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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The age of lies: how politicians hide behind statistics

Perhaps it is time to combine our Trump-era, heightened sensitivity to untruths with a new broadcasting technique or two.

The small slabs of crude election soundbites, with extra ornamentation in the form of half-true and meaningless headline statistics, clunk across the airwaves, and we grimace. The dead prose reaches us umpteen times a day – “an economy that works for all”, “the many and not the few”, “work is the way out of poverty”, “more being spent on our schools than ever before”, “the NHS is treating more patients than ever ­before”, “fastest growth rate in Europe”, “the national interest”, “the most ­important election in my lifetime” – and yes, let’s hear it for “strong and stable leadership”.

On 30 April, Andrew Marr tried a little witty and civilised pre-emptive mocking to stop Theresa May using soundbites in his interview with her, but it did not work because it could not work. Embarrassment about clichés and almost idiotic numbers is not what democratic politicians worry about at election time. Many of us may pine for the old American game-show device – where, for failing to amuse and divert the audience, contestants are removed from the fray by a man hammering a gong – but that is not on offer and, in election mode, the politicians will do as they have long learned to do. They will listen to the Lynton Crosbys and Seumas Milnes of this world and plough on – and on.

The soundbites are largely vacuous and we are more noisily sardonic about them than three decades ago (hooray for media literacy) but they aren’t worse than normal. There is no point expecting the debate to run on the lines of Gladstone’s Midlothian campaign 140 years ago, when he charged around Britain giving five-hour speeches – richly informed by Liberal philosophy – which did the trick for him and his party.

The clichés are, naturally, often interchangeable. Everybody running for high political office could quite contentedly utter any or all of the above phrases, though I concede it doesn’t require an inspired analyst of modern British politics to know what Theresa May is trying to do with her leadership riff – nor Jeremy Corbyn with his “rule for the many and not the few”, a phrase that has been used religiously since the adoption of universal suffrage. Only Jacob Rees-Mogg would put it to one side.

I spent almost 30 years at the BBC – working with a cadre of (mostly) hugely talented and impartial presenters and editors trying to find ways of injecting a bit more surprise or rigour into political interviews. (Surprise and rigour are often not the same thing.) I recall David Dimbleby reducing Alastair Campbell to semi-public fury in 1997 by excavating Tony Blair’s early political career and finding, neither surprisingly nor, in my view, particularly reprehensibly, that he had said Michael Foot-like things in a Michael Foot-like era. Oddly, nobody had thought to do this after he had been elected leader three years earlier, so Dimbleby’s approach to Blair had an element of ­surprise. And then there was John Humphrys’s relentless needling of Gordon Brown for his comic refusal after the 2008 financial crash to use the word “cuts” to describe what might have to happen to reduce the budget deficit, or even to agree with his own chancellor, Alistair Darling, that the global economic outlook was very bad. Brown had an on-air mega-curdle.

We know the score – the politicians find the rhetorical and statistical position that provides the best short-term defensive crouch, while the interviewer at least wants to make sure that the audience knows the question posed is relevant, fair and, if need be, that it has been dodged. Time presses on both participants – but the impact of the compression is unequal. The interviewee usually has the upper hand. In her early period Margaret Thatcher, who was a good deal more nervous than her subsequent reputation for clarity and authority would suggest, might well have been the all-time queen of interview delay tactics. However, most interviewees know that once they have found an answer to a question the first thing to do is to pad it out in case the next question is a little more difficult.

I am not outraged by any of this; nor do I believe these encounters should be dismissed as sterile, or that we should be contemptuous of the skills involved on either side of the exchange. The sort of one-sided triumph enjoyed by LBC’s Nick Ferrari with Diane Abbott is rare, and her numerical amnesia over policing made a whole argument go kerplunk – but even in more orthodox interviews you can often detect at the very least a broad weakness in a broad argument.

To my ear Corbyn sounds perpetually unsteady on defence policy (see his Marr interview in the first week of the campaign) and public finances, and neither May nor David Cameron before her manages much fluency on the impact of cuts on the working poor once they have uttered that threadbare soundbite about work being the route out of poverty. Would that it were so simple.

Our willingness to dismiss as boring these interviews, the staple of daily current affairs programmes, is overdone. And we have been a little graceless about the extent to which senior UK politicians do – or did – engage in at least some forms of public debate. Anyone who follows the US media will know how rare it has always been for senior members of the administration and White House staff to expose themselves to the sort of scrutiny still supplied by the Sunday political shows, Radio 4 current affairs programmes, Newsnight or Channel 4 News.

For decades, senior politicians in the UK turned up in the studios – often with scarcely concealed irritation – but they went through with it. In part because it was expected and in part out of self-interest. Good interview performances could lead to rapid promotion. Iain Duncan Smith was (you may be surprised by this) particularly effective in his early years at advocating his causes, and his party’s, in front of a microphone. But the studios did for him when he became Tory leader. As it turned out, his failings were more obvious when confronted by a skilled interviewer than in the House of Commons. His nervous coughing finally caught up with him one morning on the Today programme, and that was that.

Duncan Smith and Abbott are far from alone in seeing their currency plummet as a result of losing the plot in an interview. Harriet Harman, normally a highly fluent and agile politician, was sacked as social security secretary in 1998 after a grim outing, at least for her, with John Humphrys – caused not by his abrasiveness nor by any Abbott-like forgetfulness, but by her almost tangible unhappiness with a New Labour policy she was defending.

Even now, on BBC Question Time, some heavyweights will turn up only to be mauled by the voters on topics a long way away from the heart of their portfolio. Yes, they get copious notes from party researchers and have endless rehearsals to minimise the chance of saying anything too intellectually lively: but they should nevertheless get credit for risking it in the first place.

However, outside election time this tradition of broadcasting interrogation and debate, not much more than 50 years old, is under stealthy attack. The presenting team on Today is seriously good, but it is hard not to notice that the heavy hitters turn up less often for their ten minutes of duelling; similarly with Newsnight and Channel 4 News.

The Prime Minister’s Olympian approach to this sort of public engagement aggravates what was already a problem. The broadcasters may be losing ground. In this election there will be no head-to-head leaders’ debates featuring Labour and the Conservatives, and there is no great uproar about it. As it happens, I don’t believe that their absence is a disaster – not least because the format of individual leaders confronting an engaged Question Time audience one at a time (a “tradition” that began in 1997) provides far more substance and revelation than the 2010 or 2015 leaders’ debates did.

In the meantime, what can be done to the interview to improve the quality of public debate? Forcing out the clichés is not a realistic goal. Yet perhaps it is time to combine our Trump-era, heightened sensitivity to untruths with a new broadcasting technique or two. The BBC Trust (which I was part of for two years until it ceased to exist in April) commissioned its final independent editorial report on the BBC’s use of statistics from a panel of experts chaired by the former UK chief statistician Jil Matheson.

It is a superb piece of work. Above all it pleads with the BBC to do more to put statistics in context. The work was largely complete before the EU referendum so it did not pass judgement about either the veracity of the Brexiteers’ “extra £350m for the NHS” claim or the BBC’s coverage of that claim. I listened and watched a lot and, contrary to the views of many leading members of the Remain campaign, the BBC seemed to me to have consistently signalled to the audience the risible nature of the figure, if not as rudely as many would have liked.

Yet there is a different perspective on that cause célèbre. Only very rarely did the BBC on air (or anyone else, for that matter) compare the sums involved with total UK public expenditure: a net annual payment to the EU of about £8.5bn, compared to public expenditure of about £785bn. This £8.5bn is not a trivial sum – and it is likely to sound gargantuan to an unskilled worker on low wages in Hartlepool – but it hardly threatens the nation’s existence. We will have to think about that number all over again when the EU divorce bill gets paid.

In the past few years there has been a welcome growth online of fact-checking websites that get to grips with some of the half-sense or nonsense uttered – sometimes deliberately – in public debate. Among the broadcasters, Channel 4 News got in first with “FactCheck” and deserves great credit for having done so. The BBC has Reality Check; there are also the non-aligned Full Fact and others. And the Institute for Fiscal Studies (IFS) sits as a mega-authority when it pronounces on individual economic statistics. (It was a particularly dispiriting episode when the IFS took a pounding during the EU campaign.)

The good newspapers and the broadcasters have correspondents who can – and do – understand the context in which statistical argument takes place. They know the difference between a big number and a not-so-big number, the difference between an aggregate spending figure and spending per head of population, the difference in importance between a one-month figure and a trend – and a trend that does not change much over time.

This is all good, and better than it used to be. But perhaps more of this rigour can be woven into what is still the dominant form of political accountability in broadcasting: the interview.

So let us try a thought experiment. Imagine (though we don’t really have to imagine) that the Health Secretary, Jeremy Hunt, comes into a studio to say, surprise, surprise, that more is being spent in real terms on the NHS than ever before. Imagine that he is told there will be no questions on anything else until he can answer, let’s say, two obvious supplementary questions: in the course of the past 60 years how often has his assertion not been true? (Answer, says the IFS: four times, one of which was 2011/12.) And what has been the growth in per capita NHS spend, in real terms, since 2009/10, compared to the previous 15 years or so? (Answer: 0.6 per cent, as opposed to 5.4 per cent.) Answering these would show that his boast is one that almost all of his predecessors could have made, and also that the Conservative-led coalition was less generous to the health service than the preceding Labour government. It would be absolutely fair for Jeremy Hunt to respond vigorously about the need to cut the deficit or even to make points about who was in government when the crash happened – but he could not be allowed to get away with statistical near-rubbish.

Similarly, the mantra on English education (“Our schools are getting more money than ever before”) is a waste of air. It’s not that the cuts are “vicious” – just that the assertion when put in context is gibberish. The economy is growing and the school population is growing, fast. So if we were not spending more in total, and in real terms, then the cuts would be vicious. And yet, per head, there will be less in real terms for pupils. Period.

The front-line interviewers I know best are very skilled journalists and they often do try to get a jab in when the numerical nonsense gets going – but they have to move on, whether to other urgent matters or to seek a news headline from the interview, and there is not enough jeopardy for the press officer or spin doctor who wrote the politician’s brief to desist from writing the same stuff next time around.

There may be other ways of levelling up matters. The interview could proceed as normal; but at the end of it up could pop, say, Tim Harford (of the brilliant statistics programme More or Less on Radio 4) to put in the necessary corrections. It would have to be done within a few minutes or else the impact would dissipate. From time to time, Harford or his equivalent does appear after a political interviewee has spouted statistically illiterate twaddle – but not often enough, and usually this happens long after the attempted mugging of intelligent debate. Too little, too late.

It would be obligatory to ensure that this type of treatment, particularly at election time, was meted out to all the parties – but outside the election it is the government of the day and its news departments that are going to have to face most of the music. Fair enough.

My suggestion is not put forward because I am advocating a particular party’s reading of the state of the nation (or nations). There is no monopoly on vice. We should not forget Labour’s “triple counting” of health service spending after 1997 even if Blair/Brown subsequently, in benign economic circumstances, did indeed put their foot on the health-spending accelerator.

Rather, when the election dust settles and the media seminar post-mortems crank up yet again – about the level of turnout, political ennui, the particular disengagement of the young, the coverage of the leaders, the role of opinion polls and other staples – we need to keep working on how to improve the quality of public debate. It is not all awful, and a stylised contempt for what is good is itself corrupting of democracy. But the numbers nonsense needs fixing. 

Mark Damazer is Master of St Peter’s College, Oxford, and was the controller of BBC Radio 4 from 2004 to 2010

This article first appeared in the 18 May 2017 issue of the New Statesman, Age of Lies

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