The Knock-Down, Part 3: Certainty and Uncertainty

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David Ryan

David Ryan is a boat builder and USCG licensed master captain. He is the owner of Sailing Montauk and skipper of Montauk''s charter sailing catamaran MON TIKI You can follow him on Twitter @CaptDavidRyan

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  1. Avatar Scott Fields
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    says:

    Equally rare does not mean equally consequential.

    I like this very much.Report

    • Avatar David Ryan in reply to Scott Fields
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      says:

      This idea of distinguishing the likelihood of an event from the consequences if said event were to occur is something I think I’ve had an intuitive grasp of, but I didn’t have math for it until I read Taleb’s first book “Fooled by Randomness”. Here’s his example:

      Say you and I got out to lunch and we agree that we will flip a coin for who will pick up the check. In making that agreement, we have each agreed to pay for 1/2 of lunch.

      Fine.

      Now imagine I have a revolver and I put one bullet in one chamber and you offer to give me $1000 if I put the gun to my head, pull the trigger and do not end up dead.

      In this case, if I decide to accept our offer, the answer is not that I have agreed to be 1/6th dead, because death is not a survivable state.

      Taleb then extends this math to cover speculators who invest in ways that can “blow-up”, which is to say, leveraged financial bets that can result in unservivable losses. You can see why his views became fashionable after the 2008 World Financial Crisis.

      In life, of course, it’s more complicated. I like to do (some) things that, if done imprudently, can result in death. A purely Talebian view of risk (ie avoiding any possiblity of “blowing up” )would lead to a very dull life indeed. None the less, I’ve found Talib’s framework for understanding risk concordant with fuzzier ideas about risk-management and prudent risk taking that have also been useful to me.Report

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