The Black Swan of Cairo

April 27, 2011
Nassim Taleb and Mark Blythe on "The Black Swan of Cairo" -- it does a fantastic job of explaining how tail risk works in geopolitics.

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Go read the essay by Nassim Taleb and Mark Blythe on “The Black Swan of Cairo” — it does a fantastic job of explaining how tail risk works in geopolitics. I’m reminded of this exchange from the film the title references:

Gil’s Agent: Tom Baxter’s come down off the screen and he’s running around New Jersey!… Nobody knows how it happened, but he’s done it.
Gil Shepherd: How can he do that? It’s not physically possible!
Gil’s Agent: In New Jersey anything can happen.

The point here is that it’s all too easy to confuse the unprecedented with the impossible. There’s a weak form of this fallacy and a strong form: the weak form is seen in US foreign policy, where analysts never expect something which hasn’t happened before. And the strong form is seen in Middle Eastern domestic policy, where repressive authoritarianism is considered a means of preventing revolution, rather than a guarantee that something violently unexpected is sure to happen at some point.

It’s easy to see what this means in theory. Taleb and Blythe write:

Seeking to restrict variability seems to be good policy (who does not prefer stability to chaos?), so it is with very good intentions that policymakers unwittingly increase the risk of major blowups. And it is the same misperception of the properties of natural systems that led to both the economic crisis of 2007-8 and the current turmoil in the Arab world. The policy implications are identical: to make systems robust, all risks must be visible and out in the open — fluctuat nec mergitur (it fluctuates but does not sink) goes the Latin saying.

Just as a robust economic system is one that encourages early failures (the concepts of “fail small” and “fail fast”), the U.S. government should stop supporting dictatorial regimes for the sake of pseudostability and instead allow political noise to rise to the surface. Making an economy robust in the face of business swings requires allowing risk to be visible; the same is true in politics.

And in practice?

Consider that Italy, with its much-maligned “cabinet instability,” is economically and politically stable despite having had more than 60 governments since World War II (indeed, one may say Italy’s stability is because of these switches of government). Similarly, in spite of consistently bad press, Lebanon is a relatively safe bet in terms of how far governments can jump from equilibrium; in spite of all the noise, shifting alliances, and street protests, changes in government there tend to be comparatively mild. For example, a shift in the ruling coalition from Christian parties to Hezbollah is not such a consequential jump in terms of the country’s economic and political stability. Switching equilibrium, with control of the government changing from one party to another, in such systems acts as a shock absorber. Since a single party cannot have total and more than temporary control, the possibility of a large jump in the regime type is constrained…

U.S. policy toward the Middle East has historically, and especially since 9/11, been unduly focused on the repression of any and all political fluctuations in the name of preventing “Islamic fundamentalism” — a trope that Mubarak repeated until his last moments in power and that Libyan leader Muammar al-Qaddafi continues to emphasize today, blaming Osama bin Laden for what has befallen him. This is wrong. The West and its autocratic Arab allies have strengthened Islamic fundamentalists by forcing them underground, and even more so by killing them.

As Jean-Jacques Rousseau put it, “A little bit of agitation gives motivation to the soul, and what really makes the species prosper is not peace so much as freedom.” With freedom comes some unpredictable fluctuation. This is one of life’s packages: there is no freedom without noise — and no stability without volatility.

The problem here, of course, is that when Islamic fundamentalism turns violently murderous, you can’t simply sit back and let it happen on the grounds that there is no stability without volatility. And while Taleb might extol his beloved Lebanon as a “relatively safe” country with “economic and political stability”, it’s unacceptably volatile and dangerous by the standards of most of the rest of us. I’m happy to agree that it’s better to be Lebanon than to be Iran. But I’d like to hope we can significantly improve on both, and help to build a region which has less volatility than Lebanon and less tail risk than, say, Saudi Arabia.

Update: Some readers were having difficulty getting to the article, I’ve changed the link and it should be better now.


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