casino coffers.
Conclusion: A back-of-the-envelope calculation shows that the dollar
value of these Black Swans, the off-model hits and potential hits I've just
outlined, swamp the on-model risks by a factor of close to 1,000 to 1. The
casino spent hundreds of millions of dollars on gambling theory and hightech
surveillance while the bulk of their risks came from outside their
models.
All this, and yet the rest of the world still learns about uncertainty and
probability from gambling examples.
THE LUDIC FALLACY, OR T H E U N C E R T A I N T Y OF T H E NERD 1 31
WRAPPING UP PART ONE
The Cosmetic Rises to the Surface
All of the topics in Part One are actually only one. You can think about a
subject for a long time, to the point of being possessed by it. Somehow you
have a lot of ideas, but they do not seem explicitly connected; the logic
linking them remains concealed from you. Yet you know deep down that
all these are the same idea. Meanwhile, what Nietzsche calls bildungsphilisters,
* or learned philistines, blue collars of the thinking business, tell
you that you are spread out between fields; you reply that these disciplines
are artificial and arbitrary, to no avail. Then you tell them that you are a
limousine driver, and they leave you alone—you feel better because you do
not identify with them, and thus you no longer need to be amputated to fit
into the Procrustean bed of the disciplines. Finally, a little push and you
see that it was all one single problem.
One evening I found myself at a cocktail party in Munich at the apartment
of a former art historian who had more art books in its library than
I thought existed. I stood drinking excellent Riesling in the spontaneously
formed English-speaking corner of the apartment, in the hope of getting to
a state where I would be able to start speaking my brand of fake German.
One of the most insightful thinkers I know, the computer entrepreneur
Yossi Vardi, prompted me to summarize "my idea" while standing on one
leg. It was not too convenient to stand on one leg after a few glasses of perfumed
Riesling, so I failed in my improvisation. The next day I experienced
staircase wit. I jumped out of bed with the following idea: the
cosmetic and the Platonic rise naturally to the surface. This is a simple extension
of the problem of knowledge. It is simply that one side of Eco's library,
the one we never see, has the property of being ignored. This is also
the problem of silent evidence. It is why we do not see Black Swans:
we worry about those that happened, not those that may happen but did
not. It is why we Platonify, liking known schémas and well-organized
knowledge—to the point of blindness to reality. It is why we fall for the
problem of induction, why we confirm. It is why those who "study" and
fare well in school have a tendency to be suckers for the ludic fallacy.
* What Nietzsche means by this term are the dogma-prone newspaper readers and
opera lovers who have cosmetic exposure to culture and shallow depth. I extend
the term here to the philistine hiding in academia who lacks in erudition out of
lack of curiosity and is closely centered on his ideas.
1 3 2 UMBERTO E C O ' S A N T I U B R A RY
And it is why we have Black Swans and never learn from their occurrence,
because the ones that did not happen were too abstract. Thanks to
Vardi, I now belonged to the club of single-idea people.
We love the tangible, the confirmation, the palpable, the real, the
visible, the concrete, the known, the seen, the vivid, th'e visual, the
social, the embedded, the emotionally laden, the salient, the stereotypical,
the moving, the theatrical, the romanced, the cosmetic, the official, the
scholarly-sounding verbiage (b******t), the pompous Gaussian economist,
the mathematicized crap, the pomp, the Académie Fran?aise, Har-
.vard Business School, the Nobel Prize, dark business suits with white
shirts and Ferragamo ties, the moving discourse, and the lurid. Most of all
we favor the narrated.
Alas, we are not manufactured, in our current edition of the human
race, to understand abstract matters—we need context. Randomness and
uncertainty are abstractions. We respect what has happened, ignoring
what could have happened. In other words, we are naturally shallow and
superficial—and we do not know it. This is not a psychological problem;
it comes from the main property of information. The dark side of the
moon is harder to see; beaming light on it costs energy. In the same way,
beaming light on the unseen is costly in both computational and mental effort.
Distance from Primates
There have been in history many distinctions between higher and lower
forms of humans. For the Greeks, there were the Greeks and the barbarians,
those people of the north who uttered amorphous sentences similar,
to the Attic ear, to an animal's shrieks. For the English, a higher form of
life was the gentleman's—contrary to today's definition, a gentleman's life
was practiced through idleness and a code of behavior that included,
along with a set of manners, the avoidance of work beyond the necessities
of comfortable subsistence. For New Yorkers, there are those with a Manhattan
zip code and those with such a thing as a Brooklyn or, worse,
Queens address. For the earlier Nietzsche, there was the Apollonian compared
to the Dionysian; for the better-known Nietzsche, there was the
Ubermensch, something his readers interpret however it suits them. For a
modern stoic, a higher individual subscribes to a dignified system of virtue
that determines elegance in one's behavior and the ability to separate results
from efforts. All of these distinctions aim at lengthening the distance
THE LUDIC FALLACY, OR T H E U N C E R T A I N T Y OF T H E N E R D 1 33
between us and our relatives among other primates. (I keep insisting that,
when it comes to decision making, the distance between us and these hairy
cousins is far shorter than we think.)
I propose that if you want a simple step to a higher form of life, as distant
from the animal as you can get, then you may have to denarrate, that
is, shut down the television set, minimize time spent reading newspapers,
ignore the blogs. Train your reasoning abilities to control your decisions;
nudge System 1 (the heuristic or experiential system) out of the important
ones. Train yourself to spot the difference between the sensational and the
empirical. This insulation from the toxicity of the world will have an additional
benefit: it will improve your well-being. Also, bear in mind how
shallow we are with probability, the mother of all abstract notions. You
do not have to do much more in order to gain a deeper understanding of
things around you. Above all, learn to avoid "tunneling."
A bridge here to what is to come. The Platonic blindness I illustrated with
the casino story has another manifestation: focusing. To be able to focus
is a great virtue if you are a watch repairman, a brain surgeon, or a chess
player. But the last thing you need to do when you deal with uncertainty
is to "focus" (you should tell uncertainty to focus, not us). This "focus"
makes you a sucker; it translates into prediction problems, as we will see
in the next section. Prediction, not narration, is the real test of our understanding
of the world.
hen I ask people to name three recently implemented technologies
that most impact our world today, they usually propose the
computer, the Internet, and the laser. All three were unplanned,
unpredicted, and unappreciated upon their discovery, and remained unappreciated
well after their initial use. They were consequential. They were
Black Swans. Of course, we have this retrospective illusion of their partaking
in some master plan. You can create your own lists with similar results,
whether you use political events, wars, or intellectual epidemics.
You would expect our record of prediction to be horrible: the world is
far, far more complicated than we think, which is not a problem, except
when most of us don't know it. We tend to "tunnel" while looking into
the future, making it business as usual, Black Swan-free, when in fact
there is nothing usual about the future. It is not a Platonic category!
We have seen how good we are at narrating backward, at inventing
stories that convince us that we understand the past. For many people,
knowledge has the remarkable power of producing confidence instead of
measurable aptitude. Another problem: the focus on the (inconsequential)
regular, the Platonification that makes the forecasting "inside the box."
I find it scandalous that in spite of the empirical record we continue to
project into the future as if we were good at it, using tools and methods
that exclude rare events. Prediction is firmly institutionalized in our world.
We are suckers for those who help us navigate uncertainty, whether the
1 3 6 WE J U S T C A N ' T PREDICT
* Note that these sayings attributed to Yogi Berra might be apocryphal—it was the
physicist Niels Bohr who came up with the first one, and plenty of others came up
with the second. These sayings remain, however, quintessential Berraisms.
fortune-teller or the "well-published" (dull) academics or civil servants
using phony mathematics.
From Yogi Berra to Henri Poincaré
The great baseball coach Yogi Berra has a saying, "It is tough to make predictions,
especially about the future." While he did not produce the writings
that would allow him to be considered a philosopher, in spite of his
wisdom and intellectual abilities, Berra can claim to know something
about randomness. He was a practitioner of uncertainty, and, as a baseball
player and coach, regularly faced random outcomes, and had to face
their results deep into his bones.
In fact, Yogi Berra is not the only thinker who thought about how
much of the future lies beyond our abilities. Many less popular, less pithy,
but not less competent thinkers than he have examined our inherent limitations
in this regard, from the philosophers Jacques Hadamard and
Henri Poincaré (commonly described as mathematicians), to the philosopher
Friedrich von Hayek (commonly described, alas, as an economist), to
the philosopher Karl Popper (commonly known as a philosopher). We can
safely call this the Berra-Hadamard-Poincaré-Hayek-Popper conjecture,
which puts structural, built-in limits to the enterprise of predicting.
"The future ain't what it used to be," Berra later said.* He seems to
have been right: the gains in our ability to model (and predict) the world
may be dwarfed by the increases in its complexity—implying a greater and
greater role for the unpredicted. The larger the role of the Black Swan, the
harder it will be for us to predict. Sorry.
Before going into the limits of prediction, we will discuss our track
record in forecasting and the relation between gains in knowledge and the
offsetting gains in confidence.
Chapter Ten
THE SCANDAL OF PREDICTION
Welcome to Sydney—How many lovers did she have?—How to be an economist,
wear a nice suit, and make friends—Not right, just "almost" right-
Shallow rivers can have deep spots
One March evening, a few men and women were standing on the esplanade
overlooking the bay outside the Sydney Opera House. It was close
to the end of the summer in Sydney, but the men were wearing jackets despite
the warm weather. The women were more thermally comfortable
than the men, but they had to suffer the impaired mobility of high heels.
They all had come to pay the price of sophistication. Soon they would
listen for several hours to a collection of oversize men and women singing
endlessly in Russian. Many of the opera-bound people looked like they
worked for the local office of J . R Morgan, or some other financial institution
where employees experience differential wealth from the rest of the
local population, with concomitant pressures on them to live by a sophisticated
script (wine and opera). But I was not there to take a peek at the
neosophisticates. I had come to look at the Sydney Opera House, a building
that adorns every Australian tourist brochure. Indeed, it is striking,
though it looks like the sort of building architects create in order to impress
other architects.
That evening walk in the very pleasant part of Sydney called the Rocks
1 3 8 WE J U S T C A N ' T P R E D I CT
was a pilgrimage. While Australians were under the illusion that they had
built a monument to distinguish their skyline, what they had really done
was to construct a monument to our failure to predict, to plan, and to
come to grips with our unknowledge of the future—our systematic underestimation
of what the future has in store.
The Australians had actually built a symbol of the epistemic arrogance
of the human race. The story is as follows. The Sydney Opera House was
supposed to open in early 1963 at a cost of AU$ 7 million. It finally
opened its doors more than ten years later, and, although it was a less ambitious
version than initially envisioned, it ended up costing around AU$
104 million. While there are far worse cases of planning failures (namely
the Soviet Union), or failures to forecast (all important historical events),
the Sydney Opera House provides an aesthetic (at least in principle) illustration
of the difficulties. This opera-house story is the mildest of all the
distortions we will discuss in this section (it was only money, and it did not
cause the spilling of innocent blood). But it is nevertheless emblematic.
This chapter has two topics. First, we are demonstrably arrogant about
what we think we know. We certainly know a lot, but we have a built-in
tendency to think that we know a little bit more than we actually do,
enough of that little bit to occasionally get into serious trouble. We shall
see how you can verify, even measure, such arrogance in your own living
room.
Second, we will look at the implications of this arrogance for all the activities
involving prediction.
Why on earth do we predict so much? Worse, even, and more interesting:
