Taleb's Four Quadrants
The Kingdom of the Ordinary (Mediocristan)
There is a lot of variation, but no extreme changes. For example, no matter how much calorie intake increases, extreme changes in body weight do not occur. At most, people barely exceed 100 kg, and 500 kg is absolutely out of the question. In short, very large deviations are nearly impossible. It follows a normal distribution curve.
The Kingdom of Extremes (Extremist)
There is little variation, but when a change occurs, it is enormous. For example, the top 0.1% accounts for more than half of all novel sales. Until then, there is little profit, but once a certain threshold is crossed, change occurs extremely. The distribution of personal assets under modern capitalism also belongs to this kingdom of extremes. The probability of occurrence is extremely small, but that tiny possibility overwhelms everything. That is why prediction based on past data is impossible.
| M0 "True/False" | M1 Expected Value |
|---|---|
| Medical decisions for individual patients (health, not epidemics) | Epidemics (many people infected) |
| Psychological experiments (yes/no answers) | Intellectual and artistic success (defined by book sales, citations, etc.) |
| Life/death (one person, not n people) | Climate effects (specific amounts) |
| Symmetric bets at roulette | War damage (number of casualties) |
| Prediction markets | Security, terrorism, natural disasters (number of victims) |
| Finance: investment performance without leverage (e.g., retirement accounts) | |
| Insurance (a measure of expected losses) | |
| Economics (policy) | |
| Casinos |
How Should We Use the Four Quadrants?
Nassim Taleb recommends moving from quadrant 4 to quadrant 3. But there will be times when you are unavoidably exposed to quadrant 4, or when you must enter quadrant 4 yourself to be exposed to positive black swans. In such cases, he recommends following the guidelines below.
Use the Barbell Strategy
Mix work from the ordinary kingdom and work from the extreme kingdom. The ratio is 9:1. This allows you to minimize risk while being exposed to positive black swans that bring positive outcomes.
Respect Tradition and Nature
Remember the Lindy effect. What has survived for a long time is more robust. If you bring in new rules and methodologies, the burden of proof lies with the proposer. But in complex systems, its ripple effects cannot be proven. Therefore, if you have no choice before a black swan, return to the old methods.
Avoid Optimization, Create Insurance with Redundancy
Respond to crises with diversified investment and resource accumulation. Even if a black swan approaches, one of your diversified assets may survive, or you can hold out by consuming resources accumulated in excess.
Don't Predict
Never try to predict a black swan. Humans are prediction machines, so they instinctively try to predict. Suppress that instinct. Force yourself to think that an infinite number of unknowns lie ahead.
Topics: Nassim Taleb
Category: Scrap/Article
Source: Link