If You Were Expecting It, It's Not a 'Black Swan'
It's the bread and butter of pundits to speculate what the world might look like after a relatively improbable but potentially disruptive event, like the U.K.'s exit from the European Union or a Donald Trump victory in the U.S. presidential election. The perceived probability of these "black swan" events is pretty high, after all, and contingency plans may be in order.
It's useful, however, to remember how the author of "The Black Swan," Nassim Taleb, framed it in his 2007 book:
"There are two varieties of rare events: a) the narrated Black Swans, those that are present in the current discourse and that you are likely to hear about on television, and b) those nobody talks about, since they escape models -- those that you would feel ashamed discussing in public because they do not seem plausible. I can safely say that it is entirely compatible with human nature that the incidences of Black Swans would be overestimated in the first case, but severely underestimated in the second one."
Taleb linked this observation to the research of Daniel Kahneman and Amos Tversky showing that people ascribe a greater probability to unlikely events that are discussed with them. The more a person thinks about a scenario, the less impossible it begins to appear.
Recently, journalists, investors and political scientists have discussed a number of "narrated black swans." In September 2014, it was the possibility of Scotland seceding from the U.K. after an independence referendum. At the end of July 2014, some statistical models suggested an almost 50 percent probability of secession. Less than a month later, the same models put it at 5 percent.
A year ago, the exit of Greece from the European Union was the hot subject. The probability of the momentous event reached 50 percent after Greeks voted in a referendum to reject the EU's reform proposals linked to further aid. By the time the Greek government capitulated and it was clear that the referendum had been just an ineffective bargaining tool, the probability slipped below 10 percent.
Now, the hot topics are the U.K. withdrawal from the EU and a Trump win. The Bookmaker Ladbrokes puts the chances of the U.K. leaving the EU at 31 percent. PredictIt, a political market, cites a 39 percent probability of Trump in the White House. Unless you're a gambler, these are extremely high odds for two events that are, in fact, highly unlikely.
A popular vote in an established democracy -- or a concerted diplomatic effort, as in the case of the Greek exit -- is more likely to lead to a reasonable, relatively conservative outcome than to a wild, disruptive one. It's difficult to recall a true "black swan" election in Europe or in the U.S. in this century, notwithstanding populists' strong gains in recent years. There have been some upsets and some public opinion swings, but no candidate resembling Trump has won a majority anywhere, and no country voted to break up or leave a major economic alliance. Most people in democratic nations desire stability and will only take their protests so far. It's basic sanity that makes these countries successful democracies, after all.
Real "black swans" don't emerge in areas where much public argument and discussion is involved or even useful. Leicester City's win in the English Premier League, despite initial odds of 1/5,000, was a true "black swan." The Ukrainian revolution of late 2013-early 2014 was another. President Vladimir Putin's invasion of Crimea in 2014 was a third. These were events that "you would feel ashamed discussing in public" until they started happening because they were considered too implausible.
News outlets have an interest in assigning higher probabilities to unlikely disruptive events: It makes for better copy. It's possible that by weighing in with the warnings and the dystopian scenarios, media help keep societies sane and reduce the probability of "narrated black swans." They may be another safeguard against bad decisions by the public.
Taleb himself has a low opinion of media and of safe outcomes. In March, he published the following on Facebook:
"The 'establishment' composed of journos, BS-Vending talking heads with well-formulated verbs, bureaucrato-cronies, lobbyists-in training, New Yorker-reading semi-intellectuals, image-conscious empty suits, Washington rent-seekers and other 'well thinking' members of the vocal elites are not getting the point about what is happening and the sterility of their arguments. People are not voting for Trump (or Sanders). People are just voting, finally, to destroy the establishment."
That, however, doesn't fit in with the argument in the book. The probability of this "narrated black swan" is likely overestimated, if only because everybody's talking about it.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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