Explaining Taleb Concepts to Myself Vol. 1
Nassim Taleb's writing has changed my life. More so than any other thinker, I find myself constantly coming back to his ideas and encountering instances of them in the real world where my understanding or action is informed by his work. I think this is because the system he sets up throughout Incerto is complete - from mathematical explanations of why randomness exists to practical advice on how to operate under it to a code of ethics informed by what seems like, after about 1,500 pages, the nature of all things.
Because of its completeness, Taleb's ideas are complex and generally require layers of understanding. You won't understand black swans until reading about convexity, the narrative fallacy, ergodicity, fat tails, etc. The titles of the books suggest that there are at least five higher-order categories of ideas, but he asserts (and I retrospectively agree) that they collectively pull on the same string - how to operate under opacity. This graphic from Taleb's website shows how these layers interact:
Much has been written trying to explain the title concepts of black swans, antifragility, or skin in the game to those who don't want to read the books - and judging by how frequently the terms are incorrectly thrown around, most haven't even read the summaries. But I find it more helpful to start with some of the building blocks in hopes of building a solid foundation on which to explain the big ideas. I plan to write mini explanations of many of the concepts in Incerto and update them on an ongoing basis, mostly as a means of explaining them to myself for my own reference.
I'll start with a few of the most basic ideas - the distinction between Mediocristan and Extremistan, Via Negativa, and fat tails.
The two stans
Mediocristan is the utopian land of dentists, coin flips, and bell curves where the odds of any event, if it plays out a sufficient number of times, are normally distributed. No single event can skew the average of the collective in any significant way, so you are free to make sweeping judgments and generalizations from data collected in Mediocristan, even with modest sample sizes. Weight, height, calorie consumption, car accidents, and IQ all hail from here.
Extremistan is home to things like book sales, wealth, income, terrorist attacks, natural disasters, and of course financial markets. As an example, if you lined up all the fans at an NFL game by their height, even if the tallest person alive was in attendance, the average could not be skewed by much. However, if you lined them up by their net worth, then added Jeff Bezos to the mix, the average net worth would increase by two and a half million dollars. In Extremistan, one single observation can contort even a large dataset. You should therefore be very hesitant to draw conclusions from historical data of this type. How can you be sure that what Taleb refers to as "type 2 randomness" (the type that belongs in Extremistan) won't lead to a black swan in the near future?
You can already see the layered nature of Talebian terms.
Fat Tails
As is often the case, these things make sense in narrative before needing to be spelled out on a chart. Fat tails are certainly one of those terms, as the name says it all. A fat-tailed distribution is named so because the graphical representation of an Extremistan dataset in which things look otherwise Gaussian but for one massive outlier singlehandedly shifting the entire "tail" of the curve up the Y-axis.
Via Negativa
In theology and philosophy, Taleb says, focusing on what something is not is less prone to fallacies than focusing on what it is. In Antifragile he writes "if I spot a black swan, I can be quite certain that the statement 'all swans are white' is wrong. But even if I have never seen a black swan, I can never hold such a statement to be true." In other words, negative knowledge is more robust to error than positive knowledge. You can make a million observations of what something is without being 100% certain it will always be that way, but one observation can reverse that notion.
Charlie Munger knows this. He says "It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.” Indeed most successful investors win by not going bust, chess players win by not losing, you get healthy by not eating bad foods, and you live longer by not smoking. Antifragility is reached by removing fragilities.
"In most circumstances fraught with a high degree of randomness, one cannot really tell if a successful person has skills, or if a person with skills will succeed - but we can pretty much predict the negative, that a person totally devoid of skills will eventually fail" (Antifragile). The reason that I consider Via Negativa a building block concept is that randomness robs us of our certainty about why something succeeded - only by observing the negatives can we build robust knowledge that doesn't make us susceptible to hidden risks.