Impact of the Highly Improbable – Part 2

As said in my earlier post, Black swan is a surprise event. Something which would have a major impact and the concerned set of people are quite oblivious to its presence.

Now why would anyone be blind to such an event if it would create a major impact? The reason is complacency and denial. Like how once we establish a system we take it for granted that it would work completely fine and become complacent. And second major reason is “Denial”

As Dan Brown says in Inferno “The human mind has a primitive ego defense mechanism that negates all realities that produce too much stress for the brain to handle. It's called denial.” 

Some time we prefer to be in our comfort zone that we deny the sign which might show something different can happen. That sign is a black swan event.

Nassim Nicolas Taleb states that the theory was developed to explain,

1. The disproportionate role of high-impact, hard to predict, and rare events that are beyond the realm of normal expectations in history, science, finance and technology.
2. The non-computability of the probability of the consequential rare events using scientific methods (owing to the very nature of small probabilities)
3. The psychological biases that make people individually and collectively blind to uncertainty and unaware of the massive role of the rare event in historical affairs

This also gives you an idea as to why anyone would be blind to black swan. The reason is what has been classified as three kinds of fallacies: The Platonic Fallacy, The Narrative Fallacy and The Ludic Fallacy

•         The Platonic Fallacy – where the analyst falls into the Platonic trap of creating categories of events, and how he attempts to understand a new event in terms of the rules created for the old categories. This mainly happens because human beings tend to be in their comfort zone. For instance I take the field of auditing; it is like trying to continue the same audit procedures. The element of surprise is missing and new events which might have caused misstatement in financials might go unnoticed.

•         The Narrative Fallacy – where the analyst falls prey to explanations of information linking bits of data together, and hence does not observe some other logical link that may actually be there. Or perhaps does not observe the randomness that may actually persist while the explanation clouds judgement. Again am tempted to relate to my profession. Like how clients explains the procedures in the most convincing manner but the internal controls may not be working in the way it is being explained.

•         The Ludic Fallacy – where the analyst attempts to explain away the randomness of events in life using the probabilities attributed to games, i.e., where the probability of some event occurring is likened to the various results associated with the flipping of a coin. (Ludus is the Latin word from games.)

The theory does not say one must not look at probabilities but it only says that one must be robust and alert to events which might indicate that the improbable can happen.

Nassim Nicolas Taleb gives a very good illustration for this blindness to actual realities

Look at this sentence

A BIRD IN THE

THE HAND IS WORTH

TWO IN THE BUSH

What comes to your mind when you see this? Famous proverb…

Our brains automatically ignore the error of the word ‘the’ repeating twice and process the sentence as what it would be if written correctly, rather than just at first accepting the data for what it is, that the sentence is ungrammatical

Prejudice and preconceived notion can also be stated as reasons for being blind to black swan events.

The black swan theory can be applied in any field. Wondering what would be taken here! I would take the most interesting Indian History. Quite a big topic on its own! I would try to cover some major events and will try to identify the black swan events which triggered major changes. Those events which are so obvious now were not so obvious to the people at that time.

The little black swan fed itself in human complacency, grew and created unprecedented impacts.

Let me first divide the Indian history in the most popular way, the Pre Independence era and the post independence era.

Let’s go to pre independence era and apply the black swan theory.

Where to start?

Why not the Mughal empire 1526 – 1858? The ones who defeated the Delhi sultans! Let us go to the golden era of architecture and let us see how the ones who were at their peak lost it all.

To be continued…