Real men do cry

Yvo de BoerIn the picture, on the left, Yvo de Boer, a Dutch politician who is executive secretary of the UN Framework Convention on Climate Change and has a reputation for toughness, weeping after two sleepless nights, an extension of the deadline for the Bali talks, and an accusation by the Chinese of having called a plenary session in bad faith even while negotiations were going on outside the main room.

De Boer had to be helped off-stage with a knot in his throat: but then, as Julian Glover writes in The Guardian, “the tears, of course, count entirely in his favor”.

Supercrunchers and The Black Swan: Two very different books

How can two so-called “Business books of the year” be so at odds? Supercrunchers, by Ian Ayres, is subtitled “How Anything Can Be Predicted”; The Black Swan, by Nassim Nicholas Taleb, is based on the central idea of our “blindness with respect to randomness, particularly the large deviations”, and the dramatic impact of randomness on our lives and on history itself.

I found Supercrunchers only marginally interesting. That’s perhaps because a significant part of my job and my team’s job is supercrunching: running a large number of controlled experiments with a small or large number of variables, and optimizing for the most desirable outcome. The language of multivariate testing is common enough throughout my organization that it has become second nature to many of us. Where I work, it is not acceptable not to run experiments, or to run them with the wrong control groups. It’s hard for me to disagree with the idea that if you can manage a business through data crunching, it would be a folly not to.

Where Supercrunchers becomes more wide-ranging, in my opinion, is only when it moves from business to public policy: education, justice and medicine are all domains where we ought to seek the truth, and we don’t look at the data often enough. (A notable success of this method: Ernesto Zedilllo’s Progresa program for rural and urban poverty reduction, later renamed Oportunitades. It is a conditional transfer of cash to poor people – get prenatal care, go for nutrition monitoring, keep your kids in school – and it works best if the money is given to mothers, who seem to be more likely than fathers to use it for their children).

The Black Swan is by far the more fascinating book. A black swan, in Taleb’s essay, is an improbable event with the following characteristics: it is an outlier; it carries an extreme impact; and we tend to explain its occurrence after the fact, saying that it was predictable after all. We are blind towards randomness, particularly with respect to large deviations, and we consistently underestimate the probability of black swans, while black swans are all that really matters, in our lives as in social science and history.

Taleb’s book is a very personal rant about an idea that he very deeply cares about, written in a very idiosyncratic style. To understand his argument, consider that any physical or social phenomenon belongs to one of two domains: Taleb calls them Mediocristan and Extremistan. Matters that belong to Mediocristan exhibit mild randomness and are well described by a Gaussian curve: height, weight, car accidents, mortality rates, IQ, incomes of bakers, restaurant owners and orthodontists. Matters that belong to Extremistan exhibit wild randomness and are either described by a very different distribution or totally intractable: wealth, book sales per author, populations of cities, number of speakers per language, earthquake damage, sizes of companies, commodity prices, financial markets. In other words, take a group of 100 random people, then add basketball player Yao Ming to the group: their average height goes up a little bit. But only a little bit, because Yao Ming, as tall as he is, isn’t even twice as tall as the tallest of the 100 random people. Then take another group of 100 random people, add Bill Gates to the mix, and see what happens to their average wealth. That’s because wealth is not normally distributed at all, and Gates is a heck of a lot more times richer than the next richest guy in his group of 100 people than Yao Ming is taller than the next tallest guy in his group. Technology and progress seem to have made the Extremistan-type phenomena more ubiquitous and more relevant than Mediocristan-type phenomena: for example, before the birth of recorded music, income for musicians was a lot more normally distributed than it is today, in what Sherwin Rosen has called “the economics of superstars”.

What are the implications of black swans? Taleb offers few concrete answers, not because he’s a lazy writer, but because to him this is an intrinsic result of his skeptical method. In terms of investment strategy, if you accept that most measures of risk are flawed, then there are really no predictably “medium-risk” assets. You are better off with a “barbell” strategy, putting 85 to 90 percent of your assets into very safe instruments, such as Treasury bills, and the other 10 to 15 percent into venture capital-style portfolios, which are meant to expose you to the good black swan. Other than that, you should try to expose yourself to as many opportunities as you can, which implies living in a big city and going to lots of parties (or, if you are autistic, sending your associates).

The Black Swan is a very seductive book by an intriguing author: one who has decided to “never attend business “meetings”, avoid the company of “achievers” and people in suits who don’t read books, and take a sabbatical year for every three on average.” It does not wear its philosophical ambitions lightly, and it makes Supercrunchers look trivial by comparison. Ayres’s daughter, Anna, may have learned a great deal from her dad in her ability to use the standard deviation concept at the age of eight, but he’s probably doing her a disservice when he implies (in Chapter Eight) that the standard deviation of NYSE returns is 20 percent in a Gaussian distribution – a statement that Taleb, having crunched billions of market data points in his work as a trader, would find entirely nonsensical (random walk, anyone?) The opening case history of Supercrunchers is particularly disappointing: so, some Princeton economist can predict Bordeaux prices from the season’s temperatures and rainfall patterns? Big deal! Anybody can do that – after the weather has occurred. It would start to be interesting if somebody could predict the weather for the 2008 Bordeaux today, in December 2007 – which, as we know, is devilishly difficult. And anyway, if you’re a chateau owner growing your Bordeaux, that’s not what you should worry about. Temperature and rainfall in Bordeaux belong to Mediocristan, so you’re not going to get big surprises one way or the other. What you ought to do is go out and buy insurance against the probability that a volcanic eruption blackens European skies with ash for the entire summer; that a previously undiscovered plant disease wipes out your grapes; that an accident at a nuclear power plant makes your land radioactive for the next three generations. (The mere fact that I am coming up with examples from real events – Indonesian forest fires, phyllossera, Chernobyl – shows you how unimaginative I am in stretching myself to think of real black swan-type risks).

In summary, if you only have time for one book this Christmas holiday, go for The Black Swan. Supercrunchers will get you to optimize your spreadsheets, but The Black Swan will get you to use your brain: and that’s what books are for.

“The costs of prevailing, or even what it means”: more from Jane Smiley

I have already quoted from Jane Smiley’s Thirteen Ways of Looking at the Novel, but I think I should say more about this unusual book.

In the aftermath of 9/11, Smiley set out to read a hundred novels: starting from The Tale of Genji, moving on to Nordic sagas, to Boccaccio’s Decameron, and all the way to today’s novels – by Rohinton Mistry, Francine Prose, Chang-rae Lee, Zadie Smith, Ian McEwan. After finishing each one, she took notes, one to three pages of ideas and throughts fresh from the novel; these rather personal collected notes form the second half of the book. At the same time, she worked on the thirteen longer essays that make up the first half. Because she is “a slow reader”, she says, and because she read a few more books along the way, and (I imagine) because she had other things to do, such as writing another novel and going on a book tour to promote it, it took her about two and a half years. Today I would like to quote some thoughts about the novel as a civilizing force from Chapter Eight, “The Novel and History”. (Polemically, she notes that George W. Bush’s favorite book is not a novel, but a children’s book, The Very Hungry Caterpillar by Eric Carle, perhaps reflecting the fact that “he doesn’t read, or hasn’t read, any serious novels.”) Here’s what Smiley writes about how novels deepened her understanding of other human beings and her sense of history.

After a hundred and more novels of all kinds and degrees of seriousness, I was well aware that the habit of reading novels molds the mind in several significant ways, ways that other forms of literature do not. […] After more than a hundred novels and two and a half years of history, I saw that the world I thought was established and secure, at least in the West, is more fragile than I thought, because it is newer than I realized. […] I saw, with some surprise, that my world is fragile not only because of forces from the East, but also because of forces from the West, forces from Texas, forces from Wyoming, forces from the evangelical right, forces from the corporate world, forces from the world of think tanks and political institutes. We seem to live in a world now where all thoughts are focused on the idea of prevailing, of imposing one’s beliefs on others, and no thoughts, no thoughts are given to the costs of prevailing, or even what it means. Have these people never read Moby-Dick? Well, no, they haven’t. […]

My guess is that mere technology will not kill the novel. […] But novels can be sidelined — dismissed to the seraglio, where they are read by women and children and have no effect on those in power. When that happens, our society will be brutalized and coarsened by people who speak rather like us and look rather like us but who have no way of understanding us or each other.