extremistan vs mediocristan
lessons from the black swan
I am reading Nassim Nicholas Taleb’s The Black Swan for the first time in many years. While it is often classified as a business or economics book, NNT’s first bestseller contains so much more than the general business book nonsense with the smiling author beaming from the cover with groundbreaking business principles like, “Don’t treat your employees like dog crap.” The Black Swan is a beautiful book, philosophical, reflective, grounded, exploratory, and curious. In my imagination, NNT would be a difficult person in real life (and the few years I followed him on Twitter more than affirm that impulse). But man, if it isn’t a good idea to revisit his work (or read it for the first time! I would start with either The Black Swan or Antifragile, which I plan to reread in the next few weeks).
The book’s premise is that we are terrible at predicting catastrophic events. The same economists who assured us in 2007 that everything was fine in the small, temporary blip of a housing downturn wrote articles in 2009 telling us how inevitable the crash so clearly was. Taleb says it as follows: “I noticed that very intelligent and informed persons were at no advantage over cabdrivers in their predictions, but there was a crucial difference. Cabdrivers did not believe they understood as much as learned people—really, they were not experts and they knew it.”
The epistemic humility of the cabdriver is sorely lacking in the intellectual, whether he be an economist or a journalist. Another crucial difference is that no one is looking to the cabdriver for financial prediction; on the other hand, people take economists (way too) seriously.
One of the most useful distinctions Taleb draws in The Black Swan is on the differences between two fictional countries. The first he dubs Mediocristan. Here is the law of Mediocristan: “When your sample is large, no single instance will significantly change the aggregate or the total.” He uses a few examples to illustrate things that reside in Mediocristan. One of those is a person’s weight. If I put 1,000 people in a room, no single person’s weight will shift the collective weight of the room to a very high degree. Even if we put a 500-pound person in the room, averaged out across 1,000 people, that person’s net effect will be low.
Extremistan is a different country. In Extremistan single events, single people, and single institutions can have an outsized effect on the entire population. Here is the law of Extremistan: “In Extremistan, inequalities are such that one single observation can disproportionately impact the aggregate, the total.” Income lives in Extremistan. If you put 1,000 people in a room and one of them is a billionaire, that person’s wealth will have a large effect on the aggregate.
To return to 2008, if Lehman Brothers fails, thousands of people lose their jobs and a domino effect is set off that sweeps up other venerable banking institutions with prime real estate in lower Manhattan to the point that the federal government intervenes to the tune of a couple trillion taxpayer dollars. If your local liquor store fails, a few people lose their jobs but there is no government intervention. In fact, a new liquor store opens up pretty quickly. Big banks live in Extremistan; your local liquor store, Mediocristan.
Much of the modern world falls into Extremistan. NNT wrote The Black Swan pre-Covid, but the pandemic neatly illustrates the dangers of Extremistan. As a sidenote, at the end of the second edition of The Black Swan, Taleb warns that “epidemics will be more acute” in our globalized world. “I see the risks of a very strange acute virus spreading throughout the planet,” he prophesies. I remember thinking just that in the early days of Covid, lab-leak theories aside. If this had happened 100 years ago, it would have been confined to an area of rural China most of us had never heard of. In our scalable, travel-friendly environment, a new virus now lives in Extremistan. It can hop on a flight and lead to global panic in a matter of weeks.
Our weapons exist in Extremistan. To kill someone in the ancient world, you had to line up across from him and run at him while screaming and brandishing a piece of iron. Now, we can exterminate a population with the press of a button.
Literary bestsellers exist in Extremistan. Question: Why did The Da Vinci Code sell 60 million copies? Answer: Because it sold 50 million copies. It certainly had little to do with literary merit. Even the whodunit, cliffhanger pacing is not unique. The book became a cultural sensation because books live in Extremistan. A lot of (better) books went unread because people wanted to be a part of the conversation surrounding the book everyone was reading.
The problem with this is not just the acute risks (and rewards) on offer in Extremistan, but that most of us—including the venerable economists who have predicted macroeconomic events correctly approximately 0 times in my life—still act as if we are living in Mediocristan. Jaron Lanier made this point in relation to the rise of the Internet when he compared Kodak to Instagram. Kodak in its heyday employed over 100,000 people, most of them in good-paying middle-class jobs. It was a big company that did not predict the Black Swan of the digital revolution and then the rise of social media. Instagram, on the other hand, had 13 employees when Facebook purchased it for one billion dollars. Kodak had thousands of people making a modest income; Instagram made 13 people exceedingly wealthy. Some businesses operate in Extremistan.
The finance part of the book—and why it is often miscategorized as an economics book—is that NNT uses the realities of our world to suggest a barbell strategy for investing. Put 85-90 percent of your net worth in safe, boring instruments. With the remaining 10-15 percent, be very aggressive. Think through the potential black swans and put yourself in the way of striking it big if one goes in your favor.
However, it is a fool’s errand to try to predict any single black swan event. What we need instead is to acknowledge that there is more complexity and unpredictability within our systems than we can imagine and that outlandish events can have a disparate impact. We need to put ourselves in a position to not be entirely caught off guard when the next totally unpredictable event lays waste to decades of stock market and bank gains.
The image above is a screenshot from one of my favorite movies of all time, the crime-comedy Snatch by Guy Ritchie, which I watched on a transatlantic flight a few weeks ago. I like to think of NNT as the Brad Pitt character at this moment. Jason Statham and the other guy are totally surprised by the event that is taking place (I am being opaque even though the movie came out over 20 years ago so as not to spoil anything), and their faces show it. An awareness of the black swan helps prevent us from being similarly caught off-guard. We may not know what exactly will happen, but we can be ready for something.
We live in Extremistan, not Mediocristan. It is time we start appreciating the differences between the two and adjust accordingly.