The Black Swan: The Impact of the Highly Improbable

When I started trading foreign exchange, I befriended a fellow named Vincent who exactly resembled a Brooklyn trader, down to the mannerisms of Fat Tony, except that he spoke the French version of Brooklynese. Vincent taught me a few tricks. Among his sayings were “Trading may have princes, but nobody stays a king” and “The people you meet on the way up, you will meet again on the way down.”

There were theories when I was a child about class warfare and struggles by innocent individuals against powerful monster-corporations capable of swallowing the world. Anyone with intellectual hunger was fed these theories, which were inherited from the Marxist belief that the tools of exploitation were self-feeding, that the powerful would grow more and more powerful, furthering the unfairness of the system. But one had only to look around to see that these large corporate monsters dropped like flies. Take a cross section of the dominant corporations at any particular time; many of them will be out of business a few decades later, while firms nobody ever heard of will have popped onto the scene from some garage in California or from some college dorm.

Consider the following sobering statistic. Of the five hundred largest U.S. companies in 1957, only seventy-four were still part of that select group, the Standard and Poor’s 500, forty years later. Only a few had disappeared in mergers; the rest either shrank or went bust.

Interestingly, almost all these large corporations were located in the most capitalist country on earth, the United States. The more socialist a country’s orientation, the easier it was for the large corporate monsters to stick around. Why did capitalism (and not socialism) destroy these ogres?

In other words, if you leave companies alone, they tend to get eaten up. Those in favor of economic freedom claim that beastly and greedy corporations pose no threat because competition keeps them in check. What I saw at the Wharton School convinced me that the real reason includes a large share of something else: chance.

But when people discuss chance (which they rarely do), they usually only look at their own luck. 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.

Everything is transitory. Luck both made and unmade Carthage; it both made and unmade Rome.

I said earlier that randomness is bad, but it is not always so. Luck is far more egalitarian than even intelligence. If people were rewarded strictly according to their abilities, things would still be unfair—people don’t choose their abilities. Randomness has the beneficial effect of reshuffling society’s cards, knocking down the big guy.

In the arts, fads do the same job. A newcomer may benefit from a fad, as followers multiply thanks to a preferential attachment-style epidemic. Then, guess what? He too becomes history. It is quite interesting to look at the acclaimed authors of a particular era and see how many have dropped out of consciousness. It even happens in countries such as France where the government supports established reputations, just as it supports ailing large companies.

When I visit Beirut, I often spot in relatives’ homes the remnants of a series of distinctively white-leather-bound “Nobel books.” Some hyperactive salesman once managed to populate private libraries with these beautifully made volumes; many people buy books for decorative purposes and want a simple selection criterion. The criterion this series offered was one book by a Nobel winner in literature every year—a simple way to build the ultimate library. The series was supposed to be updated every year, but I presume the company went out of business in the eighties. I feel a pang every time I look at these volumes: Do you hear much today about Sully Prudhomme (the first recipient), Pearl Buck (an American woman), Romain Rolland, Anatole France (the last two were the most famous French authors of their generations), St. John Perse, Roger Martin du Gard, or Frédéric Mistral?

The Long Tail

I have said that nobody is safe in Extremistan. This has a converse: nobody is threatened with complete extinction either. Our current environment allows the little guy to bide his time in the antechamber of success—as long as there is life, there is hope.