Black Swan Problem

An Even More Vicious Roulette

Reality is far more vicious than Russian roulette. First, it delivers the fatal bullet rather infrequently, like a revolver that would have hundreds, even thousands, of chambers instead of six. After a few dozen tries, one forgets about the existence of a bullet, under a numbing false sense of security. This is the black swan problem (also known as the turkey problem or the problem of induction), a puzzle that is ancient, predating its usual association with David Hume by centuries—as old as philosophy itself. Though often called “Hume’s problem,” it was formulated with no less precision by the ancients, and the core challenge of drawing universal conclusions from limited experience has troubled thinkers for millennia. Hume, incidentally, was far from the tormented skeptic of stereotype: he was jovial, a bon vivant, practical-minded, and sociable, reminding us that deep doubt does not require gloom. The problem is also related to a tendency called denigration of history: gamblers, investors, and decision-makers feel that the sorts of things that happen to others would not necessarily happen to them.

Second, unlike a well-defined, precise game like Russian roulette, where the risks are visible to anyone capable of multiplying and dividing by six, one does not observe the barrel of reality. Very rarely is the generator visible to the naked eye. One is thus capable of unwittingly playing Russian roulette—and calling it by some alternative “low risk” name. We see the wealth being generated, never the processor, a matter that makes people lose sight of their risks, and never consider the losers. The game seems terribly easy and we play along carelessly. Even scientists with all their sophistication in calculating probabilities cannot deliver any meaningful answer about the odds, since knowledge of these depends on our witnessing the barrel of reality—of which we generally know nothing.

Finally, there is an ingratitude factor in warning people about something abstract (by definition anything that did not happen is abstract). Say you engage in a business of protecting investors from rare events by constructing packages that shield them from their sting. Say that nothing happens during the period. Some investors will complain about your spending their money; some will even try to make you feel sorry: “You wasted my money on insurance last year; the factory did not burn, it was a stupid expense. You should only insure for events that happen.” One investor came to see me fully expecting me to be apologetic (it did not work). But the world is not that homogeneous: there are some (though very few) who will call you to express their gratitude and thank you for having protected them from the events that did not take place.