Lucretius Problem

To illustrate the dangers of using Mediocristan data sets to predict future outcomes he references the tales written by the Roman poet Titus Lucretius Carus. Lucretius wrote that “the fool believes that the tallest mountain in the world will be equal to the tallest one he has observed.” With this Lucretius Problem, as Taleb calls it, you can see why humanity might treat some data sets like they were from Mediocristan and make confident decisions based on the predictive capabilities of such data sets even though they might very well be missing massive outliers like those found in data sets from Extremistan — thus destroying any predictive potential from the data set.

Taleb references real-life examples of situations in which Mediocristan data sets were used to make decisions and because those data sets didn’t include the massive outliers, they resulted in catastrophic events. The Fukushima nuclear disaster is a specific event he references whereby the reactor was built to withstand the worst past historical earthquake (the equivalent of the tallest mountain seen to date), but unfortunately there was a bigger earthquake that wasn’t considered in the data set, thus the reactor suffered catastrophic failure with untold costs because of a tsunami caused by this outlier earthquake.

Humans are notoriously bad at envisioning their future selves, and partly because we lack any incentive to. If we're focused on quarterly returns, storing up talent or money for an as-yet imaginary event is counterproductive. That's completely natural, but it's bad for business: a survey Gallup conducted before COVID-19 showed that only 22% of employees strongly agree they could take risks at work that could lead to important new products, services or solutions. And a 2014 Corporate Executive Board report showed that auditors spent only 6% of their time analyzing strategic risks, but that the likelihood that strategic business risk failure would lead to significant losses in market value was 86%. Auditors spent most of their time on operational and financial risks. Better strategic risk assessment should, obviously, be built into recovery plans because Taleb is right –whatever their color, these swans bite. But managing strategic risks has to extend beyond CEOs, CFOs, risk managers and chief strategy officers.