In the summer of 79 AD, the inhabitants of Pompeii would be going around their daily business, unconcerned with the mountain that rose above their city. They were used to frequent earthquakes, the latest of which in 62 AD had caused extensive damage to the city. However, historically the eruptions of Mt. Vesuvius had been quite mild, thus of very little concern to the people that lived below the mountain.

Yet, all this was about to change just a short time later. Mt. Vesuvius erupted in one of the biggest eruptions in recorded European history and buried the city of Pompeii, as well as many of the surrounding cities, below tons of ashes, rocks, and lava. This event was unprecedented in the human memory of the people who were living in the area, but it happened. They had judged things using a scale that encompassed only the worst case events that they had experienced up until now. Then the unexpected happened.

Nassim Taleb in his book “The Black Swan” calls this a “black swan event”, something so unthinkable or even unpredictable, that it doesn’t enter people’s minds or that they dismiss outright. The problem is that these events do happen sometimes, and usually cannot be predicted.

A Black Swan is an event with the following three attributes. First, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility. Second, it carries an extreme impact. Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable.

People usually judge things based on their experience and passed events. They don’t take into account that this might not always predict the entire span of possible outcomes. To further quote Nassim Taleb:

In Pharaonic Egypt, scribes tracked the high-water mark of the Nile and used it as an estimate for a future worst-case scenario. The same can be seen in the Fukushima nuclear reactor, which experienced a catastrophic failure in 2011 when a tsunami struck. It had been built to withstand the worst past historical earthquake, with the builders not imagining much worse – and not thinking that the worst past event had to be a surprise, as it had no precedent.

This type of thinking is summed up in the famous Rumsfeld Matrix, based on an iconic phrase that the then US Secretary of Defense uttered and that subsequently passed into wisdom lore. He said that there are known knowns, known unknowns, and the unknown unknowns. The category of unknown unknowns is precisely where events like the eruption of Mt. Vesuvius fit into.

Most of the time, whatever you do, you will not be able to predict that these things will happen: they are unknown unknowns and thereby hard to predict. However, what you should do when trying to foresee the future is to keep in mind that these things can and will happen and adjust your models accordingly.

Apparently for the Chinese, being on guard against black swan events, and fending off grey rhino events (which are highly obvious, but ignored threats) is part of the national strategy.

China must be on guard against “black swan” risks while fending off “gray rhino” events, President Xi Jinping said on Monday, adding that the economy faces deep and complicated changes.

Just like the Chinese are doing, everyone should keep the possibility of something unexpected happening in mind. Even simple systems can go wild. And more complex systems can get wilder still. Even small changes can lead to huge outcomes down the line. When Edward Lorenz was doing weather simulations on his clunky computer back in 1961, he didn’t expect that cutting off a few decimal points would lead to such wildly different outcomes. These experiments showed how unpredictable the world can get, since even a slight change can matter a whole lot.

This also brings us back to the role of luck, and how much it really matters in how things turn out. Daniel Kahneman, the world leading psychologist and Nobel Prize winner, reflected upon the role of luck in his life:

I mean, you know, some talent was really needed. And – but luck – you know, I can see so many points in my life where luck made all the difference. And mainly, the luck is with the people you meet and the friendships you make. There is a large element of luck in that. And my life was transformed by sheer luck in, you know, finding a partner, an intellectual partner, with whom we got along very well and we got a lot done.

The lesson in all this is that no matter how much you plan or try, some things are outside your control. Some events are unpredictable and will happen no matter how hard you try to foresee the future. You need to keep this in mind.

Read More:
Survivorship Bias.

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