Taleb's Concepts of Mediocristan and Extremistan
Taleb introduces these concepts with very helpful examples. In a section called "Travels Inside Mediocristan," Taleb writes:
"Let's play the following thought experiment. 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 (p.32)."
Then, in a section called "The Strange Country of Extremistan," Taleb writes "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?"
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 the bestselling author in the world, J.K. Rowling, the author of the Harry Potter books. Her book sales with vastly exceed the total of the other thousand authors.
So, then, the key point that Taleb is making is that in the country or "domain" of Extremistan, the cumulative magnitude of an outlier, such as Bill Gates, is on an entirely different scale than it is in the country of Mediocristan. "In Extremistan, inequalities are such that one single observation can disproportionately impact the aggregate, or the total."
Taleb continues: "So while weight, height, and calorie consumption are from Mediocristan, wealth is not. Almost all social matters are from Extremistan. Another way to say it is that social quantities are informational, not physical: you cannot touch them (p.33)."
A key implication of this distinction is that in Mediocristan, the overall impact of an "outlier" is not that significant relative to the total, but in Extremistan, that impact is enormous. Consequently, if we are in the domain of Extremistan, and we use analytical tools from Mediocristan for prediction, risk management, etc., we can face enormous surprises. Some of these surprises may be positive and some may be negative, but their impact will likely exceed what we are prepared for.
Taleb's central critique of "The Bell Curve, That Great Intellectual Fraud," (the title of Chapter 15) is that it is often applied to areas that are subject to the dynamics of Extremistan, even though it only accurately describes Mediocristan.