In a nutshell, Dance with Chance is all about knowing what you can and cannot predict and, therefore, what you can and cannot control.
Think about it. Every day human beings make decisions. Some are important: should you invest your life savings in the stock market? Others are trivial: should you take an umbrella today? But in both these cases you have no control. The stock market will go up or down, it will rain or it won’t”¦ and there’s nothing you can do about it.
The problem comes when people seek to gain control by making predictions. By consulting an investment expert or a weather forecast, they think they can control the value of their investments or avoid getting wet.
But this is just an illusion. An illusion that psychologists call “˜the illusion of control’.
In many areas of life – the stock market and the weather are just two examples – accurate prediction just isn’t possible. There is always uncertainty about the future in most areas of our lives. Throw in some emotions, such as greed, fear and hope, and human beings’ predictions get even less accurate. So what are we to do?
Fortunately, Dance with Chance comes up with plenty of positive suggestions. Most importantly, it uncovers a “˜paradox of control’ that’s the antidote to the “˜illusion of control’. By knowing when to give up control, we can actually gain more control over many aspects of our lives than we had in the first place.
From EconTalk.org (Includes full transcript).
Direct link to mp3 interview
Nassim Taleb talks about the financial crisis, how we misunderstand rare events, the fragility of the banking system, the moral hazard of government bailouts, the unprecedented nature of really, really bad events, the contribution of human psychology to misinterpreting probability and the dangers of hubris. The conversation closes with a discussion of religion and probability.
[Update 9/8/2010 A paper Danny co-authored, “Income’s Influence on Happiness” has just been released.]
… the bat costs $1 more than the ball. How much does the ball cost? Daniel Kahneman KNOWS that the first thought that entered your head was $.10–even if you’re a Computer Science major at MIT. But that’s the wrong answer.
Daniel Gilbert’s “Stumbling On Happiness” led me to Nicholas Taleb’s “Fooled By Randomness“. Both books cite the work of Danny Kahneman. I blogged a bit about him here. I have been rummaging around the internet looking for whatever I can find on Danny and his work and have come up with some excellent content. But let me give you a taste of the sort of fascinating facts you’ll hear in Danny’s lectures first.
In a study Danny (I don’t know him personally but after listening to all these lectures, I feel as though I do. He could no doubt name the cognitive bias this suggests) mentions in one of his talks, people are asked how much pleasure they derive from their car. They are then asked enough questions about the car to determine its blue book (resale) value. It turns out that there IS a correlation between the amount of pleasure the subject reported and the dollar value of the car. i.e. Yes, that late model BMW in the garage DOES give you more pleasure than my 20 year old Honda would. BUT! They then go on to ask the subject if they find their commute to work pleasurable, and guess what?– nobody does!. It turns out that the ONLY time people derive pleasure from their car is when they are THINKING about it.
With Amos Tversky (Kahneman’s longtime research partner, with whom he would have shared the Nobel prize had Tversky not died in 1996) and others, Kahneman established a cognitive basis for common human errors using heuristics and biases (Kahneman & Tversky, 1973, Kahneman, Slovic & Tversky, 1982), and developed Prospect theory (Kahneman & Tversky, 1979). He was awarded the 2002 the Nobel Prize in Economics for his work in Prospect theory.
anchoring and adjustment -describes the common human tendency to rely too heavily, or “anchor,” on one trait or piece of information when making decisions.
availability heuristic -where people base their prediction of the frequency of an event or the proportion within a population based on how easily an example can be brought to mind.
conjunction fallacy -when it is assumed that specific conditions are more probable than a general condition that contains the specific condition. (i.e. You think you’re MORE likely to die in an air disaster brought on by a terrorist event, than you are to die in ANY kind of air disaster).
framing (economics) -reversals of preference when the same problem is presented in different ways. (10% fat vs. 90% fat-free!)
loss aversion -the tendency for people strongly to prefer avoiding losses than acquiring gains. (Why New Yorkers stay in New York for the culture, and Angelenos stay in LA for the weather!!).
peak-end rule – we judge our past experiences almost entirely on how they were at their peak (pleasant or unpleasant) and how they ended.
prospect theory -how people make choices in situations where they have to decide between alternatives that involve risk.
reference class forecasting -predicts the outcome of a planned action based on actual outcomes in a reference class of similar actions.
simulation heuristic – people determine the likelihood of an event based on how easy it is to picture mentally. (Why we buy lottery tickets.)
status quo bias -in other words, people like things to stay relatively the same.
Media – Most of these lectures have a fairly long-winded intro. Skip ahead if you don’t need the background info.
If you want to be a dentist, it’s rational to assume that if you go to school, get your degree, and set up a dental practice, you will be able to attain a comfortable standard of living. You may be able to project your probable income range with some degree of accuracy.
But if you want to be a rock star, it’s irrational to assume that if you go to rock school, get good at guitar, and start a band, you will become rich and famous.
According to Nassim Nicholas Taleb’s way of thinking, the dentist and the wannabe rock star fall into two distinct categories with drastically different risk characteristics. The dentist falls into the domain he calls ‘Mediocristan’, and the rock star, ‘Extremistan’. Extremistan is dominated by ‘fat tails’, or rare but profoundly significant events. Problems arise when we think we’re operating in Mediocristan but in fact are operating in Extremistan.”Karl Marx wanted to turn knowledge into action, what I want to do is turn our lack of knowledge into action”. Taleb suggests that by becoming aware of our own ignorance, we can stop taking action where our action is irrational.
I’m on my second reading of Fooled By Randomness and am very much looking forward to The Black Swan. In the meantime I’ve been hunting down all the audio I can find on Taleb because his talks are extremely interesting and he is a very engaging speaker. He has a bit of attitude when addressing an audience, in part no doubt because much of what he has to say offends of lot of people, especially anyone whose expertise is related to forecasting. He has obvious disdain for financial forecasters in particular, probably because he sees the impact these ‘guys in suits riding around in limousines’ have on the lives of ‘people taking the subway to work everyday’ (i.e.pensions).
What Taleb has to say has resonated with me at a very deep level. Much of the facts and studies he brings to light confirm my long lingering suspicion that something about the way the world sees itself is profoundly inaccurate and weirdly irrational.
I’ve listened to each of these talks at least a half dozen times and every time I do I take away another profound insight. Be sure to check out Taleb’s Home Page as well. Taleb on EconTalk.org April 30, 2007 LongNow Lecture-The Future Has Always Been Crazier Than We Thought Feb. 4, 2007
And from PopTech 2005:
Nassim Nicholas Taleb is not afraid to say “I don’t know.” In fact, he’s proud of his ignorance. A mathematician, philosopher and hedge-fund manager all in one iconoclastic package, Taleb demonstrates the wisdom in admitting the limitations of our knowledge.