Why is surprise the permanent conditionof the U.S. political and economic elite?In 2008, when the global financial systemimploded, the cry that no one could haveseen this coming was heard everywhere,despite the existence of numerous analy-ses showing that a crisis was unavoidable.It is no surprise that one hears preciselythe same response today regarding thecurrent turmoil in the Middle East. Thecritical issue in both cases is the artificialsuppression of volatility—the ups anddowns of life—in the name of stability. Itis both misguided and dangerous to pushunobserved risks further into the statisti-cal tails of the probability distribution ofoutcomes and allow these high-impact,low-probability “tail risks” to disappearfrom policymakers’ fields of observation.What the world is witnessing in Tunisia,Egypt, and Libya is simply what happenswhen highly constrained systems ex-plode.

Complex systems that have artificiallysuppressed volatility tend to become ex-tremely fragile, while at the same timeexhibiting no visible risks. In fact, theytend to be too calm and exhibit minimalvariability as silent risks accumulate be-neath the surface. Although the statedintention of political leaders and eco-nomic policymakers is to stabilize thesystem by inhibiting fluctuations, the re-sult tends to be the opposite. Theseartificially constrained systems becomeprone to “Black Swans”—that is, theybecome extremely vulnerable to large-scale events that lie far from the statisti-cal norm and were largely unpredictableto a given set of observers.

Such environments eventually experi-ence a massive blowup, catching every-one oª-guard and undoing years of sta-bility or, in some cases, ending up farworse than they were in their initialvolatile state. Indeed, the longer it takes

[ 1 ]

The Black Swan of CairoHow Suppressing Volatility Makes the World Less

Predictable and More Dangerous

Nassim Nicholas Taleb and Mark Blyth

Nassim Nicholas Taleb is Distinguished Professor of Risk Engineeringat New York University’s Polytechnic Institute and the author of The BlackSwan: The Impact of the Highly Improbable. Mark Blyth is Professor of In-ternational Political Economy at Brown University.

[2] foreign affairs . Volume 90 No. 3

The Black Swan of Cairofor the blowup to occur, the worse the re-sulting harm in both economic and polit-ical systems.

Seeking to restrict variability seems tobe good policy (who does not prefer sta-bility to chaos?), so it is with very goodintentions that policymakers unwittinglyincrease the risk of major blowups. Andit is the same misperception of the prop-erties of natural systems that led to boththe economic crisis of 2007–8 and thecurrent turmoil in the Arab world. Thepolicy implications are identical: to makesystems robust, all risks must be visibleand out in the open—fluctuat nec mergi-tur (it fluctuates, but does not sink) goesthe Latin saying.

Just as a robust economic system isone that encourages early failures (theconcepts of fail small and fail fast), theU.S. government should stop supportingdictatorial regimes for the sake of pseu-dostability, and instead allow politicalnoise to rise to the surface. Making aneconomy robust in the face of businessswings requires allowing risk to be visi-ble; the same is true in politics.

SEDUCED BY STABILITY

Both the recent financial crisis and thecurrent political crisis in the Middle Eastare grounded in the rise of complexity,interdependence, and unpredictability.Economic policymakers in the UnitedKingdom and the United States havelong promoted policies aimed at elimi-nating fluctuation—no more booms andbusts in the economy, no more “Iraniansurprises” in foreign policy. These poli-cies have almost always produced unde-sirable outcomes. For example, the U.S.banking system became very fragile fol-lowing a succession of progressively

larger bailouts and government interven-tions, particularly after the 1983 rescue ofmajor banks (ironically, by the same Rea-gan administration that trumpeted freemarkets). Promoting these bad policieshas been a bipartisan eªort throughout.Republicans have been good at fragiliz-ing large corporations through bailouts,and Democrats have been good at frag-ilizing the government. At the sametime, the financial system as a whole ex-hibited little volatility; it kept gettingweaker while providing policymakerswith the illusion of stability, illustratedmost notably when Ben Bernanke, whowas then a member of the Board of Gov-ernors of the Federal Reserve, declaredthe era of “the great moderation” in 2004.

Putatively independent centralbankers fell into the same trap. Duringthe 1990s, U.S. Federal Reserve ChairAlan Greenspan wanted to iron out theeconomic cycle’s booms and busts, andhe sought to control economic swingswith interest-rate reductions at theslightest sign of a downward tick in theeconomic data. Furthermore, he adaptedhis economic policy to guarantee bankrescues, with implicit promises of a back-stop—the now infamous “Greenspanput.” These policies proved to have gravedelayed side eªects. Washington stabi-lized the market with bailouts and by al-lowing certain companies to grow “toobig to fail”. Because policymakers be-lieved it was better to do something thanto do nothing, they felt obligated to healthe economy rather than wait and see if ithealed on its own.

The foreign policy equivalent is tosupport the incumbent no matter what.And just as banks took wild hidden risksthanks to Greenspan’s implicit insurance

foreign affairs . May / June 2011 [3 ]

Nassim Nicholas Taleb and Mark Blythpolicy, client governments such as HosniMubarak’s in Egypt for years engaged inovert plunder thanks to similarly reliableU.S. support.

Those who seek to prevent volatilityon the grounds that any and all bumps inthe road must be avoided paradoxicallyincrease the probability that a tail riskwill cause a major explosion. Consider asa thought experiment a man placed in anartificially sterilized environment for adecade and then invited to take a ride ona crowded subway; he would be expectedto die quickly. Likewise, preventing smallforest fires can cause larger forest fires tobecome devastating. This property isshared by all complex systems.

In the realm of economics, price con-trols are designed to constrain volatilityon the grounds that stable prices are agood thing. But although these controlsmight work in some rare situations, thelong-term eªect of any such system is aneventual and extremely costly blowupwhose cleanup costs can far exceed thebenefits accrued. The risks of a dictator-ship, no matter how seemingly stable, areno diªerent, in the long run, from thoseof an artificially controlled price.

Such attempts to institutionally engi-neer the world come in two types: thosethat conform to the world as it is, andthose that attempt to reform the world.The nature of humans, quite reasonably,is to intervene in an eªort to alter theirworld and the outcomes it produces. Butgovernment interventions are laden withunintended—and unforeseen—conse-quences, particularly in complex systems,so humans must work with nature by tol-erating systems that absorb human im-perfections rather than seek to changethem.

Take, for example, the recent cele-brated documentary on the financial cri-sis, Inside Job, which blames the crisis onthe malfeasance and dishonesty ofbankers and the incompetence of regula-tors. Although it is morally satisfying,the film naively overlooks the fact thathumans have always been dishonest andregulators have always been behind thecurve. The only diªerence this timearound was the unprecedented magni-tude of the hidden risks and a misunder-standing of the statistical properties ofthe system.

What is needed is a system that canprevent the harm done to citizens by thedishonesty of business elites; the limitedcompetence of forecasters, economists,and statisticians; and the imperfectionsof regulation, not one that aims to elimi-nate these flaws. Humans must try to re-sist the illusion of control: just as foreignpolicy should be intelligence-proof (itshould minimize its reliance on the com-petence of information-gathering orga-nizations and the predictions of “experts”in what are inherently unpredictable do-mains), the economy should be regula-tor-proof, given that some regulationssimply make the system itself more frag-ile. Due to the complexity of markets, in-tricate regulations simply serve to gener-ate fees for lawyers and profits forsophisticated derivatives traders who canbuild complex financial products in orderto derive profits by skirting those regula-tions.

DON’T BE A TURKEY

The life of a turkey before Thanksgivingis illustrative: the turkey is fed for 1,000days and every day seems to confirm thatthe farmer cares for it—until the last day,

[4 ] foreign affairs . Volume 90 No. 3

The Black Swan of Cairowhen confidence is maximal. The “turkeyproblem” occurs when a naive analysis ofstability is derived from the absence ofpast variations. Likewise, confidence instability was maximal at the onset of thefinancial crisis in 2007.

The turkey problem for humans is theresult of mistaking one environment foranother. Humans simultaneously inhabittwo systems: the linear and the complex.The linear domain is characterized by itspredictability and the low degree of in-teraction among its components, whichallows the use of mathematical methodsthat make forecasts reliable. In complexsystems, there is an absence of visiblecausal links between the elements, mask-ing a high degree of interdependence andextremely low predictability. Nonlinearelements are also present, such as thosecommonly known, and generally misun-derstood, as “tipping points.” Imaginesomeone who keeps adding sand to asand pile without any visible conse-quence, until suddenly the entire pilecrumbles. It would be foolish to blamethe collapse on the last grain of sandrather than the structure of the pile, butthat is what people do consistently, andthat is the policy error.

U.S. President Barack Obama mayblame an intelligence failure for the gov-ernment’s not foreseeing the revolutionin Egypt (just as former U.S. PresidentJimmy Carter blamed an intelligencefailure for his administration’s not fore-seeing the 1979 Islamic Revolution inIran), but it is the suppressed risk in thestatistical tails that matters—not the fail-ure to see the last grain of sand. As a re-sult of complicated interdependence andcontagion eªects, in almost all complexsystems, a small number of possible

events dominate, namely, Black Swans.Engineering, architecture, astronomy,

most of physics, and much of commonscience are linear domains. The complexdomain is the realm of the social world,epidemics, and economics. Crucially, thelinear domain delivers mild variationswithout large shocks, whereas the com-plex domain delivers massive jumps andgaps. Complex systems are misunder-stood, mostly because humans’ sophisti-cation, obtained over the history ofhuman knowledge in the linear domain,does not transfer properly to the complexdomain. Humans can predict a solareclipse and the trajectory of a space ves-sel, but not the stock market or Egyptianpolitical events. All complex systemshave commonalities and even universali-ties. Sadly, deceptive calm (followed byBlack Swan surprises) seems to be one ofthose properties.

THE ERROR OF PREDICTION

As with a crumbling sand pile, it wouldbe foolish to attribute the collapse of afragile bridge to the last truck thatcrossed it, and even more foolish to try topredict in advance which truck mightbring it down. The system is responsible,not the components. But after the crisisof 2007–8, many people thought thatpredicting the subprime meltdown wouldhave helped. It would not have, since itwas a symptom of the crisis, not its un-derlying cause. Likewise, Obama’s blam-ing “bad intelligence” for his administra-tion’s failure to predict the crisis in Egyptis symptomatic of both the misunder-standing of complex systems and the badpolicies involved.

Obama’s mistake illustrates the illu-sion of local causal chains—that is, con-

foreign affairs . May / June 2011 [5 ]

Nassim Nicholas Taleb and Mark Blythfusing catalysts for causes and assumingthat one can know which catalyst willproduce which eªect. The final episodeof the upheaval in Egypt was unpre-dictable for all observers, especially thoseinvolved. As such, blaming the cia is asfoolish as funding it to forecast suchevents. Governments are wasting billionsof dollars on attempting to predict eventsthat are produced by complex systemsand are therefore not statistically under-standable at the individual level.

As Mark Abdollahian of SentiaGroup, one of the contractors who sellpredictive analytics to the U.S. govern-ment, noted regarding Egypt, policy-makers should “think of this like LasVegas. In blackjack, if you can do fourpercent better than the average, you’remaking real money.” But the analogy isspurious. There is no “four percent bet-ter” on Egypt. This is not just moneywasted but the construction of a falseconfidence based on an erroneous focus.It is telling that the intelligence analystsmade the same mistake as the risk-man-agement systems that failed to predictthe economic crisis—and oªered theexact same excuses when they failed. Po-litical and economic “tail events” are un-predictable, and their probabilities arenot scientifically measurable. No matterhow many dollars are spent on research,predicting revolutions is not the same ascounting cards [ADDITION OK, TODRAW OUT THE BLACKJACKMETAPHOR?]; humans will never beable to turn politics into the tractablerandomness of blackjack.

Most explanations being oªered forthe current turmoil in the Middle Eastfollow the “catalysts as causes” confusion.The riots in Tunisia and Egypt were ini-

tially attributed to rising commodityprices, not to stifling and unpopular dic-tatorships. But Bahrain and Libya arecountries with high gdps that can aªordto import grain and other commodities.Again, the focus is wrong even if thelogic is comforting. It is the system andits fragility, not events, that must bestudied—what physicists call “percola-tion theory,” in which the properties ofthe terrain are studied rather than thoseof a single element of the terrain.

When dealing with a system that isinherently unpredictable, what should bedone? Diªerentiating between two typesof countries is useful. In the first, changesin government do not lead to meaningfuldiªerences in political outcomes (sincepolitical tensions are out in the open). Inthe second type, changes in governmentlead to both drastic and deeply unpre-dictable changes.

Consider that Italy, with its much-maligned “cabinet instability,” is eco-nomically and politically stable despitehaving had more than 60 governmentssince World War II (indeed, one may sayItaly’s stability is because of theseswitches of government). Similarly, inspite of consistently bad press, Lebanonis a relatively safe bet in terms of how fargovernments can jump from equilibrium;in spite of all the noise, shifting alliances,and street protests, changes in govern-ment there tend to be comparativelymild. For example, a shift in the rulingcoalition from Christian parties toHezbollah is not such a consequentialjump in terms of the country’s economicand political stability. Switching equilib-rium, with control of the governmentchanging from one party to another, insuch systems acts as a shock absorber.

[6 ] foreign affairs . Volume 90 No. 3

The Black Swan of CairoSince a single party cannot have total andmore than temporary control, the possi-bility of a large jump in the regime typeis constrained.

In contrast, consider Iran and Iraq.Mohammad Reza Shah Pahlavi andSaddam Hussein both constrainedvolatility by any means necessary. In Iran,when the shah was toppled, the shift ofpower from the shah to Ayatollah Ruhol-lah Khomeini was a huge, unforeseeablejump. After the fact, analysts could con-struct convincing accounts about howkilling Iranian Communists, driving theleft into exile, demobilizing the democ-ratic opposition, and driving all dissentinto the mosque had made Khomeini’srise inevitable. In Iraq, the United Statesremoved the lid and was actually sur-prised to find that the regime did notjump from hyperconstraint to somethinglike France. But this was impossible topredict ahead of time due to the nature ofthe system itself. What can be said, how-ever, is that the more constrained thevolatility, the bigger the regime jump islikely to be. From the French Revolutionto the triumph of the Bolsheviks, historyis replete with such examples, and yetsomehow humans remain unable toprocess what they mean.

THE FEAR OF RANDOMNESS

Humans fear randomness—a healthy an-cestral trait inherited from a diªerent en-vironment. Whereas in the past, whichwas a more linear world, this trait en-hanced fitness and increased chances ofsurvival, it can have the reverse eªect intoday’s complex world, making volatilitytake the shape of nasty Black Swans hid-ing behind deceptive periods of “greatmoderation.” This is not to say that any

and all volatility should be embraced. In-surance should not be banned, for exam-ple.

But alongside the “catalysts as causes”confusion sit two mental biases: the illu-sion of control and the action bias (the il-lusion that doing something is alwaysbetter than doing nothing). This leads tothe desire to impose man-made solu-tions. Greenspan’s actions were harmful,but it would have been hard to justify in-action in a democracy where the incen-tive is to always promise a better outcomethan the other guy, regardless of the ac-tual, delayed cost.

Variation is information. When thereis no variation, there is no information.This explains the cia’s failure to predictthe Egyptian revolution and, a genera-tion before, the Iranian Revolution—inboth cases, the revolutionaries them-selves did not have a clear idea of theirrelative strength with respect to theregime they were hoping to topple. Sorather than subsidize and praise as a“force for stability” every tin-pot poten-tate on the planet, the U.S. governmentshould encourage countries to let infor-mation flow upward through the trans-parency that comes with political agita-tion. It should not fear fluctuations perse, since allowing them to be in the open,as Italy and Lebanon both show indiªerent ways, creates the stability ofsmall jumps.

As Seneca wrote in De clementia, “Re-peated punishment, while it crushes thehatred of a few, stirs the hatred of all ...just as trees that have been trimmedthrow out again countless branches.” Theimposition of peace through repeatedpunishment lies at the heart of manyseemingly intractable conflicts, including

foreign affairs . May / June 2011 [7 ]

Nassim Nicholas Taleb and Mark Blyththe Israeli-Palestinian stalemate. Fur-thermore, dealing with seemingly reliablehigh-level o⁄cials rather than the peoplethemselves prevents any peace treatysigned from being robust. The Romanswere wise enough to know that only afree man under Roman law could betrusted to engage in a contract; by exten-sion, only a free people can be trusted toabide by a treaty. Treaties that are negoti-ated with the consent of a broad swath ofthe populations on both sides of aconflict tend to survive. Just as no centralbank is powerful enough to dictate stabil-ity, no superpower can be powerfulenough to guarantee solid peace alone.

U.S. policy toward the Middle Easthas historically, and especially since 9/11,been unduly focused on the repression ofany and all political fluctuations in thename of preventing “Islamic fundamen-talism”—a trope that Mubarak repeateduntil his last moments in power and thatLibyan leader Muammar al-Qaddaficontinues to emphasize today, blamingOsama bin Laden for what has befallenhim. This is wrong. The West and its au-tocratic Arab allies have strengthened Is-lamic fundamentalists by forcing themunderground, and even more so bykilling them.

As Jean-Jacques Rousseau put it, “Alittle bit of agitation gives motivation tothe soul, and what makes the speciesprosper is not peace so much as free-dom.” With freedom comes some unpre-dictable fluctuation. This is one of life’spackages: there is no freedom withoutnoise—and no stability without volatil-ity.!