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Posted by Inya Ivkovic Dec 16, 2007 |
Nassim Taleb continues his intriguing journey of effects of randomness on life in general, and financial markets in particular, with a brief recount of how the idea of alternative histories, or “possible worlds,” developed.
In philosophy, it was the 18th century philosopher Gottfried Leibniz who first contemplated that “God’s mind included an infinity of possible worlds, of which he selected just one.” (Note that Leibniz coined the phrase, “the best of all possible worlds.”)
In quantum physics, the multitude of possible worlds appeared as an idea of the universe perceived as a tree, which can split into numerous parallel worlds; each a different possibility, but only one a reality to any one creature. Taleb’s says, “I am an essayist-trader in one of the parallel universes, plain dust in another.”
And finally, in economics, the idea of alternative histories/possible worlds is best explained through the scenario analysis, or rather, through the various “What Ifs.” Take the Dupont Model, for example, whereby each change of variable components delivers different end result.
Revisiting the Russian roulette metaphor, Taleb states that, “Reality is far more vicious than Russian roulette. First, it delivers the fatal bullet rather infrequently, like a revolver that would have hundreds, even thousands of chambers instead of six. After a few dozen tries, one forgets about the existence of a bullet, under a numbing false sense of security.”
It is precisely that forgotten bullet that eventually catches up with every fool of randomness, as the fool is swept by the Black Swan event into oblivion. It is that same bullet that makes investors forget about all the losers. It is that same bullet that makes investors disregard risk management as too costly, even though it is perhaps the only thing separating their retirement from complete and utter disaster.