Mediocristan and Extremistan: The Two Categories of Random Events

Only a couple of weeks back, all “experts” were in strong denial of the effects, severity, and speed of coronavirus. “It is no more dangerous than winter flu,” they all announced. Even after its recent escalation “doctors” and “analysts” are still not agreeing that we need to worry. The mortality rate is very low, nothing to worry, they say. You have a bigger risk of you drowning in your bathtub than being killed by coronavirus, they claim. But what they don’t understand is that not all risks are equal.

We misappropriate the correlation between the death of one person for some reason and that of another for a different reason.

Never compare a multiplicative, systemic, and fat-tailed risk to a non-multiplicative, idiosyncratic, and thin-tailed one.

— Nassim Nicholas Taleb, Skin in The Game

What we need to be concerned is with multiplicative processes with systemic effects, i.e., things that can affect more than one person should they happen, for example, a virus. On top of that, unlike the coronavirus, your bathtub isn’t trying to kill you.

Taleb introduces two categories in which random events (such as being randomly infected by a virus or getting randomly hit by a car) fall: Mediocristan (thin-tailed events) and Extremistan (fat-tailed events).

Mediocristan is thin-tailed and affects the individual without correlation to the collective. Extremistan, by definition, affects many people. Hence Extremistan has a systemic effect that Mediocristan doesn’t. Multiplicative risks—such as epidemics—are always from Extremistan. They may not be lethal (say, the flu), but they remain from Extremistan.

In The Black Swan, Taleb illustrates the two categories with lucid examples.

Mediocristan: “Assume you round up a thousand people randomly selected from the general and have them stand next to each other in a stadium…. Imagine the heaviest person you can think of and add him to that sample. Assuming he weighs three times the average, between four hundred and five hundred pounds, he will rarely represent more than a very small fraction of the weight of the entire population (in this case, about a half a percent.) … You can get even more aggressive. If you picked the heaviest biologically possible human on the planet (who yet can still be called a human), he would not represent more than, say, 0.6 percent of the total, a very negligible increase.”

Extremistan: “Consider by comparison the net worth of the thousand people you lined up in the stadium. Add to them the wealthiest person to be found on the planet—say Bill Gates, the founder of Microsoft. Assume his net worth to be close to $80 billion—with the total capital of the others around a few million. How much of the total wealth would he represent? 99.9 percent? ... For someone’s weight to represent such a share, he would need to weigh fifty million pounds!”

Taleb provides another example of Extremistan: book publishing. Suppose one randomly chooses a thousand authors, and adds up the total number of books they have sold. Now, add one of the bestselling authors of the world, say J.K. Rowling, the author of the Harry Potter series. Her book sales would vastly exceed the total of the other thousand authors.

The key point is that in the domain of Extremistan, the cumulative magnitude of an outlier, such as Bill Gates, is on an entirely different scale than it is in Mediocristan. “In Extremistan, inequalities are such that one single observation can disproportionately impact the aggregate, or the total.”

So while weight, height, and calorie consumption are from Mediocristan, wealth and group of viruses (such as coronavirus) are not. Also, Mediocristan risks are subjected to the Chernoff Bound.

Taleb elucidates the Chernoff Bound as follows:

The probability that the number of people who drown in their bathtubs in the United States doubles next year—assuming no changes in population or bathtubs—is one per several trillions lifetimes of the universe. This cannot be said about the doubling of the number of people killed by terrorism [or a deadly virus] over the same period.

In conclusion, journalists and analysts are trained with tools built for Mediocristan. They simply cannot comprehend that it doesn’t make sense to compare deaths from car accidents with that of a deadly virus.

Therefore, according to Taleb, it is perfectly rational to be paranoid about coronavirus and other such events with systemic effects (such as terrorists polluting the water supply) even if all the expert analysts are trying to convince you otherwise. Consequently, it is perfectly rational to wear a mask even if the mortality rate isn’t alarming. It doesn’t cost you much even you’re wrong, but all it takes is for your “refined paranoia” to be right once, thereby causing a Black Swan, and it saves your life.