because of its volatility, it is usually manufactured at home and it is prone to accidental detonation – or, indeed, sometimes fails to detonate at all.

When two weeks after the July 2005 attacks four bombers attempted to replicate the carnage, their bombs failed to explode precisely because they had not been manufactured properly. The same was true for Richard Reid, the “Shoe Bomber”, and Umar Farouk Abdulmutallab, the “Underwear Bomber”, who smuggled TATP explosives on to American aircraft in 2001 and 2009, respectively.

Perhaps the most worrying aspect of the Paris attacks is that every device proved to be viable – a reality born of the permissive environment in Syria and Iraq. A new generation of terrorists is now able to learn and rehearse the skills required to build devices that detonate successfully. The skills come with experience, and the newly ungoverned spaces of the Levant provide an ideal training ground.

Yet, for all the viability of the TATP devices used in Paris, the greatest loss of life came from assault rifles. This demonstrates how relatively unsophisticated tactics can still achieve mass casualties for terrorists determined to kill as many people as possible. The threat is particularly acute in mainland Europe, where automatic weapons move easily across the Continent, typically originating from criminal gangs in eastern Europe. Smuggling them into Britain is harder because the Channel limits the number of potential entry points.

The added protection resulting from Britain being an island is often overlooked. Just as guns are able to move more freely across the Continent, so, too, can people. This was brought into sharp relief when Imran Khawaja, a British man from west London who joined Islamic State in January 2014, attempted to re-enter the UK.

Khawaja had been particularly cunning. He hoped to slip back into Britain by evading the authorities after faking his own death in Syria, a plan his compatriots facilitated by eulogising and glorifying him. He then made his way across Europe by land, passing through several European countries before being arrested on arrival at Dover. None of this is to suggest that Britain does not face a very serious threat from Islamic State terrorism (it does), but the risks here are diminished compared to the threat facing countries in mainland Europe.


Trying to understand the strategic rationale behind Islamic State’s attacks outside Syria and Iraq is daunting. A degree of conjecture is required, although information gleaned from its communiqués, statements, and behaviour can go some way towards
informing a judgement.

It may seem obvious to observe that IS sees itself primarily as a state, yet this is worth restating, because other jihadist groups have made claims to statehood while continuing to act as terrorists or insurgents, tacitly recognising the nonsense of their own position. Not so Islamic State. It truly believes it has achieved the Sunni ideal of a caliphate and it acts accordingly.

This was the thinking that led the group to break from al-Qaeda, rebuffing Ayman al-Zawahiri’s position as the group’s emir. From Islamic State’s perspective, countries are not subservient to individuals. The significance of this self-belief became apparent last summer when the US began dropping aid parcels to stranded Yazidis who were otherwise starving and dying from exposure in the Sinjar Mountains of Iraq. The US also committed itself to protecting Erbil in northern Iraq by bombing IS fighters who were moving on the city, not least because US diplomats were based there and President Obama could not afford a repeat of the 2012 Benghazi debacle in Libya.

Islamic State responded by beheading its first Western hostage, the American journalist James Foley. Although the video of this was billed as a “Message to America”, it was directed specifically at Obama rather than the American people. In a speech evidently written for him, Foley told viewers that the US government was to blame for his execution because of its “complacency and criminality”.

When Mohammed Emwazi – “Jihadi John” – appeared in Isis videos as executioner-in-chief, he went some way towards explaining those accusations. “You are no longer fighting an insurgency. We are an Islamic army and a state,” he said. “Any attempt, by you, Obama, to deny the Muslims their rights of living safely under the Islamic caliphate will result in the bloodshed of your people.” To that extent, Islamic State has pursued a campaign of retribution over the past 12 months against those it regards as belligerent enemies: the United States, Britain, France, Russia and its regional arch-rival Hezbollah, the Lebanese-based and Iranian-backed Shia militia.

There is an unspoken corollary to this approach, too: that Islamic State wants to make the cost of acting against it so unbearably high that its opponents are intimidated into acquiescence. For all its nihilistic sadism, IS is a rational actor. The group controls a large landmass, enjoys autonomy and makes claims to a revived caliphate. That is a project it wants to continue expanding and consolidating by being left alone to overrun the Middle East, a process that involves massacring minorities, including the Shias, Christians, Yazidis and Kurds.
If the West intervenes in this it must be prepared to face the prospect of mass-casualty terrorism at home.

Some will invariably argue that this is precisely what we should do. Leave them to it: Islamic State may be distasteful, but the cost of acting against it is too high. Besides, we cannot police the world, and what concern is it of ours if Arab societies implode in this way?

This view overlooks a broader (and inevitable) strategic imperative that can never be divorced from Islamic State. The group’s millenarianism and commitment to eschatological beliefs are such that it wants to be left alone – for now.

IS ultimately believes it must confront and then defeat the West in a comprehensive battle between haqq and batil: truth and falsehood. That became clear enough when Abdul-Rahman Kassig (originally Peter Kassig) became the fifth Western hostage to be executed by IS in November last year. The video of his killing was different from those that preceded it and started with the execution of 21 soldiers from the Syrian Arab Army who were fighting on behalf of President Bashar al-Assad.

A short speech by Mohammed Emwazi – again, directed at Obama – noted that the execution was taking place in Dabiq, a town in north-western Syria. The significance of this is not to be underestimated. Dabiq is noted as being the venue of a final showdown between the armies of Islam and those of “Rome”, a reference to the superpower of the day.

“To Obama, the dog of Rome, today we’re slaughtering the soldiers of Bashar and tomorrow we’ll be slaughtering your soldiers,” Emwazi said. “We will break this final and last crusade . . . and here we are burying the first of your crusader army [Kassig] in Dabiq.”

Kassig was branded a “crusader” because he had served in the US armed forces.

That final encounter is not necessarily reliant on Western intervention. Emwazi explained that Islamic State would also use Dabiq as a springboard to “slaughter your people on your streets”. Thus, for Islamic State, a confrontation with the West is inevitable. It would rather be left to consolidate its position for now, but there is no eventuality in which we could expect to escape its sabre-rattling indefinitely.

The religious significance attached to sites such as Dabiq plays a huge role in motivating the fighters of IS. While the world looks on with horrified bewilderment at its rampages, the power of its eschatological reasoning provides some insight.

Writing shortly after Russia entered the conflict, a relatively well-known Dutch fighter called Yilmaz (also known as Chechclear) invoked the importance of end-times prophecies. “Read the many hadith [sayings of the Prophet Muhammad] regarding Bilad al Sham [Greater Syria/the Levant] and the battles that are going to be fought on these grounds,” he said. “Is it not slowly unfolding before our eyes?”

Herein lies the power of Islamic State’s reasoning – its fighters, and the movement as a whole, draw huge succour from the religious importance of the sites around which they are fighting. It serves to convince them of the righteousness of their cause and the nobility of their endeavours.

Faced with a campaign of Western aerial bombardment (albeit one that is limited and unambitious), Islamic State has decided to bait its enemies into fighting it on the ground. To that end, towards the end of the Kassig execution video, Emwazi advises Obama that Islamic State is “eagerly waiting for the rest of your armies [sic] to arrive”.


One final point should be noted about the possible strategic aims of the Paris attacks of 13 November. Islamic State has been dispirited by the mass migration of Syrian refugees into Europe. Instead, it has appealed to them to migrate eastwards, towards the caliphate, rather than into disbelieving Western nations.

In an attempt to dissuade refugees from heading to Europe, IS released a series of videos featuring Western foreign fighters – including some from France – who told viewers how much they despised their home countries. Their message was one of persecution, of Muslims under siege, and of a hostile, unwelcoming Western world.

By way of contrast, they attempted to display the benefits of living in the so-called caliphate, with stilted images of the good life that would make even North Korean officials blush: schoolchildren in class, doctors in hospitals, market stalls filled with fresh produce.

Smuggling fighters into France who had posed as refugees is likely to have been a deliberate and calculating move, designed to exploit fears among some about the potential security risk posed by accepting Syrian refugees. Islamic State likens refugees seeking a future in Europe to the fracturing of Islam into various encampments following the death of the Prophet Muhammad in 632AD. Most of these sects arose from divisions over who should succeed the Prophet in leadership of the Muslim community, but some went into open apostasy.

Viewing events in this way, Islamic State argues that any Muslim not backing its project is guilty of heresy. For refugees to be running from it in such large numbers is particularly humiliating: the group even ran an advert that juxtaposed an image of a camouflaged military jacket alongside that of a life vest. A caption read, “How would you rather meet Allah?”

An article published this year in Islamic State’s English-language magazine Dabiq made this very point. It noted that: “Now, with the presence of the Islamic State, the opportunity to perform hijrah [migration] from darul-kufr [the land of disbelief] to darul-Islam [the land of Islam] and wage jihad against the Crusaders . . . is available to every Muslim as well as the chance to live under the shade of the Shariah alone.”

Islamic State recognises that it cannot kill all of the refugees, but by exploiting European fears about their arrival and presence, they can at least make their lives more difficult and force them into rethinking their choice. All of this falls into a strategy where IS wants to eradicate what it calls the “grayzone” of coexistence. Its aim is to divide the world along binary lines – Muslim and non-Muslim; Islam and non-Islam; black and white – with absolutely no room for any shades of grey.

“The Muslims in the West will quickly find themselves between one of two choices, they either apostatise and adopt the kufri [infidel] religion propagated by Bush, Obama, Blair, Cameron, Sarkozy and Hollande in the name of Islam so as to live amongst the kuffar [disbelievers] without hardship, or they [migrate] to the Islamic State,” says an editorial in Dabiq magazine. “The option to stand on the sidelines as a mere observer is being lost.”


Atrocities such as the Paris attacks are designed to put a strain on the “grayzone”, thereby polarising Muslim and non-Muslim communities alike. Indeed, this is precisely what Islamic State said it hoped to achieve after the Malian-French radical Amedy Coulibaly declared, in a video released two days after his death, that he had participated in the Charlie Hebdo attacks on IS’s behalf. “The time had come for another event – magnified by the presence of the Caliphate on the global stage – to further bring division to the world and destroy the grayzone everywhere,” Dabiq said.

Beyond the tendency of all totalitarian movements to move towards absolutism in their quest for dominance, Islamic State also believes that by polarising and dividing the world it will hasten the return of the messiah. Once again, eschatology reveals itself as an important motivating principle.

This is both a blessing and a curse for Islamic State. Certainly, it is what underwrites its remarkable self-assurance and certainty and at the same time fuels its barbarism. Yet it may also prove to be its unravelling. IS has now attacked Russian and French civilians within a fortnight, killing hundreds. The wider world is finally realising that Islamic State is a threat it cannot afford to ignore.

Shiraz Maher is a contributing writer for the New Statesman and a senior research fellow at the International Centre for the Study of Radicalisation at King’s College London

Shiraz Maher is a contributing writer for the New Statesman and a senior research fellow at King’s College London’s International Centre for the Study of Radicalisation.

This article first appeared in the 19 November 2015 issue of the New Statesman, The age of terror