Mediocristan,vs.,Exstremistan, finance, share, loan Mediocristan vs. Exstremistan
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In his book The Black Swan, Nassim Taleb develops two ideas, Mediocristan and Extremistan, to help explain his Black Swan Theory. Mediocristan is where normal things happen, things that are expected, whose probabilities of occurring are easy to compute, and whose impact is not terribly huge. The bell curve and the normal distribution are emblems of Mediocristan. For those not very familiar with statistics, the bell curve represents the normal distribution, where small, low-impact changes have the highest probabilities of occurring, and huge, wide-impact changes have a very small probability of occurring. Nature is full of things that follow a normal distribution. Peoples heights follow a normal distribution. Imagine yourself walking down the street. If you see ten people, the odds are that most of them will be very close to average height, with only a small number being very short or very tall. This is a normal distribution. Mediocristan therefore constitutes the normal, the easy to predict, the expected, the small impact, the mundane. Exstremistan is a different beast. In Extremistan, nothing can be predicted accurately and events that seemed unlikely or impossible occur frequently and have a huge impact. Black Swan events occur in Exstremistan. Think of income distributions. Most people make close to an average salary, some people make less, but a few people make a huge amount. If you tried to calculate an average salary, the highest incomes (the million dollar salaries) would have a disproportionate effect on the average. To illustrate further, imagine a room full of 30 random people. If you asked everyone their salary and calculated the average, the odds are the average would seem pretty reasonable. However, if you added Bill Gates to the room and then calculated the average salary, your average would jump up by a huge margin. One observation had a disproportionate effect on the average. This is Exstremistan. Things like book sales, whether a movie becomes a hit, or a viral video on the internet all have similar characteristics, and therefore reside in Extremistan. You may be thinking, so what? Well, the problem is that people tend to think that most things fall into the Mediocristan category, that they are normal, can be predicted and have a regular, known probability of occurring, and will not have a drastic impact. We have a tendency to think that change occurs smoothly and incrementally. This is Mediocristan. Taleb believes that the most important events, the ones that werent expected and have a huge impact (Black Swan events, basically), fall into the Exstremistan category, and these events happen much more often than people realize. If you think about it, there are plenty of things that fit this idea. The financial crisis, the housing crash, and major worldwide historical events like 9-11 all fit the mold. People tend to think that these types of changes happen slowly and smoothly, but in reality, they can happen very suddenly, without warning, and can have a drastic impact that is felt everywhere. Taleb uses these idea of Mediocristan vs Exstremistan to illustrate the importance of Black Swan events. The Black Swans are not predictable, but they have a huge impact and they happen much more often than most people realize. The more quickly you understand the importance of Exstremistan and Black Swan events, the more protected you can become from their negative consequences.
Mediocristan,vs.,Exstremistan,