Wednesday, April 06, 2011

Black swans, and the prosperity of the wicked

Psalms 73 and 37, especially, remark on how the wicked prosper day by day, and then in due time they slip on some banana peel and fall into the fire. I've seen a couple of unusual and interesting descriptions of just how this works from a couple of sharp secular thinkers.

Nassim Nicholas Taleb is a professional trader that wrote Fooled by Randomness about trading strategies and everyone's inclination to be deceived by seeing apparently meaningful patterns in completely random events. This very easily leads to developing strategies that seem brilliant because they lead to steady gains almost all the time, but they're actually very stupid if they cause you to lose everything through a black swan, an unforeseen random event. One example he gave was his neighbor across the street who was very proud of how well he prospered through the 1990s by buying on the dips. And then the 1998 financial panic came along, and he lost his account in a week, and his job very soon after.

Joseph Stiglitz, writing at Al Jazeera English today ("Gambling with the Planet"), discusses the common failure to think straight that has led both to the calamity at the Fukushima nuclear plant and in the 2008 calamity in the world's financial system. In the first place, we do a very poor job of estimating the risks of rare events, since being rare the sample size is necessarily very small, and our normalcy bias inclines us to think that as it is it will ever be.

Normalcy bias, the notion that if it's always been this way it always will be, is refuted in our lives daily, but we just can't believe the evidence. There's no use telling an 8-year-old boy that some day he won't want to be a fireman and that he will be interested in girls. The most stupid example in my experience is when I had a supercold some years ago. There I was, miserable with a 103 fever, and I realized that I was unable to imagine that I would ever feel any other way. There was no way to think differently. I just had to tell God that I was convinced that I would feel that way for the rest of my life. There was no way I was going to think straight about this. I just had to acknowledge that that was how I was thinking and to state before God that I was just incapable of making any sense.

Everyone is subject to this kind of folly. What ruins the wicked is their lack of humility, their confidence in their own thoughts, and their consequent failure to consult God - why would that be necessary, since we are wise and have figured out how it works. As we read in Psalm 1, Romans 1, and elsewhere in the Bible, that is the essence of wickedness. The bad behavior is just a consequence, not its essence.

Now here what Taleb calls the ludic fallacy comes into the question. The ludic fallacy is the notion that games (Latin "ludus," "game"), our models of reality, actually describe reality. So the wise man says, "I know," but he can't discover, as Ecclesiastes reminds us. Sometimes these can be useful tools, but in fact the complications we have to leave out in order to understand things can easily make all the difference. Black swans fly out of those tiny wrinkles on the pool table, and a whole lot more often than we can expect.

The other thing is that Tokyo Electric Power Company (TEPCO) executives and school superintendents are not rewarded for thinking about black swans. They're rewarded for how they look this quarter or the 2011-2012 school year, and over such an interval, the guys and girls that ignore the danger of black swans get the best results. For 40 years, TEPCO was rewarded for figuring they'd never see an earthquake over 8.2 or a tsunami over 50 feet high. It was cheaper to site the backup diesel pumps on the ground, and that was no problem, because no tsunami was going to pass over the tsunami wall guarding the plant. So when the International Atomic Energy Agency warned TEPCO in 2008 that their plants were not safe enough, TEPCO blew them off. They already knew they were taking their chances.

It's easy now for our wrath to burn against those idiots, but that makes sense only until we consider our own ways and realize that we too really are those idiots. Since we're all this way, let's budget for it. Let's be quick to hear, slow to speak, and slow to anger, remembering that wisdom is with the humble. We are designed to malfunction if we close our ears - to other people and especially to God, no matter how bright we may be. It's how God has arranged for pride to go before stumbling, and a haughty spirit before a fall.

This is no academic exercise. The nuclear plant operators and regulators in the United States are no better than their Japanese counterparts. Building the Diablo Canyon nuclear plant on an earthquake fault, rated for only a 7.5 - and the retrofit was accidentally done backwards on the second reactor! - and with no tsunami wall at all, doesn't make a lot more sense than how General Electric designed the Fukushima plant for TEPCO.


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