Of Aids, economics, fortune-telling and black swans

As a director of BusinessMap, a research organisation, it was my task to brief foreign investors about the political and economic challenges they might face in investing in South Africa.

A question they often asked was: “What economic impact will the HIV-Aids virus have?”

At first I would answer that it was difficult if not impossible to know, because the answer would depend on so many variables. How would the pandemic affect household spending, for instance? How would the tremendous social cost translate into a pure economic cost? How would a declining population, given the absence at the time of State-provided ARVs, affect the economy? And shouldn’t the moral imperative to offer ARVs outweigh fine calculations of cost?

They weren’t satisfied. Surely I should know something as important as the economic effect? they insisted. In the end I found a reasonably convincing econometric study from a reputable source and quoted from it that the virus would shave half a percent point off the economic growth rate for a number of years.

This satisfied my clients. They had a figure, which they probably promptly forgot.

A moment’s thought will tell you the absurdity of providing such an exact numerical effect. Why not one-and-a-half percentage points? Or half a point? How would one know for certain without being able to calculate the economic growth rate without the virus, a practical impossibility?

More to the point, why were the clients not prepared to accept the sheer impossibility of knowing the exact effect?

It is certain that other studies that predicted disastrous economic consequences on the basis of the effect of the HIV-Aids pandemic on State finances were wrong. They failed firstly to take into account that the government would not initially pay for HIV-Aids treatment, and secondly that, when the decision was made to provide ARVs, it could easily be afforded.

This experience makes me readily accept one of the many ideas of a recent book that deserves more acclaim than it has received.

Actually, the problem is an ethical one for people in the particular business I was in, which was not forecasting or fortune-telling, but was damned close. The problem is discussed in The Black Swan, by Nassim Nicholas Taleb.

The Black Swan is a popular book and in the minds of some this will immediately disqualify it on the basis that what is pop must be trivial. Not academic in tone it may be, but the implications of what Taleb has to say are profound.

It’s the product of an inquiring, tough and curious mind. Yet this is neither tome nor tract. And anyone who can quote Montaigne along with Von Hayek deserves attention.

Taleb’s style is opinionated, sometimes quite angrily assertive, irreverent and hugely amusing. An example: “Being an executive does not require very developed frontal lobes but rather a combination of charisma, a capacity to sustain boredom and the ability to shallowly perform on harrying schedules.”

Don’t be fooled by the humour. This is serious stuff. The Black Swan examines not only of our failure to come to grips with the unpredictable, but also of our deep-rooted habit of settling for an easy narrative explanation rather than admitting that we simply don’t know.

To talk of The Black Swan brings to mind the present global financial crisis. Taleb does not only deal with disasters, but all truly disruptive, paradigm-changing events.

The metaphor of The Black Swan is this: before the West discovered Australia one could confidently state, or more importantly one could believe one could confidently state, “All swans are white.” For millennia no one had ever seen anything but white swans. After the discovery of the Australian continent and its black swans, the statement was definitively false.

While the discovery of the black swan itself had not momentous consequence, it is the central metaphor for the inability to predict unexpected events with huge consequences, like the 9/11 terrorist attack, market crashes, or the discovery of penicillin.

Taleb defines Black Swans in terms of three characteristics: they are outliers, i.e. they lie outside the realm of regular expectations, secondly they have extreme impact, and thirdly human nature makes us concoct explanations for these outliers after the fact, making them seem explicable and predictable.

The central idea of the book, however, is that human beings are blind to randomness, especially large deviations.

We pretend that life is predictable, plannable and incremental. We give credence to economic forecasts. But even a moment’s reflection will show us the course of our own lives proceeded through a series of largely unpredictable events, the jobs we ended up doing, the life partners we chose and our wealth or poverty.

That appeals to me. I have long believed that we see patterns where none exist and are programmed not to accept randomness.

In retrospect, I should have applied that kind of skepticism more thoroughly to my own profession: Taleb points out the spurious tendency of over causation in journalism — the tendency to ascribe cause with insufficient evidence, even when we should suspend judgment. This is part of the narrative fallacy that blinds us to Black Swans.

I ask myself: Have I, as a journalist, been as scrupulous as I should be about asserting causation? I know that I was astonished to discover, quite early on in my life as a business journalist, that the reasons given for currency and stock movements quite often might as well have been fiction. I’m talking about headlines like, “Finance Minister’s resignation causes fall in rand (ie versus the dollar),” when the real cause was, say, an appreciation in the value of the dollar against the rand.

This has given me pause and underlines the necessity of always trying to take the story further. The difference between investigative journalism and ordinary journalism is that investigations should take the story a whole lot further.

But we cannot avoid telling stories. Taleb’s advice is to keep in mind that they are just that. At one point he suggests, in discussing journalism, that fiction might be more reliable than insufficiently verified non-fiction.

As my first instinct is to reach for the Collected Works of WB Yeats in trying to understand the world, I think he’s got something there, though we still crave the news, shakily created by fallible journalists, especially when big uncertainty strikes, as it is now doing in financial markets.