(This essay was published in Hong Kong Economic Journal on 4 January 2017.)
The world has witnessed many black swans in the past year, most notably Brexit and Hillary Clinton losing the U.S. Presidential race to Donald Trump.
A black swan, according to Nassim Nicholas Taleb, the author of the book The Black Swan: The Impact of the Highly Improbable (2007), requires three principal characteristics: It is unpredictable; it carries a massive impact; and, after the fact, we concoct an explanation that makes it appear less random, and more predictable, than it was.
Many events would qualify as black swans by this definition. In the business world, for example, the astonishing success of Google and Amazon was totally unexpected.
The 2008 financial meltdown took almost every economist by surprise. During a briefing by academics at the London School of Economics on the financial turmoil on the international markets in 2008, the Queen described the turbulence in the markets as “awful” and asked: “Why did nobody notice it?” Why, if these things were so large, did everyone miss it?
Black swans are even more common in politics. Here in Hong Kong, Leung Chun-Ying announced last month to the surprise of almost everyone that he will not be seeking a second term as Chief Executive. Five years ago he was the surprise candidate to win the post. Globally, we have seen the big surprises of the Arab Spring in 2011, “9/11” in 2001,the collapse of the Soviet Union and the Eastern European bloc in 1989, and World War I. Hardly anyone had predicted these events would happen, and certainly not when they would occur.
Revolutions Are Always Surprises
The success of the Iranian Revolution in 1978-79 was another surprise. None of the major intelligence organizations — not even the CIA or the KGB — expected Shah Mohammad Reza Pahlavi’s regime to collapse. Right up to the revolution, they expected him to weather the gathering storm. Retrospective perceptions notwithstanding, the Shah’s fall came as a surprise even to the Ayatollah Ruhollah Khomeini, the fiery cleric who, from exile, masterminded the revolutionary mobilization process that catapulted him to Iran’s helm.
The Russian Revolution of February 1917 was not totally unexpected. But despite industrial strikes and peasant uprisings, the Tsar was widely believed to enjoy the allegiance of the army, without whose cooperation a revolution was deemed out of the question. In the early days of 1917 Lenin told an audience in Switzerland that older men like himself would not live to see Russia’s great explosion.
Even the Bolsheviks and Mensheviks in Petrograd did not foresee the imminent fall of the Tsar during the months leading up to the revolution. Nor did the Tsar himself realize what was in store. Until the very last day of his rule, he apparently believed that the movement against him was too weak to succeed. Just three days before the Romanov dynasty was overthrown, the British Ambassador cabled his Foreign Minister: “Some disorders occurred today, but nothing serious.”
The French Revolution of 1789 also startled the world as tellingly revealed in Alexis de Tocqueville’s masterpiece, The Ancien Regime and the French Revolution. Drawing on pre-revolutionary documents, Tocqueville reports that on the eve of the revolution, Louis XVI had not the slightest clue that a violent eruption was in the making — let alone that he was about to lose his throne and his head.
The French monarch considered his strongest base of support to be the middle class, which in fact was to form the backbone of the insurgence. The aristocrats, meanwhile, were more preoccupied with royal encroachments on their political rights than with the mounting frustrations of the middle class. Outside observers did no better at predicting the King’s fall. Not even Frederick the Great of Prussia, whose political acumen is legendary, had an inkling of the trouble brewing next door.
The list of black swan events can be extended on and on into many other areas.
Explaining and Dealing with Black Swans
Why do we fail to acknowledge the phenomenon of black swans until after they occur?
Part of the answer, according to Taleb, is that humans are often caught off guard by or slow to recognize the rare and novel because they have a propensity to extend existing knowledge and experience to future events and experiences. Most of our thinking usually is limited in scope and we make assumptions based on what we see and know. The tyranny of conventional wisdom limits our imagination.
To predict black swans, humans have to go beyond specifics and focus on generalities, to take into consideration what they don’t know. But this is difficult. Even experts who work with sophisticated models and mine seas of data are trapped by the rules and procedures they have invented to help guide their predictions. Very often these experts are unable to truly estimate opportunities, too vulnerable to the impulse to offer stories to explain away any discovered novelty, and not open enough to recognizing and rewarding those who can imagine the impossible.
But extreme events do happen and typically have a great effect. Their effects are even greater due to the fact that they are unexpected, meaning few are prepared for their occurrence except by chance. For this reason, consequential events in history are often unexpected — although humans later convince themselves that these events are explainable in hindsight. This reflects our tendency to construct narratives around facts.
Rare and improbable events do occur much more than we dare to think. They are the manifestations of some underlying disorder that is not detected. In markets, they reflect structural imbalances in supply and demand. In society, they reflect the existence of dysfunctional institutional arrangements. Such disorder is prevented from self-correcting, perhaps by hidden power configurations. Black swans are the unexpected events that announce the presence of some hidden, undetected underlying disorder.
Tim Harford’s book Messy: The Power of Disorder to Transform Our Lives (2016) is a timely publication that celebrates the benefits that messiness has in our lives: why it’s important, why we resist it, and why we should embrace it instead.He explains that the human qualities we value – creativity, responsiveness, resilience – are integral to the disorder, confusion, and disarray that produce them.
The mess Harford has in mind is less physical than psychological. It’s not that disruption is inherently good, or that we should strive actually to be messy — unconstrained by rules and procedures, free to roam and think, surrounded by playful mess. It’s that rigid rules are bad, whether they err on the side of too much mess or too little. Rigidity disempowers people. In telling us to be messy, Harford urges us to recapture our autonomy.
During World War II, Gen. Erwin Rommel’s messy autonomy allowed him to succeed against great odds: Even when the British had broken Germany’s communications codes, they couldn’t predict his actions. They had no idea that he would disobey direct orders; neither, of course, did his superiors. “Life cannot be controlled. Life itself is messy,” Harford writes. When we try to be rigid in response, the result is a messy failure.
The most powerful message isn’t in the examples of military, corporate or creative success, but in the realization that mess — the autonomy that comes from discarding inflexible rules and neat labels — is important even when we don’t actually want it. The mess with the greatest transformative edge may be the one that forces you out of your routine despite your certainty that what you’re doing works just fine already.
Our basic human insight is to stick with what we know. Rules are easier than exceptions: People themselves are messy, but heuristics and labels are often easier to rely on than nuanced analysis. The result can be a disconcerting like-mindedness, an invisible bubble of opinions that reinforces our own. This is the well-known echo chamber feature of social media.
Harford describes a study that analyzed tweets in the wake of the August 9, 2014 police shooting of Michael Brown in Ferguson, Missouri — the group that was pro-Brown and the group that was pro-police. The two sets of posters hardly interacted. Given a larger social map that could be explored, we pick the tidiest corner we can find and stay with it.
Disorder leads to black swans. Being messy allows us to think out of the box to find creative solutions for the imbalances in our economy and the dysfunctions in our society. Yet we are often hardwired to stick with what is known, familiar and comfortable.
And this is why, despite lofty goals of freethinking, mess often fails in the moments it most needs to succeed.In our heart of hearts, we don’t like to be challenged about our dearly held beliefs. The end result is that we simply give up trying. Hartford urges us not to: “We have to believe the ultimate goal of the collaboration is something worth achieving.” That’s the true message he gives us — not for autonomy when we want it, but autonomy even when we are more comfortable without it.
The frequency of black swans in recent times is a manifestation of widespread disorder in many parts of the world. Our instinct is to see black swans through the same lenses we have used in the past – to prescribe the same remedies which were used to treat previous disorders. Perhaps we should pause and ask whether today’s black swans are indeed the same as those of the past.
Are the effects of Globalization 2.0 sufficiently different from those of Globalization 1.0? Are their effects on poverty, inequality and economic opportunities the same now as they were then?
I think they are obviously not. So why stick with the same old remedies? Time to move out of our comfort zones.
Photo: www.businessinsider.com
