3 ms·

If, at a casino, there is a 1% chance of going bust, then given N people attending the casino approx 1% will go bust, no matter the size of N. However, if a si

If, at a casino, there is a 1% chance of going bust, then given N people attending the casino approx 1% will go bust, no matter the size of N. However, if a single person goes to the casino N times, their odds of going bust approach 100% as N gets larger, because as soon as you go bust you can no longer keep playing. In any kind of iterated game, concern about tail risks is justified when the tail risk means you can no longer play the game. Social science and economic research that attempts to analyze the "rationality" of human behavior has thus far failed to take this logic into consideration, falsely portraying people as irrationally "loss-averse". This oversight in the research community is obvious to successful investors, insurers, etc. because the latter have personal investment in the outcome of these iterated situations that the former simply do not. [This is only my attempt at a summary of his argument, not a defense] [EDIT: spelling mistake]

sp527 9y ago
Loss aversion is a human bias that has fairly obvious evolutionary origins: fear is a stronger behavioral motivator than risk-seeking tendency because it confers a survival advantage (‘you only die once’).
- wjmao88 9y ago
  And ‘you only die once’ is the ultimate form of tail risk.
dragonwriter 9y ago
> Social science and economic research that attempts to analyze the "rationality" of human behavior has thus far failed to take this logic into consideration, falsely portraying people as irrationally "loss-averse". And here’s where he goes off the tracks: even a quick search of Google Scholar will show that it, at best, grossly overstates the case to say that social science (and particularly economics, and even more specifically the subfield of “decision theory” that he calls out) research “thus far” has neglected tail risks in addressing rationality (it's also incorrect to say that there is some kind of consensus result that people vary from rationality consistently in the direction of loss-aversity.)
- feulistia 9y ago
  As a research psychologist, I found his rant particularly upsetting because the very thing he's ranting about has been dealt with in the social sciences for years and years and years. One of the reasons this issue keeps recurring is because, taken to its logical conclusion, the "time" probability paradigm (to use his term, there are better terms that have been used) as applied to persons' behaviors, only applies to that single individual, which then leads to a sort of paradox. Although we might want to know the probabilities for Theodorus Ibn Warqa, this is in principle unknowable because there is only one Theodorus Ibn Warqa. So when he is ruined, you can in theory say nothing about Maximillian Samuel Warqa. At some point you have to invoke a counterfactual of sorts, and use a different person as a substitute, and this is why the "ensemble" probability model is invoked. Taleb is right that the consequences of a ruin event are different at the individual level, but so what? The cost estimate is different from the probability estimate. It's not like people don't understand this. Maybe in the strawman literature he reads, but not in what anyone else is thinking. What's more typical is a ruin event one way or a ruin event another. This is difficult stuff if you go beyond the toy gambler scenario he's dealing with. Just for one example: https://dash.harvard.edu/handle/1/11718181 https://dash.harvard.edu/handle/1/11718181 People wrestle with this not because they're idiots, but because it's more difficult than it seems once you really dive into it.

sp527 9y ago

Loss aversion is a human bias that has fairly obvious evolutionary origins: fear is a stronger behavioral motivator than risk-seeking tendency because it confers a survival advantage (‘you only die once’).

wjmao88 9y ago
And ‘you only die once’ is the ultimate form of tail risk.

dragonwriter 9y ago

> Social science and economic research that attempts to analyze the "rationality" of human behavior has thus far failed to take this logic into consideration, falsely portraying people as irrationally "loss-averse". And here’s where he goes off the tracks: even a quick search of Google Scholar will show that it, at best, grossly overstates the case to say that social science (and particularly economics, and even more specifically the subfield of “decision theory” that he calls out) research “thus far” has neglected tail risks in addressing rationality (it's also incorrect to say that there is some kind of consensus result that people vary from rationality consistently in the direction of loss-aversity.)

feulistia 9y ago
As a research psychologist, I found his rant particularly upsetting because the very thing he's ranting about has been dealt with in the social sciences for years and years and years. One of the reasons this issue keeps recurring is because, taken to its logical conclusion, the "time" probability paradigm (to use his term, there are better terms that have been used) as applied to persons' behaviors, only applies to that single individual, which then leads to a sort of paradox. Although we might want to know the probabilities for Theodorus Ibn Warqa, this is in principle unknowable because there is only one Theodorus Ibn Warqa. So when he is ruined, you can in theory say nothing about Maximillian Samuel Warqa. At some point you have to invoke a counterfactual of sorts, and use a different person as a substitute, and this is why the "ensemble" probability model is invoked. Taleb is right that the consequences of a ruin event are different at the individual level, but so what? The cost estimate is different from the probability estimate. It's not like people don't understand this. Maybe in the strawman literature he reads, but not in what anyone else is thinking. What's more typical is a ruin event one way or a ruin event another. This is difficult stuff if you go beyond the toy gambler scenario he's dealing with. Just for one example: https://dash.harvard.edu/handle/1/11718181 https://dash.harvard.edu/handle/1/11718181 People wrestle with this not because they're idiots, but because it's more difficult than it seems once you really dive into it.