(Allen Lane, £20)
The Political Punter: How to make money betting on politics, by Mike Smithson
(Harriman House, £12.99)
The black swan was the example used by John Stuart Mill to illustrate the problem of induction in the philosophy of science, which states that no amount of empirical evidence for a proposition can ever prove conclusively that it is true.
For hundreds of years, zoologists assumed that all swans were white, because they had never seen any evidence to the contrary. But then with the discovery of Australia came the sighting of a black swan. Nassim Nicholas Taleb, in his book of the same name, has a more specific definition—for him, a "black swan" is an event that meets three conditions: a) it was unpredictable b) it had a big impact and c) after the event, we tried to explain it and make it appear more predictable than it actually was. The rise of Google is one example; 9/11 is another.
Taleb believes the modern world increasingly resembles a fantasy realm he calls "Extremistan," where inequality, unexpectedness and improbability rule, and where black swans happen. Extremistan is home to "winner-takes-all" activities—from publishing and academic citations to modern warfare and income. But most statisticians and economists believe that the world is more like "Mediocristan"—an orderly and predictable place where most events follow a bell curve-like distribution on a graph. Taleb's mission is to demonstrate that many of the models we use to understand the world are based on the mistaken assumption that we live in Mediocristan rather than Extremistan. Corporations produce grand strategies for future growth, forgetting that their most profitable activity arose from a chance phone call made a year earlier. Financial analysts build sophisticated models of risk to reassure clients that their investments will be safe; within six months a global financial crisis wipes the firm out.
Taleb argues not that we should attempt to overcome our biases, but rather that we should accept the limits of our ability to make predictions. Yet while he preaches humility, his technique is that of the pub bore. Taleb is keen to present himself as an essayist rather than a mathematician or scientist, a sceptical philosopher in the vein of Montaigne. The result is an eccentric book full of rambling anecdotes, terrible jokes and wonky arguments. Yet this approach may be intrinsic to the case. On encountering the notion of the black swan, one's first thought is that the point is trivial—we all know that the future is difficult to predict with any accuracy; we know that grand plans have a tendency to go wrong. And were the book written more conventionally, perhaps we'd never be convinced. But Taleb wears you down with his persistence, and like the charismatic pub bore, after a while he brings you around to his way of thinking. All of a sudden, you see black swans everywhere, and Taleb begins to seem like a sort of visionary, who sees the progression of history for what it really is—a series of events whose causes and effects remain deeply mysterious. Eventually, of course, you realise that if the theory explains everything, it explains nothing at all.
So what can we do about our exposure to black swans? How do we adjust to life in Extremistan? It's here that Taleb's argument is weakest. He tells us not to give up planning, nor to stop believing that we can learn lessons from history, but simply to bear in mind our own limitations. He says that he would like to live under an "epistemocracy," in which our rulers acknowledged their ignorance rather than celebrated their knowledge—but it is not at all clear what this would mean in practice. While he awaits the epistemocratic paradise, however, Taleb seems content with the open, laissez-faire approach of the US, not particularly on ideological grounds, but because by allowing people the freedom to experiment and innovate, they are opened up to the realities of Extremistan and can take advantage of positive black swans.
One of Taleb's targets is what he calls the "ludic fallacy," the idea that the sort of randomness encountered in games of chance can be taken as a model for randomness in real life. As Taleb points out, the "uncertainty" of a casino game like roulette or blackjack cannot be considered analogous to the radical uncertainty faced by real-life decision-makers—military strategists, say, or financial analysts. Casinos deal with known unknowns—they know the odds, and while they can't predict the outcome of any individual game, they know that in the aggregate they will make a profit. But in Extremistan, as Donald Rumsfeld helpfully pointed out, we deal with unknown unknowns—we do not know what the probabilities are and we have no firm basis on which to make decisions or predictions.
The kind of decision-making under conditions of radical uncertainty that interests Taleb is not usually to be found at the bookies. But consider political betting, which does involve exposure to black swans. Mike Smithson's excellent how-to guide, The Political Punter, makes this point in discussing the Tory leadership election of 2005. At the start of the campaign, David Davis was considered the frontrunner, both by the media and the bookmakers. But after what was seen as a disastrous party conference speech, he was leap-frogged by David Cameron, who never looked back. Davis's speech was a black swan—no one saw it coming and it had a huge effect on the outcome of the election. The scandals that beset Simon Hughes and Mark Oaten in the 2006 Liberal Democrat leadership campaign were also black swans. As a punter, it's not clear how to deal with the political world's exposure to black swans—Taleb teaches us that it's not possible to make a meaningful assessment of how they should be incorporated into the odds. Still, despite having been put together rather hastily, Smithson's book is a good guide to giving yourself a competitive advantage in political betting.
