Fat Tony and Dr. John; this is probably the most vexing problem I know
about the connections between two varieties of knowledge, what we dub
Platonic and a-Platonic. Simply, people like Dr. John can cause Black
Swans outside Mediocristan—their minds are closed. While the problem is
very general, one of its nastiest illusions is what I call the ludic fallacy—
the attributes of the uncertainty we face in real life have little connection
to the sterilized ones we encounter in exams and games.
So I close Part One with the following story.
LUNCH AT LAKE COMO
One spring day a few years ago, I was surprised to receive an invitation
from a think tank sponsored by the United States Defense Department to
a brainstorming session on risk that was to take place in Las Vegas the following
fall. The person who invited me announced on the phone, "We'll
have lunch on a terrace overlooking Lake Como," which put me in a state
of severe distress. Las Vegas (along with its sibling the emirate of Dubai)
is perhaps one place I'd never wish to visit before I die. Lunch at "fake
Como" would be torture. But I'm glad I went.
The think tank had gathered a nonpolitical collection of people they
called doers and scholars (and practitioners like me who do not accept the
1 2 6 UMBERTO E C O ' S A N T I U B R A RY
distinction) involved in uncertainty in a variety of disciplines. And they
symbolically picked a major casino as a venue.
The symposium was a closed-doors, synod-style assembly of people
who would never have mixed otherwise. My first surprise was to discover
that the military people there thought, behaved, and acted like
philosophers—far more so than the philosophers we will see splitting
hairs in their weekly colloquium in Part Three. They thought out of the
box, like traders, except much better and without fear of introspection.
An assistant secretary of defense was among us, but had I not known his
profession I would have thought he was a practitioner of skeptical empiricism.
Even an engineering investigator who had examined the cause of a
space shuttle explosion was thoughtful and open-minded. I came out of
the meeting realizing that only military people deal with randomness with
genuine, introspective intellectual honesty—unlike academics and corporate
executives using other people's money. This does not show in war
movies, where they are usually portrayed as war-hungry autocrats. The
people in front of me were not the people who initiate wars. Indeed, for
many, the successful defense policy is the one that manages to eliminate
potential dangers without war, such as the strategy of bankrupting the
Russians through the escalation in defense spending. When I expressed my
amazement to Laurence, another finance person who was sitting next to
me, he told me that the military collected more genuine intellects and risk
thinkers than most if not all other professions. Defense people wanted to
understand the epistemology of risk.
In the group was a gentleman who ran a group of professional gamblers
and who was banned from most casinos. He had come to share his
wisdom with us. He sat not far from a stuffy professor of political science,
dry like a bone and, as is characteristic of "big names," careful about his
reputation, who said nothing out of the box, and who did not smile once.
During the sessions, I tried to imagine the hotshot with a rat dropped
down his back, putting him in a state of wriggling panic. He was perhaps
good at writing Platonic models of something called game theory, but
when Laurence and I went after him on his improper use of financial
metaphors, he lost all his arrogance.
Now, when you think of the major risks casinos face, gambling situations
come to mind. In a casino, one would think, the risks include lucky
gamblers blowing up the house with a series of large wins and cheaters
taking away money through devious methods. It is not just the general
public that would believe so, but the casino management as well. ConseTHE
LUDIC FALLACY, OR T H E UNCERTAINTY OF T H E NERD 1 27
quently, the casino had a high-tech surveillance system tracking cheaters,
card counters, and other people who try to derive an advantage over them.
Each of the participants gave his presentation and listened to those of
the others. I came to discuss Black Swans, and I intended to tell them that
the only thing I know is that we know precious little about them, but that
it was their property to sneak up on us, and that attempts at Platonifying
them led to additional misunderstandings. Military people can understand
such things, and the idea became recently prevalent in military circles with
the expression unknown unknown (as opposed to the known unknown).
But I had prepared my talk (on five restaurant napkins, some stained) and
was ready to discuss a new phrase I coined for the occasion: the ludic fallacy.
I intended to tell them that I should not be speaking at a casino because
it had nothing to do with uncertainty.
The Uncertainty of the Nerd
What is the ludic fallacy? Ludic comes from ludus, Latin for games.
I was hoping that the representatives of the casino would speak before
me so I could start harassing them by showing (politely) that a casino was
precisely the venue not to pick for such a discussion, since the class of risks
casinos encounter are very insignificant outside of the building, and their
study not readily transferable. My idea is that gambling was sterilized and
domesticated uncertainty. In the casino you know the rules, you can calculate
the odds, and the type of uncertainty we encounter there, we will
see later, is mild, belonging to Mediocristan. My prepared statement was
this: "The casino is the only human venture I know where the probabilities
are known, Gaussian (i.e., bell-curve), and almost computable." You
cannot expect the casino to pay out a million times your bet, or to change
the rules abruptly on you during the game—there are never days in which
"36 black" is designed to pop up 95 percent of the time.*
In real life you do not know the odds; you need to discover them, and
the sources of uncertainty are not defined. Economists, who do not con-
* My colleague Mark Spitznagel found a martial version of the ludic fallacy: organized
competitive fighting trains the athlete to focus on the game and, in order not
to dissipate his concentration, to ignore the possibility of what is not specifically allowed
by the rules, such as kicks to the groin, a surprise knife, et cetera. So those
who win the gold medal might be precisely those who will be most vulnerable in
real life. Likewise, you see people with huge muscles (in black T-shirts) who can
impress you in the artificial environment of the gym but are unable to lift a stone.
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sider what was discovered by noneconomists worthwhile, draw an artificial
distinction between Knightian risks (which you can compute) and
Knightian uncertainty (which you cannot compute), after one Frank
Knight, who rediscovered the notion of unkown uncertainty and did a lot
of thinking but perhaps never took risks, or perhaps lived in the vicinity of
a casino. Had he taken economic or financial risks he would have realized
that these "computable" risks are largely absent from real life! They are
laboratory contraptions!
Yet we automatically, spontaneously associate chance with these Platonified
games. I find it infuriating to listen to people who, upon being informed
that I specialize in problems of chance, immediately shower me
with references to dice. Two illustrators for a paperback edition of one of
my books spontaneously and independently added a die to the cover and
below every chapter, throwing me into a state of rage. The editor, familiar
with my thinking, warned them to "avoid the ludic fallacy," as if it were a
well-known intellectual violation. Amusingly, they both reacted with an
"Ah, sorry, we didn't know."
Those who spend too much time with their noses glued to maps will
tend to mistake the map for the territory. Go buy a recent history of probability
and probabilistic thinking; you will be showered with names of alleged
"probability thinkers" who all base their ideas on these sterilized
constructs. I recently looked at what college students are taught under the
subject of chance and came out horrified; they were brainwashed with this
ludic fallacy and the outlandish bell curve. The same is true of people
doing PhD's in the field of probability theory. I'm reminded of a recent
book by a thoughtful mathematician, Amir Aczel, called Chance. Excellent
book perhaps, but like all other modern books it is grounded in the
ludic fallacy. Furthermore, assuming chance has anything to do with
mathematics, what little mathematization we can do in the real world
does not assume the mild randomness represented by the bell curve, but
rather scalable wild randomness. What can be mathematized is usually
not Gaussian, but Mandelbrotian.
Now, go read any of the classical thinkers who had something practical
to say about the subject of chance, such as Cicero, and you find something
different: a notion of probability that remains fuzzy throughout, as
it needs to be, since such fuzziness is the very nature of uncertainty. Probability
is a liberal art; it is a child of skepticism, not a tool for people with
calculators on their belts to satisfy their desire to produce fancy calculations
and certainties. Before Western thinking drowned in its "scientific"
THE LUDIC FALLACY, OR T H E UNCERTAINTY OF T H E NERD 1 29
mentality, what is arrogantly called the Enlightenment, people prompted
their brain to think—not compute. In a beautiful treatise now vanished
from our consciousness, Dissertation on the Search for Truth, published in
1673, the polemist Simon Foucher exposed our psychological predilection
for certainties. He teaches us the art of doubting, how to position ourselves
between doubting and believing. He writes: "One needs to exit
doubt in order to produce science—but few people heed the importance of
not exiting from it prematurely.... It is a fact that one usually exits doubt
without realizing it." He warns us further: "We are dogma-prone from
our mother's wombs."
By the confirmation error discussed in Chapter 5, we use the example
of games, which probability theory was successful at tracking, and claim
that this is a general case. Furthermore, just as we tend to underestimate
the role of luck in life in general, we tend to overestimate it in games of
chance.
"This building is inside the Platonic fold; life stands outside of it," I
wanted to shout.
Gambling with the Wrong Dice
I was in for quite a surprise when I learned that the building too was outside
the Platonic fold.
The casino's risk management, aside from setting its gambling policies,
was geared toward reducing the losses resulting from cheaters. One does
not need heavy training in probability theory to understand that the
casino was sufficiently diversified across the different tables to not have to
worry about taking a hit from an extremely lucky gambler (the diversification
argument that leads to the bell curve, as we will see in Chapter 15).
All they had to do was control the "whales," the high rollers flown in at
the casino's expense from Manila or Hong Kong; whales can swing several
million dollars in a gambling bout. Absent cheating, the performance of
most individual gamblers would be the equivalent of a drop in the bucket,
making the aggregate very stable.
I promised not to discuss any of the details of the casino's sophisticated
surveillance system; all I am allowed to say is that I felt transported into a
James Bond movie—I wondered if the casino was an imitation of the
movies or if it was the other way around. Yet, in spite of such sophistication,
their risks had nothing to do with what can be anticipated knowing
that the business is a casino. For it turned out that the four largest losses
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incurred or narrowly avoided by the casino fell completely outside their
sophisticated models.
First, they lost around $100 million when an irreplaceable performer
in their main show was maimed by a tiger (the show, Siegfried and Roy,
had been a major Las Vegas attraction). The tiger had been reared by the
performer and even slept in his bedroom; until then, nobody suspected
that the powerful animal would turn against its master. In scenario analyses,
the casino had even conceived of the animal jumping into the crowd,
but nobody came near to the idea of insuring against what happened.
Second, a disgruntled contractor was hurt during the construction of a
hotel annex. He was so offended by the settlement offered him that he
made an attempt to dynamite the casino. His plan was to put explosives
around the pillars in the basement. The attempt was, of course, thwarted
(otherwise, to use the arguments in Chapter 8, we would not have been
there), but I shivered at the thought of possibly sitting above a pile of
dynamite.
Third, casinos must file a special form with the Internal Revenue Service
documenting a gambler's profit if it exceeds a given amount. The employee
who was supposed to mail the forms hid them, instead, for
completely unexplainable reasons, in boxes under his desk. This went on
for years without anyone noticing that something was wrong. The employee's
refraining from sending the documents was truly impossible to
predict. Tax violations (and negligence) being serious offences, the casino
faced the near loss of a gambling license or the onerous financial costs of
a suspension. Clearly they ended up paying a monstrous fine (an undisclosed
amount), which was the luckiest way out of the problem.
Fourth, there was a spate of other dangerous scenes, such as the
kidnapping of the casino owner's daughter, which caused him, in order to
secure cash for the ransom, to violate gambling laws by dipping into the
