Earlier this year, I was running late for a flight, and overtook a large lorry on a twisting Sicilian road. All was well — but I shouldn't have done it. I'd put myself on the wrong side of the 'Taleb' distribution. (The distribution was named by my Financial Times colleague John Kay in honour of Nassim Taleb, author of The Black Swan.) When you bet against a Taleb distribution, you enjoy lots of small gains, but you also chance disaster. I didn't miss the flight. I might have been killed.
The financial crisis has made us all more aware of the Taleb distribution — especially in contexts where the risks are hidden by unscrupulous men. Yet betting against the Taleb distribution will always be tempting, because it means receiving a steady stream of gains (albeit in exchange for a risk of catastrophe).
We should bet with the Taleb distribution instead of against it, shaking off repeated small losses in exchange for the occasional big success. This is the strategy of the successful venture capitalist, of course — and also the approach advocated by Peter Sims in his enjoyable book Little Bets. In one of many examples, Sims describes the star comedian Chris Rock's agonising practice sessions in low-key comedy venues, scratching around for new material, and argues that it's worth tolerating a lot of disappointments in order to make it big.
But outside the carefully designed mugs' games of the lottery and the casino, we rarely find such bets attractive. This is because small failures hurt disproportionately. They are also embarrassing: we may be confident that our ship will eventually come in, but to the rest of the world we look like a dreamy loser. And, in contrast, the trader or manager who bets against the Taleb distribution looks like a safe pair of hands as the small wins stack up. By the time his bets have destroyed the company he may well be enjoying a comfortable retirement.
I have begun to look eagerly for institutions that support bets that run with the grain of the Taleb distribution. Our scientific community seems to fit the bill: the traditions of experiment, peer review, replication and dissemination in respected journals are designed to reward the successes and discard the failures.
But whether we are relying on science, the market or government to solve our problems, we should be looking for institutions that place themselves on the right side of the Taleb distribution, willing to support long shots and able to exploit each rare opportunity as it appears. A glance at the woes of the Eurozone reveals that, too often, we have been passing lorries on blind corners.
Tim Harford is a Financial Times column and author of Adept: Why Success Always Starts With Failure (Little, Brown, £20).
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