Welcome to Extremistan

[Cain]

(Note: This is one in a long line of terms I am stealing from St Taleb of the Black Swan.  Eventually, I will get around to making notes and coming up with some of my own ideas and questions, but for now I am introducing the term and its applications.  Besides, its been quiet in here lately).

http://capitalideasonline.com/articles/index.php?id=2270

This is a basic breakdown of the domains of Extremistan vs Mediocristan, that is to say, the areas which are driven by and affected most by the unpredictable, or those driven by predictable and/or measurable factors.

Experience (and biology) enable us to frame the odds. Weight is also from Mediocristan. Pick any 1,000 people and their average weight will be close to that of the general population (even if you include the world's fattest person). Personal wealth, however, is from Extremistan. For instance, the average wealth of 1,000 people will be very different if one of those people is Bill Gates.

This distinction is potent. In Extremistan, past events are a faulty guide to projecting the future. Gates may be the world's richest person, but it isn't unthinkable that someday, someone (at Google, perhaps?) will be twice as rich. Wars also reside in Extremistan. Prior to World War II, the planet had never experienced a conflict as terrible.

Probabilities can be defined and predictions made only if the events that are the subject of the probabilities and predictions can be described. Donald Rumsfeld distinguished known unknowns and unknown unknowns. Statistics, old and new, deal with known unknowns. Taleb's world is determined by unknown unknowns - black swans.

No one, he says, could have predicted the invention of the wheel or measured the probability that the wheel would be invented, because if you could do either of these things you would already have invented the wheel. The invention of the wheel was a black swan.

Taleb argues convincingly that we treat far too much of our reality as if it were Mediocristan when in fact much of it often behaves like Extremistan, where there are occasional black swans among the white. So, for example, out of the many thousands of books, films and recordings released each year, a small number will account for the largest part of sales, and it is not possible to predict with certainty which of the many works released will find black swan-style success (or failure). Indeed, in any endeavor susceptible to notable, unpredictable exceptions, no amount of examining the past will enable us to foretell the future.

[LMNO]

However, would this not depend on the scope/range you are using?

To take the last example, next year is is fairly certain that televised sporting events will have a large amount of American viewers.  Which sport will be ranked highest will be a bit harder to predict, and which actual game in that sport even harder still. 

Similarly, you can predict that peak TV watching times will be between 6-9 pm.  Which networks/shows can't be predicted, but the fact that eyes will be watching most often can be.

I'm not sure if this helps or hinders this essay.

[That One Guy]

LMNO - get the Black Swan book Cain refered to, which this is excerpted from. In the book, terms and general scope are outlined a bit more in the introduction so that these questions aren't rattling around in anyones mind during the meat. I'm on chapter 3, and this book is, indeed, as amazing as Cain says. Read it. Srsly.

The examples you use are actually part of the "known unkown" that is refered to - the fact that people will be watching two teams play in the super bowl is known - what two teams will actually play the game is a "known unknown". Also, that environment (sports) is easier to make predictions based on the limited personnel and limited number of games - many of the unknowns are "known unknowns" (IE injuries are known to happen so they won't be unexpected, but they also cannot be predicted specifically in advance making the specifics and their impact unknown).

If there was some event that caused the Super Bowl to be cancelled (I have no idea what it would be) that would be an "unknown unknown", or Black Swan in the book's parlance, something totally unpredictable.

[LMNO]

This also reminds me of Asimof's "Foundation" trilogy.

Specifically, the Mule.

[That One Guy]

The Mule would be an excellent example of a Black Swan, actually.

[Cain]

Yup.  It's a good metaphor for why command economy states (ie the USSR) fail, because their plans are always based only on known data or within known ranges.  No-one predicted the price of oil doubling in the 80s, for example.

Free enterprise (not "capitalism" per se) can deal with these problems, to a degree, because the failure of one company is not replicated in all other companies.  However, as corporate entities continue to homogenize and recieve state funding irrespective of their failures, well, you can see the problem...

[Bebek Sincap Ratatosk]

Yup.  It's a good metaphor for why command economy states (ie the USSR) fail, because their plans are always based only on known data or within known ranges.  No-one predicted the price of oil doubling in the 80s, for example.

Free enterprise (not "capitalism" per se) can deal with these problems, to a degree, because the failure of one company is not replicated in all other companies.  However, as corporate entities continue to homogenize and recieve state funding irrespective of their failures, well, you can see the problem...

"Sub Prime Mortgage Market" seems like an appropriate set of words here.