Capturing the Black Swan

This past weekend, I started reading Nassim Taleb’s The Black Swan. I held off on reading it for a while because I heard him speak a few times and read enough about the book to figure I had the general gist, but I received a copy as a gift last year and so, I decided to dive in. Already, I can see this book being a potential gold mine for fantasy sports ruminations. In fact, one of the fields he makes reference to early in the book—when talking about the relevance of this train of thought—is gambling, which is essentially the way I choose to approach fantasy baseball and something I’ve also been reading more about recently.

Some of the core tenets of the book aren’t exactly revolutionary at face value, but they’re the type of thoughts that become increasingly consuming the more you think about them. This is because they are nearly infinitely applicable. A main premise of Taleb’s is that the impact of difficult-to-predict, outlier type events on the arc of the world’s history is extremely profound.

The real fantasy implication in the early part of the book comes from two points. First, what we don’t know is more important than what we do know. Because we have done as much possible to account for what we do know, that information—or the resulting events there from—has very little opportunity to harm us compared to that which we don’t know.

Second, due to both an excessive reliance on what we do know and an inflated perception of the completeness of our knowledge, we both lack the imagination to conceive of and tend to underestimate the likelihood and impact of the extreme outlying events that shift paradigms do so much to shape the world – Black Swans.

Jose Bautista was a Black Swan. Black Swans emerge each year to varying degrees. As Taleb states, unpredicted highly impactful events occur more often than we expect them to and their impacts are huge. We can parse the idea of how predictable the emergence of players like Ryan Braun and Francisco Liriano were (both were indeed making mockeries of their competition in the minors), but ultimately they succeeded beyond even the wildest of expectations. The main point here is that these types of events will occur and we need to consider them within the realm of possibility—even if they’re highly unlikely.

An unknown Blue Jay jacking 54 dingers, Albert Pujols getting hurt and missing 130 games, or playing a full season and hitting .287, Mark Prior recapturing something like his 2003 form—a small number of events like these happen each year, invariably. Now, it would be beyond foolish for us to try to predict what those few absolutely inexplicable things will be and it would be even more foolish to “bet” on those types of things occurring when assembling our team. The risk is just too great. Practically speaking, what we should do is keep aware that a few of these kinds of things will happen and be open to such occurrences.

As high level fantasy players, we sometimes talk ourselves out of the reality of what is occurring on the field. I talked myself out of believing in Jose Bautista for a long time; I wanted no part of him. Yet, Bautista was doing basically unprecedented things, smacking homers seemingly every night. My reaction was to retreat deeper into my shelter of “advanced knowledge,” his further defiance of the tenets of such knowledge paradoxically reinforcing my belief that he was just that much more due for that much more drastic a regression.

Instead of looking at dramatic outliers as a way to reinforce the rules they are presently defying, perhaps we should also pause and consider whether we may be passing up the truly game-changing opportunity by trying too hard to disregard such performance. Obviously, I’m not recommending one go crazy and drop proven valuable commodities to chase an obscure player who hits three homers in five games. Also, I’m certainly not advocating that we abandon the knowledge base and empirically-based decision-making processes we’ve developed. What I am saying is that perhaps we should integrate the mere fact that inexplicable cases are bound to occur more soundly into our models of thought.

Further, from an investment standpoint, there’s no way I and so many others should have passed on the opportunity to inexpensively acquire Bautista for so long in 2010. Hindsight is 20/20 and all, but quite simply, the impact catching that Black Swan lightning in a bottle is so disproportionate to what you lose by taking a few unsuccessful lost cost shots to nab it, that it’s a good bet from a simple leverage point of view.

In a sense, I think this is a skill that really separates the handicapping sharps from the square public bettors. I’ve recently been reading more and more about professional sports gamblers and thinking about what I should incorporate into my fantasy perspective. One point that seems to also jibe with my take on some of Taleb’s writing is that in addition to thinking about playing the team, sometimes you have to think about just playing the number.

Before wrapping up, I’d like to mention one more point that Taleb makes in the early part of Black Swan. Taleb cautions us about being too secure in our knowledge about things. He implies that our tendency to try to “Platonify” an incredibly complex world often, in turn, precludes us from seeing the Black Swans. It urges us to explain them away, to ignore them because doing so protects that which we know against the uncertainty of that which we don’t know and the potential implications of the unknown on the known systems – systems we build lives, careers, institutions, and societies on.

Remember, the fantasy community is going to get many, many things wrong. In fact, there’s a good chance that none of the folks you might look to for guidance about fantasy baseball will predict a single one of the three most profound influencers of the 2011 season. But that’s perfectly fine, because the flip side of knowing your capabilities is to know your limitations. We must retain a healthy skepticism, but also continually remind ourselves not to cast as false all that doesn’t adhere to our current understandings

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Comments

  1. GreggB said...

    Great article.  I’m in the same position—gone through about 100 pages of The Black Swan and find it to be profound and important for many things, including how we look at baseball. To take it from fantasy to real baseball, one of the implications, it seems to me, is that teams would be better served trying to develop a larger number of players in the minors and supporting them for a longer period of time—giving the team a much better likelihood of turning up the unexpected black swan.  James wrote about radically expanding the minors in his blog last week, although citing a number reasons beyond this.

  2. Alex (nee TOLAXOR) said...

    Yeah, except in a strict sense, a Black Swan is an event for which our prior distributions are completely uninformative. So Taleb kinda messes with the definition for his own purposes there (not that I don’t disagree with point predictions in complex systems and distribution choices and many other aspects of applied probability theory he is popularizing).

    Category 5 hurricanes, stars getting hurt, 50 home run seasons out of nowhere (Foster, Anderson), these things all have imaginable frequencies for us.

    A rather simple litmus test for an event being a “black swan” would be if the event is not just extraordinary, but extra-ordinary to the point that there are no usable reference points.

    Take for example, Black Pearls.  When they were discovered, there was no market precedent, and as such, great uncertainty towards how the market would value them.  It wasn’t until a jeweler marked them up as “special” that it was determined they would be more (and not less) valuable than white pearls.

    So to your point, if you think you might “catch lightening in a bottle” you, even informally, are suggesting that such an occurrence is not unfathomable (and therefore, a real black swan).

  3. KDR said...

    Fantastic Derek! I just discovered the book a month or so ago and like GreggB I immediately started to ruminate on how to apply this to fantasy baseball.

    The idea of the Black Swan (although I didn’t know the fancy term last year) hit me when I read in Shandler’s BForecaster that in the 2009 season something ridiculous like over half of the top 276 players performed worse than their predictions. The article was basically saying that we can’t even accurately project the first round talents let alone the majority of the talent pool.

    I mean if the “experts” such as Ron, THT, BP, The Book, etc who have been doing this for years and years can’t get a handle on how to forecast accurate projections, what do we do?

    One lesson I learned before my 2010 draft was to go for a handful of players who were busts or injured in 2009 yet had a track record of success – Glaus, Hart, Kelly Johnson, Tim Hudson, etc. I think each season you need to find 2 to 3 of these players for a few bucks or in the end game.

    Another lesson I painfully learned was taught to me by throwing all of my eggs in one basket and not properly thinking through the risk. Jacoby Ellsbury anyone? I got him about $15 cheaper than I had him pegged in my 13-team mixed 5X5 league and nowhere was he considered an injury risk. I thought I was all set at SB, just plug in 55-60 SB from him (see? I was figuring he’d come down from 70, regression to the mean and what not)and scoop up some SB from my OF and that category was done.

    Wrong.

    If I would’ve known more about the Black Swan and risk management I would’ve done a better job of planning for trouble, something along the lines of stashing a Coco Crisp or Rajai Davis as a backup.

    Now with the painful “experience” I learned from my mistake of not understanding my risk with Ellsbury I am making more plans for 2011, yet there will be inevitably more Black Swans this season no one will see….

    OK, sorry for rambling a bit, I would like to participate further in some ongoing discussions of how the Black Swan can help planning for fantasy baseball.

  4. GreggB said...

    Hi Alex,

    I think you are using a stricter definition for a black swan than Taleb himself. In his prologue he summarizes black swans as having rarity, extreme impact and retrospective predictability. It doesn’t have to be inconceivable.

  5. obsessivegiantscompulsive said...

    I love that book too, because that is the way I have always thought of things.

    Thinking of the inconceivable is a good practice in general, both for thinking out of the box, as well as preparing for an uncertain future.

    Still, there is only so much you can do sometimes.  To give my example, last year I picked up both Gordon Beckham and Pablo Sandoval, and I thought I had 3B covered:  NOT!

    That, I think, is the flipside of all this, when the bad do happen, you have to be flexible and move on at some point to your next option.  Even then, I recall picking up Baustista at some point to fill my 3B need, but then dropped him when he got cold.  I did regret that, but the fact is that most players do not continue to hit like that, they will cool off.  Not sure how you keep the Bautista’s while dumping the Beckham’s.  That’s the holy grail in fantasy baseball, for sure.

  6. The Baltimoron said...

    I’m failing to grasp the relationship here.  How are we to anticipate black swans if they are, by definition, outliers?  I see the impact in history, but hindsight does no one any favors in prognosticating future successes.  How does the book’s message impact our thought on fantasy seasons to come?

  7. NWS said...

    Baltimoron-

    One of the bigger points that Taleb emphasizes is people not being prepared for Black Swan occurences and being exposed to destructive consequences. The implication for Fantasy would be that you should not (as previous people have said) put yourself in a situation where one event can ruin your season.

    My guess is that in the long run, players who have consistent records of not being injured are overvalued by the market (meaning drafts). People seem to believe that the future will greatly mirror the past, but when you do not prepare yourself for the Black Swan then that assumption comes back to kill you.

    Taleb repeats an example of a turkey who is fed each day for 100 days, which makes it think that the man coming to him is a good thing because he will always be fed as that is what happens in the past. Of course, this ends on the 101st day, which is Thanksgiving. This is Taleb’s metaphor for the danger of basing predictions of an uncertain future on a certain past.

  8. Alex (Formerly known as TOLAXOR) said...

    @GreggB

    “I think you are using a stricter definition for a black swan than Taleb himself. In his prologue he summarizes black swans as having rarity, extreme impact and retrospective predictability. It doesn’t have to be inconceivable.”

    Yep.  Which is why you may want to be careful tossing the term “Black Swan” around. Tail events can be represented in a distribution, you’re simply arguing over model value.  Black Swans cannot.  When I read Taleb’s book with this in mind, it wasn’t as smooth as if you just swallow what he’s dishing.

  9. Derek Ambrosino said...

    Sorry for the delayed responses guys—

    Alex,

    Aren’t we just quibbling over semantics though? Taleb is a bit more loose on the concept of a Black Swan than the original notion of the historic Australian black swan example, or whatever. In fact, that’s a reason why he distinguishes his use of the term, by making it a proper noun, from the very similar, but not identical, theory that preceded his writing. Basically, the concept is unchanged when we recognize that the use of the term “Black Swan” was kind of a marketing device for his worldview.

    My column was explicitly in reference to Taleb’s book, and I tried to use the term generally as Taleb did, at least in spirit. Admitedly, I loosened it a bit more than he did to the original but that was to expand the underlying notion within a fairly narrow context. ….If it sidesteps the tangential debates, I’m happy to remane my column “Capuring Pink Elephants.”

    KDR,

    Being a Queens-born hip hop junkie, I’m just going to pretend that stands for Kool D Rap, okay?

    I had originally drafted a longer version of this article that had some more specifics about some of my strategies in relation to these ideas, and a number of them are similar to the points you made. I too have a habit of investing in stars coming off injury, former top prospects that have been written off, and other high-risk investments. What makes this similar to a Black Swan investment philosophy is that, on the whole, you are not expecting each these investments to turn out well. What you are hoping for is to go 1-3 or 2-5 and have those successes reap rewards many times their investment, while replacement level talent can easily be found, which mitigates most of the investment in the busted plays.

    Funny you mention Davis—last season, I was quite high on him. I thought he could lead the league in steals while being an extremely affordable investment. I also felt he didn’t have a totally solid hold on his job. So, I backed him up with Wily Taveras, hoping to not need him. (There’s always a market for 50 steals, even 1-category specialists, so I wasn’t worried about wasted value if they both worked out). Turned out Davis actually did his job, mostly, for me. At one point though I did have to add Crisp to hedge. I made a big surge in steals around the 2/3 mark of the season fueled by them. I think the two had something like a 10 combined steal weekend series against Boston, and that was turning point for me in that league.

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