Power law distributions

The last text was about Mediocristan and Extremistan. Let's forget the former and focus on the latter. Extremistan is a world in which the enormous outcomes are the results of small causes. 80/20 rule is the best known power-law distribution. It states that 80 percent of the outcomes come from 20 percent of the causes. This is just one power-law distribution and there are uncountable amounts of them. Do not focus on the 80/20 rule when you think about power-law distributions. Covid19-epidemic is an extreme example of a power-law distribution. Even though it is not sure, it likely started when one person ate some part of an animal he should not have. Millions of people will suffer from the virus.

The good, the bad and the irrelevant

It is not important to only understand that a minority of causes or inputs produce the majority of effects and outputs. Understanding that the majority of causes or inputs produce a minority of causes and outputs is equally important. Let's say that your causes and effects have 80/20 distribution. Then 80 percent of your causes and inputs are irrelevant. Their effects and outputs are close to zero. It is safe to say that 20 percent of your causes and inputs have large positive and negative effects and outputs. If your life is good, then your 20 percent has larger positive than negative effects. If your life is bad, the negative effects of that 20 percent are larger.

You do not have to be a rocket scientist to understand you have to enlarge the effects of positive causes and inputs in your life and diminish the negative ones. You can change to get rid of some of the irrelevant 80 percent of the causes and inputs. Change them into positives. It is unlikely you can get rid of all the negative causes and inputs. You can find ways to diminish some of the effects and outputs. You can transform some of them into irrelevant ones.

Long-term predictions are not smart in Extremistan

You can make predictions in Extremistan and be right for a short time, but the overall results of predictions are usually negative. As I mentioned in the last text, you need 100 billion fold data points in the 80/20 world compared to the normal distribution world. When the power-law distribution is 50/1, you cannot have enough data points or computing power to make any useful predictions. Financial markets and economies are parts of Extremistan. Therefore, an economist, financial pundit, or someone else who believes they can make exact predictions are idiots. Their total effect on the economy is negative. The funny thing is that they believe their predictive models are based on solid math. In short, do not believe anyone who believes they can make any useful long-term predictions in any social interactions. The world today is not predictable.

When predicting is not possible, you have to prepare for everything. How to do it is a whole another ball game. One way to deal with it is to reduce tight interactions. Do not use all your resources to achieve something like putting all of your time or other resources like money into one endeavor. Be less leveraged than you can. Have smaller debts than you can take. Be more independent. Rely less on other people and their resources. Have many income streams. Then you rely less on a single one.

Start making small experiments. Make small and numerous adjustments to your inputs. See what happens. There are lots of examples of what you can do. Make small changes in your marketing materials when you can do them in a cost-efficient way. Change a few words or colors, etc. Make small adjustments to your daily habits like your eating. See what happens if you diminish the availability of bad nutrition and increase the availability of a good one. Put some of your sweets (if you have them at home or work) into somewhere you cannot see them without increased effort in finding them.

Do you consider yourself a helpful person? If you found anything useful in this text, teach it to your friends.

Until next time,

-TT

Mediocristan and Extremistan

There are two statistical worlds in which we live. Nassim Taleb has described them with names Mediocristan and Extremistan. The first world is a normal distribution world and the second world has extreme distributions. In mediocristan, two persons that have a combined length of 4.00 meters are close to each other. For example, they have 2.01meters and 1.99 meters in length. In extremistan, there are two persons whose combined wealth is 10 million. It is most likely that one of them has wealth close to that of 10 million and the other has wealth about 100,000. As you can see, these worlds are totally different from each other. In other words, one figure does not change statistics much in Mediocristan, but one figure can change everything in Extremistan.

Mediocristan

Mediocristan is the world where the majority of the people think we live in. This applies even to the majority of the most educated persons. Success equals effort and skills in this world. Mediocristan applies to most biological effects on humans. Genes work in ways that produce mostly results that can be found the normal distribution. The results that genes produce have high predictability. You can define probabilities to them and they do not change much. Here are some percentages how much some biological or psychological attributes of humans are explained by the genes they inherit:

• Height 70%, Weight 80%
• Reading disability 60%, Verbal ability 60%
• Face remembrance 60%, Spacial ability 70%
• General intelligence 50 %, Personality 40%

As you likely know, your biological parents´ genes affect your biological and psychological traits. If they have some extreme traits, likely, these traits are not so extreme in you. In a world with normal distributions, return to averages happen fast. If you have a height of 2.10 meters, your son´s height will likely be closer to average.

Extremistan

Extremistan is the place where a minority of the people think we live in. Extremistan applies to most social effects on humans. Success is non-linear with effort in this world. Social contagions produce results that produce extreme distributions. Most of them are from Extremistan. Some social attributes that are from Extremistan are book sales per author, wealth, and sizes of companies. There is no predictability in Extremistan. It is almost impossible to predict extreme statistical distributions like changes in stock prices. Even figuring out the mean of a simple 80/20 Pareto distribution requires a sample size of a hundred billionfold compared to normal distribution according to Taleb. Changes in stock prices have much larger extreme distribution. Therefore, they cannot be predicted in any modern computer or human brain. This means is that it is much easier to prove that someone is wrong than what the reality is. Today´s world suffers from the domination of high-effect, low-probability events. Most scientific breakthroughs happen when they are not expected, instead of deadlines put to researchers.

Events and effects that combine both worlds

Some events happen in both worlds. For example, some economic effects from predictable catastrophes like earthquakes have extreme distributions. An earthquake that has twice the power than the other can cause tenfold economic effects on people. The earthquake in the same magnitude as 100 years before can also cause manyfold effects today than it did then. These kinds of socio-economic effects grow in magnitude when more people live in big cities, and we use more of nature´s resources.

The modern world grows larger and larger winner-take-all effects. Even a little bit more skillful athletes can earn ten times more money than athletes a few percentage points below their skill levels. The same effects can apply to authors, musicians, and other artists. But this does not always apply. Even a little bit luckier author with the same skills can make a hundredfold more money than others.

Nothing to add,

-TT