NSA and the Fat Tail – RantAWeek

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NSA and the Fat Tail

Posted by Tyler Miksanek on October 27, 2013 at 1:00 pm

Sometimes, the most intriguing examinations of current events stem from an analysis that eschews the political mindset and replaces it with a different style of thinking.  RantAWeek adopted a mathematical tone for last year’s analysis on the connection between Olympic medals and GDP.  Similarly, a use of mathematical concepts can benefit a discussion concerning the NSA’s spying on the communications of world leaders.

The mathematical concept in question is the fat tail.  A fat tail describes a statistical result far from the expected value that nonetheless has a reasonable chance of occurring.  Mathematicians often like to simplify calculations by ignoring outliers, but the whole point of the fat tail is that these outliers really matter, and ignoring them is dangerous.  Take the financial markets as an example.  Classical views of the financial markets held that daily changes in large stock indices like the Dow Jones followed a normal distribution, which is characterized by ‘skinny tails’ that make large changes a statistical improbability.  However, since records began for the Dow Jones in 1896, the index has experienced more than 38 days with a daily price change greater than 7%.  Assuming a normal distribution, large price changes occurring with that frequency is almost statistically impossible.  Financial traders trusting in the assumed impossibility of rapid price swings would have seen their theory, and their market holdings, disintegrate before their eyes on Black Monday in 1987, when the Dow Jones dropped 22.6%.  The fat tail in the financial market had manifested itself in a nasty way, wiping billions of dollars off balance sheets across not only the country but also the world.

So how does this all connect to the NSA scandal?  The NSA’s strategy in spying on the communications of world leaders was to gain an information advantage.  In other words, there was an expected benefit.  The U.S. government was able receive some additional intelligence on the thoughts of world leaders through the implementation of this spying network.  On the other hand, and equally important to note, is that on a macro scale, this benefit was relatively small.  After all, President Obama summed up the power of diplomacy in garnering information by saying,  “…if I want to know what [German] Chancellor [Angela] Merkel is thinking, I’ll call Chancellor Merkel.”  Even without the massive spying program, the U.S. government would have been able to acquire most necessary information through less secretive strategies.

Obama’s remarks seem rather hollow in retrospect, as Angela Merkel has now accused the United States of spying on her internal communications to gain information.  However, the extent of the alleged spying extends well beyond Germany.  France, Argentina and Mexico are all accusing the U.S. of spying on their leaders.  All the news begs the question, why did the NSA pursue such a extreme spying program if some of the benefits were limited to extra information about countries that are already our allies?

The answer- they forgot about the fat tail.  The risk/reward scenario played out well when it was assumed the spying program would be safe from international criticism because it could never be reported by the media.  But in doing so they ignored the possible outliers in the fat tail.  This mistake became clear when Edward Snowden’s leaks began, and the unexpected result of international news coverage greatly changed the situation.  The NSA would never have embarked on the program if they knew the damage Snowden’s leaks would cause.  But that’s what makes the fat tail so difficult to take into account, it is by definition unexpected.

Even though a fat tail event is not expected to occur, the challenge lies in planning for them.  That way, embarrassing situations like the one the NSA currently finds itself in can be avoided.  Luckily for the United States as a whole, most countries are simply accepting the NSA spying as an inevitable consequence of the information age.  While there has been some backlash, it has not been nearly as devastating as it could be.

Still, the NSA got lucky with the response.  Not all fat tail scenarios end as well.  And that’s why when any policymaker makes an important decision, they should always consider the fat tail.

Filed under Domestic, Technology
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