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

Biteback and James Wharton
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“It was the most traumatic chapter of my life”: ex-soldier James Wharton on his chemsex addiction

One of the British Army’s first openly gay soldiers reveals how he became trapped in a weekend world of drug and sex parties.

“Five days disappeared.” James Wharton, a 30-year-old former soldier, recalls returning to his flat in south London at 11pm on a Sunday night in early March. He hadn’t eaten or slept since Wednesday. In the five intervening days, he had visited numerous different apartments, checked in and out of a hotel room, partied with dozens of people, had sex, and smoked crystal meth “religiously”.

One man he met during this five-day blur had been doing the same for double the time. “He won’t have been exaggerating,” Wharton tells me now. “He looked like he’d been up for ten days.”

On Monday, Wharton went straight to his GP. He had suffered a “massive relapse” while recovering from his addiction to chemsex: group sex parties enhanced by drugs.

“Crystal meth lets you really dig in, to use an Army term”

I meet Wharton on a very different Monday morning six months after that lost long weekend. Sipping a flat white in a sleek café workspace in Holborn, he’s a stroll away from his office in the city, where he works as a PR. He left the Army in 2013 after ten years, having left school and home at 16.


Wharton left school at 16 to join the Army. Photo: Biteback

With his stubble, white t-shirt and tortoise shell glasses, he now looks like any other young media professional. But he’s surfacing from two years in the chemsex world, where he disappeared to every weekend – sometimes for 72 hours straight.

Back then, this time on a Monday would have been “like a double-decker bus smashing through” his life – and that’s if he made it into work at all. Sometimes he’d still be partying into the early hours of a Tuesday morning. The drugs allow your body to go without sleep. “Crystal meth lets you really dig in, to use an Army expression,” Wharton says, wryly.


Wharton now works as a PR in London. Photo: James Wharton

Mainly experienced by gay and bisexual men, chemsex commonly involves snorting the stimulant mephodrone, taking “shots” (the euphoric drug GBL mixed with a soft drink), and smoking the amphetamine crystal meth.

These drugs make you “HnH” (high and horny) – a shorthand on dating apps that facilitate the scene. Ironically, they also inhibit erections, so Viagra is added to the mix. No one, sighs Wharton, orgasms. He describes it as a soulless and mechanical process. “Can you imagine having sex with somebody and then catching them texting at the same time?”

“This is the real consequence of Section 28”

Approximately 3,000 men who go to Soho’s 56 Dean Street sexual health clinic each month are using “chems”, though it’s hard to quantify how many people regularly have chemsex in the UK. Chemsex environments can be fun and controlled; they can also be unsafe and highly addictive.

Participants congregate in each other’s flats, chat, chill out, have sex and top up their drugs. GBL can only be taken in tiny doses without being fatal, so revellers set timers on their phones to space out the shots.

GBL is known as “the date rape drug”; it looks like water, and a small amount can wipe your memory. Like some of his peers, Wharton was raped while passed out from the drug. He had been asleep for six or so hours, and woke up to someone having sex with him. “That was the worst point, without a doubt – rock bottom,” he tells me. “[But] it didn’t stop me from returning to those activities again.”

There is a chemsex-related death every 12 days in London from usually accidental GBL overdoses; a problem that Wharton compares to the AIDS epidemic in a book he’s written about his experiences, Something for the Weekend.


Wharton has written a book about his experiences. Photo: Biteback

Wharton’s first encounter with the drug, at a gathering he was taken to by a date a couple of years ago, had him hooked.

“I loved it and I wanted more immediately,” he recalls. From then on, he would take it every weekend, and found doctors, teachers, lawyers, parliamentary researchers, journalists and city workers all doing the same thing. He describes regular participants as the “London gay elite”.

“Chemsex was the most traumatic chapter of my life” 

Topics of conversation “bounce from things like Lady Gaga’s current single to Donald Trump”, Wharton boggles. “You’d see people talking about the general election, to why is Britney Spears the worst diva of them all?”

Eventually, he found himself addicted to the whole chemsex culture. “It’s not one single person, it’s not one single drug, it’s just all of it,” he says.



Wharton was in the Household Cavalry alongside Prince Harry. Photos: Biteback and James Wharton

Wharton feels the stigma attached to chemsex is stopping people practising it safely, or being able to stop. He’s found a support network through gay community-led advice services, drop-ins and workshops. Not everyone has that access, or feels confident coming forward.

“This is the real consequence of Section 28,” says Wharton, who left school in 2003, the year this legislation against “promoting” homosexuality was repealed. “Who teaches gay men how to have sex? Because the birds and the bees chat your mum gives you is wholly irrelevant.”


Wharton was the first openly gay soldier to appear in the military in-house magazine. Photo courtesy of Biteback

Wharton only learned that condoms are needed in gay sex when he first went to a gay bar at 18. He was brought up in Wrexham, north Wales, by working-class parents, and described himself as a “somewhat geeky gay” prior to his chemsex days.

After four years together, he and his long-term partner had a civil partnership in 2010; they lived in a little cottage in Windsor with two dogs. Their break-up in 2014 launched him into London life as a single man.

As an openly gay soldier, Wharton was also an Army poster boy; he appeared in his uniform on the cover of gay magazine Attitude. He served in the Household Cavalry with Prince Harry, who once defended him from homophobic abuse, and spent seven months in Iraq.


In 2012, Wharton appeared with his then civil partner in Attitude magazine. Photo courtesy of Biteback

A large Union Jack shield tattoo covering his left bicep pokes out from his t-shirt – a physical reminder of his time at war on his now much leaner frame. He had it done the day he returned from Iraq.

Yet even including war, Wharton calls chemsex “the most traumatic chapter” of his life. “Iraq was absolutely Ronseal, it did exactly what it said on the tin,” he says. “It was going to be a bit shit, and then I was coming home. But with chemsex, you don’t know what’s going to happen next.

“When I did my divorce, I had support around me. When I did the Army, I had a lot of support. Chemsex was like a million miles an hour for 47 hours, then on the 48th hour it was me on my own, in the back of an Uber, thinking where did it all go wrong? And that’s traumatic.”

Something for the Weekend: Life in the Chemsex Underworld by James Wharton is published by Biteback.

Anoosh Chakelian is senior writer at the New Statesman.

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