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

Getty
Show Hide image

Inside the minds of the Isis murderers

As pressure on the terror group who claimed responsiblity for the Manchester attack intensifies, the threat to Britain will only become more acute.

The police and security services had consistently warned that a significant terrorist attack in Britain was inevitable. Yet no warning could have prepared us for the horror of the suicide attack on the Manchester Arena on Monday night. Twenty-two people were killed and at least 60 were wounded as they were leaving a concert by Ariana Grande in what was the most deadly attack in Britain since the London bombings of 7 July 2005, in which 56 people died.

Like the London bombers, the Manchester suicide attacker, Salman Ramadan Abedi, was British. He was 22, lived in Manchester and studied business management at Salford University before dropping out. He worshipped at Didsbury Mosque. The son of Libyans, Abedi is said to have returned recently from a visit to the North African country, where Islamic State has a foothold.

Ariana Grande is a former children’s TV star who made her name on channels such as Nickelodeon. Her fan base is overwhelmingly young and female, and many of those killed or wounded were children, including Saffie Rose Roussos, an eight-year-old girl from Leyland, Lancashire.

Islamic State inevitably claimed responsibility for the massacre, dismissing the victims as “crusaders”, “polytheists” and “worshippers of the cross”. This is not the first time Islamist terrorists have targeted children.

A Chechen jihadist group calling itself ­Riyad-us Saliheen (meaning “Gardens of the Righteous”) took more than 1,100 hostages, including 777 children, in a school siege in Beslan, Russia, in September 2004. In the event, more than 330 were massacred, including 186 children. Gunmen from the Pakistani Taliban also stormed a school in 2014, killing 148.

For terrorist actors, these are neither whimsical nor irrational acts. Contemporary jihadist movements have curated a broad and expansive intellectual ecosystem that rationalises and directs their actions. What they want is to create an asymmetry of fear by employing indiscriminate barbarism to intimidate and subdue their opponents into submission.

We have grown accustomed to a wave of terrorist attacks being carried out in the name of the self-styled Islamic State ever since the group’s official spokesman Abu Muhammad al-Adnani began prioritising them in 2014. (He was killed in an American air strike on Aleppo province in Syria in August last year.)

The US-led coalition against Islamic State has weakened the terror group in its former strongholds of Mosul in Iraq and Raqqa in Syria. In response, IS has been forced to concentrate more on what it calls “external operations” – by which it means inspiring its sympathisers and operatives to carry out attacks on Western countries. Indeed, al-Adnani encouraged the group’s supporters not to migrate towards IS-held territory but rather to focus their efforts on attacks in their home countries.

“The tiniest action you do in the heart of their [Western] land is dearer to us than the biggest action by us,” he said in an audio statement released last year. “There are no innocents in the heart of the lands of the crusaders.”

Islamic State refers to its strategy as “just terror”. Its framing places culpability for attacks on Western states on these nations themselves by claiming that IS actions are a response to aggression or assault. That much has been outlined in the group’s literature. “When will the crusaders end their hostilities towards Islam and the Muslims? . . . When will they recognise that the solution to their pathetic turmoil is right before their blinded eyes?” the militants ask in the IS magazine Dabiq. “Until then, the just terror will continue to strike them to the core of their deadened hearts.”

IS offered a rationale of this sort as justification for its bombing of a Russian commercial aircraft – Metrojet Flight 9268, travelling from Sharm el-Sheikh in Egypt to St Petersburg. That attack in October 2015 killed 224. Similar reasoning was offered for the attacks in Paris the following month in which 137 people were killed, in a series of co-ordinated, commando-style gun and bomb outrages across the city.

“Revenge was exacted upon those who felt safe,” IS declared in Dabiq. “Let the world know that we are living today in a new era. Whoever was heedless must now be alert. Whoever was sleeping must now awaken . . . The [caliphate] will take revenge for any aggression against its religion and people, sooner rather than later. Let the ­arrogant know that the skies and the lands are Allah’s.”

***

Through my academic research at King’s College London, I have ­interviewed scores of Westerners who became foreign fighters in Syria and Iraq to quiz them about their motives. Last year, one man from High Wycombe who had joined IS told me that it wanted to attack British targets in response to the vote in the House of Commons to extend British air strikes against IS targets to include sites in Syria (the British had only been targeting the group in Iraq until that point). “Do they [the British government] expect us to sit back and do nothing? ­Idiots,” he said.

In this respect, IS frames its attacks as acts of “revenge” and predicates its response on the Islamic principle of qisas, which is comparable to lex talionis or the doctrine of “an eye for an eye”. Qisas was always intended to be a tool of private redress for an individual or his/her family to seek justice in matters relating to bodily harm. Typically, it relates to cases of murder and manslaughter, or acts involving physical mutilation (say, leading to loss of limbs). The principle creates a framework for retributive justice.

The contemporary Salafi-jihadi movement has adopted a particularly innovative approach to the concept of qisas in two ways. First, groups such as IS have taken the idea and construed it in a way that justifies indiscriminate terrorism, such as the attack in Manchester. They argue that qisas has a political dimension and that it can be applied to international affairs in a way that holds civilians responsible for the perceived crimes of their governments.

Second, qisas is normally applied only in cases where the aggressor is known. IS, by contrast, holds every citizen-stranger of an enemy state responsible for the actions of his or her government. Thus, when it released its statement claiming responsibility for the Manchester attack, it said that it had struck against a “gathering of the crusaders . . . in response to their transgressions against the lands of the Muslims”.

It is this militaristic construction of qisas that allows IS to rationalise the bombing of a venue where large numbers of young girls had gathered to watch a pop concert, dismissing them as “crusaders”.

This is not new. In 1997, Osama Bin Laden told CBS News that “all Americans are our enemies, not just the ones who fight us directly, but also the ones who pay their ­taxes”. His rationale was that all Americans, by virtue of citizenship alone, are vicariously liable for the actions of their government.

Just a few years later, Bin Laden used the same idea to justify the 11 September 2001 attacks and also invoked it in reference to the Israeli-Palestinian conflict. “The blood pouring out of Palestine must be equally revenged,” he wrote. “You must know that the Palestinians do not cry alone; their women are not widowed alone; their sons are not orphaned alone.”

IS used the concept most dramatically in January 2015, when it burned alive a Royal Jordanian Air Force pilot, Muath al-Kasasbeh, whose plane had crashed in its territory. A video of the killing was circulated on the internet and social media. The group claimed his bombing raids had killed civilians and that it wanted to punish him with “equal retaliation”, in keeping with qisas.

What is well known about al-Kasasbeh’s murder is that he was burned alive inside a cage – but that is not the whole story. To understand how IS tethered this to the principle of qisas, it is the end of the gruesome video that is invested with most significance. After al-Kasasbeh has died, a truck emerges and dumps rubble over the cage. It was claimed this was debris from a site he had bombed, thus completing the “equal retaliation” of returning like for like. The idea was that IS had retaliated using the two principal forms in which a missile attack kills – by fire or debris.

***

The Manchester attack came on the fourth anniversary of the brutal murder of Fusilier Lee Rigby in Woolwich, south London. Rigby was killed by Michael Adebolajo and Michael Adebowale in the middle of the afternoon on a street outside a military barracks. That attack was in keeping with a pattern we have become increasingly accustomed to in Europe: an unsophisticated plot that employs ordinary, everyday items – a car, say, or a knife.

The consequences of such attacks have been seen across Europe, most notably in Nice on 14 July 2016, when 86 people were killed during Bastille Day celebrations after a jihadist drove a truck into crowds on the promenade. Similar attacks followed in Berlin, Westminster and Stockholm.

The security services find that these murderous attacks are extremely hard to disrupt because they typically involve lone actors who can mobilise quickly and with discretion. The Manchester attack was different. Explosives were used, which means the plot was inherently more sophisticated, requiring careful planning and preparation.

We know that two of the 7/7 bombers had previously trained in Pakistan’s lawless tribal regions, where they honed their skills. In other plots, such as the connected attacks in London and Glasgow Airport of 2007, the explosive devices failed mainly because the bomb-makers had found it difficult to travel abroad and develop their skills in safe environments. Whatever Abedi’s connections, the long war in Syria and Iraq has once again created a permissive environment for terrorist training and attack planning.

The devastating impact of this has already been felt across Europe. Since the Syrian uprising began in 2011, more than 800 Britons are believed to have travelled there to fight. From Europe as a whole, the figure is over 5,000, of which a significant number are believed to have joined IS. Of the British contingent, the security services estimate that about half have returned or become disengaged from the conflict. Of those who remained, a hundred are believed to be active, the rest having been killed.

It is improbable that Abedi acted alone in Manchester or that this plot had no international component. Indeed, he was already known to the authorities (and had returned recently from Libya). As pressure on IS intensifies across Syria and Iraq, the threat to Britain will only become more acute as the group’s sympathisers prepare for what they consider to be a fightback.

This speaks to the scale of the threat facing Britain, and Europe more generally. Our police and security services have been stretched and continuously tested in recent years. Just recently, in March, the Metropolitan Police assistant commissioner Mark Rowley told Radio 4’s Today programme that 13 plots had been thwarted since Lee Rigby’s murder in 2013. Put another way, the police have disrupted terrorist plots every four months for the past four years.

Naturally, Islamic State is not the only threat. On 13 May, one of Osama Bin Laden’s sons, Hamza, released a video, titled “Advice for martyrdom-seekers in the West”, on behalf of al-Qaeda. Hamza, 27, who was his father’s favoured successor to lead the group, called on its supporters to concentrate on attacks in the West rather than migrating to conflict zones in the Middle East and beyond. Scenes of previous ­terrorist attacks in Britain played throughout the video.

The central leadership of al-Qaeda is increasingly looking for opportunities to reassert itself after being eclipsed by Islamic State and losing control of its affiliates in Syria. It needs attacks and a cause in the West with which to revive itself. Hamza therefore cited the January 2015 Charlie Hebdo attack in Paris as a critical example, calling for the assassination of anyone deemed to have “insulted” Islam.

The Charlie Hebdo attack was especially important for al-Qaeda because it enabled the group to transcend the fratricidal conflicts that frequently define relations between the various jihadist groups. In Syria, for instance, al-Qaeda’s affiliates (when it had better control over them) and Islamic State have been in open war with each other.

Yet, the Charlie Hebdo attack brought warm praise from the group’s Islamist rivals because none of them wanted to appear ­unsupportive of an atrocity that had, as the terrorists proclaimed, “avenged” the Prophet Muhammad’s honour.

The British man from High Wycombe who joined IS told me the group had welcomed the attack for precisely those reasons. It was something that, in his view, had confirmed the “nobility” of the attackers, even if they had not been members of IS.

Is it too late for the West to save itself, I asked him. What if the West simply accepted all of Islamic State’s demands: would that provide respite?

The answer was as emphatic as it was stark: “We primarily fight wars due to ppl [sic] being disbelievers. Their drones against us are a secondary issue.”

He went on: “Their kufr [disbelief] against Allah is sufficient of a reason for us to invade and kill them. Only if they stop their kufr will they no longer be a target.”

In other words, we are all guilty, and we are all legitimate targets.

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 25 May 2017 issue of the New Statesman, Why Islamic State targets Britain

0800 7318496