The Black Swan, Second Edition

First, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility. Second, it carries an extreme impact (unlike the bird). Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable.Read more at location 376 • Delete this highlight Add a note Consider the Indian Ocean tsunami of December 2004. Had it been expected, it would not have caused the damage it did—the areas affected would have been less populated, an early warning system would have been put in place. What you know cannot really hurt you.Read more at location 423 • Delete this highlight Add a note The inability to predict outliers implies the inability to predict the course of history, given the share of these events in the dynamics of events.Read more at location 426 • Delete this highlight Add a note wars are fundamentally unpredictable (and we do not know it).Read more at location 432 • Delete this highlight Add a note Our inability to predict in environments subjected to the Black Swan, coupled with a general lack of the awareness of this state of affairs, means that certain professionals, while believing they are experts, are in fact not. Based on their empirical record, they do not know more about their subject matter than the general population, but they are much better at narrating—or, worse, at smoking you with complicated mathematical models. They are also more likely to wear a tie.Read more at location 434 • Delete this highlight Add a note you can set yourself up to collect serendipitous Black Swans (of the positive kind) by maximizing your exposure to them.Read more at location 439 • Delete this highlight Add a note The strategy for the discoverers and entrepreneurs is to rely less on top-down planning and focus on maximum tinkering and recognizing opportunities when they present themselves.Read more at location 443 • Delete this highlight Add a note the reason free markets work is because they allow people to be lucky, thanks to aggressive trial and error, not by giving rewards or “incentives” for skill.Read more at location 444 • Delete this highlight Add a note We do not spontaneously learn that we don’t learn that we don’t learn. The problem lies in the structure of our minds: we don’t learn rules, just facts, and only facts.Read more at location 455 • Delete this highlight Add a note Metarules (such as the rule that we have a tendency to not learn rules) we don’t seem to be good at getting.Read more at location 457 • Delete this highlight Add a note It is the same logic reversal we saw earlier with the value of what we don’t know; everybody knows that you need more prevention than treatment, but few reward acts of prevention.Read more at location 496 • Delete this highlight Add a note This is an essay expressing a primary idea; it is neither the recycling nor repackaging of other people’s thoughts. An essay is an impulsive meditation, not science reporting. I apologize if I skip a few obvious topics in this book out of the conviction that what is too dull for me to write about might be too dull for the reader to read.Read more at location 536 • Delete this highlight Add a note There is a contradiction; this book is a story, and I prefer to use stories and vignettes to illustrate our gullibility about stories and our preference for the dangerous compression of narratives.*Read more at location 556 • Delete this highlight Add a note Ideas come and go, stories stay.Read more at location 560 • Delete this highlight Add a note Anyone looking for confirmation will find enough of it to deceive himself—and no doubt his peers.* The Black Swan idea is based on the structure of randomness in empirical reality.Read more at location 567 • Delete this highlight Add a note The writer Umberto Eco belongs to that small class of scholars who are encyclopedic, insightful, and nondull. He is the owner of a large personal library (containing thirty thousand books), and separates visitors into two categories: those who react with “Wow! Signore professore dottore Eco, what a library you have! How many of these books have you read?” and the others—a very small minority—who get the point that a private library is not an ego-boosting appendage but a research tool.Read more at location 618 • Delete this highlight Add a note Read books are far less valuable than unread ones. The library should contain as much of what you do not know as your financial means, mortgage rates, and the currently tight real-estate market allow you to put there.Read more at location 622 • Delete this highlight Add a note We tend to treat our knowledge as personal property to be protected and defended. It is an ornament that allows us to rise in the pecking order.Read more at location 626 • Delete this highlight Add a note Let us call an antischolar—someone who focuses on the unread books, and makes an attempt not to treat his knowledge as a treasure, or even a possession, or even a self-esteem enhancement device—a skeptical empiricist.Read more at location 632 • Delete this highlight Add a note History is opaque. You see what comes out, not the script that produces events, the generator of history. There is a fundamental incompleteness in your grasp of such events, since you do not see what’s inside the box,Read more at location 737 • Delete this highlight Add a note everyone thinks he knows what is going on in a world that is more complicated (or random) than they realize;Read more at location 745 • Delete this highlight Add a note we can assess matters only after the fact, as if they were in a rearview mirrorRead more at location 747 • Delete this highlight Add a note the overvaluation of factual information and the handicap of authoritative and learned people,Read more at location 748 • Delete this highlight Add a note Categorizing is necessary for humans, but it becomes pathological when the category is seen as definitive, preventing people from considering the fuzziness of boundaries, let alone revising their categories.Read more at location 878 • Delete this highlight Add a note Categorizing always produces reduction in true complexity.Read more at location 899 • Delete this highlight Add a note I experienced the strangest feeling I have ever had in my life, this deafening trumpet signaling to me that I was right, so loudly that it made my bones vibrate. I have never had it since and will never be able to explain it to those who have never experienced it. It was a physical sensation, perhaps a mixture of joy, pride, andRead more at location 945 • Delete this highlight Add a note When your sample is large, no single instance will significantly change the aggregate or the total. The largest observation will remain impressive, but eventually insignificant, to the sum.Read more at location 1203 • Delete this highlight Add a note In Extremistan, inequalities are such that one single observation can disproportionately impact the aggregate, or the total.Read more at location 1223 • Delete this highlight Add a note The epistemological consequence is that with Mediocristan-style randomness it is not possible* to have a Black Swan surprise such that a single event can dominate a phenomenon.Read more at location 1237 • Delete this highlight Add a note In fact, the entire knowledge-seeking enterprise is based on taking conventional wisdom and accepted scientific beliefs and shattering them into pieces with new counterintuitive evidence,Read more at location 1343 • Delete this highlight Add a note Mistaking a naïve observation of the past as something definitive or representative of the future is the one and only cause of our inability to understand the Black Swan.Read more at location 1386 • Delete this highlight Add a note The way to remedy this is through meta-analyses of scientific studies, in which an überresearcher peruses the entire literature, which includes the less-advertised articles, and produces a synthesis.Read more at location 2055 • Delete this highlight Add a note We like to think about specific and known Black Swans when in fact the very nature of randomness lies in its abstraction. As I said in the Prologue, it is the wrong definition of a god.Read more at location 2110 • Delete this highlight Add a note 1, the experiential one, is effortless, automatic, fast, opaque (we do not know that we are using it), parallel-processed, and can lend itself to errors. It is what we call “intuition,” and performs these quick acts of prowess that became popular under the name blink, after the title of Malcolm Gladwell’s bestselling book.Read more at location 2169 • Delete this highlight Add a note Most of our mistakes in reasoning come from using System 1 when we are in fact thinking that we are using System 2. How? Since we react without thinking and introspection, the main property of System 1 is our lack of awareness of using it!Read more at location 2180 • Delete this highlight Add a note the Surrealists, the Dadaists, the anarchists, the hippies, the fundamentalists. A school allows someone with unusual ideas with the remote possibility of a payoff to find company and create a microcosm insulated from others. The members of the group can be ostracized together—which is better than being ostracized alone.Read more at location 2424 • Delete this highlight Add a note If you engage in a Black Swan–dependent activity, it is better to be part of a group.Read more at location 2427 • Delete this highlight Add a note The trick is to be as smooth as possible in personal manners. It is much easier to signal self-confidence if you are exceedingly polite and friendly; you can control people without having to offend their sensitivity. The problem with business people, Nero realized, is that if you act like a loser they will treat you as a loser—you set the yardstick yourself.Read more at location 2504 • Delete this highlight Add a note Now suspend the causality. Assume that a person’s genetic variance allows for a certain type of body shape. Those born with a natural tendency to develop a swimmer’s body become better swimmers. These are the ones you see in your sample splashing up and down at the pools. But they would have looked pretty much the same if they lifted weights. It is a fact that a given muscle grows almost the same way whether you take steroids or climb walls at the local gym.Read more at location 2713 • Delete this highlight Add a note A life saved is a statistic; a person hurt is an anecdote. Statistics are invisible; anecdotes are salient.Read more at location 2763 • Delete this highlight Add a note My biggest problem with the educational system lies precisely in that it forces students to squeeze explanations out of subject matters and shames them for withholding judgment, for uttering the “I don’t know.” Why did the Cold War end? Why did the Persians lose the battle of Salamis? Why did Hannibal get his behind kicked? Why didRead more at location 2907 • Delete this highlight Add a note Salamis? Why did Hannibal get his behind kicked? Why did CasanovaRead more at location 2910 Note: what is he tryimg to say here , why does survival negate cause ? Edit What I Learned Losing a Million Dollars,Read more at location 2929 • Delete this highlight Add a note We certainly know a lot, but we have a built-in tendency to think that we know a little bit more than we actually do, enough of that little bit to occasionally get into serious trouble. We shall see how you can verify, even measure, such arrogance in your own living room.Read more at location 3225 • Delete this highlight Add a note Epistemic arrogance bears a double effect: we overestimate what we know, and underestimate uncertainty, by compressing the range of possible uncertain statesRead more at location 3275 • Delete this highlight Add a note So far we have not questioned the authority of the professionals involved but rather their ability to gauge the boundaries of their own knowledge. Epistemic arrogance does not preclude skills. A plumber will almost always know more about plumbing than a stubborn essayist and mathematical trader.Read more at location 3367 • Delete this highlight Add a note A hernia surgeon will rarely know less about hernias than a belly dancer. But their probabilities, on the other hand, will be off—and, this is the disturbing point, you may know much more on that score than the expert.Read more at location 3369 • Delete this highlight Add a note it is a good idea to question the error rate of an expert’s procedure. Do not question his procedure, only his confidence. (As someone who was burned by the medical establishment, I learned to be cautious, and I urge everyone to be: if you walk into a doctor’s office with a symptom, do not listen to his odds of its not being cancer.)Read more at location 3370 • Delete this highlight Add a note Experts who tend to be experts: livestock judges, astronomers, test pilots, soil judges, chess masters, physicists, mathematicians (when they deal with mathematical problems, not empirical ones), accountants, grain inspectors, photo interpreters, insurance analysts (dealing with bell curve–style statistics).Read more at location 3394 • Delete this highlight Add a note Experts who tend to be … not experts: stockbrokers, clinical psychologists, psychiatrists, college admissions officers, court judges, councilors, personnel selectors, intelligence analysts (the CIA’s record, in spite of its costs, is pitiful), unless one takes into account some great dose of invisible prevention. I would add these results from my own examination of the literature: economists, financial forecasters, finance professors, political scientists, “risk experts,” Bank for International Settlements staff, august members of the International Association of Financial Engineers, and personal financial advisers.Read more at location 3396 • Delete this highlight Add a note Plans fail because of what we have called tunneling, the neglect of sources of uncertainty outside the plan itself.Read more at location 3587 • Delete this highlight Add a note The unexpected has a one-sided effect with projects. Consider the track records of builders, paper writers, and contractors. The unexpected almost always pushes in a single direction: higher costs and a longer time to completion. On very rare occasions, as with the Empire State Building, you get the opposite: shorter completion and lower costs—these occasions are becoming truly exceptional nowadays.Read more at location 3600 • Delete this highlight Add a note In one representative test, they broke a group into two varieties, optimistic and pessimistic. Optimistic students promised twenty-six days; the pessimistic ones forty-seven days. The average actual time to completion turned out to be fifty-six days.Read more at location 3604 • Delete this highlight Add a note we are too narrow-minded a species to consider the possibility of events straying from our mental projections, but furthermore, we are too focused on matters internal to the project to take into account external uncertainty, the “unknown unknown,” so to speak, the contents of the unread books.Read more at location 3612 • Delete this highlight Add a note With human projects and ventures we have another story. These are often scalable, as I said in Chapter 3. With scalable variables, the ones from Extremistan, you will witness the exact opposite effect. Let’s say a project is expected to terminate in 79 days, the same expectation in days as the newborn female has in years. On the 79th day, if the project is not finished, it will be expected to take another 25 days to complete. But on the 90th day, if the project is still not completed, it should have about 58 days to go. On the 100th, it should have 89 days to go. On the 119th, it should have an extra 149 days. On day 600, if the project is not done, you will be expected to need an extra 1,590 days.Read more at location 3654 • Delete this highlight Add a note As you see, the longer you wait, the longer you will be expected to wait.Read more at location 3659 • Delete this highlight Add a note they do not teach you to build an error rate around those assumptions—but their error rate is so large that it is far more significant than the projection itself!Read more at location 3698 • Delete this highlight Add a note The second fallacy lies in failing to take into account forecast degradation as the projected period lengthens. We do not realize the full extent of the difference between near and far futures. Yet the degradation in such forecasting through time becomes evident through simple introspective examination—without even recourse to scientific papers, which on this topic are suspiciously rare.Read more at location 3699 • Delete this highlight Add a note The third fallacy, and perhaps the gravest, concerns a misunderstanding of the random character of the variables being forecast. Owing to the Black Swan, these variables can accommodate far more optimistic—or far more pessimistic—scenarios than are currently expected.Read more at location 3708 • Delete this highlight Add a note “What should he do? Do you have a better way for us to predict?” and “If you’re so smart, show me your own prediction.” In fact, the latter question, usually boastfully presented, aims to show the superiority of the practitioner and “doer” over the philosopher, and mostly comes from people who do not know that I was a trader.Read more at location 3720 • Delete this highlight Add a note The Poverty of Historicism).*Read more at location 3879 • Delete this highlight Add a note law of iterated expectations, which I outline here in its strong form: if I expect to expect something at some date in the future, then I already expect that something at present.Read more at location 3891 • Delete this highlight Add a note to understand the future to the point of being able to predict it, you need to incorporate elements from this future itself.Read more at location 3897 • Delete this highlight Add a note once a proof of an arcane theorem has been announced, we frequently witness the proliferation of similar proofs coming out of nowhere, with occasional accusations of leakage and plagiarism. There may be no plagiarism: the information that the solution exists is itself a big piece of the solution.Read more at location 3904 • Delete this highlight Add a note if you consider them living beings and endowed with free will. If I can predict all of your actions, under given circumstances, then you may not be as free as you think you are. You are an automaton responding to environmental stimuli.Read more at location 4115 • Delete this highlight Add a note not only can the past be misleading, but there are also many degrees of freedom in our interpretation of past events.Read more at location 4178 • Delete this highlight Add a note This does not necessarily mean that he lacks confidence, only that he holds his own knowledge to be suspect. I will call such a person an epistemocrat; the province where the laws are structured with this kind of human fallibility in mind I will call an epistemocracy. The major modern epistemocrat is Montaigne.Read more at location 4246 • Delete this highlight Add a note Take a personal computer. You can use a spreadsheet program to generate a random sequence, a succession of points we can call a history. How? The computer program responds to a very complicated equation of a nonlinear nature that produces numbers that seem random. The equation is very simple: if you know it, you can predict the sequence.Read more at location 4380 • Delete this highlight Add a note while in theory randomness is an intrinsic property, in practice, randomness is incomplete information,Read more at location 4389 • Delete this highlight Add a note a) There is no functional difference in practice between the two since we will never get to make the distinction—the difference is mathematical, not practical. If I see a pregnant woman, the sex of her child is a purely random matter to me (a 50 percent chance for either sex)—but not to her doctor, who might have done an ultrasound. In practice, randomness is fundamentally incomplete information.Read more at location 4395 • Delete this highlight Add a note The demand for certainty is one which is natural to man, but is nevertheless an intellectual vice. If you take your children for a picnic on a doubtful day, they will demand a dogmatic answer as to whether it will be fine or wet, and be disappointed in you when you cannot be sure. …Read more at location 4449 • Delete this highlight Add a note I do not believe in the track record of advice-giving “philosophy” in helping us deal with the problem; nor do I believe that virtues can be easily taught; nor do I urge people to strain in order to avoid making a judgment. Why? Because we have to deal with humans as humans. We cannot teach people to withhold judgment; judgments are embedded in the way we view objects. I do not see a “tree;” I see a pleasant or an ugly tree. It is not possible without great, paralyzing effort to strip these small values we attach to matters. Likewise, it is not possible to hold a situation in one’s head without some element of bias. Something in our dear human nature makes us want to believe; so what?Read more at location 4457 • Delete this highlight Add a note What you should avoid is unnecessary dependence on large-scale harmful predictions—those and only those. Avoid the big subjects that may hurt your future: be fooled in small matters, not in the large. Do not listen to economic forecasters or to predictors in social science (they are mere entertainers), but do make your own forecast for the picnic. By all means, demand certainty for the next picnic; but avoid government social-security forecasts for the year 2040.Read more at location 4475 • Delete this highlight Add a note Know how to rank beliefs not according to their plausibility but by the harm they mayRead more at location 4479 • Delete this highlight Add a note I am trying here to generalize to real life the notion of the “barbell” strategy I used as a trader, which is as follows. If you know that you are vulnerable to prediction errors, and if you accept that most “risk measures” are flawed, because of the Black Swan, then your strategy is to be as hyperconservative and hyperaggressive as you can be instead of being mildly aggressive or conservative. Instead of putting your money in “medium risk” investments (how do you know it is medium risk? by listening to tenure-seeking “experts”?), you need to put a portion, say 85 to 90 percent, in extremely safe instruments, like Treasury bills—as safe a class of instruments as you can manage to find on this planet. The remaining 10 to 15 percent you put in extremely speculative bets, as leveraged as possible (like options), preferably venture capital–style portfolios.*Read more at location 4515 • Delete this highlight Add a note First, make a distinction between positive contingencies and negative ones. Learn to distinguish between those human undertakings in which the lack of predictability can be (or has been) extremely beneficial and those where the failure to understand the future caused harm. There are both positive and negative Black Swans. William Goldman was involved in the movies, a positive–Black Swan business. Uncertainty did occasionally pay off there.Read more at location 4537 • Delete this highlight Add a note Aside from the movies, examples of positive–Black Swan businesses are: some segments of publishing, scientific research, and venture capital. In these businesses, you lose small to make big. You have little to lose per book and, for completely unexpected reasons, any given book might take off. The downside is small and easily controlled. The problem with publishers, of course, is that they regularly pay up for books, thus making their upside rather limited and their downside monstrous. (If you pay $10 million for a book, your Black Swan is it not being a bestseller.)Read more at location 4545 • Delete this highlight Add a note Middlebrow thinkers sometimes make the analogy of such strategy with that of collecting “lottery tickets.” It is plain wrong. First, lottery tickets do not have a scalable payoff; there is a known upper limit to what they can deliver. The ludic fallacy applies here—the scalability of real-life payoffs compared to lottery ones makes the payoff unlimited or of unknown limit. Secondly, the lottery tickets have known rules and laboratory-style well-presented possibilities; here we do not know the rules and can benefit from this additional uncertainty, since it cannot hurt you and can only benefit you.*Read more at location 4558 • Delete this highlight Add a note Don’t look for the precise and the local. Simply, do not be narrow-minded. The great discoverer Pasteur, who came up with the notion that chance favors the prepared, understood that you do not look for something particular every morning but work hard to let contingency enter your working life. As Yogi Berra, another great thinker, said, “You got to be very careful if you don’t know where you’re going, because you might not get there.”Read more at location 4563 • Delete this highlight Add a note Seize any opportunity, or anything that looks like opportunity. They are rare, much rarer than you think. Remember that positive Black Swans have a necessary first step: you need to be exposed to them. Many people do not realize that they are getting a lucky break in life when they get it. If a big publisher (or a big art dealer or a movie executive or a hotshot banker or a big thinker) suggests an appointment, cancel anything you have planned: you may never see such a window open up again. I am sometimes shocked at how little people realize that these opportunities do not grow on trees. Collect as many free nonlottery tickets (those with open-ended payoffs) as you can, and, once they start paying off, do not discard them.Read more at location 4571 • Delete this highlight Add a note Beware of precise plans by governments. As discussed in Chapter 10, let governments predict (it makes officials feel better about themselves and justifies their existence) but do not set much store by what they say. Remember that the interest of these civil servants is to survive and self-perpetuate—not to get to the truth.Read more at location 4581 • Delete this highlight Add a note if you make corporations compete, it is sometimes the one that is most exposed to the negative Black Swan that will appear to be the most fit for survival. Also recall from the footnote on Ferguson’s discovery in Chapter 1 that markets are not good predictors of wars. No one in particular is a good predictor of anything. Sorry.Read more at location 4589 • Delete this highlight Add a note Do not waste your time trying to fight forecasters, stock analysts, economists, and social scientists, except to play pranks on them. They are considerably easy to make fun of, and many get angry quite readily. It is ineffective to moan about unpredictability: people will continue to predict foolishly, especially if they are paid for it, and you cannot put an end to institutionalized frauds.Read more at location 4593 • Delete this highlight Add a note All these recommendations have one point in common: asymmetry. Put yourself in situations where favorable consequences are much larger than unfavorable ones. Indeed, the notion of asymmetric outcomes is the central idea of this book: I will never get to know the unknown since, by definition, it is unknown. However, I can always guess how it might affect me, and I should base my decisions around that.Read more at location 4600 • Delete this highlight Add a note But the idea behind Pascal’s wager has fundamental applications outside of theology. It stands the entire notion of knowledge on its head. It eliminates the need for us to understand the probabilities of a rare event (there are fundamental limits to our knowledge of these); rather, we can focus on the payoff and benefits of an event if it takes place. The probabilities of very rare events are not computable; the effect of an event on us is considerably easier to ascertain (the rarer the event, the fuzzier the odds). We can have a clear idea of the consequences of an event, even if we do not know how likely it is to occur. I don’t know the odds of an earthquake, but I can imagine how San Francisco might be affected by one. This idea that in order to make a decision you need to focus on the consequences (which you can know) rather than the probability (which you can’t know) is the central idea of uncertainty. Much of my life is based on it.Read more at location 4609 • Delete this highlight Add a note the more you use a word, the less effortful you will find it to use that word again, so you borrow words from your private dictionary in proportion to their past use. This explains why out of the sixty thousand main words in English, only a few hundred constitute the bulk of what is used in writings, and even fewer appear regularly in conversation. Likewise, the more people aggregate in a particular city, the more likely a stranger will be to pick that city as his destination. The big get bigger and the small stay small, or get relatively smaller.Read more at location 4746 • Delete this highlight Add a note Some ideas will prove contagious, but not others; some forms of superstitions will spread, but not others; some types of religious beliefs will dominate, but not others. The anthropologist, cognitive scientist, and philosopher Dan Sperber has proposed the following idea on the epidemiology of representations. What people call “memes,” ideas that spread and that compete with one another using people as carriers, are not truly like genes. Ideas spread because, alas, they have for carriers self-serving agents who are interested in them, and interested in distorting them in the replication process. You do not make a cake for the sake of merely replicating a recipe—you try to make your own cake, using ideas from others to improve it. We humans are not photocopiers. So contagious mental categories must be those in which we are prepared to believe, perhaps even programmed to believe. To be contagious, a mental category must agree with our nature.Read more at location 4763 • Delete this highlight Add a note The luck of others counts greatly. Another corporation may luck out thanks to a blockbuster product and displace the current winners. Capitalism is, among other things, the revitalization of the world thanks to the opportunity to be lucky. Luck is the grand equalizer, because almost everyone can benefit from it. The socialist governments protected their monsters and, by doing so, killed potential newcomers in the womb.Read more at location 4796 • Delete this highlight Add a note Not so with Web vendors. A Web bookstore can carry a near-infinite number of books since it need not have them physically in inventory. Actually, nobody needs to have them physically in inventory since they can remain in digital form until they are needed in print, an emerging business called print-on-demand. So as the author of this little book, you can sit there, bide your time, be available in search engines, and perhaps benefit from an occasional epidemic. In fact, the quality of readership has improved markedly over the past few years thanks to the availability of these more sophisticated books. This is a fertile environment for diversity.Read more at location 4834 • Delete this highlight Add a note Cognitive Diversity: How Our Individual Differences Produce Collective Benefits,Read more at location 4852 • Delete this highlight Add a note this: the Gaussian–bell curve variations face a headwind that makes probabilities drop at a faster and faster rate as you move away from the mean, while “scalables,” or Mandelbrotian variations, do not have such a restriction. That’s pretty much most of what you need to know.*Read more at location 5029 • Delete this highlight Add a note The situation is even more lopsided with book sales. If I told you that two authors sold a total of a million copies of their books, the most likely combination is 993,000 copies sold for one and 7,000 for the other. This is far more likely than that the books each sold 500,000 copies. For any large total, the breakdown will be more and more asymmetric.Read more at location 5039 • Delete this highlight Add a note Have you ever heard of the 80/20 rule? It is the common signature of a power law—actually it is how it all started, when Vilfredo Pareto made the observation that 80 percent of the land in Italy was owned by 20 percent of the people. Some use the rule to imply that 80 percent of the work is done by 20 percent of the people. Or that 80 percent worth of effort contributes to only 20 percent of results, and vice versa. As far as axioms go, this one wasn’t phrased to impress you the most: it could easily be called the 50/01 rule, that is, 50 percent of the work comes from 1 percent of the workers. This formulation makes the world look even more unfair, yet the two formulae are exactly the same. How? Well, if there is inequality, then those who constitute the 20 percent in the 80/20 rule also contribute unequally—only a few of them deliver the lion’s share of the results. This trickles down to about one in a hundred contributing a little more than half the total.Read more at location 5046 • Delete this highlight Add a note The 80/20 rule is only metaphorical; it is not a rule, even less a rigid law. In the U.S. book business, the proportions are more like 97/20 (i.e., 97 percent of book sales are made by 20 percent of the authors); it’s even worse if you focus on literary nonfiction (twenty books of close to eight thousand represent half the sales).Read more at location 5053 • Delete this highlight Add a note We can make good use of the Gaussian approach in variables for which there is a rational reason for the largest not to be too far away from the average. If there is gravity pulling numbers down, or if there are physical limitations preventing very large observations, we end up in Mediocristan. If there are strong forces of equilibrium bringing things back rather rapidly after conditions diverge from equilibrium, then again you can use the Gaussian approach. Otherwise, fuhgedaboudit. This is why much of economics is based on the notion of equilibrium: among other benefits, it allows you to treat economic phenomena as Gaussian.Read more at location 5072 • Delete this highlight Add a note Casino operators understand this well, which is why they never (if they do things right) lose money. They simply do not let one gambler make a massive bet, instead preferring to have plenty of gamblers make series of bets of limited size. Gamblers may bet a total of $20 million, but you needn’t worry about the casino’s health: the bets run, say, $20 on average; the casino caps the bets at a maximum that will allow the casino owners to sleep at night. So the variations in the casino’s returns are going to be ridiculously small, no matter the total gambling activity. You will not see anyone leaving the casino with $1 billion—in the lifetime of this universe.Read more at location 5109 • Delete this highlight Add a note First central assumption: the flips are independent of one another. The coin has no memory. The fact that you got heads or tails on the previous flip does not change the odds of your getting heads or tails on the next one. You do not become a “better” coin flipper over time. If you introduce memory, or skills in flipping, the entire Gaussian business becomes shaky. Recall our discussions in Chapter 14 on preferential attachment and cumulative advantage. Both theories assert that winning today makes you more likely to win in the future. Therefore, probabilities are dependent on history, and the first central assumption leading to the Gaussian bell curve fails in reality.Read more at location 5337 • Delete this highlight Add a note Second central assumption: no “wild” jump. The step size in the building block of the basic random walk is always known, namely one step. There is no uncertainty as to the size of the step. We did not encounter situations in which the move varied wildly. Remember that if either of these two central assumptions is not met, your moves (or coin tosses) will not cumulatively lead to the bell curve. Depending on what happens, they can lead to the wild Mandelbrotian-style scale-invariant randomness.Read more at location 5345 • Delete this highlight