Black Swan Errors

Black Swan Errors

Nonpredictive Approach: Building stuff in a manner immune to perturbations—hence robust to changes in future outcomes.

Thalesian versus Aristotelian: The Thalesian focuses on exposure, payoff from decision; the Aristotelian focuses on logic, the True-False distinction. For Fat Tony, the problem is all about sucker-nonsucker, or risks and rewards. (Also see nonlinearities, convexity effects.)

Conflation of Event and Exposure: Mistaking a function of a variable for the variable itself.

Naturalistic Risk Management: The belief that, when it comes to risk management, Mother Nature has a much, much more significant track record than rationalistic humans. It is imperfect, but much better.

Burden of evidence: The burden of evidence falls on those who disrupt the natural, or those who propose via positiva policies.

Ludic Fallacy: Mistaking the well-posed problems of mathematics and laboratory experiments for the ecologically complex real world. Includes mistaking the randomness in casinos for that in real life.

Antifragile Tinkering, Bricolage: A certain class of trial and error, with small errors being “the right” kind of mistakes. All equivalent to rational flâneur.

Hormesis: A bit of a harmful substance, or stressor, in the right dose or with the right intensity, stimulates the organism and makes it better, stronger, healthier, and prepared for a stronger dose the next exposure. (Think of bones and karate.)

Naive Interventionism: Intervention with disregard to iatrogenics. The preference, even obligation, to “do something” over doing nothing. While this instinct can be beneficial in emergency rooms or ancestral environments, it hurts in others in which there is an “expert problem.”

Naive Rationalism: Thinking that the reasons for things are, by default, accessible to university buildings. Also called the Soviet-Harvard illusion.

Turkey and Inverse Turkey: The turkey is fed by the butcher for a thousand days, and every day the turkey pronounces with increased statistical confidence that the butcher “will never hurt it”—until Thanksgiving, which brings a Black Swan revision of belief for the turkey. The inverse turkey error is the mirror confusion, not seeing opportunities—pronouncing that one has evidence that someone digging for gold or searching for cures will “never find” anything.

Doxastic Commitment, or “Soul in the Game”: You must only believe predictions and opinions by those who committed themselves to a certain belief, and had something to lose, in a way to pay a cost in being wrong.

Heuristics: Simple, practical, easy-to-apply rules of thumb that make life easy. These are necessary (we do not have the mental power to absorb all information and tend to be confused by details) but they can get us in trouble as we do not know we are using them when forming judgments.

Opaque Heuristic: Routine performed by societies that does not seem to make sense yet has been done for a long time and sticks for unknown reasons.

Dionysian: Opaque heuristic seemingly irrational, named after Dionysos (or Bacchus for Romans), the god of wine and revelling. Is contrasted to the Apollonian, which represents order.

Agency Problem: Situation in which the manager of a business is not the true owner, so he follows a strategy that cosmetically seems to be sound, but in a hidden way benefits him and makes him antifragile at the expense (fragility) of the true owners or society. When he is right, he collects large benefits; when he is wrong, others pay the price. Typically this problem leads to fragility, as it is easy to hide risks. It also affects politicians and academics. A major source of fragility.

Hammurabi Risk Management: The idea that a builder has more knowledge than the inspector and can hide risks in the foundations where they can be most invisible; the remedy is to remove the incentive in favor of delayed risk.

Green Lumber Fallacy: Mistaking the source of important or even necessary knowledge—the greenness of lumber—for another, less visible from the outside, less tractable one. How theoreticians impute wrong weights to what one should know in a certain business or, more generally, how many things we call “relevant knowledge” aren’t so much so.

Skin in the Game / Captain and Ship Rule: Every captain goes down with every ship. This removes the agency problem and the lack of doxastic commitment.

Empedocles’ Tile: A dog sleeps on the same tile because of a natural, biological, explainable or nonexplainable match, confirmed by long series of recurrent frequentation. We may never know the reason, but the match is there. Example: why we read books.

Cherry-picking: Selecting from the data what serves to prove one’s point and ignoring disconfirming elements.

Ethical Problems as Transfers of Asymmetry (fragility): Someone steals antifragility and optionality from others, getting the upside and sticking others with the downside. “Others’ skin in the game.”

The Robert Rubin violation: Stolen optionality. Getting upside from a strategy without downside for oneself, leaving the harm to society. Rubin got $120 million in compensation from Citibank; taxpayers are retrospectively paying for his errors.

The Alan Blinder problem: (1) Using privileges of office retrospectively at the expense of citizens. (2) Violating moral rules while complying perfectly with the law; confusion of ethical and legal. (3) The regulator’s incentive to make complicated regulations in order to subsequently sell his “expertise” to the private sector.

The Joseph Stiglitz problem: Lack of penalty from bad recommendation causing harm to others. Mental cherry-picking, leading to contributing to the cause of a crisis while being convinced of the opposite—and thinking he predicted it. Applies to people with opinions without skin in the game.

Rational Optionality: Not being locked into a given program, so one can change his mind as he goes along based on discovery or new information. Also applies to rational flâneur.

Ethical Inversion: Fitting one’s ethics to actions (or profession) rather than the reverse.

Narrative Fallacy: Our need to fit a story, or pattern, to a series of connected or disconnected facts. The statistical application is data mining.

Narrative Discipline: Discipline that consists of fitting a convincing and good-sounding story to the past. Opposed to experimental discipline. A great way to fool people is to use statistics as part of the narrative, by ferreting out “good stories” from the data thanks to cherry picking; in medicine, epidemiological studies tend to be marred with the narrative fallacy, less so controlled experiments. Controlled experiments are more rigorous, less subjected to cherry-picking.

Non-narrative action: Does not depend on a narrative for the action to be right—the narrative is just there to motivate, entertain, or prompt action. See flâneur.

Robust Narrative: When the narrative does not produce opposite conclusions or recommendations for action under change of assumption or environment. The narrative is otherwise fragile. Similarly, a robust model or mathematical tool does not lead to different policies when you change some parts of the model.

Subtractive Knowledge: You know what is wrong with more certainty than you know anything else. An application of via negativa.

Via negativa: In theology and philosophy, the focus on what something is not, an indirect definition. In action, it is a recipe for what to avoid, what not to do—subtraction, not addition, say, in medicine.

Subtractive Prophecy: Predicting the future by removing what is fragile from it rather than naively adding to it. An application of via negativa.

Lindy Effect: A technology, or anything nonperishable, increases in life expectancy with every day of its life—unlike perishable items (such as humans, cats, dogs, and tomatoes). So a book that has been a hundred years in print is likely to stay in print another hundred years.

Neomania: A love of change for its own sake, a form of philistinism that does not comply with the Lindy effect and understands fragility. Forecasts the future by adding, not subtracting.

Opacity: You do not see the barrel when someone is playing Russian roulette. More generally, some things remain opaque to us, leading to illusions of understanding.

Mediocristan: A process dominated by the mediocre, with few extreme successes or failures (say, income for a dentist). No single observation can meaningfully affect the aggregate. Also called “thin-tailed,” or member of the Gaussian family of distributions.

Extremistan: A process where the total can be conceivably impacted by a single observation (say, income for a writer). Also called “fat-tailed.” Includes the fractal, or power-law, family of distributions.

Nonlinearities, Convexity Effects (smiles and frowns): Nonlinearities can be concave or convex, or a mix of both. The term convexity effects is an extension and generalization of the fundamental asymmetry. The technical name for fragility is negative convexity effects and for antifragility is positive convexity effects. Convex is good (a smiley), concave is bad (a frowny).

Philosopher’s Stone, also called Convexity Bias (very technical): The exact measure of benefits derived from nonlinearity or optionality (or, even more technically, the difference between x and a convex function of x). For instance, such bias can quantify the health benefits of variable intensity of pulmonary ventilation over steady pressure, or compute the gains from infrequent feeding. The Procrustean bed from the neglect of nonlinearity (to “simplify”) lies in assuming such convexity bias does not exist.

The graphical appendix is not included in this excerpt.