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Yearly Archives: 2008

Black Swans and human relations


Last week, I travelled to Zurich for a conference on hedge funds. I’d never been to a conference on hedge funds before, and only went this year because I’d read so many juicy stories about the spectacular collapse of the hedge fund market, that I wanted to go over and gloat at the humbled titans of global finance and see what they were planning to do now. Rubber-neck journalism of the lowest kind, in other words.

The conference was at the Dolder Grand, a salubrious, airy hotel perched on a hill above the town, with a fine view of the snowy Alps that circle the town like so many bodyguards, to shield it from the prying eyes of any tax inspectors. Inside the mountain retreat, the mood was sombre. The hedgies gathered, like characters in a Thomas Mann story, to try and cure themselves of the incurable ailment of the credit crunch.

I too was in a bad mood. I didn’t really care about the demise of the hedge fund industry, or even about the possible collapse of western capitalism. I was brooding over the fact a friend of mine hadn’t invited me to their birthday party. I was taking it very un-Stoically, wondering what I had done to deserve this slight, and whether it presaged an inevitable failure on my part to assimilate socially. I had reacted rather over-sensitively, as my post-traumatic personality tends to do.

We watched in numbed silence, the hedgies and I, as panel after panel spoke in hushed tones about the possible extinction of their industry. And then a gentleman called Nassim Nicholas Taleb took to the podium, and everyone perked up.

Taleb is a former banker, with 20 years’ experience as an options trader, and is also the author of two very successful books – Fooled By Randomness: The Hidden Role of Chance in Life and in the Markets (2001), and more recently, of The Black Swan: The Impact of the Highly Improbable (2007).

His key idea is this: markets use statistical models, such as the Sharpe ratio or Value At Risk (VAR), to try and predict the likelihood of things happening, and thus to manage risk. But these models are all useless.

They are useless because they only predict the future based on the average returns of the past. However, markets are often affected by what he called ‘Black Swan events’ – abrupt and improbable events, which nevertheless have an enormous impact on the market.

He says: “Take any class of random observables in the market, and the exception dominates, not the mean. Take publishing. Out of the 16,000 novels published each year, the vast majority of the revenue will be made by between five and 35 books. Take software companies – out of 50,000 companies, more than half of sales are accounted for by one company, Microsoft. The exception dominates.”

It is the same in financial markets. It is no use trying to predict what will happen by looking at the average performance over a period of time. A Black Swan event can occur at any time, and render your risk model completely useless. Taleb used to trade options for UBS and BNP Paribas. He says: “If you look at UK interest rate options from 2008 to 1988, 99% of the variation during that period was in one day, September 16 1992, when the UK left the ERM.”

Taleb has a dim view of modern banking risk management, which tries to predict the future by the average events of the past. He mocks former Fed Reserve chairman Alan Greenspan for saying ‘this has never happened before’: “What large-scale event ever had a precedent? No financial crisis ever had a precedent, just as no war ever had a precedent.”

Western banking, for all its sophisticated quant models and rocket scientist analysts, has repeatedly lost everything it ever made in one catastrophic quarter. It happened in 1982, and again in 1987, it almost happened in 1998, and now has happened again in 2008. In 1982, when Citicorp had to be bailed out by the American government, the then-chairman Walter Riston, said ‘It was just a bad quarter’. Taleb said: “What do you mean, a bad quarter, when you lost all the money you ever made? That’s like owning an airplane, and saying ‘well, it only crashed once’.”

The conclusion to be drawn from Taleb’s insights is that we know less than we think we know. We are more in the dark than modern risk management pretends. Bad things happen, and they are very hard to predict. However, good things can also happen, equally hard to predict. We exist in a cloud of unknowing, and should humbly accept that fact. “I am trying to make my life as simple as possible”, Taleb says. That is the best possible defense against Black Swan events.

Taleb acknowledges that his intellectual ancestry is an ancient Greek sect called the Sceptics. The sect was started in the late fourth century BC by a Greek philosopher called Pyrrho, and developed in the second century by Carneades.

The Sceptics were a rival school to the Stoics, whom they contemptuously called the Dogmatists. This is because the Stoics claimed one could ‘know’ the world, recognize its divine structure, and order one’s soul accordingly.

This was dogmatic and foolish, the Sceptics responded. We can never ‘know’ whether something is true or not, we can only say that it appears so to us. This applies to predicting what will happen, or why something else happened: we can never second-guess the universe. Just because some things happened in the past, that doesn’t mean something else will happen in the future. We are in the dark.

But this is not necessarily a bad thing, the Sceptics asserted. In fact, if we suspend judgments about things, if we don’t cling to our opinions about the world, we can avoid unnecessary anxiety and attain a state of ataraxia, or tranquility. So in fact, even though their beliefs were very different to Stoicism, the aim of their philosophy was the same – a life free of worry.

On my way back to Zurich airport, I looked out on the fields of snow, and thought about Black Swan events. I’d read that month that German scientists had discovered a black hole at the centre of our galaxy. How long before some really big Black Swan hit the planet, and life on earth ended, just as improbably as it began?

My Blackberry vibrated in my pocket, like a small pet mouse trying to console me. I took it out and looked at it. It was an email from my friend, inviting me to a poker game. I wondered why he had invited me to that, and yet failed to invite me to his birthday party. And then I realised, he had probably sent my invite to the wrong email address. He often sent emails to an address that I no longer used. Or perhaps he had simply forgotten to invite me.

The point is, I didn’t know. It could have been a number of different reasons, but my mind had seized on the most negative explanation – that he didn’t like me, and that this signified my inevitable exclusion from society.

Again and again, my mind has betrayed this particular skewed bias. Several times, I have dug myself into a ditch of emotional abjectivity, because of my dogmatic interpretation of a particular event, and in fact, subsequent events have proved my initial interpretation to be far too negative and pessimistic. Yet somehow, I forget, and something else happens, that my mind seizes on as evidence to back up its pessimistic view of the world.

I am not alone in this. People with depression and anxiety disorders will very often jump to the most pessimistic explanations of random events. Someone gives them a dirty look in the street, and they interpret it as revealing some inherent weakness or flaw in their own personality, rather than wondering if that someone was simply having a bad day. They are dogmatic in their interpretation of reality. They cling to it, even on minimal evidence, even when their dogmatism is the cause of emotional suffering.

Scepticism can still play a role, then, both in trying to predict the global financial markets, and in trying to negotiate everyday human relations. We can never know exactly what others think of us, or why someone reacted as they did.

We can certainly try and discover the truth, we can communicate with others, ask them what they meant when they said such-and-such.

But we can also learn to keep an open mind, not jump to conclusions too quickly, learn to watch out for the skewed biases of our brains, be they either too optimistic or too pessimistic, and always to be prepared for the arrival of fresh data.

AA Long, the Stoic Revivalist

AA Long, 71-year-old professor of classics at Berkeley, is one of the most influential scholars in Hellenistic philosophy of modern times. He can claim a leading role in the revival of both academic and popular interest in Stoicism in the last 30 years. In a telephone interview, he discusses how the study of Stoicism has changed since he began working in the 1960s, how Brits and Americans differ in their attitude to Stoicism, and why writing about Epictetus in his latest book made him change his own relationship with Stoicism.

What was the state of Stoic studies when you began working on it in the 1960s?

I started working on Stoicism in the middle of the 1960s. I think my first article was published in 1967. At that time it was very weak indeed. My revered teacher, David Furley, who had done excellent work on Epicureanism, said it was the most neglected field in ancient philosophy. I was challenged by the idea that, instead of working off other people’s articles, I’d be working directly on primary sources. It was virgin terrain, relatively speaking.

I received a lot of early positive feedback in England. In 1970, I held eight seminars at Oxford, which were quite well attended. Then I was invited to write Hellenistic Philosophy [published in 1974, since translated into seven languages], and it took off from there.

Why, when you began working, were Stoic studies in such a dire state?

At that time, the dominant philosophers were Plato and Aristotle. The Oxford philosophy course, for example, went straight from Aristotle to Descartes, with nothing in between. There were good reasons for this. If you’re looking for the most exciting and intellectually challenging texts, that’s Plato and Aristotle.

Also, we’ve lost most of the original works of Stoicism, so for any understanding of ancient Stoicism, you have to dig around in all kinds of arcane sources. Or you read the Roman Stoics – Epictetus, Marcus Aurelius, Cicero, Seneca. By the standards of the time, these authors were seen as very second rate intellectually, they were seen as rhetorical rather than analytical.

And there was something deeper at work as well – a British suspicion of therapy, a sense that ‘we’re British, we don’t delve into such matters’.

But I thought Stoicism, particularly Marcus Aurelius, had been popular in the nineteenth century?

Epictetus and Marcus Aurelius had certainly been very popular in the late 17th and early 18th century, with philosophers like Butler, Shaftesbury and Adam Smith. Stoicism offered a kind of rational theistic alternative to Christianity. You could be a Stoic and bow politely at the Church.

In the UK, it declines after that. Epictetus was very popular up to the French Revolution, but he wasn’t very prominent in the nineteenth century, when Plato and Aristotle were much more popular, partly as a result of the nineteenth century revival of the curriculum. But what happened in the UK was not necessarily what happened elsewhere. France is the one European country where Stoicism has always enjoyed a big standing. Epictetus and Seneca have always been widely read in France.

To the extent that there’s a revival today, it’s much more in the US [where Long became a naturalized citizen, having originally been born in the UK] . Stoicism has never really gone away in the US. If you look at the nineteenth century, you can see the influence of Stoicism in Emerson, Thoreau, Dreiser [whose final novel was titled The Stoic], right the way up to Tom Wolfe.

In the US, you have an ideology of personal responsibility, of not expecting the outside world to help you, to keep a cheerful response to natural disasters. In California, you sometimes get serious forest fires and floods, and people lose their homes. But when you see them interviewed on TV, rather than be bereft, they are often resilient and Stoic.

There’s also a sense that life needs to have meaning, that there’s more to it than just our world. There’s extreme hedonism here, but on the other hand, there’s the ecology movement and the simple life attitude.

Americans think they should take themselves seriously, that their lives should be taken seriously. It can be tedious. It’s far from the British ‘don’t be daft’ response to earnestness. That British response can be healthy, but it can also be insidiously cynical.

Do you think Stoicism does well in the US partly because of the self-help movement?

Absolutely. I recently did a piece on Seneca, in which I referred to a woman’s magazine called Self, which is mainly about having a nice butt and things like that, but the page I quoted was pure Stoicism. It said: ‘Are you happy? Are you really happy? True happiness is more a state of mind than a set of circumstances’. You couldn’t get a more pithy summary of Stoicism.

Of course, there’s been a greater interest in Stoicism in academia as well over the last 20 years, through people like Becker, Nussbaum, and myself. There’s even a club of Stoics, they have their own web page and everything.

That’s us! So are you a Stoic?

Before I wrote my book on Epictetus, I would say that I wasn’t a Stoic, I was an academic writing about Stoicism. But when I was writing the book, I was living with him intensely, the book lived with me a lot, and I internalised it. It altered my mindset. Now, little phrases of it pop into my head. If I do find myself in a tricky situation, I say to myself, what would Epictetus do in this situation. I use one of his distancing techniques.

For example, if there is a situation of fear or desire, you can recognise that this isn’t just a blind force, but a judgement. And you can say to yourself, ‘could I look at this situation a different way?’

When I’ve talked to some psychologists, they are often very sceptical, and say ‘the trauma is too deep’. It may well be so. But it can be not such deep trauma, but something tractable.

So I find Epictetus very helpful. It provides solace during the difficult periods that we all experience. And of course, his gallows humour can be very effective.

And the Stoic outlook, far from being individualistic and isolated, is more in line with EM Forster – ‘only connect’. It’s very much a philosophy of interconnectedness.

The most powerful image is that of Hierocles. One should think of oneself as a centre of concentric circles – your self, your family, your friends, your neighbourhood, your city, your country, your continent, and the entire human race. And you try and bring all of these circles closer to the centre, so that you cease to think of anyone as an alien. And don’t think your good could be reasonably achieved without the good of other people as well. If you believe we are basically similar, then how is it reasonable for me to do something and it not be allowed for you?

So you think one can turn ancient Stoicism into a genuine contemporary way of life?

If you try to turn it into a practical ethics, then clearly some things have to be given up. The Candidean optimism, the idea that this is the best of all possible worlds, doesn’t fit our world, it doesn’t fit Darfur. The theism has to go. You could reinterpret it, so that when Stoics talk about God, you could instead talk about perfect rationality.

Couldn’t you say that Stoicism fits our nature? So to follow it is to follow our nature?

Well, you have to be careful. Hitler would say he is just following his nature. Actually, the Stoic idea of being true to one’s nature is not subjective at all. It’s more like mathematics.

In some ways, it is like the ‘ethics of authenticity’ that Charles Taylor talks about, the idea of being true to your deep nature. On the other hand, it’s nothing like the Sixties idea of authenticity, because it’s not about just ‘doing your thing’, but about following a universal law.

Epictetus is good on this. He says, ‘if you’re Agamemnon, do this, if you’re Thersites, do that’. This is the person I take myself to be, and this is the ideal.

Anyway, to go back to the question of can Stoicism be a practical ethics. Stoic ethics don’t make sense unless you have a) universal determinism and b) universal providence.

If you believe these two things, then the main axioms of Stoic ethics are the only viable way to live. If you jettison one or both of them, then it doesn’t make sense to say that humans can flourish under all circumstances.

And the free will issue is thorny. The ancient Stoics say we have freedom only in whether we assent to impressions, and not at all in the external world. But how we interpret events affects how we act, so we must be free to some extent to affect the external world.

The whole thing about free will is it’s a paradoxical notion wherever you go with it. What Stoics are trying to say is, we are a product of antecedent causes, yet we are also self-conscious, so we can determine our lives. We are part of the causal system. We are part of God. We create the Logos. And the Logos also creates us. It can’t function the way it does independently of us. We’re part of it. And not just a mechanical part. The Stoics are really compatibilists. They accept causality, but believe it is also compatible with a degree of human independence.

So could you live by Stoic values?

I can’t agree that all values beyond the self are indifferent. I prefer the Aristotelian idea that there are goods and bads external to oneself. It’s the notion of a child dying of malnutrition, and we could have done something about it. For the Stoics, that child is a matter of indifference. Whatever happened, it was meant to be so.

There’s the point of view of the potentially virtuous agent, who can suffer any situation and use it as an opportunity to practice virtue. But what about the purely passive victim, the child?

Still, many people manage to extract the core of Stoicism – the cognitive theory of the emotions – and live by that without caring about some of the more obtuse aspects of dogma.

Absolutely. As with so many would-be curative strategies, if it works, it works. No one wants to foreclose this. A worthwhile human life can exist under many different circumstances – look at The Diving Bell and the Butterfly. We can certainly extract a core of practical attitudes. It’s just a question of how far you want to push it and say ‘this is Stoicism’.

Of course, in the ancient world there were certainly different emphases. The Stoicism of Marcus Aurelius was different to the Stoicism of Cicero.

How appropriate would you say Stoicism is to our time?

Look at where and when it tends to flourish. It flourished during the Hundred Years War, when Lipsius wrote De Constantia. It was immensely popular then. It flourished during the Vietnam War, via James Stockdale. I got to know him quite well, in fact, he’d call me up to ask me some technical points. So it seems it flourishes in times of upheaval, and we are living through such a time now.

I was recently asked to give a lecture at San Quentin prison. And I decided to talk about Epictetus, to read some passages of him and then bring in Tom Wolfe. I was trying to challenge the inmates to think ‘you’re only in prison if you’re not there of your own will’. And these guys were very interested in this. They tended to be rather sympathetic. I find it absolutely amazing that they didn’t say ‘this is complete bullshit’.

So it seems you’ve been taking the message of Stoicism beyond the walls of academia?

Yes, perhaps I have, since living in the US. Last year, I gave some talks in southern California, with a Buddhist, on ‘how to be good when times are bad’. I find it very interesting how responsive people tend to be. Just recently, a student came up to me and said ‘you are lecturing on Stoicism next term, aren’t you?’ There was a real urgency there.

But I guess there are risks as well, when a philosopher leaves academia and goes philosophizing in the street?

I felt I was taking a risk in San Quentin. I was being asked to give a talk on ancient history, but I found it impossible without getting the audience to think about whether it made sense to them.

But the danger is you end up with a person who is very distressed or disturbed asking for help, and it’s beyond one’s training.

Yes. There’s a fine line between academia and therapy. I’ve fortunately never been in the situation where someone is really desperate.

So would you describe yourself as a Stoic?

I would describe myself as a rather inconstant Stoic.