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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Game of Stones: The power struggle at the heart of British curling

Dynasties, scandal and “the curse” behind the scenes of the only Olympic sport you can play while eating pizza.

At the 1980 annual Canadian men’s curling championship, the Calgary competitor Paul Gowsell ordered a pizza mid-play. With tangled red hair down to his shoulders, a thick beard and in his signature plaid trousers, Gowsell – or “Pizza Paul” – had become a cult curling figure in the late Seventies.

“The rebel of the curling world” was known for his drinking and partying on the curling circuit, and rocking up to tournaments – or “bonspiels”, to give them their proper name – in his battered VW van.

Legend has it that a stray olive from his pizza on the ice lost his opponents the game that day.

Since Gowsell’s heyday, curling has professionalised. It became an official Winter Olympics sport in 1998 (the previous and only time it had this status was in 1924), but remains one of the most peculiar competitions of the season.

“We do get made fun of a lot” 

The brooms, frantic brushing, screaming from the “skip” (the captain of the team in charge of strategy), gliding on one knee, and even the equipment itself – 44-pound lumps of granite known as “stones”, which look a bit like old-fashioned irons – make for bizarre watching, as competitors release their stones before the “hogline” in an attempt to reach the “house”: the target at the end of the rink.

The etiquette is to shake hands before a game, and say “good curling”.

Its quirks are not lost on curlers, who appear to embrace the gentle mockery of their sport. The array of outlandish patterned trousers worn by the Norwegian men’s team brought a goofy humour to Pyeongchang (pink hearts for Valentine’s Day were a particular hit), inspiring an entire Facebook page of half a million Likes dedicated to their legwear. Meanwhile, the moustachioed and red-hatted US curler Matt Hamilton has been memed as Mario by his own team.


A veteran curling commentator I speak to, who does not want to be named because he remains closely involved in the sport and wishes to speak frankly, says comedic takes on curling – like the 2010 episode of The Simpsons “Boy Meets Curl”, in which Homer and Marge accidentally discover their innate talent for the game – “generally help promote the sport”.

“People definitely make fun of it! There are a lot of awesome personalities in curling and I think part of it is because we do get made fun of a lot. You kind of have to have a really good sense of humour to curl,” says John Cullen, a 32-year-old Canadian comedian and competitive curler in the world-ranked Team Joanaisse.

Every time the Winter Olympics come along, curling manages to entrance audiences. It’s one of the few sports to be played for the entirety of the Games because of its “round robin” structure (where each country has to play the other, at least once).

Curling benefits from a lot of airtime. Matches can last three hours, and there are mixed doubles as well as separate men’s and women’s tournaments.

But it also captures our imagination because, unlike figure skating or alpine skiing, we feel like anyone could have a go. Curlers don’t all look like athletes. The dedicated viewer can watch them chatting, see their anguished facial expressions – and hear them swear when they mess up.

“You still have people who make the Olympics who’ve got a bit of a belly”

“It has a big appeal for people because it seems – even though it’s not – like a game you could play, if you’re just a regular person watching the Olympics,” says Cullen, who has curled for 20 years. “Every Olympics, people think to themselves, ‘OK, if I started curling tomorrow, I could be in the next Olympics’.”

A bit like darts, he adds: “Curling is a lot more physically demanding than darts, but when you watch darts on TV, you think ‘oh these guys are drinking, they’re not in shape’.

“It seems accessible in a way other sports don’t… Curlers now are more fit than ever, but you still have people who make the Olympics who, yeah, they’ve got a bit of a belly, or they don’t really look like they spend that much time in the gym. They just kind of look like regular people.”

Adding to curling’s relatability, there are two real-life couples in the mixed doubles this year, and you can watch them bicker as they play. Norway’s girlfriend-and-boyfriend outfit Kristin Skaslien and Magnus Nedregotten admit to having heated arguments on the ice (she never sweeps for him, as far as I can tell from watching one of their games – you go, sister), whereas Russia’s wife-and-husband duo Anastasia Bryzgalova and Aleksandr Krushelnitckii have had their bronze medal tarnished by the latter’s suspected doping.

When a doping scandal reaches your sport, you know it’s made it.

***

Traced back to 16th-century Scotland, the sport nicknamed the “Roaring Game” – because of the sound of rolling across ice – was played socially with stones on frozen ponds and lochs by farmers in winter, when no farming could be done.

Competitions between neighbouring communities began in the 18th century, when Rabbie Burns would play and even wrote some poetry about it, and Scots took the game across the country with the arrival of the railways. They later exported it to places as far as North America and New Zealand.

But it took until 2002 for the general public to notice curling in Britain. The Great British women curlers’ unexpected gold at the Winter Olympics in Salt Lake City transformed attitudes towards the sport – it was the first time Britain had won gold at the Winter Olympics since Torvill and Dean’s Bolero ice dance in 1984 at Sarajevo.

 “We used to get a lot of jokes about housewives with brooms”

An audience of 5.7 million people watched the tense final live on the BBC, when five previously unknown women from Scotland beat Switzerland with the final throw – since dubbed the “Stone of Destiny” – played by the skip, Rhona Martin.

“It definitely put curling on the map. We used to get wee write-ups in the back of the paper and that was it,” she tells me over the phone from her home in Ayrshire. “We used to get a lot of jokes about housewives with brooms, and curling your hair, whereas now people see it as a sport because they’re more knowledgeable about the game.”


Rhona Martin delivering the Stone of Destiny. Photo: Getty

A flag-waving crowd greeted her team when they landed in Heathrow – adoration they hadn’t been expecting. They received a congratulatory message from then Prime Minister Tony Blair (“You have captured the imagination of the whole of the UK”), appeared on everything from Lorraine Kelly’s sofa to Ready Steady Cook, were put up at Claridge’s and received MBEs from the Queen, and sat in the royal box at Wimbledon.

Curling fever didn’t last long, however. The women returned to full-time work or being full-time mothers. Talk of a Hollywood movie about their victory died. Two of the five endured intrusive news reports about their marriages breaking down, and Martin (now Howie after a subsequent marriage) was at one point a “single mother living on benefits”, as put by one of her agents.

This became known as the “Curse of the Curlers”, according to the Guardian. Indeed, Howie’s gold medal was stolen from the Dumfries Museum four years ago, never to be recovered.

***

Has the curse on British curling finally been lifted?

Two dynasties of curling champions dominate Team GB this year: the Muirheads and the Smiths. Both are Scottish farming families from Perthshire, both have two or more siblings on the Olympic curling teams, and all the competitors are children of world champions: they grew up on farms about 40 miles apart, and were regulars at their local rink.

“We’re all super-competitive”

The only member of the men’s team who is neither Muirhead nor Smith, Kyle Waddell, comes from another Scottish curling dynasty: his grandfather Jimmy was European curling champion in 1979.

Eve Muirhead, skip of the women’s team, is the current queen of the dominant Muirhead dynasty. The three-time world medallist, now 27, was the youngest ever skip to win a Winter Olympic medal, when her team took bronze at Sochi in 2014. Her brothers Tom and Glen on the men’s team are making their Olympic debut.

The Muirheads’ father Gordon, a sheep farmer, is a world champion who competed at the 1992 Winter Olympics in Albertville, France. Eve was inspired to begin curling at the age of nine.


The Muirhead siblings on their farm. Photo: Getty

Kyle Smith, the skip of the men’s team, is head of the curling house of Smith. His younger brother Cammy is on the same team. Their father David, a dairy and potato farmer, was a world champion skip in 1991, and their uncle Peter (known as “Pistol Pete” in the curling world, for his sharp-shooter-like accuracy) represented Team GB at the Vancouver 2010 Winter Olympics.

Known as Team Muirhead and Team Smith, they still help out with their respective families’ farming duties. While training for the Olympics, Kyle Smith fed the calves before going to the gym in the morning or milking at weekends, and the Muirhead brothers combine their sheep farming duties with training (they’re missing the lambing season to be at the Olympics). But Eve – who also plays golf and the bagpipes – prioritises curling practice.


The Smiths and Muirheads playing together. Photo: Getty

The Smiths are trailing the Muirheads medal-wise and see themselves as “the underdogs”, but there’s more rivalry between siblings than between the two families, who often play on the same team.

“I know we’re all super-competitive,” Eve tells me down the line from Pyeongchang. “We all support each other to the bitter end. To have my two brothers here is really special, I guess it makes this Olympics a little bit more special than the other ones.”

Just last season, the Muirhead brothers were on different teams and went head-to-head, competing for the same Olympic spot, which made working together on the farm temporarily tough. They had to check up on each other’s flocks while the other was training to beat them.

“Our local rink has unfortunately now closed down”

“I have learned how to wind him up over the last year so I have a few tricks up my sleeve,” Thomas, the younger Muirhead, quipped at the time. All the Muirhead siblings are so competitive that no board games were allowed at home.

Curling isn’t seen as a “posh” sport, like skiing (although curling clubs have been linked to freemasonry in the past), and it’s likely that such a small pool of talent is down to the sport’s decline rather than a privileged elite.

Eve Muirhead tells me that her “local rink at Pitlochry” – where she played as a child – has “unfortunately now closed down”, and this is part of a trend in Scotland. At curling’s peak in 1993, Scotland had 31 ice rinks which offered curling. The number is now down to 22.

The veteran curling commentator I speak to says the Olympics have benefited the sport’s image, but the money spent on elite competitive curling “to ‘buy’ GB medals” in this country “hasn’t helped grassroots curling much; only a few curlers benefit”.

It’s even starker in countries with no curling legacy. China has just two curling clubs for a population of 1.4 billion and still sends teams to the Olympics. Cullen confirms this, from his experience of international play. “Once curling got us [Canada] in the Olympics, a lot of countries recognised this as an opportunity to get a medal,” he says. “So what they’ve done in some of those cases in China, Japan, Korea, is they’ve found athletes from other sports and converted them into curlers.”

***

But this doesn’t mean curling is easy; it just makes it a more competitive sport. With my only background in curling being an episode of Pingu I watched as a child (he sweeps with his foot, the innovator), I rounded up some colleagues and went to the Sliders Social Fun and Games Club at Queens ice rink in West London to try it out for myself.

The banging beats, disco ball, and giant projected episode of Pointless on a rink-side screen didn’t exactly scream 16th century loch, but we pulled on our studded grippy rubber soles and took to the ice.

While one colleague discovered that she was “actually sick” (her words) at curling, most of us found the stones impossibly heavy and rolled them nowhere near the target.




New Statesman staff curl

The author attempts to curl

After a few failed attempts, I tried a double-handed curl, but that didn’t work at all. One bolder team member developed a special “one-knee thrust” move, which worked quite well.

Even the brushing was quite tough, because you fear falling over at any moment. Some men on the neighbouring rink told us we were “rubbish”.

Essentially, curling is really hard. A lesson that adds to its status as history’s most misunderstood sport. But its players remain dedicated, and audiences engrossed. As Rhona Howie, the master of the “Stone of Destiny”, tells me: “Never, ever give up, and keep fighting, one stone at a time.”

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