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 unholy huddle

Northern Ireland’s strict anti-abortion laws are supported by politicians across the sectarian divide. Women are paying the price.

In June 2013 a 26-year-old administrative assistant named Sarah Ewart married her long-term boyfriend in Belfast. Soon she was pregnant. At 19 weeks, “for a bit of fun”, she and her husband, Jason, paid for a scan so that they could see the baby. Instead, the sonographer sent them straight to the Ulster Hospital, where a consultant told them that their baby – a girl – had anencephaly, meaning she had no skull or brain. She would die either in the womb or within minutes of being born, and it would be a difficult and dan­gerous birth.

The couple, both devout Christians, were distraught. After much anguish they decided to terminate the pregnancy. “I couldn’t go through nine months of pregnancy to come home with nothing and simply prepare for a funeral,” Ewart recalled tearfully as she sat in her neat home on the eastern fringe of the city one recent morning.

But the consultant told her that a termination was not possible in Northern Ireland. The province never adopted the Abortion Act 1967, which legalised abortion in the rest of the United Kingdom. It is still governed by the Offences Against the Person Act 1861, which makes it a crime, punishable by life imprisonment, to administer “any poison or other noxious thing” or to “use any instrument” to induce a miscarriage. The sole exceptions are when a woman’s life, or her long-term mental or physical health, is at risk.

Ewart’s only option was to travel to England for an abortion, as many hundreds of women from Northern Ireland do each year, but the doctors were constrained even from telling her where to go, for fear of prosecution. “I am not going to prison for anybody,” one doctor declared, banging her desk with a folder. Ewart consulted the Yellow Pages and then visited a family planning centre in central Belfast, which gave her the phone number of an advice centre outside Northern Ireland. As she left the building with her husband and mother, Ewart was accosted by anti-abortion protesters brandishing photographs of dismembered foetuses. “Don’t kill your baby!” they shouted, though they knew nothing about her case. “I was in floods of tears,” she said.

She and her mother, Jane Christie, emailed all 108 members of the Stormont assembly, Northern Ireland’s devolved parliament, begging for an exemption so she would not have to travel to England. Only two bothered to reply.

Christie took out a £2,100 bank loan, because women from Northern Ireland are ineligible for free abortions on the NHS. On 6 October that year, they flew to England and checked in to a cheap hotel in Streatham, south London. At the abortion clinic Ewart joined what she described as a “conveyor belt” of girls waiting to rid themselves of unwanted pregnancies.

“While I was grieving, they were talking about what bar they were heading to that night,” she said. The foetus was disposed of without her seeing it. “It was just horrendous. I just don’t know what I’d do if I had to go through that again.” She resolved to fight to change the law. Outraged by the indifference of members of the legislative assembly, she told her story that same month to Stephen Nolan, the host of a popular show on BBC Radio Ulster.

The interview had an enormous impact, igniting a controversy over Northern Ireland’s draconian and archaic abortion law that is still raging. Ewart’s story made it impossible for the religious fundamentalists – Protestant and Catholic – who supported the status quo to continue to claim the moral high ground. It undermined the notion that abortions were the fruit of sexual promiscuity. Ewart was clearly not some feckless teenager who had slept around. She was happily married. She had desperately wanted her baby. She was, moreover, a churchgoing Presbyterian who, like the rest of her family, always voted for the Democratic Unionist Party (DUP), Northern Ireland’s biggest political party and a staunch defender of the existing abortion law. Far from demanding wholesale reform, moreover, Ewart was campaigning merely for the ban to be lifted in the case of fatal foetal abnormalities.

As David Ford, the leader of the centrist Alliance Party, told me: “The interview made a lot of people stop and think, ‘What if it was my wife or daughter?’”

“It really touched people,” Patrick Corrigan, Amnesty International’s Northern Ireland programme director, agreed. “Until then, abortion had been seen in very black-and-white terms – pro-life v pro-choice, almost good v evil. Suddenly, here was a case that introduced grey areas, and real life.”

***

For nearly three decades, from the late 1960s onwards, the Troubles trapped Northern Ireland in a time warp. The sectarian conflict dominated politics, to the exclusion of social issues. It reinforced religious identities and isolated the province from progressive outside influences.

In the late 1990s the Reverend Ian Paisley was still fulminating about “sodomites at Stormont” when Elton John gave a concert there, and hardline Protestants picketed a performance of Jesus Christ Superstar at the Opera House in Belfast because they considered it blasphemous. Even today, gay marriage is not permitted. Emma Campbell, of the pressure group Alliance for Choice, characterises sex education in some faith-based schools in Northern Ireland as “cross your legs, hold hands and wait till you are married”.

When in 2012 a private Marie Stopes clinic offering a very limited – and entirely legal – abortion service opened opposite the Europa Hotel in Belfast, uproar ensued. There were furious demonstrations, staff and patients were abused, and John Larkin, the attorney general for Northern Ireland, tried unsuccessfully to shut it down. Larkin, a Roman Catholic, declined to be interviewed for this article, but in 2008 he likened abortion to “putting a bullet in the head of the child two days after it’s born”.

Edwin Poots, the DUP assembly member and health minister, weighed in by publishing draft guidelines for health-care professionals that threatened prosecution if they breached his extremely narrow interpretation of the abortion law. The guidelines said, for instance, that they had to report women who sought their help after using abortion pills, and that doctors should consult psychiatrists before determining that a woman’s long-term mental health was at risk.

“The chill and fear went through the corridors of every hospital and every individual,” Samina Dornan, a senior consultant at the Royal Maternity Hospital in Belfast, told me. The number of abortions carried out in the province fell from 51 in the year starting April 2012 to just 16 in 2014-15.

The Royal College of Midwives (RCM) felt compelled to advise its 1,250 members in Northern Ireland to adopt a “don’t ask, don’t tell” policy if women came to them with complications that could have been caused by abortion pills. “It’s totally unacceptable that a piece of legislation dating back to 1861 is still current. It’s totally unfit for purpose, and protects neither women nor the staff caring for them,” said Breedagh Hughes, the RCM’s Northern Ireland director, when we met at her city-centre office.

The furore over the Marie Stopes clinic, closely followed by Sarah Ewart’s interview, prompted the Alliance Party leader Ford, who was then justice minister, to propose a very modest reform – that abortions should be permitted in cases of fatal foetal abnormalities.

In February this year the assembly – four-fifths male – voted on that, and on another amendment that would allow abortions in cases of rape or incest. The first was defeated 59-40, the second 64-30, with the DUP and the nationalist Social Democratic and Labour Party locked in an improbable alliance that for once transcended the province’s sectarian divide – what Ewart’s mother described to me as a “holy huddle”.

The votes flew in the face of polls suggesting that nearly 70 per cent of the public supported the amendments. They also defied a ruling three months earlier by a high court judge, Mr Justice Horner, that the abortion ban breached the European Convention on Human Rights by failing to allow exceptions for fatal foetal abnormalities and sex crimes (only the Republic of Ireland and Malta have more restrictive legislation).

“I was gutted,” said Ewart, who had joined various human rights organisations in seeking a judicial review of the law. “Winning that ruling was like winning the Lottery, only to find there was no money.”

Pro-choice activists were enraged. “Our not-in-my-backyard politicians know full well that abortions happen and are required, but as long as they’re exported, that’s OK,” said Kellie O’Dowd, who chairs Alliance for Choice. “They see any relaxation as encouragement to sexual immorality.” Breedagh Hughes said: “Our unionist politicians insist Belfast is as British as Bristol – except when it comes to this issue.”

***

Ian Paisley, the fire-and-brimstone preacher who died in 2014, created the DUP in 1971, and even today a third of its members and elected representatives are members of the small, fundamentalist and patriarchal Free Presbyterian Church, which he also founded. Followers of that Church take every word of the Bible literally, condemn drinking, smoking, homosexuality and miscegenation, and expect women to cover their head in church.

The DUP hierarchy refused to be interviewed for this article, but others who share their absolutist views were less reticent.

Peter Lynas, Northern Ireland director of the Evangelical Alliance, is a smooth-talking former barrister who recently masterminded the building of a £3m, thousand-seater evangelical megachurch in the northern town of Coleraine. As we sat in his office in Paisley’s old Belfast East stronghold, he told me he opposes abortions for fatal foetal abnormalities because they cannot be tightly defined, and for rape and incest, because proof of such crimes could not be obtained in the short time available. More importantly, he argued, destroying a life is wrong in any circumstances. A foetus is “either a human being, in which case no justification for abortion is adequate, or it’s not, in which case no justification is required. We say it is always a human being.”

Bernadette Smyth, a devout Catholic with four children, is the founder of a group called Precious Life and a self-styled “voice for the unborn child”. From a central Belfast office financed by the American anti-abortion organisation Stanton Healthcare of Boise, Idaho, she campaigns to close the Marie Stopes clinic, which she accuses of profiting from death.

Her “street counsellors” and “prayer partners” constantly picket the clinic, hanging graphic photographs of mutilated foetuses from lamp posts and accosting women going in and out, all of which has forced the clinic to offer its patients escorts equipped with body cameras and walkie-talkies. In December 2014 Smyth was found guilty of harassing Dawn Purvis, who was then the clinic’s director, and ordered to pay £2,000 compensation and to perform 100 hours of community service. Her conviction was later overturned for lack of evidence.

Smyth calls abortion “the killing of innocent, vulnerable, unborn children”. When we met at her office – all purples and greys, with the slogan “Live Laugh Love” inscribed on a wall – she showed me a framed sonogram of “David”, a 20-week-old foetus. David’s hard-pressed mother had wanted to abort him, Smyth said, until she was rescued by the Precious Life counsellors and given the financial and moral support she needed to persevere. “I’ve lost count of how many babies I’ve helped save,” she said.

Far from relaxing the law, Smyth wants even tighter restrictions on the province’s doctors. As an alternative to abortion, she and Peter Lynas of the Evangelical Alliance want women to be given more counselling and support to shepherd them through crisis pregnancies: what Lynas calls a “comprehensive and tailored pathway to care”.

They deny that their views are extreme. “What’s extreme about loving and caring for vulnerable and innocent children?” Smyth asked. “There’s nothing extreme about loving women so much you want to provide and care for them throughout whatever crisis they are in. It’s not extreme to campaign against death.”

But their brand of compassion cuts little ice with Smyth’s old nemesis, Dawn Purvis.

Northern Ireland has long produced strong women. They held their communities together during the Troubles while their menfolk fought. Purvis led the loyalist Progressive Unionist Party for three years until she resigned over the failure of its ­paramilitary counterpart, the Ulster Volunteer Force, to disarm in 2010. She also founded the Marie Stopes clinic, and when we met at the headquarters of Alliance for Choice, an industrial unit overshadowed by the giant steel-and-wire-mesh “peace wall” that still divides the Falls Road from the Shankill, she told me harrowing stories of women who have sought its help.

One had been beaten and raped by her partner for 72 hours, during which he had knelt on top of her and cut a contraceptive implant from her arm with a Stanley knife. Another woman’s partner had removed her coil with a pair of pliers. A 12-year-old girl raped by a relative had been forced to travel to England for an abortion, with police officers accompanying her to retrieve the foetus as “evidence”. Each February, Purvis said, there is a surge in the number of women seeking help because they have been raped and abused by their partner over the Christmas period.

“When I hear our politicians ranting about their views, and I mean ranting, I wish they could sit in front of these women and tell them, ‘No, you’re not having an abortion. Continue with your pregnancy and give the baby up for adoption,’” she said. “They’ve no idea about the extremely frightening and complicated situations these women face. I think it’s immoral to refuse them abortions. It’s un-Christian.”

At the Alliance for Choice office I also met a 29-year-old woman who works in human resources in Craigavon, south-west of Belfast. “Judy” – she withheld her real name for fear of retribution from the anti-abortion lobby – became pregnant in late 2013, a year after marrying. Happy and excited, she and her husband went for her 20-week scan, only to learn that their baby had a form of dwarfism called thanatophoric dysplasia. Worse, its ribcage was so narrow that its lungs could not develop, and it would suffocate at birth even if it survived that long.

After much soul-searching the couple decided to terminate the pregnancy, not ­because the baby was deformed, but because it would be “born to die, and everyone knew it”. They wanted the abortion to be performed and to begin grieving, but were informed curtly by a doctor: “That’s not going to happen.”

“In a split second she took away our light at the end of the tunnel,” Judy said. She was forced to carry the baby to term. For 15 weeks, as her bump grew, she endured the congratulations of strangers and people asking what sex it was. “It took every ounce of my strength to hold it together,” she said. Work colleagues who knew the truth avoided her, not knowing what to say. “I would just go home and sob.”

She had to mix with other pregnant women at prenatal clinics. She discovered that the baby was a girl, and had to discuss with her consultant whether she wanted her child resuscitated at birth, and how many times.

The baby was born dead, but Judy’s agony continued. People who remembered her pregnancy would ask how the baby was doing. When she told them it was stillborn they were mortified. A termination “would have diminished our suffering. Being forced to continue with this pregnancy merely added to the tragedy,” she recalled. “We’re a modern country, and not to allow women a medical procedure in their greatest time of need is ridiculous.”

***

Today both Judy and Sarah Ewart, whose radio interview ignited the debate, have healthy babies, but the controversy rages on. Officially 833 women travelled from Northern Ireland to England for abortions in 2015, though the real number is probably double that. Most were aged between 20 and 35, and 62 per cent had partners, so few were the promiscuous teenagers of the politicians’ imagination.

Many people regard Northern Ireland’s wilful exporting of its problem as shameful. “We should look after our own women,” Professor Jim Dornan, one of the leading obstetricians in the province, said. But no political redress is imminent.

Although a more liberal assembly was elected in May, and though Sinn Fein – the second-biggest party – now favours a limited relaxation of the abortion law, the DUP retains what is in effect a veto over any change, thanks to a procedural device called a “petition of concern”, which was originally designed to safeguard minority rights in the power-sharing assembly. That is how the DUP thwarted a vote in favour of gay marriage last November.

Nor is any legal redress imminent. John Larkin, the attorney general, has appealed against Justice Horner’s ruling that the present law breaches human rights. Whatever the result of that appeal, the case is expected to go first to the Supreme Court in London, then to the European Court of Human Rights in Strasbourg.

Increasingly, however, the “abortion pill” offers women in Northern Ireland a way around the ban, especially for those too poor to go to England.

The pills, easily purchased online for as little as £50, are perfectly safe if administered properly, but not if taken secretly by women who may ignore the instructions, use them too late, have pre-existing medical conditions, or hesitate to seek help if they suffer complications for fear of prosecution. There is a danger of severe haemorrhaging, and if the foetal sac is incompletely discharged the remnants can become infected, leading to potentially fatal sepsis.

Though used worldwide, such pills are still illegal in Northern Ireland. In February an anonymous, 21-year-old woman was convicted and given a three-month suspended prison sentence after her Belfast flatmates reported her to the police for ­using them. Other prosecutions are pending.

But, like latter-day suffragettes, some women’s rights activists are starting to flout the law openly, defying the police to arrest them. Last year 215 women signed an open letter in which they said they had bought abortion pills, and invited prosecution. In May three others, hoping for a showcase trial, presented themselves at a police station in Derry and asked to be prosecuted for procuring the pills. In June pro-choice activists used a drone to fly abortion pills across the border from the republic to show that the law was absurd and unenforceable.

The activists argue that, by banning the pills, Northern Ireland’s politicians are merely driving abortion underground, with potentially fatal consequences of a sort that should belong to the past.

“Making abortion illegal doesn’t make it go away. It makes it unsafe,” said a young woman called Cara, who once self-aborted in a Travelodge hotel room and now helps other women who need to have abortions. Over a drink at a pub in Belfast, she told me how, in her own caravan, she had helped a part-time shop assistant terminate her pregnancy. The woman couldn’t afford to go to England and was too ashamed to tell her family she was pregnant.

Health-care professionals are increasingly alarmed by the implications for women. “This is the modern equivalent of the backstreet abortion. It might not be coat hangers and knitting needles, but the outcome is the same,” said Breedagh Hughes, of the Royal College of Midwives. “My biggest worry is that women will be deterred from seeking the help they need, and that the old spectre of women dying from botched abortions will rear its ugly head again.” 

This article first appeared in the 28 July 2016 issue of the New Statesman, Summer Double Issue