The Ludic Fallacy

January 23rd, 2008  |  Published in Journal  |  2 Comments

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Dr Peter Taylor

Dr Peter Taylor is a Research Associate at the Future of Humanity Institute, Oxford University. In his article he questions game theory and therefore the very basis of most modern decision-making.

“There are more things in heaven and earth, Horatio,
Than are dreamt of in your philosophy.”

Hamlet rebukes Horatio with these words explaining that there is more to the world than just book-learned rationality. As we start the 21st Century, many thinkers are critically re-evaluating our claims to predictive knowledge. Maybe they do not go as far as invoking the ghosts that haunted Hamlet, nonetheless their arguments are upsetting the apple carts so carefully constructed and loaded in the several hundred years since the birth of modern science. Nassim Taleb is one such thinker, and in his book “The Black Swan” he has coined the phrase “The Ludic Fallacy” to represent the false belief that the metaphor of games of chance adequately describes uncertainties in the real world. So instead of real life being one huge trip to a casino, Taleb sees “Black Swans” flying in from the land of “Unknown Unknowns” to confound the odds. To avoid missing the plot as Horatio did in Hamlet, Taleb argues that we should remove our blinkers and accept that we live in a truly uncertain world. That way we will be better prepared to cope in a world where change, and with it further arrivals of “Black Swans”, is faster than ever before.

Ours is a confident and uniquely prosperous age, still full of inequalities to be sure, but one in which we feel we can be proud of our many advances; as creators of machines, makers of life, destroyers of worlds. Masters of the Universe, indeed. Are we too confident, too proud? That is what we shall argue using as our vehicle one of Taleb’s catchy ideas – the “Ludic Fallacy”. “Ludic” is from the Latin ludus, meaning games as in the Ludo we played as children, and “Fallacy” from the Latin fallacia meaning deceit, used nowadays to describe a false notion or argument. Taleb uses the term “Ludic Fallacy” as shorthand for what he sees as the false notion that games of chance are a sound way of describing uncertainty in real life. He comes to this conclusion from first-hand experiences of life in war-torn Lebanon as well as trading on Wall Street. His is not the conventional wisdom. Far from it, for, as Taleb rejoices in reminding us in his book, despite their serial failures at prediction, Nobel Prize-winning economists and Wall Street “quants” perpetuate the belief that our computerised models describe the world adequately. The facts seem to justify his scepticism. Not only that, but it is almost self-evidently true that the world does and will contain things we don’t understand or know. Taleb is by no means the first one to spot this problem with uncertainty. Many of the great thinkers about probability – Keynes, Shackle, Savage – have been there before him, but they mostly only stayed a short while speculating on the land of “Unknown Unknowns”, before moving quickly back to the safe ground of presuming we knew the “space of possibilities” and could apply probability theory to the problem.

Taleb’s central complaint is, then, that people presuppose a probabilistic model can represent reality. He denies this in two senses – that the “space of possibilities” can be known, and that the probabilities can be computed for each of these possibilities. It is more than just an academic argument: the practical ramifications are massive if we cannot be sure that our current models are right. Computerised models founded on probability form the basis for nearly all of our future predictions in fields from economics to climate change. If these are fundamentally flawed, then their conclusions need not hold up in reality. Indeed, we may be deluding ourselves utterly.

And it seems that Taleb may well be right. Indeed, you don’t need to read his book – worthwhile though that is with his many examples – to know this. Prediction after prediction has been wrong: financial markets continue to crash, the collapse of the Eastern Bloc was hardly foreseen, natural disasters keep surprising us. If there’s one thing we can be certain of, then it’s that we are uncertain. Yet in facing the 21st century, and as the progress of our lives become less certain through an increasingly complex world, we are placing ever greater trust in these predictive guidance systems to navigate our way through safely.

Many times we can truly say we know something. 2 and 2 do make 4. Our genetic code is made of DNA. The floor doesn’t collapse under our weight. Silver Birch won the Grand National in 2007. We can predict the passage of a spaceship to the outer planets. Our omniscience of the factual and the past, and in some cases the future, made more palpable through methods of sharing knowledge such as the Internet, strengthens our belief in thinking we know more than we really do, or indeed really can. We see ever more rapid advances in science and technology, such as in genetics, where only in the last month Craig Venter announced the automated creation of new artificial life. Parallel to this is growth in population, energy consumption, industrial production and economic activity. Every index of consumption, production or throughput that we look at shows exponential or supra-exponential growth. A growth that some (see References) see as heading towards a “Singularity” of infinite, and hence unachievable, size within this century. There has never been greater pace of change and no longer can we assume that what held last year may be true this year or the next. This is where the Ludic Fallacy really bites. When the world moved slowly, we could absorb changes by periodic re-sets of our thoughts. In Taleb’s terms this would be accepting Black Swans into our space of possibilities. But as the world speeds up, and worryingly as we deceive ourselves ever more about our abilities to predict changes and our responses to them, the Black Swans flock towards us, changing the possible outcomes on which we had based our assessments.

Is dealing with a real life problem an exercise in engineering played out as a game of chance? Or is it more like an exploration into the unknown where our actions are guided by our principles and values? The Ludic Fallacy indicates that with the pace of change in the 21st Century, our generation will be forced to take the second option.

Related: The Ellsberg Paradox, an example of decision-making and uncertainty.

References

Taleb, N. N. (2007) The Black Swan – The Impact of the Highly Improbable, Allen Lane
Sornette, D (2003) Why Stock Markets Crash Critical Events in Complex Financial Systems, Princeton
Kurzweil, R (2006) The Singularity is Near, Duckworth

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