Michel Pire
22 June 2007
column
Johannesburg — MUCH of what happens in history, says Nassim Taleb in an article published at Edge.org, comes from very large, sudden, and totally unpredictable events, while much of what we usually talk about is almost pure noise. Our track record in predicting those events that have the greatest impact on us is dismal; yet by some mechanism called the hindsight bias we think that we understand them. We have a bad habit of finding "laws" by fitting stories to events and detecting false patterns. As Taleb says, "We go through life like drivers looking through the rear-view mirror while convinced we are looking ahead."
So what can we do to compensate for this; the fact that we are not capable of accurate predictions and don't seem to learn from our experiences?
According to Taleb, we should begin by being aware of two types of people: "People worthy of respect who try to resist explaining things, and people who cannot resist explaining things".
If they had to be classified into either a left or right-hand column, here are a few examples of who he thinks belongs to each:
"In the left column, that of the people who take their knowledge too seriously, you first have historians: 'This was caused by that. Why? Because two events coincided; we had a tall president and suddenly we had prosperity, maybe having a tall president is good for the economy.' You can always find explanations.
"Secondly, you have the journalists. On the day when Saddam was caught, the bond market went up in the morning, and it went down in the afternoon. So here we had two headlines -- 'Bond Market Up on Saddam News,' and in the afternoon, 'Bond Market Down on Saddam News' -- and then they had in both cases very convincing explanations of the moves. Basically if you can explain one thing and its opposite using the same data you don't have an explanation. It takes a lot of courage to keep silent.
"In the right-hand column you have Montaigne, worthy of respect because he's intensely introspective, with the courage of resisting his own knowledge ... add Hume, Popper, Hayek, Keynes, Peirce. In that category you also have the physicists and the scientists in the empirical world. Why? Not because they don't have human biases, but because they have this huge infrastructure above them that prevents them from saying something that they cannot back up empirically.
"You also have sc eptical traders in the right column, those who are aware of our inability to predict markets. They do not speculate but take advantage of imbalances and order-flow. They operate from a base of natural scepticism."
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