Sunday, May 10, 2009

Evaluation of The Black Swan

The book is a rich resource for people who must make decisions in the face of uncertainty and incomplete information. It is written at an intuitive level so it does not require sophisticated training in mathematics or philosophy to understand. On the other hand, the subject matter is thoroughly presented. For practioners, its risk management implications cross-cut many business disciplines. For consumer behavior operators and academics, it has profound implications about the misuse of mathematical models.

The Black Swan by Nassim Taleb

It is easy to misuse survey statistics and, according to Taleb, quite often done. He provides high-level guidelines that indicate if a statistical approach is questionable (see Implications section of this post). He also gives many aphorisms for how to think clearly and avoid common decision making mistakes. Here is a short sampling:

  • Focus on anti-knowledge, what we know as false instead of what we know. What we know is captive to the unknown, but if we disprove the justification for an effort we can save ourselves time and money (p. xxi).

  • The future will be less predictable but we still must predict (p. 203).

  • To escape the narrative fallacy, make testable predictions. (p. 72).

  • Favor experiments over history and theories (p. 83-4, 120).

  • Don’t focus. Uncertainty can come from any direction (p. 133).

  • Understand scalable and non-scalable variability

  • If we can predict people’s actions then they are automatons. Is this a valid (p. 183)?

  • Rank assumptions not by likelihood but by harm they can cause (p. 203).

  • Invest in preparedness, not in prediction (p. 208).

  • Seize asymmetric opportunities: low cost, high payoff activities even if the payoff has a low probability (p. 205).

  • Look to be broadly right rather than precisely wrong (p. 284).
It would be easy to misinterpret this work as advocating a carelessness of futurity (for example, see EO, 2007, p3 in his review of the book on Amazon). Such is not the case. It is the realization that Rationalism is dead, Positivism is dead. What do we do now? Taleb is actually giving guidance on the most responsible approach for considering the future. This should be expressly stated: this is not giving up on our dealings with the future but a start on how to properly deal with it.

Information Sources
His could not be stronger. He has personally worked with Benoit Mandelbrot the leading fractal mathematician in the world. He makes extensive use of the work by Nobel Laureate Daniel Kahneman in the Psychology of Uncertainty. It’s the same for network theory, citing the seminal works of mathematicians Watts and Strogatz. Additionally, he brings his own hard earned experience in the trenches of international finance.

Implications for Consumer Research
Foremost, do question surveys and the validity of their statistical assumptions. Taleb notes that physical quantities such as height and weight are subject to some sort of Gaussian distribution (p. 33). Measures dealing with social matters are not usually Gaussian and if not, we have two choices: 1.) the use of Fractal mathematics if the problem is tractable; 2.) run experiments and analyze evidence if intractable.

How do we decide if the population measure is fractal-able? If the measure follows a power rule, in mathematical terms is self-similar, then fractal mathematics applies. A simple power law is the Pareto 80/20 rule, as discussed in last weeks post. If there is a power rule that applies then the distribution is fractal.

How has consumer research faired by universally applying a Gaussian distribution to social matters? As noted in last week's post, there are mixed results and one of the failures may be instructive. Consider New Coke.

Wilson and Ogden (2004, pp 30-1, 52-3) report that Coca Cola used both statistical survey methods as well as work with focus groups to decide if the New Coke campaign should be launched. They ran into a problem, the recommendations from each approach conflicted.

The conclusion drawn from the statistical surveys was to change the formula. The result from the focus groups was the opposite; change would be a big mistake. Coca Cola decided to discount the soft evidence from focus groups and go with hard data from proven mathematical statistics.

The measures were not physical attributes but opinions and beliefs. Based on Taleb’s work, we should question the applicability of Gaussian distribution assumptions to such measures. They may be valid, but maybe not. Wilson and Ogden conclude (p. 52) “survey research is becoming less credible as an accurate representation of publics….” Contrary to the hard data predictions, New Coke did not fair well.

A second and more positive implication is the explosive power of Internet marketing. Internet connections are fractal – a popular Web page is linked to by other pages, these pages in turn linked to by their interested parties, and soon you get a fractal like spider web of connections. This is the basis for viral marketing, which is fractal. Internet marketing can give us asymmetric leverage, where the Black Swan that occurs is positive for us. A classic example of the fractal explosiveness in viral marketing is Smirnoff’s Tea Partay (see Johnson, 2009, p. 26).

Hawkins, et al (2007, p. 249) note that viral marketing is an online strategy to generate buzz and word of mouth (WOM). Buzz is an idea contagion that “[creates] an exponential expansion of word of mouth.” It is low cost but they go on to say (p. 248) that such strategies must be used with care so no miscommunications diminish the brand.

Taleb (2007, p. 220) would say idea contagions are fractal as well as exponential. Fractal worlds are winner take all. They follow a scalable power rule, something like 10% of the videos capture 90% of the traffic, and 10% of that top 10% capture 90% of that 90%. In such a world the top 1% owns a lot, 81% in this example. For WOM marketing online, this means you front $600K to produce a video but most times it doesn’t hit, but when it does it can hit big.

Taleb advises us (p. 205) that living today requires a lot more imagination because it is a world dominated by extremes and the unknown. He goes on to say that consumer behaviorists should seize asymmetric opportunities where you make a series of small bets that you will lose for the occasional big payoff. This is the most effective strategy in the world we are rapidly becoming.

Cacioppo, John and Richard Petty (1986.) The Elaboration Likelihood Model of Persuasion. Retrieved on April 13, 2009 from the EBSCOHost database.

EO (April 25, 2007).Many important ideas, many flaws that detract from the message. Retrieved on April 14, 2009 from

Hawkins, Del, David Mothersbaugh and Roger Best (2007). Consumer Behavior. McGraw-Hill/Irwin.

Johnson, Celia (March 6, 2009). 10 of the Best. BANDT-COM.AU. Retrieved on April 18, 2009 from EBSCOHOST.

Ortega y Gasset, Jose (1994). The Revolt of the Masses. W. W. Norton & Company.

Simon, H.A. (1960). Administrative Behavior: A Study of Decision-Making Processes in Administrative Organization. Macmillan.

Taleb, Nassim Nickolas (2007). The Black Swan. Random House.

Wallace, AFC (1963). Culture and Personality. Random House.

Wilson, L. and Ogden, J. (2004). Strategic Communications Planning For Effective Public Relations and Marketing, 4th Ed. Kendall/Hunt Publishing

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