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Revenge of the White Swan

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 Special Section:
Reviews of The Black Swan
Robert Lund
This article comprehensively reviews the recent controver-
sial book The Black Swan: Impact of the Highly Improbable.
Whereas the book is statistically reckless about many issues in
our profession, I also find reason to recommend perusal of its
contents.
KEY WORDS: Extremes; Normality; Philosophy; Probability;
Random sampling.
The Black Swan: The Impact of the Highly Improbable is not
your normal (pun intended) statistics book. Foremost, the au-
thor, Nassim Nicholas Taleb, insults his audience more than a
vintage Don Rickles performance. Statisticians raised on math-
ematical discourse will find the author’s philosophical and con-
descending prose entertaining, if not awkward. The book fires
shots at economists, philosophers, social scientists, and statisti-
cians, with tie-wearing financial managers and the French taking
the bulk of the trauma. Certainly, Taleb prefers to raise his voice
rather than reinforce his argument. Between the barbs, Taleb
makes many excellent points that merit discussion. The author
is also reckless at times and subject to grandiose overstatements;
the professional statistician will find the book ubiquitously naive.
Many of Taleb’s remarks (e.g., that “ . . . the bell curve is . . .
[the] . . . Great Intellectual Fraud”) deserve a response from our
community.
Ordinarily, a book like this gets only a short review in The
American Statistician. The increased airplay here is justified in
part by the unprecedented success of Taleb’s previous effort,
Fooled by Randomness: The Hidden Role of Chance in Life and
in the Markets (Taleb 2001). This predecessor became a mathe-
matics bestseller, alerting society to the importance of random-
ness. Another reason for the heightened coverage is, as this ar-
ticle’s title suggests, revenge. Many of the claims in The Black
Swan need clarification and/or moderation.
The theme of the current book centers on rare events with
extreme impact, which the author calls black swans. The term
“black swan” stems from the fact that Westerners knew only of
white swans before Australia, home of black swans, was col-
onized. Taleb’s premise is that black-swan events—happenings
that would be difficult to predict with available data at the time—
Robert Lund is Professor, Department of Mathematical Sciences, Clemson Uni-
versity, Clemson, SC 29634-0975 (E-mail: lund@clemson.edu).

2007
c American Statistical Association DOI: 10.1198/000313007X219374
Revenge of the White Swan
have paramount importance in life, but are generally underap-
preciated. Taleb works in finance, an area notorious for unpre-
dictability. In this setting, black-swan events typically involve
stock market sell-offs, which frequently happen with little ad-
vance warning. Taleb’s premise is that black-swan events also
permeate life’s everyday aspects. A priori, who could have pre-
dicted 9/11, the invention and subsequent evolution of the Inter-
net, or the serendipitous circumstances surrounding one’s first
encounter with their current love interest? Taleb also believes
that we attach bogus explanations to black-swan events in hind-
sight; the best rationale for why some events happened is truly
randomness.
I concur with the book’s central premise that the extremes of a
distribution are frequently more important (and impactful) than
the means. To appreciate this, simply watch an NBA basketball
game (extreme height), PGA golf tournament (extreme hand-to-
eye coordination and touch), or a local newscast (a summary of
the days’ extreme events). Taleb refers to those who dwell on the
central tendencies of a distribution as mediocristans. While the
world certainly has its share of mediocristans, Taleb completely
ignores those of us who study extremes . . . and there quite a few
extremeophiles about. This brings us to my primary complaint
with the book: it is frequently so mathematically naive as to make
statisticians (and many others) look unjustifiably foolish.
It took me about a week to read this book. During this week, I
vowed to scrutinize my local world for evidence of extremes. Are
we really ignoring them? It was a bad week for Taleb. Foremost,
I was on a winter ice-climbing trip in the Colorado Rockies, a
non-mediocristan activity by most people’s standards. Traveling
to Colorado, the airline reminded me before takeoff that “the
seat cushion could be used as a flotation device in the event of a
water landing”; the highway State Troopers (watch your speed
in Georgia) were ticketing the fastest speeders on the drive to
the airport; there was a fire extinguisher in my hotel room (it
needed recharging); the local highway (U.S. Highway 550 near
Telluride) was equipped with an avalanche house over the road
protecting motorists; I was revising a paper (Parisi and Lund
in press) that estimates return periods of extreme Atlantic hur-
ricanes hitting the United States mainland (incidentally, Parisi
works on Taleb’s home turf—Standard & Poor’s on Wall Street),
and perhaps most relevant to me, much of the climbing gear I
was laboriously hauling (ropes, ice screws, etc.) was designed to
prevent the black-swan event of a deadly fall. Whereas society
could be even more conscious about extremes, Taleb seemed to
be overstating the neglect.
Taleb sells himself as an empirical skeptic, someone scornful
The American Statistician, August 2007, Vol. 61, No. 3 189
of advanced mathematical models, a person who needs to be
convinced with raw data. While empirical data analysts are ad-
mittedly underappreciated, the book at times felt logically con-
flicted because of its simplicity. Elaborating, Taleb’s stance is
that the real world is very complex, something not easily de-
scribed by simple mathematics. However, advanced mathemat-
ical models (examples forthcoming) were often dismissed with
nothing more than raw rhetoric. (Taleb concludes that statisti-
cians are just better at “smoking you with complicated math-
ematical models” than other disciplines.) Subfields of statistics
tailored to the exact problem at hand were often not mentioned or
naively dismissed. This shortcoming is perhaps best illustrated
in the subject of extremes itself, the central topic of the book.
Extreme value theory is the statistician’s bible for quantify-
ing rare events. Extreme value methods have a long and sto-
ried history [see Gumbel (1958) and the references therein]; the
topic even has its own journal (Extremes) and a text devoted
purely to the impacts of extremes in finance and the markets
(Embrechts, Klüppelberg, and Mikosch 1999) which, inciden-
tally, has a picture of an extreme drop in a stock price series
on its cover. SAMSI’s 2007–2008 program lists Risk Analy-
sis, Extreme Events, and Decision Theory as one of its three
major subject foci. Foundational omissions such as this occur
throughout the book and paint the author poorly to the statistical
community. Taleb insinuates that statisticians are totally inept
at quantifying the tails of distributions, and worse, that we de-
fault to Gaussianity to make tail property conclusions (this may
be inadvisable as the normal distribution has very skinny tails).
While tail features of distributions are indeed harder to model
than means or medians (after all, there are fewer observations
in the tails), the situation is not as hopeless as conveyed. As an
aside, extremes are also an area where limit distributions are de-
cisively non-normal; Taleb misleads the layman with the mantra
that the statistician’s diet is all normal.
For concreteness, suppose that we want to estimate the largest
earthquake in the United States over the next century, say from
earthquake data from the last 100 years. Taleb insinuates that
statisticians merely fit normal distributions to the raw data (say
earthquake Richter magnitudes, which in a later point, are noted
to be naturally measured on a logarithmic scale). In truth, statis-
ticians handle the problem in a well-established manner: fit the
extreme value cumulative distribution function

  ground zero should clarify what an insurable loss is. Within the

x − µ −1/ξ
F (x) = exp − 1 + ξ , −∞<x <∞
σ +
(1)
to the largest quake observed during the each of the last 100
years, say from yearly maximum earthquake magnitudes, which
we denote by X1 , . . . , X100 . Here, x+ = max(x, 0) and ξ , µ,
and σ > 0 are the three parameters of the extreme value family
(the case where ξ = 0 is interpreted as a limit as ξ → 0 in
(1) and is called a Gumbel distribution). The result is an esti-
mate of the distribution of the largest earthquake magnitude in
the United States in any year; raise this to the 100th power to
get the distribution of the largest quake over a century [year-to-
year correlation in the annual maximums is not overly problem-
atic as theory explains why extremes are less correlated in time
than sample means; see Hsing (1995)]. Equation (1) contains
190 Special Section: Reviews of The Black Swan
all possible mathematical limit laws for scaled maximums—it
is analogous to a central limit theorem for maximums. By fit-
ting the distribution family in (1) to the sample maximums, one
intrinsically accounts for the tail features in the data. Normality
assumptions are not necessary nor relevant; the independent and
identically distributed caveat for the sample can even be signifi-
cantly relaxed (see Leadbetter, Lindgren, and Rootzen 1983). As
a whole, extreme value methods are more reliable for estimat-
ing tail properties of a random sequence than raw extrapolation
techniques. Yes,√the convergence of the estimate of F is much
slower than the n-central limit theorem rate for sample aver-
ages (again, there are fewer observations in the extreme tail), but
the situation is not hopeless, nor does normality enter into the
picture.
Established theory also explains why the peaks of many sta-
tionary stochastic processes occur at times approximately de-
scribed by a simple time-homogeneous Poisson process. This
is the so-called peaks-over-threshold paradigm (see Pickands
1975). As the interevent times of a Poisson process are expo-
nentially distributed and hence memoryless, there is indeed sig-
nificant unpredictability in the times of extreme maxima. The
point is again that things have been accurately quantified in the
probability literature previously.
In fairness to Taleb, his concern lies more with random el-
ements not captured in the data sample than with defects of
probability theory or statistical methods. An example may help
clarify: Taleb notes that the six largest losses sustained in Las
Vegas have nothing to do with gambling. One of these losses
in fact stems from the kidnapping of a casino owner’s daughter,
something unlikely to be considered in any probability model.
While the point is taken, two counterpoints are immediate: (i)
exactly what is being modeled? and (ii) what does the sampled
data represent?
Toward counterpoint (i), Taleb is a true philosopher, never
quantifying exactitudes. Mathematics on rigorously posed prob-
lems is generally dismissed as being impractical. I do agree that
statisticians are apt to dwell on technicalities, sometimes to ex-
cess. However, the antipodal position seems equally problem-
atic. It is one thing to be smoked with mathematical models; I
am equally skeptical of those who philosophize so much as to
not solve anything. In regard to the Las Vegas example above,
context of the particular problem at hand, what is a black-swan
event? Most insurance policies seem very specific on what they
will pay out for. Taleb wants to be viewed as an expert, but also
does not want to be pinned down.
On counterpoint (ii), the pitfalls of nonrandom samples and
lack of control groups are well documented in elementary texts
(e.g., Aliaga and Gunderson 1998). The first third of the book
contains many anecdotal stories of defective random samples.
Statisticians will recognize several classic sampling pitfalls, mis-
takes involving nonresponse bias and length-biased sampling.
These problems are taught to statistical literacy 101 classes; it
concerns me that the faux pas are not mentioned by name. While
Taleb is quite entertaining here, the stories also collectively im-
part a “divergent irrelevancies” feel, maybe best described as
a random sample of random sampling blunders. Of course, true
random samples are painful, if not impossible, to take. And while
there may be “unsampled modes in the tail,” such modes will
arise more frequently if vagaries in the quantity being modeled
are allowed. If the sample contains only swans from Europe, you
are at risk in making conclusions about Australian swans. That is
buyer beware. That a purported random sample of wave heights
does not contain a measurement whereby a hurricane and gi-
ant comet strike the same location simultaneously is also clear,
however impactful (pun again intended) such an event would be.
At times, Taleb reinvents the wheel. For example, the term
scalability is introduced to describe data that is best quantified
on a log-scale. Taleb notes that incomes and book sales are quite
variable and best described by a power law distribution (at least
in the tails), whereas heights and calorie consumptions of hu-
mans have lighter tails. Richter earthquake magnitudes are one
example where the scientific standard employs a logarithmic
measurement scale; many quantities in astronomy also carry a
very small or large exponent. Data best measured on log-scales
typically have some polynomial moments that are infinite. Statis-
ticians call such data heavy tailed—and our community is quite
cognizant of heavy-tailed behavior. In fact, the limiting behavior
of averages and extremes from heavy-tailed random samples are
well known (see Embrechts, Klüppelberg, and Mikosch 1999).
Today’s modeler has a variety of heavy-tailed distributions to
choose from; there is even a theory of slowly varying functions
should one wish to quantify more than the exponent of decay
(see Bingham, Goldie, and Teugels 1987). Is heavy-tailed data
harder to quantify than short-tailed data? Of course. One must
invert the log scale change to quantify the original data, and this
“exponentiates errors.” However, the situation is again not as
hopeless as implied.
There is also some questionable logic within. For example,
Taleb says that we are prone to inferring that A ⊂ B when it is
known only that B ⊂ A. For example, let A = {Cloudy Today}
and B = {Rain Today} so that B ⊂ A. Taleb’s accusation is
that we conclude that A ⊂ B; that is, we cannot have cloudy
days without rain. The driving property here seems to be that
P (A|B) > P (A) if and only if P (B|A) > P (B). Whereas the
layman may not know formal probability, they intuitively know
to carry an umbrella on a cloudy day, for rain is more likely.
Many of Taleb’s shots are aimed at financial managers and
their unsupported claims of superiority. Taleb says that many
revered finance professionals owe their elevated food-chain sta-
tus to random chance. This is perhaps expected: finance is an
area where the underlying signal is weak, say in comparison to
climatology or medicine. If someone located a definitive pattern
in the markets, the rest of us would exploit it and the playing
field would level off again. Taleb’s hostility towards his finan-
cial cohorts echo society’s sentiments to some degree, so it is
hard to discount him in this arena.
The above said, there are still some models that provide loose
guidance. For example, a simple nonstationary model (nonsta-
tionarity is needed if there is to be growth) for a stock price series
{Xt } in time t ≥ 0 involves the differential equation
dXt = Xt (rdt + σ dWt ), (2)
where r is the interest rate (assumed constant in time), {Wt } is
standard Brownian motion, and σ is a variance parameter. The
Brownian component {Wt } describes perturbations in interest
rates from the baseline r. Equation (2) has the solution
 
Xt = X0 exp σ Wt + (r − σ 2 /2)t .
An immediate implication is that the marginal distribution of Xt
is log-normal in form (take X0 as constant). Connecting to the
earlier point on scalability, the log-normal distribution has much
heavier tails than the normal distribution. Moreover, if prices are
observed on the discrete time lattice {n}∞ n=0 for some  > 0,
then
log(Xn /X(n−1) ) ∼ N((σ 2 /2 − r), σ 2 );
that is, the logarithms of the relative price ratios are independent
and normally distributed. While the classical Black-Scholes op-
tion pricing formula hails from the above, the model also has
some drawbacks. For example, the sample paths of {Xt } are typ-
ically too smooth to be realistic—one needs a stochastic model
for {Wt } that has more fluctuations than Brownian motion. Also,
the assumption that σ is fixed in time and nonrandom does not
seem to be realistic. Unfortunately, mathematical remedies to
such issues are demanding. Taleb notes that large downward
jumps in price are relatively more common than large jumps
upwards [see Vinod and Reagle (2005), which Taleb does not
reference, for more on these so-called “downside risks”] and
that interludes of modest fluctuations are followed by periods
of turmoil (this is known as stochastic volatility and is why σ
cannot be constant in time). Stochastic volatility is sometimes de-
scribed with autoregressive conditional heteroscedastic (ARCH)
time series models. Connecting to Taleb’s earlier normality accu-
sation, ARCH series cannot have normal marginal distributions
(an ARCH model for Yn := log(Xn /X(n−1) ) implies that
Yn and Ym are uncorrelated, but that Yn2 and Ym2 are dependent,
which cannot hold for Gaussian series).
Up to now, I have been largely critical. However, there are
many points where I agree with Taleb. Besides the need for Wall
Street to clean up its act, society needs to be more cognizant of
randomness. Such recognition is central in Taleb’s books. I also
agree with Taleb’s castigation of causation in hindsight. Society
wants a cause for every occurring event. Is an extra hurricane or
two this year really due to El-Niño and/or global warming? Are
the two less murders your city had this year more attributable to
the new police patrol car (the newspaper headline) or two less
severe domestic disputes (randomness)? And while I believe that
Taleb has shorted society’s appreciation of extremes, I agree that
the extremes are frequently far more interesting than the means.
The book also contains many jewels of a smaller magnitude; I
had a chuckle with many of the insults.
There are a couple of warnings before concluding. First,
Taleb’s view of individuals is a zero-one law: he either idolizes
or despises. There is no middle ground. Mandlebrot and Popper
are heroes; Merton a scum. Many innocents are trashed within.
The same is true of disciplines . . . and statisticians do not come
out well within these walls. Also be advised of some South-Park
style banter. There are some fictional characters about, includ-
ing a Japanese philosopher named Fukuyama (say it slow!). The
book requires no technical prerequisites beyond high school al-
gebra, but is best read with some mathematical maturity and an
open mind. The book is generally well written and engaging,
The American Statistician, August 2007, Vol. 61, No. 3 191
except for—and this is quibbling—the almost everywhere dense
use of the term “epsiste . . . ”.
My overall feeling is that this book is well worth the time
and $26.95 paperback price. If nothing else, it may be the most
controversial elementary statistics book since The Bell Curve
(Herrnstein and Murray 1994). If you are remotely interested
in finance and/or philosophical probability, the book is a must.
Taleb’s insights into Wall Street’s black-tie shenanigans are en-
tertaining and illuminating; on risk-awareness principles alone,
I would entrust him as a mutual fund manager (who do I write
the check out to Taleb?). As far as professional statisticians are
concerned, there are many shortcomings; however, you will be
wiser for having been exposed.
REFERENCES
Aliaga, M., and Gunderson, B. (1998), Interactive Statistics, Upper Saddle River,
NJ: Prentice Hall.
192 Special Section: Reviews of The Black Swan
View publication stats
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Cambridge: Cambridge University Press.
Embrechts, P., Klüppelberg, C., and Mikosch, T. (1999), Modelling Extremal
Events for Insurance and Finance, New York: Springer.
Gumbel, E. J. (1958), Statistics of Extremes, New York: Columbia University
Press.
Herrnstein, R. J., and Murray, C. (1994), The Bell Curve: Intelligence and Class
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Hsing, T. (1995), “A Note on the Asymptotic Independence of the Sum and the
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